<PAGE> 1
============================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------
FORM 10
GENERAL FORM FOR REGISTRATION OF SECURITIES
PURSUANT TO SECTION 12(b) OR (g) OF
THE SECURITIES EXCHANGE ACT OF 1934
------------------
PAYLESS SHOESOURCE, INC.
(Exact name of registrant as specified in its charter)
MISSOURI 48-0674097
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
3231 E. 6TH STREET
TOPEKA, KANSAS 66607-2207
(Address of principal executive offices) (Zip Code)
(913) 233-5171
(Registrant's telephone number, including area code)
-----------------------
SECURITIES TO BE REGISTERED
PURSUANT TO SECTION 12(b) OF THE ACT:
<TABLE>
<CAPTION>
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH
TO BE SO REGISTERED EACH CLASS IS TO BE REGISTERED
------------------- ------------------------------
<S> <C>
Common Stock, par value $.01 per share The New York Stock Exchange, Inc.
Preferred Stock Purchase Rights The New York Stock Exchange, Inc.
</TABLE>
SECURITIES TO BE REGISTERED
PURSUANT TO SECTION 12(g) OF THE ACT:
None
===============================================================================
<PAGE> 2
<TABLE>
PAYLESS SHOESOURCE, INC.
CROSS-REFERENCE SHEET BETWEEN INFORMATION STATEMENT
AND ITEMS OF FORM 10
<CAPTION>
ITEM LOCATION IN INFORMATION STATEMENT
---- ---------------------------------
<C> <S>
1. BUSINESS. . . . . . . . . SUMMARY; CERTAIN CONSIDERATIONS;
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF RESULTS OF OPERATIONS
AND LIQUIDITY AND CAPITAL
RESOURCES; BUSINESS; THE
DISTRIBUTION; CONSOLIDATED
FINANCIAL STATEMENTS
2. FINANCIAL INFORMATION . . SUMMARY; CERTAIN CONSIDERATIONS;
SELECTED HISTORICAL FINANCIAL
INFORMATION; PRO FORMA CAPITALIZA-
TION; UNAUDITED PRO FORMA
CONSOLIDATED FINANCIAL STATEMENTS;
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF RESULTS OF OPERATIONS
AND LIQUIDITY AND CAPITAL
RESOURCES; CONSOLIDATED FINANCIAL
STATEMENTS
3. PROPERTIES. . . . . . . . BUSINESS
4. SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT . . BENEFICIAL OWNERSHIP OF MANAGEMENT;
SECURITY OWNERSHIP OF CERTAIN BENE-
FICIAL OWNERS
5. DIRECTORS AND
EXECUTIVE OFFICERS. . . . MANAGEMENT
6. EXECUTIVE
COMPENSATION. . . . . . . EXECUTIVE COMPENSATION; BENEFICIAL
OWNERSHIP OF MANAGEMENT; SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS
7. CERTAIN RELATIONSHIPS
AND RELATED
TRANSACTIONS. . . . . . . SUMMARY; TRANSACTIONS BETWEEN THE
COMPANY AND MAY; THE DISTRIBUTION
<PAGE> 3
<CAPTION>
ITEM LOCATION IN INFORMATION STATEMENT
---- ---------------------------------
<C> <S>
8. LEGAL PROCEEDINGS . . . . BUSINESS
9. MARKET PRICE OF AND
DIVIDENDS ON THE
REGISTRANT'S COMMON
EQUITY AND RELATED
STOCKHOLDER MATTERS . . . SUMMARY; CERTAIN CONSIDERATIONS;
BENEFICIAL OWNERSHIP OF MANAGEMENT;
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS; DESCRIPTION OF
CAPITAL STOCK
10. RECENT SALES OF
UNREGISTERED
SECURITIES. . . . . . . . NONE
11. DESCRIPTION OF
REGISTRANT'S
SECURITIES
TO BE REGISTERED. . . . . CERTAIN CONSIDERATIONS; DESCRIPTION
OF CAPITAL STOCK; PURPOSES AND EF-
FECTS OF CERTAIN PROVISIONS OF THE
CHARTER, THE BY-LAWS AND THE RIGHTS
AGREEMENT
12. INDEMNIFICATION OF
DIRECTORS AND OFFICERS. . MANAGEMENT
13. FINANCIAL STATEMENTS
AND SUPPLEMENTARY
DATA. . . . . . . . . . . SUMMARY; MANAGEMENT'S DISCUSSION
AND ANALYSIS OF RESULTS OF OPERA-
TIONS AND LIQUIDITY AND CAPITAL
RESOURCES; CONSOLIDATED FINANCIAL
STATEMENTS
14. DISAGREEMENT WITH
ACCOUNTANTS ON
ACCOUNTING AND
FINANCIAL DISCLOSURE. . . NONE
15. FINANCIAL STATEMENTS
AND EXHIBITS
(a) Financial Statements--See Index to Combined Financial
Statements
(b) Exhibits:
</TABLE>
<PAGE> 4
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
2.1 Distribution Agreement, dated as of ,
1996, between The May Department Stores Company ("May")
and the Registrant.<F*>
3.1 Amended and Restated Articles of Incorporation of the
Registrant.<F*>
3.2 Amended and Restated By-Laws of the Registrant.<F*>
4.1 Rights Agreement, dated as of , 1996,
between the Registrant and The Bank of New York, as
Rights Agent.<F*>
10.1 Tax Sharing Agreement, dated as of , 1996,
between May and the Registrant.<F*>
10.2 Master Sublease, dated as of , 1996,
between May and the Registrant.<F*>
10.3 Payless ShoeSource, Inc. 1996 Stock Incentive Plan.<F*>
10.4 Payless ShoeSource, Inc. Spin-Off Stock Plan.<F*>
10.5 Payless ShoeSource, Inc. Spin-Off Cash Plan.<F*>
10.6 Payless ShoeSource, Inc. Restricted Stock Plan for Non-
Management Directors.<F*>
10.7 Form of Employment Agreement between the Registrant and
certain executives of Registrant.<F*>
10.8 Payless ShoeSource, Inc. Supplementary Retirement
Plan.<F*>
10.9 Payless ShoeSource, Inc. Profit Sharing Plan.<F*>
10.10 Payless ShoeSource, Inc. Deferred Compensation Plan.<F*>
10.11 Payless ShoeSource, Inc. Executive Incentive
Compensation Plan for Payless Executives.<F*>
10.12 Form of Management Severance Agreement.<F*>
10.13 Form of Indemnification Agreement.<F*>
21.1 Subsidiaries of the Registrant.<F*>
<FN>
- ------------------
<F*> To be filed by amendment.
</TABLE>
<PAGE> 5
SIGNATURE
Pursuant to the requirements of Section 12 of the Securities
Exchange Act of 1934, the registrant has duly caused this
registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized.
PAYLESS SHOESOURCE, INC.
By: /s/ Ullrich Porzig
--------------------------------------
Name: Ullrich Porzig
Title: Chief Financial Officer
Date: February 23, 1996
<PAGE> 6
April [ ], 1996
Dear Fellow Shareowners:
I am pleased to announce that the Board of Directors of The
May Department Stores Company has authorized a distribution by May
of the shares of the common stock of Payless ShoeSource, Inc. to
holders of May's common stock. Payless is the largest footwear
retailer in the United States, with over $2.3 billion in sales in
1995. Payless sold over 200 million pairs of shoes in 1995,
representing one out of every five pairs sold in the United States.
Payless operated, as of February 3, 1996, 4,549 self-service,
affordably priced, family shoe stores, of which 773 include Payless
Kids expansions. Its stores are located in 49 states, the District
of Columbia, Puerto Rico and the United States Virgin Islands.
Your board of directors believes that the distribution will
enable May and Payless to concentrate on their respective
businesses and, as a result, will enable the market to reflect
properly the performance of each company. In addition, as an
independent company with its own publicly traded stock, Payless
will be better able to attract, retain and motivate its associates
by offering economic incentives and rewards tied more directly to
Payless' performance.
If you are a shareowner of record of May common stock at the
close of business on April [ ], 1996, you will receive [ ] share
of Payless common stock for every share of May common stock you own
(and a cash payment for any fractional share of Payless common
stock you are entitled to receive). No action is required on your
part to receive your distribution. You will receive your Payless
stock certificates (and a cash payment for fractional shares, if
any) in a separate mailing shortly after May [ ], 1996. After the
distribution, May will own no shares of Payless common stock.
Payless' common stock will be listed and traded on the New
York Stock Exchange, and its stock symbol will be "PSS."
As discussed in more detail in the accompanying Information
Statement, May has received an opinion of counsel to the effect
that you will not recognize gain or loss by reason of the
distribution (except for cash received for fractional shares, if
any). In addition, the aggregate basis of your May common stock
and of your Payless common stock (including the fractional shares,
if any) will be the same as the aggregate basis in your May common
stock before the distribution, and will be allocated in proportion
to the fair market value of each. We will send you additional
information with your June [ ], 1996, dividend to help you
allocate your tax basis between your May common stock and your
Payless common stock.
The Information Statement, which is being distributed to all
owners of May common stock in connection with the distribution,
describes the transaction in detail and contains important
information about Payless, including financial statements and other
financial information.
Very truly yours,
David C. Farrell
Chairman of the Board and
Chief Executive Officer
<PAGE> 7
THE MAY DEPARTMENT STORES COMPANY
Frequently Asked Questions
About the
Distribution of Common Stock of
Payless ShoeSource, Inc.
1. WHAT WILL I RECEIVE AS A RESULT OF THE PAYLESS DISTRIBUTION?
May shareowners of record on April [ ], 1996 will
automatically receive a distribution of [ ] share of Payless
ShoeSource, Inc. common stock for each share of May common stock
they own. For example, if you own 100 shares of May common stock
on April [ ], 1996, you will receive [ ] shares of Payless
common stock.
2. WHAT WILL HAPPEN IF MY PAYLESS STOCK DISTRIBUTION YIELDS BOTH
WHOLE SHARES AND A FRACTION OF A SHARE?
Your Payless fractional share will be aggregated with other
fractional shares and the Bank of New York (our distribution agent)
will sell shares equal to the aggregate of all of the fractional
shares on the open market. The Bank of New York will then mail you
a check for your part of the net sale proceeds.
3. WHEN WILL I RECEIVE MY PAYLESS SHARES?
If you hold your May shares in your own name or in May's
Dividend Reinvestment Plan, your Payless stock certificate will be
mailed to you on or about May [ ], 1996. You should allow several
days for the mailing to reach you.
4. WHAT IF I HOLD MY MAY SHARES THROUGH MY STOCKBROKER, BANK OR
OTHER NOMINEE?
If you hold your May shares through your stockbroker, bank or
some other nominee, you are not a shareowner of record of those
shares. Your receipt of Payless stock depends on your arrangements
with the nominee that holds your May shares for you. May
anticipates that stockbrokers, banks and other nominees will credit
their customers' accounts with Payless stock about May [ ], 1996,
but you should check with your stockbroker, bank or other nominee.
5. IF I PARTICIPATE IN THE MAY PROFIT SHARING PLAN, HOW WILL THE
PAYLESS SHARES BE HANDLED IN MY ACCOUNT?
The trustee of the May Profit Sharing Plan holds all of the
May common stock held for your account in the May Stock Fund of the
May Profit Sharing Plan. As a shareowner, the trustee will receive
shares of Payless common stock in the distribution. It then will
convert those Payless shares into additional May shares by selling
the Payless shares after the distribution and using the proceeds to
purchase more May common stock for the May Stock Fund in the May
Profit Sharing Plan.
6. IF I PARTICIPATE IN THE PAYLESS PROFIT SHARING PLAN, HOW WILL
THE PAYLESS SHARES BE HANDLED IN MY ACCOUNT?
The trustee of the Payless Profit Sharing Plan holds all of
the May common stock held for your account in the May Stock Fund of
the Payless Profit Sharing Plan. As a shareowner, the trustee will
receive shares of Payless common stock in the distribution. It
then will transfer the Payless shares to your Payless stock account
in the Payless Profit Sharing Plan.
7. HOW MUCH IS A SHARE OF PAYLESS COMMON STOCK WORTH?
Payless stock will be listed on the New York Stock Exchange
under the symbol PSS. Trades in Payless common stock, and the
prices at which the stock trades, will be reported on the New York
Stock Exchange Composite Tape.
<PAGE> 8
8. HOW WILL THE DISTRIBUTION AFFECT THE MARKET PRICE OF MY MAY
COMMON STOCK?
The first day that May stock will be traded in the market
without the right to the distribution (the "ex-distribution" date)
will be May [ ], 1996. That morning, the market price of May
common stock will decrease. The decrease should be roughly
equivalent to [ ] times the value of one share of Payless common
stock. For example, if the Payless stock price just before the
distribution were $20 per share, it would be expected that the May
stock price would decrease by about $[ ] (the approximate market
value of [ ] of a share of Payless stock). Together, the market
value of your May shares and the Payless shares that you receive in
the distribution should add up to approximately the price for your
May shares just before the distribution, subject to market factors.
9. WHAT IF I WANT TO BUY OR SELL SHARES OF MAY OR PAYLESS COMMON
STOCK?
You should consult with your own financial advisors, such as
your stockbroker, bank or other advisor. Neither May nor Payless
will make recommendations about buying, holding or selling May
stock or Payless common stock.
10. HOW WILL THE DISTRIBUTION AFFECT THE DIVIDENDS I CURRENTLY
RECEIVE ON MY MAY SHARES?
The distribution has no effect on the May dividend. Payless
does not expect to pay dividends initially. As with any company,
the declaration and payment of dividends in the future are subject
to the discretion of the respective boards of directors of May and
Payless, and will depend on various factors.
11. DO I HAVE TO PAY TAXES ON THE PAYLESS SHARES I RECEIVE?
As discussed in more detail in the attached Information
Statement, May will receive an opinion of counsel that the May
shareowners will not recognize a taxable gain or loss when
receiving whole shares of Payless common stock pursuant to the
distribution. If you receive cash in lieu of fractional shares,
you will recognize gain or loss equal to the difference between
such cash received and the amount of tax basis allocable to such
fractional shares. In addition, you may have to pay taxes if you
sell your Payless shares. If you have any questions, you should
consult your own tax advisor regarding your tax treatment.
12. HOW WILL I BE ABLE TO DETERMINE MY TAX BASIS IN MY NEW SHARES
OF PAYLESS COMMON STOCK? WILL MY TAX BASIS IN MY MAY SHARES BE
AFFECTED BY THE DISTRIBUTION?
Generally, the basis in your current May stock (your "old" tax
basis) should be divided up and allocated proportionally to your
May stock and to the Payless common stock you receive in the
distribution. May will send you additional information with your
June, 1996, dividend to help you allocate your tax basis between
your May common stock and your Payless common stock.
13. WHO SHOULD I CALL FOR MORE TRANSFER INFORMATION?
Please call The Bank of New York, Shareowner Services at 800-
524-4458.
<PAGE> 9
Preliminary and Subject to Completion, Dated February 23, 1996
INFORMATION STATEMENT
PAYLESS SHOESOURCE, INC.
COMMON STOCK
(PAR VALUE $.01 PER SHARE)
--------------------
This Information Statement is being furnished by The May
Department Stores Company ("May") in connection with the
distribution (the "Distribution") by May to holders of record of
May common stock on April [ ], 1996 (the "Record Date"), of [
] share of common stock, par value $.01 per share (including the
associated preferred stock purchase rights, the "Common Stock"),
of its wholly owned subsidiary, Payless ShoeSource, Inc. (the
"Company") for every one share of May common stock owned on the
Record Date. Following the Distribution, May will own no shares
of Common Stock. The Distribution will be effective on May [ ],
1996 (the "Distribution Date"). Certificates representing the
shares of Common Stock will be mailed to shareowners on the
Distribution Date or as soon thereafter as practicable.
No consideration will be paid by May shareowners for the
shares of Common Stock. There is no current public trading
market for the Common Stock, although it is expected that a
"when-issued" trading market will develop on or about the Record
Date. Application will be made to list the shares of Common
Stock on the New York Stock Exchange under the symbol "PSS."
IN REVIEWING THIS INFORMATION STATEMENT, YOU SHOULD
CAREFULLY CONSIDER THE MATTERS DESCRIBED UNDER THE CAPTION
"CERTAIN CONSIDERATIONS."
--------------------
NO VOTE OF SHAREOWNERS IS REQUIRED IN CONNECTION WITH THE DISTRIBUTION.
NO PROXIES ARE BEING SOLICITED AND YOU ARE NOT REQUESTED TO TAKE
ANY ACTION WITH RESPECT TO YOUR SHARES.
--------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS INFORMATION STATEMENT. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
--------------------
THE DATE OF THIS INFORMATION STATEMENT IS --------------, 1996
<PAGE> 10
INSIDE FRONT COVER.
PHOTOS [to come]
<PAGE> 11
References herein to "dollar" and "$" are to United States
dollars, and the terms "United States" and "U.S." mean the United
States of America, its states, its territories, its possessions
and all areas subject to its jurisdiction.
----------------------
<TABLE>
<CAPTION>
TABLE OF CONTENTS
PAGE
----
<S> <C>
Additional Information . . . . . . . . . . . . . . . . . . . . .
Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . .
Certain Considerations . . . . . . . . . . . . . . . . . . . . .
Selected Historical Financial Information. . . . . . . . . . . .
Pro Forma Capitalization . . . . . . . . . . . . . . . . . . . .
Unaudited Pro Forma Consolidated Financial Statements. . . . . .
Management's Discussion and Analysis of Results of
Operations and Liquidity and Capital Resources . . . . . . . .
Business . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financing. . . . . . . . . . . . . . . . . . . . . . . . . . . .
<CAPTION>
PAGE
----
<S> <C>
Management . . . . . . . . . . . . . . . . . . . . . . . . . . .
Executive Compensation . . . . . . . . . . . . . . . . . . . . .
Beneficial Ownership of Management . . . . . . . . . . . . . . .
Security Ownership of Certain Beneficial Owners. . . . . . . . .
Transactions Between the Company and May . . . . . . . . . . . .
Description of Capital Stock . . . . . . . . . . . . . . . . . .
Purposes and Effects of Certain Provisions
of the Charter, the Bylaws and the Rights Agreement. . . . . .
The Distribution . . . . . . . . . . . . . . . . . . . . . . . .
Independent Public Accountants . . . . . . . . . . . . . . . . .
Index to Consolidated Financial Statements . . . . . . . . . . .
</TABLE>
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange
Commission (the "Commission") a Registration Statement on Form 10
(as the same may be amended or supplemented from time to time,
the "Registration Statement") under the Securities Exchange Act
of 1934, as amended (the "Exchange Act") with respect to the
Common Stock to be received by May shareowners in the
Distribution. This Information Statement does not contain all of
the information set forth in the Registration Statement and the
exhibits and schedules thereto, to which reference is hereby
made.
The Registration Statement and the exhibits thereto filed by
the Company with the Commission may be inspected and copied at
the public reference facilities of the Commission at Room 1024,
450 Fifth Street, N.W., Washington, D.C. 20549, as well as at the
Regional Offices of the Commission at Northwest Atrium Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and
7 World Trade Center, Suite 1300, New York, New York 10048.
Copies of this material should also be available on-line through
EDGAR and can be obtained by mail from the Public Reference
Branch of the Commission at 450 Fifth Street, N.W., Washington,
D.C. 20549 at prescribed rates.
Following the Distribution, the Company will be required to
comply with the reporting requirements of the Exchange Act and
will file annual, quarterly and other reports with the
Commission. The Company will also be subject to the proxy
solicitation requirements of the Exchange Act and will furnish
audited financial statements to its shareowners in connection
with its annual shareowners meeting.
1
<PAGE> 12
SUMMARY
The following summary is qualified in its entirety by the
more detailed information and consolidated financial statements
and related notes thereto appearing elsewhere in this Information
Statement.
THE COMPANY
Payless ShoeSource, Inc. (the "Company") is the largest
footwear retailer in the United States, with over $2.3 billion in
sales in 1995. The Company sold over 200 million pairs of shoes
in 1995, representing one out of every five pairs sold in the
United States. The Company's share of the estimated $33 billion
United States footwear market was 6.5% in 1995, and has grown
consistently over the past two decades. The Company is led by a
team of experienced management executives who have an average of
19 years of retail industry experience.
The Company operated, as of February 3, 1996, 4,549 self-
service, affordably priced, family shoe stores, of which 773
include Payless Kids expansions. The Company's stores are
located in 49 states, the District of Columbia, Puerto Rico and
the United States Virgin Islands. The Company's stores average
3,000 square feet and carry approximately 11,000 pairs of shoes.
The stores offer more than 1,000 shoe styles at prices that
average $11.00.
The Company has broad customer appeal, providing a complete
assortment of affordably priced, quality footwear for women, men
and children from all age groups, and from households with
incomes that represent 85% of the United States population. The
Company has significant market penetration with its target
customer, women aged 18-64. In fact, over 40% of its targeted
customers, regardless of household income, purchased at least one
pair of shoes from the Company last year. In addition to shoes,
the stores offer accessories, including handbags and hosiery.
Management believes the Company is the most profitable
footwear retailer in the United States, although 1995 results
were negatively impacted by a difficult retail environment, the
devaluation of the peso and the integration of certain new store
locations. The Company has achieved a compound annual sales
growth rate of 11.3% over the last five years and consistent cash
flow from operations.
During 1995, management identified steps to increase store
profitability. As a result of this analysis, during 1995, in
connection with the Distribution, the Company committed to close
or relocate approximately 450 unprofitable stores during 1996. A
one-time pretax special and nonrecurring charge of $71.8 million
associated with these store closings or relocations and other
nonrecurring items was recorded in 1995. The pro forma impact on
1995 results, had these stores been closed or relocated at the
beginning of 1995, would have been a $15.4 million increase in
earnings before income taxes.
The Company's objective is to increase sales and profits
through increased store-for-store sales in existing locations
combined with selective openings of profitable new stores.
Management intends to achieve this objective through the
following strategic initiatives:
- build on merchandising strengths (women's dress shoes,
children's, sandals) while accelerating new or
revitalized strategies of comfort, wide widths and
leather;
- continue to capitalize on long-standing relationships
with vendors and factories to provide the best
assortment and value to the customer while maintaining
strong margins;
2
<PAGE> 13
- increase the selling productivity of the front portions
of all stores and maximize the strength of urban store
locations through more focused merchandising;
- leverage competitive advantage in distribution to
increase sales (build on the Company's ability to
quickly respond to validated fashion trends while
capitalizing on its sophisticated physical distribution
system to optimize sales replenishment);
- increase market share by capturing the sales of low
priced footwear retailers and discount mass-
merchandisers that have gone out of business or closed
stores in recent months (the Company is strongly
positioned to capture market share due to the convenient
nationwide network of stores in all types of locations
(malls, shopping centers, central business districts and
free-standing stores));
- identify productive sites for new stores in existing and
new markets; and
- drive down operating costs through cost control programs
and the leveraging of technology.
In addition, the Company believes that, as an independent
company with its own publicly traded stock, it will be better
able to attract, retain and motivate its associates by offering
economic incentives and rewards tied more directly to the
Company's performance.
The Company believes that these initiatives will lead to
improved operating results. See "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF RESULTS OF OPERATIONS AND LIQUIDITY AND CAPITAL
RESOURCES." Furthermore, the Company believes there is
opportunity for continued profitable expansion of its business in
the United States.
The May Department Stores Company ("May") currently owns all
of the outstanding shares of common stock, par value $.01 per
share, of the Company (together with the associated preferred
stock purchase rights, the "Common Stock"). Following the
consummation of the pro rata distribution to the owners of May
common stock of all of the outstanding shares of Common Stock
(the "Distribution"), May will own no shares of Common Stock, and
the Company will operate as an independent, publicly owned
corporation. See "TRANSACTIONS BETWEEN THE COMPANY AND MAY" and
"THE DISTRIBUTION."
The principal executive offices of the Company are located
at 3231 E. 6th Street, Topeka, Kansas 66607-2207, and its
telephone number is (913) 233-5171.
3
<PAGE> 14
THE DISTRIBUTION
Distributing Company . . . . . . . . The May Department Stores
Company. Immediately
after the Distribution,
May will own no shares of
Common Stock, and the
Company will operate as an
independent, publicly
owned corporation.
Common Stock to be Distributed . . . Approximately [ ]
million shares, based upon
the number of shares of
common stock of May
expected to be outstanding
on April [ ], 1996 (the
"Record Date").
Distribution Ratio . . . . . . . . . [ ] share of Common
Stock for every one share
of May common stock ([
] shares of Common Stock
for every 100 shares of
May common stock) held by
May common shareowners of
record on the Record Date.
Trading Market and Symbol. . . . . . Application will be made
to list the shares of
Common Stock on the New
York Stock Exchange, Inc.
("NYSE") under the symbol
"PSS."
Record Date. . . . . . . . . . . . . Close of business on April
[ ], 1996.
Distribution Date. . . . . . . . . . May [ ], 1996. The
Distribution Agent (as
defined below) will mail
share certificates
commencing on the
Distribution Date or as
soon thereafter as is
practicable. See "THE
DISTRIBUTION -- Manner of
Effecting the
Distribution."
Distribution Agent . . . . . . . . . The Bank of New York.
Fractional Share Interests . . . . . No certificates
representing fractional
share interests will be
issued. Owners of May
common stock entitled to
receive less than a full
share of Common Stock will
receive cash in lieu of
such fractional share
interest. See "THE
DISTRIBUTION -- Manner of
Effecting the
Distribution."
Dividend Policy. . . . . . . . . . . The Company currently does
not intend to pay cash
dividends on the Common
Stock. See "CERTAIN
CONSIDERATIONS - Dividend
Policy."
4
<PAGE> 15
Reasons for the Distribution . . . . To permit each of May and
the Company to adopt
strategies and pursue
objectives appropriate to
its specific retail
segment and to permit the
Company to structure
incentive and benefit
programs to reflect the
Company's performance to
better attract, retain and
motivate its associates.
Tax Consequences . . . . . . . . . . May will receive an
opinion of counsel to the
effect that, among other
things, receipt of the
Common Stock will be tax-
free for Federal income
tax purposes to the
shareowners of May, and
May will not recognize
income, gain or loss as a
result of the
Distribution. See "THE
DISTRIBUTION - Federal
Income Tax Consequences of
the Distribution."
Relationship with May
after the Distribution . . . . . . As a result of the
Distribution, the Company
will cease to be a
subsidiary of or otherwise
affiliated with May and
will thereafter operate as
an independent, publicly
held company. May and the
Company will enter into
certain agreements
providing for (i) the
orderly separation of May
and the Company and the
making of the
Distribution, (ii) the
provision by May of
certain interim services
to the Company following
the Distribution and (iii)
the allocation of certain
tax and other liabilities.
Mr. Thomas A. Hays, who
has been the Deputy
Chairman of May since 1993
and a director of May
since 1983, will serve on
the Company's board of
directors after the
Distribution. Mr. Hays
has announced his
retirement as Deputy
Chairman and as a director
of May, effective April
30, 1996. See
"TRANSACTIONS BETWEEN THE
COMPANY AND MAY" and
"MANAGEMENT- Directors."
Certain Considerations . . . . . . . Shareowners should
carefully consider the
matters discussed under
the section entitled
"CERTAIN CONSIDERATIONS"
in this Information
Statement.
5
<PAGE> 16
PAYLESS SHOESOURCE, INC. AND SUBSIDIARIES
SUMMARY SELECTED HISTORICAL FINANCIAL INFORMATION
The following table sets forth summary selected historical
financial information for the Company. The historical financial
information presented below reflects periods during which the
Company did not operate as an independent company, and,
accordingly, certain assumptions were made in preparing such
financial information. Therefore, such information may not
necessarily reflect the consolidated results of operations or
financial position that would have existed if the Company had
been an independent company during the periods shown or of the
Company's future performance as an independent company. The
financial information set forth below should be read in
conjunction with the Company's Consolidated Financial Statements
and the Notes thereto contained elsewhere in this Information
Statement. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND LIQUIDITY AND CAPITAL RESOURCES." Earnings per
share data are presented elsewhere in this Information Statement
and on a pro forma basis only. See "UNAUDITED PRO FORMA
CONSOLIDATED FINANCIAL DATA."
<TABLE>
<CAPTION>
(millions)
STATEMENT OF
EARNINGS DATA: Fiscal Year<F1>
---------------------------------------------------------------------
1995 1994 1993 1992 1991
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net retail sales $ 2,330.3 $ 2,116.4 $ 1,966.5 $ 1,787.8 $ 1,547.5
Cost of sales 1,688.7 1,489.8 1,366.1 1,223.9 1,056.5
Selling, general
and administrative
expenses 479.9 408.4 378.7 351.6 310.7
Interest expense, net 1.0 1.1 0.9 0.8 1.3
Special and
nonrecurring
items 71.8<F2> - - - -
--------- --------- --------- --------- ---------
Total cost of sales
and expenses 2,241.4 1,899.3 1,745.7 1,576.3 1,368.5
--------- --------- --------- --------- ---------
Earnings before
income taxes 88.9 217.1 220.8 211.5 179.0
Provision for income
taxes 34.9 85.6 88.0 80.4 68.2
--------- --------- --------- --------- ---------
Net earnings $ 54.0<F2> $ 131.5 $ 132.8 $ 131.1 $ 110.8
--------- --------- --------- --------- ---------
<FN>
<F1> The Company's fiscal year ends on the Saturday closest to January 31.
Fiscal year 1995 includes 53 weeks.
<F2> During the 1995 fourth quarter, in connection with the Distribution,
the Company committed to close or relocate approximately 450 unprofitable
stores during 1996. In addition, the Company committed to restructure its
central office and other personnel. The 1995 net earnings, excluding
special and nonrecurring items, is $97.5. The pro forma impact on 1995
results, had these stores been closed or relocated at the beginning of 1995,
would have been a $15.4 increase in earnings before income taxes.
</TABLE>
6
<PAGE> 17
<TABLE>
SUMMARY SELECTED HISTORICAL FINANCIAL INFORMATION (continued)
<CAPTION>
(dollars in millions)
BALANCE SHEET DATA: FISCAL YEAR<F1>
-------------------------------------------------------------------
1995 1994 1993 1992 1991
--------- --------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Working capital $ 232.0 $ 242.8 $ 253.5 $ 206.1 $ 191.7
Property and equipment,
net $ 560.0 $ 590.6 $ 433.9 $ 383.9 $ 343.5
Total assets $ 1,014.3 $ 1,019.8 $ 840.8 $ 732.7 $ 692.7
Total debt $ 11.5 $ 13.1 $ 14.5 $ 16.1 $ 16.9
May equity investment $ 752.9 $ 793.9 $ 661.0 $ 571.1 $ 530.9
OTHER FINANCIAL DATA:
Net retail sales growth 10.1% 7.6% 10.0% 15.5% 13.3%
Earnings before interest,
income taxes, depreciation
and amortization
(EBITDA) <F2> $ 185.2<F3> $ 295.2 $ 288.7 $ 245.2 $ 226.1
Number of stores
(at period end) 4,549 4,435 3,779 3,563 3,295
Capital expenditures $ 95.4 $ 255.2 $ 139.8 $ 119.3 $ 145.6
Present value of
operating leases $ 885.5 $ 952.1 $ 779.9 $ 688.1 $ 554.0
<FN>
<F1> The Company's fiscal year ends on the Saturday closest to January 31.
Fiscal year 1995 includes 53 weeks.
<F2> EBITDA should not be considered in isolation or as a substitute for
measures of performance or cash generation prepared in accordance with
generally accepted accounting principles. See the Company's Consolidated
Financial Statements and the Notes thereto, contained elsewhere in this
Information Statement.
<F3> 1995 EBITDA, excluding special and nonrecurring items, is $255.9.
</TABLE>
7
<PAGE> 18
PAYLESS SHOESOURCE, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA
The Company has no operating history as an independent company. The
historical consolidated financial statements reflect periods during which the
Company did not operate as an independent company, and, accordingly, certain
assumptions were made in preparing such financial statements. Therefore,
such historical consolidated financial statements may not necessarily reflect
the consolidated results of operations or financial position that would have
existed had the Company been an independent company.
The underlying assumptions that result in the pro forma adjustments are: (1)
the Distribution occurred on the first day of fiscal 1995 and (2) the store
closings or relocations resulting in the special and nonrecurring charge
happened on the last day of fiscal 1994.
The pro forma consolidated financial statements should be read in conjunction
with the Company's Consolidated Financial Statements and the Notes thereto
contained elsewhere in this Information Statement. The pro forma
consolidated financial information is presented for informational purposes
only and may not necessarily reflect the future results of operations or
financial position of the Company or what the results of operations or
financial position would have been had the Company's business been operated
as an independent company during such period.
<TABLE>
- ------------------------------------------------------------------------------------------------------
PRO FORMA CONSOLIDATED STATEMENT OF EARNINGS
(Unaudited)
<CAPTION>
- ------------------------------------------------------------------------------------------------------
Year Ended February 3, 1996
(millions, except earnings per share)
Pro Forma
Historical<F1> Adjustments<F2> Pro Forma
------------- ----------- -------------
<S> <C> <C> <C>
NET RETAIL SALES $ 2,330.3 $ (102.9)<Fa> $ 2,227.4
------------- ----------- -------------
Cost of sales 1,688.7 (95.3)<Fa> 1,593.4
Selling, general and
administrative expenses 479.9 (22.9)<Fa>
6.1 <Fb> 463.1
Interest expense, net 1.0 (0.3)<Fc> 0.7
Special and nonrecurring items 71.8<F3> (71.8)<Fd> -
------------- ----------- -------------
Total cost of sales and expenses 2,241.4 (184.2) 2,057.2
------------- ----------- -------------
Earnings before income taxes 88.9 81.3 170.2
Provision for income taxes 34.9 32.0 <Fe> 66.9
------------- ----------- -------------
NET EARNINGS $ 54.0<F3> $ 49.3 $ 103.3
============= =========== =============
Pro forma earnings per share $
=============
Outstanding shares of Common Stock <Ff>
=============
<FN>
<F1> See the Company's Consolidated Financial Statements and Notes thereto,
contained elsewhere in this Information Statement.
<F2> See accompanying Notes to Unaudited Pro Forma Consolidated Financial
Data
<F3> During the 1995 fourth quarter, in connection with the Distribution, the
Company committed to close or relocate approximately 450 unprofitable stores
during 1996. In addition, the Company committed to restructure its central
office and other personnel. The 1995 net earnings, excluding special and
nonrecurring items, is $97.5. The pro forma impact on 1995 results, had
these stores been closed or relocated at the beginning of 1995, would have
been a $15.4 increase in earnings before income taxes.
</TABLE>
8
<PAGE> 19
<TABLE>
PAYLESS SHOESOURCE, INC. AND SUBSIDIARIES
- ------------------------------------------------------------------------------------------------------
<CAPTION>
PRO FORMA CONSOLIDATED BALANCE SHEET
(Unaudited)
- ------------------------------------------------------------------------------------------------------
February 3, 1996
(millions)
Pro Forma
Historical <F1> Adjustments <F2> Pro Forma
------------- ----------- -------------
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and marketable securities $ 4.6 $ 58.9 <Fa> $ 63.5
Accounts receivable, net 4.4 4.4
Merchandise inventories 398.0 398.0
Other current assets 43.9 (26.7)<Fb> 17.2
------------- ----------- -------------
Total Current Assets 450.9 32.2 483.1
Property and Equipment:
Land 6.5 6.5
Buildings and leasehold
improvements 564.6 564.6
Furniture, fixtures and equipment 278.7 278.7
Property under capital leases 18.7 18.7
------------- ----------- -------------
Total property and equipment 868.5 868.5
Accumulated depreciation and
amortization (308.5) (308.5)
------------- ----------- -------------
Property and equipment, net 560.0 560.0
Goodwill 2.9 2.9
Other Assets 0.5 0.5
------------- ----------- -------------
Total Assets $ 1,014.3 $ 32.2 $ 1,046.5
============= =========== =============
LIABILITIES AND EQUITY
Current Liabilities:
Current maturities of capital
lease obligations $ 1.2 $ $ 1.2
Accounts payable 65.0 65.0
Accrued expenses 152.7 (68.4)<Fc> 84.3
------------- ----------- -------------
Total Current Liabilities 218.9 (68.4) 150.5
Capital Lease Obligations 10.3 10.3
Deferred Income Taxes 8.9 8.9
Other Liabilities 23.3 23.3
Equity:
May equity investment 752.9 (752.9)<Fd> -
Shareowners' equity - 853.5 <Fe> 853.5
------------- ----------- -------------
Total Liabilities and Equity $ 1,014.3 $ 32.2 $ 1,046.5
============= =========== =============
<FN>
<F1> See the Company's Consolidated Financial Statements and Notes thereto,
contained elsewhere in this Information Statement.
<F2> See accompanying Notes to Unaudited Pro Forma Consolidated Financial
Data.
</TABLE>
9
<PAGE> 20
Notes to Unaudited Pro Forma Consolidated Financial Data
Pro Forma Statement of Earnings
- -------------------------------
The pro forma adjustments to the accompanying historical consolidated
statement of earnings for the year ended February 3, 1996, are described
below:
[FN]
<Fa> To reflect the impact on sales, cost of sales, and selling, general and
administrative expenses of closing or relocating approximately 450
unprofitable stores as of the last day of fiscal 1994. The pro forma
impact on 1995 results, had these stores been closed or relocated at the
beginning of 1995, would have been a $15.4 increase in earnings before
income taxes.
<Fb> To reflect the estimated aggregate cost of $7.2 which would have been
incurred by the Company as an independent company, based on estimates by
the management of the Company and May, and the $1.1 decrease of profit
sharing expense under the Payless Profit Sharing Plan versus the costs
incurred under the May Profit Sharing and Retirement Plans.
<Fc> To reflect net interest income which would have been earned by the
Company as an independent company, based on estimated net positive cash
flows determined by the management of the Company and May.
<Fd> To reflect the assumption that special and nonrecurring items took place
on the last day of fiscal 1994.
<Fe> To reflect revised income tax provision associated with the pro forma
adjustments described above at an assumed combined state and Federal
income tax rate of 39.3%.
<Ff> The number of outstanding shares represents the 1995 weighted average
outstanding shares of May common stock and an assumed distribution ratio
of [ ] share of Common Stock for each share of May common stock, plus
0.125 shares of Common Stock issued to Company associates on the first
day of fiscal 1995 in accordance with the Spin-Off Stock Plan. See
"EXECUTIVE COMPENSATION - Spin-Off Stock Plan and Spin-Off Cash Plan."
Pro Forma Balance Sheet
- -----------------------
The pro forma adjustments to the accompanying historical consolidated balance
sheet at February 3, 1996, are described below:
<Fa> To reflect the estimated marketable securities the Company would have
had in place at February 3, 1996, resulting from net positive cash flows.
<Fb> To reflect deferred tax asset impact associated with the pro forma
statement of earnings adjustments.
<Fc> To reflect balance sheet impact of special and nonrecurring items taking
place on the last day of fiscal 1994.
<Fd> To reflect the elimination of May's equity investment resulting from the
Distribution.
<Fe> To reflect the Distribution and the cumulative effect of the pro forma
adjustments.
10
<PAGE> 21
INTRODUCTION
On April [ ], 1996, the board of directors of May declared a
distribution, payable to the holders of record of May common stock,
at the close of business on the Record Date, of [ ] share of
Common Stock of the Company for every share of May common stock
([ ] shares of Common Stock for every 100 shares of May common stock)
outstanding on the Record Date.
Shareowners of May with inquiries relating to the Distribution
should contact the office of the Corporate Treasurer at The May
Department Stores Company, 611 Olive Street, St. Louis, Missouri,
63101-1799. May's telephone number is (314) 342-6300. After the
Distribution Date, shareowners of the Company with inquiries
relating to the Distribution or their investment in the Company
should contact the office of the Chief Financial Officer at the
Company, 3231 E. 6th Street, Topeka, Kansas 66601-1189. The
Company's telephone number is (913) 633-5171.
CERTAIN CONSIDERATIONS
UNAVAILABILITY OF MAY'S FINANCIAL AND OTHER RESOURCES
Prior to the consummation of the Distribution, the Company has
been operated as a wholly owned subsidiary of May. Following
consummation of the Distribution, it will no longer be able to rely
on May for financial support or benefit from its relationships with
May to obtain credit or receive favorable terms for the purchase or
sale of certain goods and services. Except as described under
"TRANSACTIONS BETWEEN THE COMPANY AND MAY" following consummation
of the Distribution, the Company will be responsible for obtaining
its own sources of financing and for its own corporate
administrative services such as tax, treasury, risk management and
insurance, accounting, legal, research and development, information
systems and human resources.
RISKS OF FOREIGN MANUFACTURING
The Company contracts for the manufacture of its merchandise
with independent third parties in the United States and 13 foreign
countries. Factories in the People's Republic of China ("China")
have been a source of approximately 80% of the Company's
merchandise.
Risks inherent in foreign manufacturing (i.e., manufacturing
outside the United States) include economic and political
instability, transportation delays and interruptions, restrictive
actions by foreign governments, the laws and policies of the United
States affecting importation of goods, including duties, quotas and
taxes, trade and foreign tax laws and fluctuations in currency
exchange rates. While the Company has not historically experienced
material adverse effects from these risks, there is no assurance
that in the future these risks will not result in increased costs
and delays or disruption in product deliveries that could cause
loss of revenue and damage to customer relationships.
China currently enjoys "most favored nation" ("MFN") status
under United States tariff laws, which provides the most favorable
category of United States import duties. China's MFN status is
annually reviewed by Congress. Extension of this status is subject
to political uncertainties. The loss of MFN status for China would
likely result in substantially increased costs to the Company in
the purchase of merchandise from China until the Company could
arrange to shift its merchandise requirements to alternative
manufacturers in other countries. The Company believes, however,
that its competitors in the footwear industry would be similarly
affected.
11
<PAGE> 22
ABSENCE OF PRIOR TRADING MARKET FOR THE COMMON STOCK
There has not been any established public trading for the
Common Stock, although it is expected that a "when-issued" trading
market may develop on or about the Record Date. Application will
be made to list the shares of Common Stock on the NYSE. There can
be no assurance as to the prices at which the Common Stock will
trade before or after the Distribution Date. In particular, the
market price for the Common Stock may be somewhat volatile
immediately following the Distribution because, among other
reasons, (i) the shares of Common Stock currently held by May will
be distributed to nearly [ ] holders of record, some of whom
may not choose to retain such shares, (ii) the shares of Common
Stock distributed to The May Department Stores Company Profit
Sharing Plan in the Distribution will be sold over time and the
proceeds reinvested in May common stock, and (iii) shares of Common
Stock will be sold by The Bank of New York, as distribution agent,
to eliminate fractional share interests. See "SECURITY OWNERSHIP
OF CERTAIN BENEFICIAL OWNERS" and "THE DISTRIBUTION -- Manner of
Effecting the Distribution." Prices for shares of Common Stock
will be determined in the marketplace and may be influenced by many
factors, including the depth and liquidity of the market for the
shares, investor perception of the Company, changes in economic
conditions in the retail industry and general economic and market
conditions. In addition, the stock market often experiences
significant price fluctuations that are unrelated to the operating
performance of the specific companies whose stock is traded.
Market fluctuations, as well as economic conditions, may adversely
affect the market price of the shares of Common Stock.
POSSIBLE ANTI-TAKEOVER EFFECTS OF CERTAIN CHARTER AND BYLAW
PROVISIONS AND OTHER MATTERS
Certain provisions of the Company's Amended and Restated
Articles of Incorporation (the "Payless Charter") and Amended and
Restated Bylaws (the "Payless Bylaws") including provisions
classifying the board of directors, governing business transactions
with certain shareowners, restricting the calling of special
shareowner meetings and requiring advance notice for shareowner
proposals and certain provisions of the General and Business
Corporation Law of Missouri (the "GBCL") could discourage potential
acquisition proposals and could delay or prevent a change in
control of the Company. In addition, the Rights (as hereinafter
defined) could have similar anti-takeover effects. Such charter
and bylaw provisions and the Rights could diminish the
opportunities for a shareowner to participate in certain tender
offers, including tender offers at prices above the then current
market value of the Common Stock and may also inhibit fluctuations
in the market price of the Common Stock that could result from
takeover attempts. See "PURPOSES AND EFFECTS OF CERTAIN PROVISIONS
OF THE CHARTER, THE BYLAWS AND THE RIGHTS AGREEMENT." In addition,
the Company's board of directors, without further shareowner
approval, may issue preferred stock that could have the effect of
delaying, deterring or preventing a change in control of the
Company. The issuance of preferred stock could also adversely
affect the voting power of the owners of the Common Stock,
including the loss of voting control to others. The Company has no
present plans to issue any preferred stock. See "DESCRIPTION OF
CAPITAL STOCK - Preferred Stock." In connection with the
Distribution, the Company has agreed to indemnify May for certain
taxes resulting from the failure of the Distribution (or certain
related transactions) to qualify as tax-free transactions if such
failure is attributable to certain actions by, or relating to, the
Company, including certain change of control transactions involving
the Company and certain dispositions of the Company's assets
occurring prior to the second anniversary of the Distribution Date.
See "TRANSACTIONS BETWEEN THE COMPANY AND MAY - Tax Sharing
Agreement." This agreement may have the effect of discouraging or
preventing an acquisition of the Company or a disposition of
certain of the Company, which may in turn depress the market price
for the shares of Common Stock.
DIVIDEND POLICY
The Company anticipates that future earnings will be used
principally to support operations and to finance new store
openings, store expansions and remodelings and, thus, the Company
does not intend to pay cash dividends on the Common Stock in the
near future. The payment of cash dividends in the future will be
12
<PAGE> 23
at the discretion of the Company's board of directors. The
declaration of dividends and the amount thereof will depend on a
number of factors, including the Company's financial condition,
capital requirements, funds from operations, future business
prospects and such other factors as the board of directors of the
Company may deem relevant.
13
<PAGE> 24
PAYLESS SHOESOURCE, INC. AND SUBSIDIARIES
SELECTED HISTORICAL FINANCIAL INFORMATION
The following table sets forth selected historical financial
information for the Company. The historical financial information
presented below reflects periods during which the Company did not
operate as an independent company, and, accordingly, certain
assumptions were made in preparing such financial information.
Therefore, such information may not necessarily reflect the
consolidated results of operations or financial position that would
have existed if the Company had been an independent company during
the periods shown or of the Company's future performance as an
independent company. The financial information set forth below
should be read in conjunction with the Company's Consolidated
Financial Statements and the Notes thereto contained elsewhere in
this Information Statement. See "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF RESULTS OF OPERATIONS AND LIQUIDITY AND CAPITAL
RESOURCES." Earnings per share data are presented elsewhere in
this Information Statement and on a pro forma basis only. See
"UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS."
<TABLE>
<CAPTION>
(millions)
STATEMENT OF
EARNINGS DATA: Fiscal Year<F1>
-------------------------------------------------------------------
1995 1994 1993 1992 1991
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net retail sales $2,330.3 $2,116.4 $1,966.5 $1,787.8 $1,547.5
Cost of sales 1,688.7 1,489.8 1,366.1 1,223.9 1,056.5
Selling, general
and administrative
expenses 479.9 408.4 378.7 351.6 310.7
Interest expense, net 1.0 1.1 0.9 0.8 1.3
Special and
nonrecurring
items 71.8<F2> - - - -
-------- -------- -------- -------- --------
Total cost of sales
and expenses 2,241.4 1,899.3 1,745.7 1,576.3 1,368.5
-------- -------- -------- -------- --------
Earnings before
income taxes 88.9 217.1 220.8 211.5 179.0
Provision for income
taxes 34.9 85.6 88.0 80.4 68.2
-------- -------- -------- -------- --------
Net earnings $54.0<F2> $131.5 $132.8 $131.1 $110.8
-------- -------- -------- -------- --------
<FN>
<F1> The Company's fiscal year ends on the Saturday closest to
January 31. Fiscal year 1995 includes 53 weeks.
<F2> During the 1995 fourth quarter, in connection with the
Distribution, the Company committed to close or relocate
approximately 450 unprofitable stores during 1996. In addition,
the Company committed to restructure its central office and other
personnel. The 1995 net earnings, excluding special and
nonrecurring items, is $97.5. The pro forma impact on 1995
results, had these stores been closed or relocated at the beginning
of 1995, would have been a $15.4 increase in earnings before income
taxes.
</TABLE>
14
<PAGE> 25
Selected Historical Financial Information (continued)
<TABLE>
<CAPTION>
(dollars in millions)
BALANCE SHEET DATA: FISCAL YEAR<F1>
---------------------------------------------------------
1995 1994 1993 1992 1991
-------- -------- ------ ------ ------
<S> <C> <C> <C> <C> <C>
Working capital $ 232.0 $ 242.8 $253.5 $206.1 $191.7
Property and equipment,
net $ 560.0 $ 590.6 $433.9 $383.9 $343.5
Total assets $1,014.3 $1,019.8 $840.8 $732.7 $692.7
Total debt $ 11.5 $ 13.1 $ 14.5 $ 16.1 $ 16.9
May equity investment $ 752.9 $ 793.9 $661.0 $571.1 $530.9
OTHER FINANCIAL DATA:
Net retail sales growth 10.1% 7.6% 10.0% 15.5% 13.3%
Earnings before interest,
income taxes, depreciation
and amortization
(EBITDA) <F2> $ 185.2<F3> $ 295.2 $288.7 $245.2 $226.1
Number of stores
(at period end) 4,549 4,435 3,779 3,563 3,295
Capital expenditures $ 95.4 $ 255.2 $139.8 $119.3 $145.6
Present value of
operating leases $ 885.5 $ 952.1 $779.9 $688.1 $554.0
<FN>
<F1> The Company's fiscal year ends on the Saturday closest to
January 31. Fiscal year 1995 includes 53 weeks.
<F2> EBITDA should not be considered in isolation or as a
substitute for measures of performance or cash generation prepared
in accordance with generally accepted accounting principles. See
the Company's Consolidated Financial Statements and the Notes
thereto, contained elsewhere in this Information Statement.
<F3> 1995 EBITDA, excluding special and nonrecurring items, is
$255.9.
</TABLE>
15
<PAGE> 26
PRO FORMA CAPITALIZATION
The following table sets forth the consolidated capitalization, the
pro forma adjustments and the pro forma consolidated capitalization
of the Company as if the distribution took place on February 3,
1996. The pro forma information may not reflect the capitalization
of the Company in the future or as it would have been had the
Company been an independent company as of February 3, 1996.
Assumptions regarding the number of shares of Common Stock may not
reflect the actual numbers at the Distribution Date.
<TABLE>
<CAPTION>
(dollars in millions)
February 3, Pro Forma Pro Forma
1996 <F1> Adjustments <F1> As Adjusted
----------- ----------- -----------
<S> <C> <C> <C>
Current maturities
of capital lease
obligations $ 1.2 $ $ 1.2
Long-term capital
lease obligations 10.3 10.3
Equity:
May equity investment 752.9 (752.9)
Shareowners' Investment:
Common Stock, $0.01
par value, authorized 120.0
shares, outstanding xx.x
shares 0.4 0.4
Preferred Stock, $0.01
par value, authorized 25.0
shares, no outstanding shares
Contributed capital
and retained earnings 752.5 752.5
------ ----------- --------
Total Equity 752.9 752.9
Total capitalization $764.4 $ - $ 764.4
====== =========== ========
Debt-to-capitalization
ratio <F2> 1% 1%
<FN>
<F1> This table should be read in conjunction with the Company's
Consolidated Financial Statements and the Notes thereto and
the Unaudited Pro Forma Consolidated Financial Statements and
the Notes thereto, contained elsewhere in this Information
Statement.
<F2> Debt-to-capitalization has been computed by dividing total
debt, which includes current maturities and long-term capital
lease obligations by capitalization, which includes current
maturities and long-term capital lease obligations, and
noncurrent deferred taxes of $8.9. The debt-to-capitalization
ratio, including the present value of future minimum rental
payments under operating leases as debt and as capitalization,
is 54% as of February 3, 1996 and pro forma as adjusted,
respectively.
</TABLE>
16
<PAGE> 27
PAYLESS SHOESOURCE, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
The Company has no operating history as an independent company.
The historical consolidated financial statements reflect periods
during which the Company did not operate as an independent company,
and, accordingly, certain assumptions were made in preparing such
financial statements. Therefore, such historical consolidated
financial statements may not necessarily reflect the consolidated
results of operations or financial position that would have existed
had the Company been an independent company.
The underlying assumptions that result in the pro forma adjustments
are: (1) the Distribution occurred on the first day of fiscal 1995
and (2) the store closings or relocations resulting in the special
and nonrecurring charge happened on the last day of fiscal 1994.
The pro forma consolidated financial statements should be read in
conjunction with the Company's Consolidated Financial Statements
and the Notes thereto contained elsewhere in this Information
Statement. The pro forma consolidated financial information is
presented for informational purposes only and may not necessarily
reflect the future results of operations or financial position of
the Company or what the results of operations or financial position
would have been had the Company's business been operated as an
independent company during such period.
<TABLE>
- ------------------------------------------------------------------------------------------------------------
PRO FORMA CONSOLIDATED STATEMENT OF EARNINGS
(Unaudited)
- ------------------------------------------------------------------------------------------------------------
Year Ended February 3, 1996
<CAPTION>
(millions, except earnings per share)
Pro Forma
Historical <F1> Adjustments <F2> Pro Forma
------------- ----------- -------------
<S> <C> <C> <C>
NET RETAIL SALES $ 2,330.3 $ (102.9) <Fa> $ 2,227.4
------------- --------- -------------
Cost of sales 1,688.7 (95.3) <Fa> 1,593.4
Selling, general and
administrative expenses 479.9 (22.9) <Fa>
6.1 <Fb> 463.1
Interest expense, net 1.0 (0.3) <Fc> 0.7
Special and nonrecurring items 71.8<F3> (71.8) <Fd> -
------------- --------- -------------
Total cost of sales and expenses 2,241.4 (184.2) 2,057.2
------------- --------- -------------
Earnings before income taxes 88.9 81.3 170.2
Provision for income taxes 34.9 32.0 <Fe> 66.9
------------- --------- -------------
NET EARNINGS $ 54.0<F3> $ 49.3 $ 103.3
============= ========= =============
Pro forma earnings per share $
=============
Outstanding shares of Common Stock <Ff>
=============
<FN>
<F1> See the Company's Consolidated Financial Statements and Notes
thereto, contained elsewhere in this Information Statement.
<F2> See accompanying Notes to Unaudited Pro Forma Consolidated
Financial Statements.
<F3> During the 1995 fourth quarter, in connection with the
Distribution, the Company committed to close or relocate
approximately 450 unprofitable stores during 1996. In addition, the
Company committed to restructure its central office and other
personnel. The 1995 net earnings, excluding special and
nonrecurring items, is $97.5. The pro forma impact on 1995 results,
had these stores been closed or relocated at the beginning of 1995,
would have been a $15.4 increase in earnings before income taxes.
</TABLE>
17
<PAGE> 28
<TABLE>
PAYLESS SHOESOURCE, INC. AND SUBSIDIARIES
- ------------------------------------------------------------------------------------------------------------------
PRO FORMA CONSOLIDATED BALANCE SHEET
(Unaudited)
- ------------------------------------------------------------------------------------------------------------------
February 3, 1996
<CAPTION>
(millions)
Pro Forma
Historical <F1> Adjustments <F2> Pro Forma
------------ ------------- -------------
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and marketable securities $ 4.6 $ 58.9 <Fa> $ 63.5
Accounts receivable, net 4.4 4.4
Merchandise inventories 398.0 398.0
Other current assets 43.9 (26.7) <Fb> 17.2
------------ --------- ------------
Total Current Assets 450.9 32.2 483.1
Property and Equipment:
Land 6.5 6.5
Buildings and leasehold
improvements 564.6 564.6
Furniture, fixtures and equipment 278.7 278.7
Property under capital leases 18.7 18.7
------------ --------- ------------
Total property and equipment 868.5 868.5
Accumulated depreciation and
amortization (308.5) (308.5)
------------ --------- ------------
Property and equipment, net 560.0 560.0
Goodwill 2.9 2.9
Other Assets 0.5 0.5
------------ --------- ------------
Total Assets $ 1,014.3 $ 32.2 $ 1,046.5
============ ========= ============
LIABILITIES AND EQUITY
Current Liabilities:
Current maturities of capital
lease obligations $ 1.2 $ $ 1.2
Accounts payable 65.0 65.0
Accrued expenses 152.7 (68.4) <Fc> 84.3
------------ --------- ------------
Total Current Liabilities 218.9 (68.4) 150.5
Capital Lease Obligations 10.3 10.3
Deferred Income Taxes 8.9 8.9
Other Liabilities 23.3 23.3
Equity:
May equity investment 752.9 (752.9) <Fd> -
Shareowners' equity - 853.5 <Fe> 853.5
------------ --------- ------------
Total Liabilities and Equity $ 1,014.3 $ 32.2 $ 1,046.5
============ ========= ============
<FN>
<F1> See the Company's Consolidated Financial Statements and Notes
thereto, contained elsewhere in this Information Statement.
<F2> See accompanying Notes to Unaudited Pro Forma Consolidated
Financial Statements.
</TABLE>
18
<PAGE> 29
Notes to Unaudited Pro Forma Consolidated Financial Statements
Pro Forma Statement of Earnings
- -------------------------------
The pro forma adjustments to the accompanying historical
consolidated statement of earnings for the year ended February 3,
1996, are described below:
[FN]
<Fa> To reflect the impact on sales, cost of sales, and selling,
general and administrative expenses of closing or relocating
approximately 450 unprofitable stores as of the last day of
fiscal 1994. The pro forma impact on 1995 results, had these
stores been closed or relocated at the beginning of 1995, would
have been a $15.4 increase in earnings before income taxes.
<Fb> To reflect the estimated aggregate cost of $7.2 which would
have been incurred by the Company as an independent company,
based on estimates by the management of the Company and May,
and the $1.1 decrease of profit sharing expense under the
Payless Profit Sharing Plan versus the costs incurred under the
May Profit Sharing and Retirement Plans.
<Fc> To reflect net interest income which would have been earned by
the Company as an independent company, based on estimated net
positive cash flows determined by the management of the Company
and May.
<Fd> To reflect the assumption that special and nonrecurring items
took place on the last day of fiscal 1994.
<Fe> To reflect revised income tax provision associated with the pro
forma adjustments described above at an assumed combined state
and Federal income tax rate of 39.3%.
<Ff> The number of outstanding shares represents the 1995 weighted
average outstanding shares of May common stock and an assumed
distribution ratio of [ ] share of Common Stock for each
share of May common stock, plus 0.125 shares of Common Stock
issued to Company associates on the first day of fiscal 1995 in
accordance with the Spin-off Stock Plan. See "EXECUTIVE
COMPENSATION - Spin-Off Stock Plan and Spin-Off Cash Plan."
Pro Forma Balance Sheet
- -----------------------
The pro forma adjustments to the accompanying historical
consolidated balance sheet at February 3, 1996, are described below:
[FN]
<Fa> To reflect the estimated marketable securities the Company
would have had in place at February 3, 1996, resulting from net
positive cash flows.
<Fb> To reflect deferred tax asset impact associated with the pro
forma statement of earnings adjustments.
<Fc> To reflect balance sheet impact of special and nonrecurring
items taking place on the last day of fiscal 1994.
<Fd> To reflect the elimination of May's equity investment resulting
from the Distribution.
<Fe> To reflect the Distribution and the cumulative effect of the
pro forma adjustments.
19
<PAGE> 30
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND LIQUIDITY AND CAPITAL RESOURCES
This discussion should be read in conjunction with the
Company's Consolidated Financial Statements and Notes thereto
contained elsewhere in this Information Statement. Since the
Company was a wholly owned subsidiary of May during the periods
presented, the financial statements may not necessarily reflect the
consolidated results of operations or financial position of the
Company had it been an independent, public company during those
periods. All dollar amounts herein are stated in millions, except
where expressly stated in billions and except shoe price
information.
GENERAL
The Company is the largest footwear retailer in the United
States, with over $2.3 billion in sales in 1995. The Company sold
over 200 million pairs of shoes in 1995, representing one out of
every five pairs sold in the United States. The Company's share of
the estimated $33 billion United States footwear market was 6.5% in
1995, and has grown consistently over the past two decades. The
Company is led by a team of experienced management executives who
have an average of 19 years of retail industry experience.
The Company operated, as of February 3, 1996, 4,549 self-
service, affordably priced, family shoe stores, of which 773 include
Payless Kids expansions. The Company's stores are located in 49
states, the District of Columbia, Puerto Rico and the United States
Virgin Islands. The Company's stores average 3,000 square feet and
carry approximately 11,000 pairs of shoes. The stores offer more
than 1,000 shoe styles at prices that average $11.00.
During recent years, the Company has grown sales by means of an
aggressive store opening program, which included acquisitions. The
five year compounded annual sales growth rate for the period ended
February 3, 1996 was 11.3%.
During 1995, management focused on store profitability as well
as continued net retail sales growth. The Company opened 114 net
new stores, adding 329,000 square feet of retail space. In
addition, the Payless Kids expansion program continued by expanding
138 stores by a total of 133,000 square feet. As announced January
17, 1996, the Company will close or relocate approximately 450
unprofitable stores during 1996. In addition, the Company committed
to restructure its central office and other personnel. The Company
recorded a one-time pretax special and nonrecurring charge of $71.8.
The pro forma impact on 1995 results, had these stores been closed
or relocated at the beginning of 1995, would have been a $15.4
increase in earnings before income taxes.
In 1994, the Company opened 656 net new stores, adding 2.6
million square feet of retail space. During the year, the Company
purchased 550 store locations from The Kobacker Company and The Shoe
Works, Inc. (collectively, "Kobacker") in 29 states and the District
of Columbia. The Company remodeled and reopened 416 of these stores
in the 1994 fourth quarter, all under the Payless ShoeSource name.
In addition, the Payless Kids expansion program continued in 1994
by adding 354 stores adjacent to existing Payless ShoeSource stores,
expanding those locations by a total of 357,000 square feet.
In 1996, the Company anticipates adding approximately 240 new
stores, with more than 720,000 square feet of retail space.
Approximately 10% of these new stores are planned to include
adjacent Payless Kids stores. The Company's total capital
expenditures in 1996 are estimated to be $114, including $60 to open
new stores, $26 to remodel existing stores and $28 to make other
required capital improvements.
20
<PAGE> 31
REVIEW OF OPERATIONS
Net earnings, excluding the impact of the special and
nonrecurring charge, totaled $97.5 in 1995 compared with $131.5 in
1994 and $132.8 in 1993. Net earnings, including the impact of the
special and nonrecurring items, were $54.0 in 1995. Total Company
return on revenues, excluding the special and nonrecurring items,
was 4.2% in 1995 compared with 6.2% in 1994 and 6.8% in 1993.
<TABLE>
Results for the past three years were as follows:
<CAPTION>
(millions)
1995<F1> 1994<F1> 1993<F1>
-------------------- ----------------------- -------------------
% of % of % of
$ Sales $ Sales $ Sales
-------- ----- -------- ----- -------- -----
<S> <C> <C> <C> <C> <C> <C>
NET RETAIL
SALES $2,330.3 100.0 $2,116.4 100.0 $1,966.5 100.0
Cost of sales 1,688.7 72.5 1,489.8 70.4 1,366.1 69.5
Selling,
general and
administrative
expenses 479.9 20.6 408.4 19.3 378.7 19.3
Interest expense,
net 1.0 - 1.1 - 0.9 -
Special and
nonrecurring
items 71.8<F2> 3.1 - - - -
-------- ----- -------- ----- -------- -----
Earnings before
income taxes 88.9 3.8 217.1 10.3 220.8 11.2
Provision for
income taxes<F3> 34.9 39.3 85.6 39.4 88.0 39.8
-------- ----- -------- ----- -------- -----
NET EARNINGS $ 54.0<F2> 2.3% $ 131.5 6.2% $ 132.8 6.8%
-------- ----- -------- ----- -------- -----
<FN>
<F1> The Company's fiscal year ends on the Saturday closest to
January 31. Fiscal year 1995 contains 53 weeks.
<F2> During the 1995 fourth quarter, in connection with the
Distribution, the Company committed to close or relocate
approximately 450 unprofitable stores during 1996. In addition, the
Company committed to restructure its central office and other
personnel. The 1995 net earnings, excluding these special and
nonrecurring items, is $97.5. The pro forma impact on 1995 results,
had these stores been closed or relocated at the beginning of 1995,
would have been a $15.4 increase in earnings before income taxes.
<F3> Percent of sales column represents effective income tax
rate.
</TABLE>
<TABLE>
NET RETAIL SALES. Net retail sales, on a 52-week basis,
increases (decreases) for 1995 and 1994 were as follows:
<CAPTION>
1995 vs. 1994 1994 vs. 1993
- ------------------------ -----------------------------
Store-for- Store-for-
Total Store<F1> Total Store<F1>
- -----------------------------------------------------------
<S> <C> <C> <C>
8.8% (3.7)% 7.6% (0.2)%
<FN>
<F1> Store-for-store sales represent sales of those stores open
during both years.
</TABLE>
21
<PAGE> 32
The 1995 store-for-store decrease reflects an overall sluggish
retail environment, combined with some cannibalization of sales as
a result of the acquisition of locations from Kobacker and a sales
decline in the Company's Mexican border stores caused by the
devaluation of the peso. The Company believes it outperformed its
competition in store-for-store sales in 1995 and increased its
share of the footwear market. The Company is addressing sales
cannibalization through the closing of unprofitable stores, and the
value of the peso appears to have stabilized.
Total sales increases for 1994 include the results of 656 net
new stores, partially offset by a 0.2% store-for-store sales
decrease.
COST OF SALES. Cost of sales includes cost of merchandise
sold and buying and occupancy costs. Cost of sales was $1,688.7 in
1995 compared with $1,489.8 in 1994, a 13.4% increase. As a
percent of net retail sales, cost of sales was 72.5% in 1995
compared with 70.4% in 1994. The drop in store-for-store sales
caused an increase in the occupancy cost as a percent of sales.
The Company also took additional markdowns to maintain current
inventories.
Cost of sales was $1,489.8 in 1994 compared with $1,366.1 in
1993, a 9.1% increase. As a percent of net retail sales, cost of
sales was 70.4% in 1994 compared with 69.5% in 1993. The 1994
percent increase was primarily due to increased occupancy, rent and
depreciation expense rates resulting from a decrease in store-for-
store sales and from the expenses associated with opening the
Kobacker locations.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling,
general and administrative expenses were $479.9 in 1995 compared
with $408.4 in 1994, a 17.5% increase. The increase of 17.5% was
due principally to a 15.1% increase in the average number of
stores. As a percent of net retail sales, selling, general and
administrative expenses were 20.6% compared to 19.3% in 1994,
resulting from a 3.7% decline in store-for-store sales coupled with
relatively fixed store staffing costs.
Selling, general and administrative expenses were $408.4 in
1994 compared with $378.7 in 1993, a 7.8% increase. The increase
was due to an 8.5% increase in the average number of stores. As a
percent of net retail sales, selling, general and administrative
expenses remained flat in spite of a 0.2% decrease in store-for-
store sales.
INTEREST EXPENSE. Interest expense is primarily related to
capitalized lease obligations.
SPECIAL AND NONRECURRING ITEMS. During the 1995 fourth
quarter, in connection with the Distribution, the Company committed
to close or relocate approximately 450 unprofitable stores during
1996. In addition, the Company implemented a plan to reduce
central office overhead by means of census reduction and expense
control programs. A one-time pretax special and nonrecurring
charge of $71.8 was recorded for these initiatives, of which $29.9
was noncash. The pro forma impact on 1995 results, had the stores
been closed or relocated at the beginning of 1995, would have been
a $15.4 increase in earnings before income taxes.
INCOME TAXES. The effective income tax rates were 39.3%,
39.4% and 39.8% in 1995, 1994 and 1993, respectively.
The decrease in the 1994 effective income tax rate to 39.4%
from 39.8% in 1993 relates to an increase in wages eligible for the
Federal Targeted Jobs Tax Credit.
IMPACT OF INFLATION. Historically, the Company's sales growth
and earnings have not been materially impacted by inflation. The
shoe industry experienced no inflation in 1995 and over the last
three years the inflation rate has averaged less than one-half of
1%.
22
<PAGE> 33
REVIEW OF FINANCIAL CONDITION
CASH FLOW. Cash flow from operations (earnings, before
special and nonrecurring charges, plus depreciation/amortization)
was $192.9 in 1995. This was 8.3% of net sales in 1995 compared
with 9.9% in 1994 and 10.2% in 1993. The Company's cash flow tends
to be fairly consistent from quarter to quarter.
<TABLE>
Sources and (uses) of cash flows are summarized below:
<CAPTION>
1995 1994 1993
- ------------------------------------------------------------------
<S> <C> <C> <C>
Earnings, before special and
nonrecurring charges and
depreciation/amortization 192.9 208.5 199.8
Other operating activities (33.6) 25.6 (31.9)
Investing activities (64.7) (235.0) (116.8)
Financing activities (1.6) (1.4) (1.7)
--------------------------------
Increase (decrease) in cash
before transactions with May 93.0 (2.3) 49.4
Net transactions with May (95.0) 1.4 (42.9)
--------------------------------
Increase (decrease) in cash (2.0) (0.9) 6.5
- ------------------------------------------------------------------
</TABLE>
The 1994 investing activities include $140.9 related to the
acquisition and remodeling of the Kobacker locations.
FINANCING ACTIVITIES. Historically, cash collected by the
Company in excess of store operating needs was transferred to May
on a daily basis and all the Company's cash requirements were
funded by May through a non-interest bearing intercompany account.
The debt and investment levels prior to the Distribution may not be
indicative of debt and investment levels had the Company operated
as an independent company during these periods.
The Company is currently in discussions with prospective
lenders regarding a revolving credit facility.
Management believes that its cash flow from operations,
together with borrowings under a credit facility, will provide it
with sufficient resources to meet its working capital needs and to
finance its projected capital expenditures.
FINANCIAL CONDITION RATIOS. The debt-to-capitalization ratio
was 1%, 2% and 2% at the end of each of 1995, 1994 and 1993,
respectively. For purposes of the debt-to-capitalization ratio,
total debt is defined as current maturities and long-term capital
lease obligations. Capitalization is defined as current maturities
and long-term capital lease obligations, noncurrent deferred taxes
and May equity investment. The debt-to-capitalization ratio,
including the present value of future minimum rental payments under
operating leases as debt and as capitalization, was 54%, 55% and
55% in 1995, 1994 and 1993, respectively. The 1995 debt-to-
capitalization ratio, after reducing the capitalized value of
leases to reflect the closing or relocating of approximately 450
unprofitable stores, would be 53%.
Fixed charge coverage, excluding special and nonrecurring
items, was 1.7x, 2.1x and 2.3x in 1995, 1994 and 1993,
respectively. Fixed charges are defined as gross interest expense
and total rent expense. Fixed charge earnings represent earnings
before income taxes, excluding special and nonrecurring items, plus
fixed charges. In 1995, the decrease in coverage resulted from an
increase in rent expense of $35.4, while fixed charge earnings
decreased. In 1994, the decline in coverage resulted from the rent
expense growing at a faster rate than fixed charge earnings.
23
<PAGE> 34
CAPITAL EXPENDITURES. The Company emphasizes return on net
assets and internal rate of return as the principal operating
measures in evaluating investments in new stores and remodels,
and elimination of unproductive space.
In 1995, the Company's capital expenditures totaled $95.4,
$49.6 for new stores, $26.4 for remodels of existing stores and
$19.4 for other necessary improvements.
In 1994, the Company's capital expenditures, excluding the
acquisition of Kobacker locations, totaled $114.3, including
$72.2 for new stores, $18.2 for remodels of existing stores and
$23.9 for other necessary improvements.
In 1996, the Company's capital expenditures are estimated to
be $114, including $60 to open new stores, $26 to remodel
existing stores and $28 to make other necessary improvements.
BUSINESS
OVERVIEW
The Company is the largest footwear retailer in the United
States, with over $2.3 billion in sales in 1995. The Company
sold over 200 million pairs of shoes in 1995, representing one
out of every five pairs sold in the United States. The Company's
share of the estimated $33 billion United States footwear market
was 6.5% in 1995, and has grown consistently over the past two
decades. The Company is led by a team of experienced management
executives who have an average of 19 years of retail industry
experience.
The Company operated, as of February 3, 1996, 4,549 self-
service, affordably priced, family shoe stores, of which 773
include Payless Kids expansions. The Company's stores are
located in 49 states, the District of Columbia, Puerto Rico and
the United States Virgin Islands. The Company's stores average
3,000 square feet and carry approximately 11,000 pairs of shoes.
The stores offer more than 1,000 shoe styles at prices that
average $11.00.
The Company has broad customer appeal, providing a complete
assortment of affordably priced, quality footwear for women, men
and children from all age groups, and from households with
incomes that represent 85% of the United States population. The
Company has significant market penetration with its target
customer, women aged 18-64. In fact, over 40% of its targeted
customers, regardless of household income, purchased at least one
pair of shoes from the Company last year. In addition to shoes,
the stores offer accessories, including handbags and hosiery.
Management believes the Company is the most profitable
footwear retailer in the United States, although 1995 results
were negatively impacted by a difficult retail environment, the
devaluation of the peso and the integration of certain new store
locations. The Company has achieved a compound annual sales
growth rate of 11.3% over the last five years and consistent cash
flow from operations.
During 1995, management identified steps to increase store
profitability. As a result of this analysis, during 1995, in
connection with the Distribution, the Company committed to close
or relocate approximately 450 unprofitable stores during 1996. A
one-time pretax special and nonrecurring charge of $71.8 million
associated with these store closings or relocations and other
nonrecurring items was recorded in 1995. The pro forma impact on
1995 results, had these stores been closed or relocated at the
beginning of 1995, would have been a $15.4 million increase in
earnings before income taxes.
The Company's objective is to increase sales and profits
through increased store-for-store sales in existing locations
combined with selective openings of profitable new stores.
Management intends to achieve this objective through the
following strategic initiatives:
- build on merchandising strengths (women's dress shoes,
children's, sandals) while accelerating new or
revitalized strategies of comfort, wide widths and
leather;
24
<PAGE> 35
- continue to capitalize on long-standing relationships
with vendors and factories to provide the best
assortment and value to the customer while maintaining
strong margins;
- increase the selling productivity of the front portions
of all stores and maximize the strength of urban store
locations through more focused merchandising;
- leverage competitive advantage in distribution to
increase sales (build on the Company's ability to
quickly respond to validated fashion trends while
capitalizing on its sophisticated physical distribution
system to optimize sales replenishment);
- increase market share by capturing the sales of low
priced footwear retailers and discount mass-
merchandisers that have gone out of business or closed
stores in recent months (the Company is strongly
positioned to capture market share due to the convenient
nationwide network of stores in all types of locations
(malls, shopping centers, central business districts and
free-standing stores));
- identify productive sites for new stores in existing and
new markets; and
- drive down operating costs through cost control programs
and the leveraging of technology.
In addition, the Company believes that, as an independent
company with its own publicly traded stock, it will be better
able to attract, retain and motivate its associates by offering
economic incentives and rewards tied more directly to the
Company's performance.
The Company believes that these initiatives will lead to
improved operating results. See "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF RESULTS OF OPERATIONS AND LIQUIDITY AND CAPITAL
RESOURCES." Furthermore, the Company believes there is
opportunity for continued profitable expansion of its business in
the United States.
INDUSTRY
The retail footwear industry can be divided into high,
moderate and value-priced segments, and is dominated by the
Company and national discount mass-merchandisers in the value-
priced segment. The high priced segment is controlled by
department stores while the moderate priced segment is declining.
Based on industry data, the U.S. footwear market is
estimated to be $33 billion and 1 billion pairs, and has stayed
relatively flat over the past several years. The value-priced
segment as a percent of the total pairs has more than doubled
over the past 15 years.
MERCHANDISING
The Company offers a broad assortment of fashionable
footwear to meet every need of its customers. This breadth of
assortment allows the Company to provide basic, seasonal and
fashion shoes in dress, casual, athletic and workboot categories.
Shoes are constructed in leather, canvas and manmade materials.
Styling is updated regularly to keep pace with proven fashion
trends. The Company purchases product to appeal specifically to
various segments of the population. Particular focus is placed
on identifying highly desirable product selection to meet the
specific needs of urban and ethnic market segments. The Company
also carries handbags, hosiery, polish and other accessories.
The merchandising effort is led by the President and three
general merchandise managers with an average of 24 years of
retail experience. They direct teams of buyers, planners and
distributors that interact with vendors, agents, factory owners
and representatives of the Company's Payless ShoeSource
International office to design, select, produce, inspect and
distribute footwear and accessories for the Company. The
Company's experienced buying organization, combined with its
strong relationship with its vendors, enables it to be on the
forefront of capitalizing on proven fashion trends.
25
<PAGE> 36
STORES
The Company's highly recognizable yellow and orange signing
package appears in a variety of retail formats including strip
centers, regional and super-regional shopping malls, junior
centers, central business districts and free-standing locations.
The store appearance remains very consistent from location to
location attesting to the flexibility of the Company's store
design. The Company is focusing on improving the fixturing and
product presentation in the front portion of its stores to
maximize sales productivity. Stores average approximately 3,000
square feet and carry approximately 11,000 pairs of shoes. The
stores offer more than 1,000 shoe styles at prices that average
$11.00.
The Company's stores operate successfully in rural, suburban
and urban environments providing convenient locations and broad
appeal to customers in every setting. The Company currently
operates profitably in markets with as few as 20,000 people per
store.
<TABLE>
The 10 states with the largest concentrations of the
Company's stores are identified below.
<CAPTION>
STATE STORES
<S> <C>
California 727
Texas 388
New York 305
Florida 289
Illinois 234
Pennsylvania 214
Ohio 212
Michigan 172
Washington 115
New Jersey 112
Other 1,781
-----
Total 4,549
=====
</TABLE>
Of the 4,549 locations, 773 have adjacent Payless Kids'
expansions. In this store format, additional selling and display
space is provided for children's shoes. Wider aisles, child-
friendly seating and an entertainment center enhance the shopping
experience for families.
Substantially all of the Company's stores are leased. The
leases typically have a primary term of 10 years, with one or two
five-year renewal options. Leases usually require payment of
base rent, applicable real estate taxes, common area expenses
and, in some cases, percentage rent based on the store's sales
volume.
The Company's stores are highly automated with an electronic
point of sale register and a back office computer that not only
records transactions from the register, but also serves many
other store supporting functions including price look up,
accumulation of associate hours worked and communications with
the Company's headquarters in Topeka, Kansas. Store associates
receive regular weekly communications from the Company's
headquarters explaining promotional and display requirements.
The Company's retail operations are directed centrally by a
senior officer and a small support staff. The retail operations
organization is subdivided into six divisions headquartered in
the cities of Atlanta, Baltimore, Chicago, Dallas, Denver and Los
Angeles. Divisions are directed by a vice president, two to four
operations managers and a small support staff.
Each store has a manager and approximately five associates.
The stores are organized into districts. District supervisors
report to the division offices and have full financial
responsibility for the stores in their district. Division
offices also have loss prevention and inventory control
functions. Human resources and merchandising support are
provided from the Company's headquarters.
26
<PAGE> 37
MARKETING
The Company's marketing efforts are multi-dimensional,
including nationally broadcast television advertising, national
magazine advertisements, local market radio and free-standing
newspaper inserts in support of major promotional periods. In
addition to media support, the Company has in-store promotional
materials, including posters, signs and point of sale items. The
Company's promotional message emphasizes not only the affordable
prices to which its customers have grown accustomed, but also
quality, fashion, selection, comfort, wide widths and a full
range of sizes for the entire family.
The Company's marketing staff is augmented by a full-service
advertising concern that provides creative services, media
purchase and consumer research.
SOURCING
The Company utilizes a network of vendors and factories in
13 foreign countries and the United States to source its products
which are manufactured to meet the Company's demanding
specifications and standards. The strength of the Company's
relationships with vendors and factories, some dating back over
40 years, has allowed the Company to quickly adapt its sourcing
strategies to reflect changing political and economic
environments. On several occasions over the past years, many of
the Company's vendors and factory owners have played significant
roles in developing production in new factories and in new
countries without compromising production capacity or product
quality. Factories in China are a source of approximately 80% of
the Company's merchandise. See "CERTAIN CONSIDERATIONS -- Risks
of Foreign Manufacturing." The Company does not purchase
"seconds" or "overruns" and does not own any manufacturing
facilities.
On a worldwide basis, approximately two-thirds of the
Company's merchandise is acquired through a network of third-
party vendors. Payless ShoeSource International, the Company's
Taipei, Taiwan based subsidiary, arranges directly with factories
the design, selection, production management, inspection and
distribution of approximately one-third of the shoes acquired for
the Company, providing a meaningful cost advantage.
The Company stands behind the quality of the shoes it sells
to its customers, and its factories share with the Company the
financial responsibility for returned merchandise. The Company's
vendors are required to carry liability insurance and are
responsible for financial damages associated with copyright and
product liability.
The Company closely integrates its merchandise purchasing
requirements with various manufacturers through its sourcing
organization which has offices in Topeka, Kansas, and in Taiwan,
China, Indonesia and Brazil.
QUALITY ASSURANCE
The Company's quality assurance organization sets standards
and specifications for product performance and appearance. It
communicates those standards and specifications through its
copyrighted quality assurance manual.
The quality assurance organization also provides technical
design support for the Company's direct purchasing function. It
is responsible for review and approval of vendor and factory
technical design, performing worldwide laboratory testing of
materials and components and for performing in-factory product
inspections to validate that materials and factory production
techniques are consistent with Company specifications. The
Company locates its field inspection personnel close to the
factories and freight consolidation facilities it uses throughout
the world.
PRODUCTION MANAGEMENT
The production management organization manages an aggressive
and ongoing process to qualify and approve new factories, while
continually assessing existing factory service and quality of
performance. New
27
<PAGE> 38
factories must meet minimum standards required
for quality of shoe production and minimum capacity requirements.
They must also agree to the Company's production control
processes and certify that neither they nor their suppliers use
forced or child labor. Factory performance must continually
improve or run the risk of being removed from the list of
approved factories. The production management organization
utilizes a unique, internally developed production control
process by which the Company is electronically linked to its
factories and vendors. By utilizing this process, production
management is able to assure the Company of on-time deliveries,
with the minimum lead time and without incurring unnecessary
costs.
The Company believes that maintaining strong factory
relationships, improving key factory performance factors and
improving factory profitability is critical to long-term sourcing
stability. Its manufacturing services group, based in Asia,
provides direction and leadership to key factories in the areas
of overall productivity improvement and lead time reduction.
MERCHANDISE DISTRIBUTION
The Company believes that its state-of-the-art distribution
system is a major competitive advantage. The Company's
merchandise distribution teams are able to track shoes by the
pair from order placement through the sale to the customer
through the use of sophisticated systems, including perpetual
inventory, product planning and retail price management systems.
These systems are maintained by experienced information systems
executives and enhanced regularly to improve the product
distribution process. Distribution analysts regularly compare
sales by size and inventory by size and style, down to the
individual shoe level when necessary, to maintain the highest
availability of product within the Company's stores.
The Company operates a single 765,000 square foot
distribution center in Topeka, Kansas, capable of replenishing
sales by style, color and size. This facility operates seven
days-a-week and has sufficient capacity to support more than
5,000 stores with current technology. Management believes this
is one of the most highly-automated and cost-efficient
distribution facilities in the industry. Stores receive product
at least once a week, maintaining a constant flow of fresh and
replenished merchandise.
EXPANSION STRATEGY
The Company anticipates adding 240 new stores in 1996. As a
result of these store openings, the Company anticipates having
approximately 4,340 stores operating at the end of fiscal 1996.
Approximately 10% of these new stores are planned to include
adjacent Payless Kids' expansions. In the five year period
commencing in 1997, the Company anticipates opening approximately
500 net new stores in new and existing markets. Each new store
investment decision is based on a careful review of market
potential, the ability to achieve a targeted return on net assets
and internal rate of return criteria. The Company believes that
there is opportunity for continued profitable expansion of its
business in the United States.
COMPETITION
The Company operates in a highly-competitive retail market
competing primarily with national and regional discount mass-
merchandisers, as well as with other self-service discount shoe
stores, regional discount mass-merchandisers and off-price outlet
stores. Competition is based on product selection and quality,
availability, price, store location, customer service and
efficient promotional activities. The Company has successfully
operated in its markets with each of these segments of retailing
for many years and has continued to capture increased market
share, by offering a wider selection of fashionable styles and
compelling prices in conveniently located stores; however, the
Company is facing increased competition from certain national
discount mass-merchandisers.
The competitive landscape continues to change. Within the
past two years, several direct self-service competitors have
ceased to operate or closed significant numbers of stores. Direct
mall competitors and regional discount mass-merchandisers have
had to reorganize and restructure, providing the Company
continued opportunities to increase revenues. The diversity of
store types (stores in strip centers, regional and super-regional
shopping malls, junior centers, free-standing locations and
central business districts) and a broad geographic base allow the
Company to take advantage of these changes and continue to grow.
28
<PAGE> 39
EMPLOYEES
The Company currently employs approximately 24,000 associates,
of whom approximately 13,000 are full-time and 11,000 part-time.
The part-time associates are primarily store sales/customer service
personnel. Approximately 650 of the Company's distribution center
associates are covered by collective bargaining agreements. The
Company considers its union and non-union employee relations to be
good.
The Company is led by a team of senior management executives
who have an average of 19 years of retail industry experience,
including an average of nine years with the Company.
LITIGATION
The Company is a party to a number of legal proceedings that
arose in the ordinary course of business. While the outcome of
these legal proceedings cannot be predicted with certainty,
management does not expect these matters to have a material adverse
effect on the business or financial position of the Company.
TRADEMARKS
The Company owns, in connection with footwear, all rights to
"Payless," "Payless ShoeSource" and "Payless Kids," each of which
is used as a trademark in connection with various merchandise or as
a service mark. The Company owns all rights to the distinctive
yellow and orange logo used in its signage and advertising. In the
United States, the Company has registered 45 key marks and owns
over 50 common law marks under which it markets private label
merchandise. In its on-going effort to protect its intellectual
property, the Company has registered its "Payless ShoeSource" and
"Payless Kids" marks extensively abroad and is actively pursuing
registration abroad of its other trademarks.
EFFECT OF COMPLIANCE WITH ENVIRONMENTAL LAWS
Compliance with Federal, state and local laws regulating the
discharge of materials into the environment or otherwise relating
to the protection of the environment has not had, and is not
expected to have, a material effect on capital expenditures,
earnings or the competitive position of the Company.
FINANCING
The Company is currently in discussions with prospective
lenders regarding a revolving credit facility. The Company expects
that the credit facility will be available for general corporate
and working capital purposes. The Company anticipates that the
covenants in the credit facility will not impose material
restrictions on the operations of the Company.
MANAGEMENT
DIRECTORS
The Payless Charter and the Payless Bylaws provide that the
Company's board of directors may have no less than three and no
more than 15 members, as determined from time to time by the board,
each to hold office for a term of three years and until his or her
successor shall have been elected and qualified, with the terms
staggered so that approximately one-third of the directors will
stand for election in any one year. The Company anticipates that
as of the Distribution Date the board of directors will consist of
six persons, each of whom will be elected for a term expiring at
the annual meeting of shareowners indicated below and until his
successor is elected and qualified. The following table sets forth
information concerning the persons who will serve as directors.
29
<PAGE> 40
<TABLE>
<CAPTION>
TERM EXPIRES AT
NAME AGE ANNUAL MEETING IN
- -----------------------------------------------------------
<S> <C> <C>
Steven J. Douglass 46 1999
Richard A. Jolosky 61 1997
Thomas A. Hays 63 1998
[ to be named] [ ] 1998
Howard R. Fricke 60 1999
Robert L. Stark 63 1997
</TABLE>
Steven J. Douglass will become the Chairman of the Board and
Chief Executive Officer of the Company as of the Distribution Date.
Mr. Douglass has been Chairman and Chief Executive Officer of the
Company since April, 1995. He joined the Company in 1993 and served
as Senior Vice President/Director of Retail Operations from 1993 to
January, 1995 and as Executive Vice President/Director of Retail
Operations from January, 1995 to April, 1995. Prior to his
association with the Company, Mr. Douglass held several positions at
divisions of May, serving as Chairman of May Company, Ohio (1990-1993)
and Senior Vice President and Chief Financial Officer of J.W.
Robinsons (1986-1990). He also held positions in May's corporate
office from 1976 to 1986, including Senior Vice President of Planning
and Reporting (1982-1986) and Vice President of Planning (1980-1982).
Prior to joining May in 1976, Mr. Douglass was employed by the J.L.
Hudson division of Dayton Hudson, as Director of Store Operations
(1975), Manager - Financial Analysis (1974-1975) and Manager - General
Accounting (1972-1974).
Richard A. Jolosky has been President of the Company since
January, 1996. He initially joined the Company in September 1982,
serving as Executive Vice President - Merchandising (1982-1984) and
then as President (1985-1988). Prior to rejoining the Company in
1996, Mr. Jolosky was President and Chief Executive Officer of
Silverman Jewelry Company (1995-1996), Chief Executive Officer of
the Richard Allen Company (1992-1995), a consultant for Northern
Automotive Company, and President and Chief Executive Officer of J
& T Shoe Company (1988). Before joining the Company initially,
he was employed as Senior Vice President and General Merchandise
Manager of Jefferson Ward (1981-1982) and Vice President and
General Merchandise Manager for Wal-Mart (1978-1981). Mr. Jolosky
also held several positions at the Meier & Frank division of May,
including General Merchandise Manager (1975-1978), Divisional
Merchandise Manager (1968-1975) and Buyer (1965-1968). Mr. Jolosky
began his career at Gimbel's Milwaukee, serving as Buyer, (1961-
1965) and as Assistant Buyer (1960-1961).
Thomas A. Hays has been the Deputy Chairman of May since 1993
and has announced his retirement as Deputy Chairman and as a
director of May effective April 30, 1996. Mr. Hays joined May in
1969 in the finance and operations areas. From 1972 to 1984, he
served as Chairman, President or Chief Executive Officer of several
operating divisions of May. Mr. Hays was named Vice Chairman of
May in 1982 and President in 1985. He was elected to May's board
of directors in 1983. Mr. Hays is also a director of May,
Mercantile Bancorporation and Union Electric Company.
[Bio of director to be named]
Howard R. Fricke has been the Chairman of the Board, President
and Chief Executive Officer of The Security Benefit Group of
Companies since 1988. Between 1974 and 1988, Mr. Fricke served as
Senior Vice President of Horace Mann Insurance Companies, President
and Chief Executive Officer of Commercial Credit Company's
insurance subsidiaries, and Chairman and Chief Executive Officer of
Anchor National Life Insurance Company and its affiliate, Anchor
National Financial Services, Incorporated. Before 1974, Mr. Fricke
was employed in various capacities by Horace Mann Insurance
Company, Franklin Life Insurance Company and State Farm Insurance.
Robert L. Stark became Dean of The Regents Center at the
University of Kansas in 1993, after retiring from Hallmark Cards,
Inc. Prior to his becoming dean, Mr. Stark was employed by
Hallmark Cards, Inc. for 35 years in several capacities, including:
Executive Vice President, President of the Personal Communication
Group, Group Vice President, President of Hallmark, Canada and a
member of the board of directors. He is also on the board of
directors of Redman Industries, Inc., Mercantile Bancorporation,
Century Products and Packerware Corporation.
30
<PAGE> 41
COMMITTEES OF THE BOARD OF DIRECTORS
The board of directors will have two committees: an Audit and
Finance Committee and a Compensation and Nominating Committee.
The functions of the Audit and Finance Committee include
making recommendations to the board of directors as to the
selection of the firm of independent public accountants and
auditors to examine the books and accounts of the Company for each
fiscal year, the proposed engagement arrangements for the
independent public accountants and auditors for each fiscal year,
and the advisability of having the independent public accountants
and auditors make specified studies and reports regarding auditing
matters, accounting procedures, tax or other matters. The Audit
and Finance Committee will also review the results of the audit for
each fiscal year, such accounting policies of the Company as are
deemed appropriate for review by the Committee, the coordination
between the independent public accountants and auditors and the
Company's internal auditing group, the scope and procedures of the
Company's internal audit work and the quality and composition of
the Company's internal audit staff. The Audit and Finance
Committee will also be responsible for reviewing and making
recommendations to the board of directors with respect to the
following matters: (a) the financial policies of the Company, debt
ratings, short-term versus long-term debt positions, debt-to-
capitalization ratios, fixed charge coverage, working capital and
bank lines, dividend policy, the long-range financial plans of the
Company, the Company's capital expenditure program including rate
of return standards and evaluation methods, specific debt and/or
equity placement activities, external financial relationships (with
investment bankers, commercial bankers, insurance companies, etc.),
financial public relations and communication programs, profit
sharing plan investments, financial aspects of proposed
acquisitions and/or divestitures, and the Company's insurance and
risk management program. The members of the Audit and Finance
Committee will be Messrs. Stark and [to be named], each of whom
will be independent directors as required by the rules of the NYSE.
The functions of the Compensation and Nominating Committee
include considering and recommending to the board of directors and
Company management the overall compensation programs of the
Company, reviewing and approving the compensation payable to the
senior management personnel of the Company and reviewing and
monitoring the executive development efforts of the Company to
assure development of a pool of management and executive personnel
adequate for orderly management succession. The Committee will
also review significant changes in employee benefits plans and
stock related plans; serve as the "Committee" under the Company's
profit sharing plan, 1996 Stock Incentive Plan, executive incentive
compensation plan for corporate executives, supplementary
retirement plan, long-term disability plan and deferred
compensation plan; and identify and recommend to the board can-
didates for directors, members of committees of the board of
directors and the successor to the chief executive. The members of
the Compensation and Nominating Committee will be Messrs. Hays and
Fricke, each of whom are "disinterested persons" within the meaning
of Rule 16b-3 under the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), and "outside directors" within the meaning of
Section 162(m) of the Internal Revenue Code (the "Code").
The board of directors of the Company may, from time to time,
establish certain other committees to facilitate its work.
COMPENSATION OF DIRECTORS
Management directors will not be entitled to additional
compensation by reason of their directorship or attendance at
meetings of the board of directors of the Company or any committee
thereof or at meetings of the shareowners. Non-management
directors will receive 1,000 shares of Common Stock upon joining
the board. Non-management directors also will be paid an annual
fee of $35,000, payable in Common Stock. All such shares of stock
are subject to restrictions on transferability and to forfeiture.
For 1996, the number of shares to be paid as the annual fee will be
determined based upon the average of the high and low trading
prices of the Common Stock on the NYSE for each of the first thirty
trading days on which trading in the Common Stock on the NYSE
occurs. Beginning in 1997, the number of shares will be determined
based upon the arithmetic average closing prices of the shares for
each of the ten trading days on which trading in the Common Stock
on the NYSE occurs prior to the date of the annual meeting. Non-management
31
<PAGE> 42
directors also will be paid $1,000 in cash per meeting
for attending more than twelve meetings (board and committee) in a
year.
EXECUTIVE OFFICERS
The following table sets forth certain information about the
persons who will be executive officers of the Company as of the
Distribution Date. Each such person will have been elected to the
indicated office with the Company on or prior to the Distribution
Date and will serve at the pleasure of the board of directors of
the Company.
<TABLE>
<CAPTION>
Name Age Position
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Steven J. Douglass 46 Chairman of the Board and Chief Executive Officer
Richard A. Jolosky 61 President
Ullrich E. Porzig 50 Senior Vice President and Chief Financial Officer
Bryan P. Collins 42 Senior Vice President - General Merchandise Manager -
Women's
Gerald F. Kelly 48 Senior Vice President - Logistics/Information Services
Duane L. Cantrell 40 Senior Vice President - Retail Operations
Thomas L. Rinehart 41 Senior Vice President - General Merchandise Manager -
Men's
Michael S. Wilkes 42 Senior Vice President - General Merchandise Manager -
Children's
Jed L. Norden 45 Senior Vice President - Human Resources
Harris Mustafa 42 Senior Vice President - Merchandise Distribution
Stephen Farley 41 Senior Vice President - Marketing
Curtis H. Barlow 47 Senior Vice President - Real Estate/Construction
- --------------------------------------------------------------------------------------------
</TABLE>
Steven J. Douglass. See "MANAGEMENT -- Directors."
Richard A. Jolosky. See "MANAGEMENT -- Directors."
Ullrich E. Porzig has been the Company's Senior Vice President
and Chief Financial Officer since he rejoined the Company in
February, 1996. He served the Company in that same capacity from
1986 to 1988. Between 1993 and 1996, Mr. Porzig was Senior Vice
President - Finance and Chief Financial Officer and Treasurer of
Petro Shopping Centers L.P. From 1982 to 1993, he was employed by
May in various capacities including Senior Vice President - Finance
of Foley's (1988-1993), Senior Vice President and Chief Financial
Officer of Meier & Frank (1985-1986) and Vice President - Planning
& Analysis of May (1982-1985). In addition, he was employed by the
Diamond's division of Dayton Hudson as Vice President and
Controller (1980-1982), by the J.L. Hudson division of Dayton
Hudson as Assistant Controller (1978-1980), Director - Credit
(1977-1978), Director - Internal Audit (1976-1977) and Director -
Profit Analysis/Capital Planning (1973-1976), and by Ford Motor
Company as Analyst - Systems Planning/Operations Research (1969-
1973).
Bryan P. Collins has been the Company's Senior Vice President
and General Merchandise Manager - Women's since January, 1994. He
also served the Company as Senior Vice President - Women's
Seasonal/Leisure (July, 1991-January, 1994), Vice President -
Merchandise Administration (March, 1991 until July, 1991), Vice
President/Division Merchandise Manager - Athletics (1983-1985),
Buyer - Children's (1980-1983), Buyer - Athletics (1978-1980),
Assistant Buyer - Men's (1977-1978), and Assistant Buyer - Canvas
(1976-1977). Mr. Collins commenced his employment with the Company
in 1975 in the distribution area. Before rejoining the Company in
1991, Mr. Collins was employed by Topline Imports as President
(1989-1991), Executive Vice President (1987-1989) and Marketing
Manager (1985-1987).
Gerald F. Kelly has been the Company's Senior Vice President -
Logistics/Information Services since February, 1996. He has also
served the Company as Senior Vice President - Information Services
and Chief Financial Officer (1990-1996) and Senior Vice President -
Information Services (1986-1990). Prior to joining the Company,
Mr. Kelly was employed by Wilson Sporting Goods as Vice President -
Management Services (1984-1986) and by James H. Lowery &
Associates as Vice President (1983-1984). He was a principal with
Arthur Young & Company from 1982 to 1983, and prior to that he was
a Managing Partner at Professional Computer Resources (1980-1982).
32
<PAGE> 43
Duane L. Cantrell has been the Company's Senior Vice President
- - Retail Operations since May, 1995. He has also served the
Company as Senior Vice President - Merchandise Distribution and
Planning (1993-1995), Senior Vice President - Merchandise
Distribution (1990-1993), Vice President - Distribution (1989-
1990), Vice President - Divisional Merchandise Manager - Women's
Casuals (1985-1989), Buyer - Women's Casuals (1984-1985), Director
- - Profit Planning/Analysis (1983-1984), Director - Merchandise
Planning/Budget (1982-1983) and Manager - Merchandise Control
(February, 1982-August, 1982). Between 1978 and 1982, Mr. Cantrell
served in positions of increasing responsibility within the
Company.
Thomas L. Rinehart has been the Company's Senior Vice
President - General Merchandise Manager - Men's since December,
1992. Before joining the Company, he was employed by The Custom
Shop as President (1992), by Club International as President (1991-
1992) and by Burdines, a division of Federated Department Stores,
as Vice President - General Merchandise Manager (1976-1991).
Michael S. Wilkes has been the Company's Senior Vice President
- - General Merchandise Manager - Children's since January, 1994.
He has also served the Company as Senior Vice President - General
Merchandise Manager - Women's Dress/Casual (1990-1994), Senior Vice
President - General Merchandise Manager - Children's (1990), Vice
President - General Merchandise Manager - Children's (1989-1990),
Vice President - Divisional Merchandise Manager - Women's Casuals
(1989) and Buyer - Children's (1986-1988). Before joining the
Company, Mr. Wilkes was employed by Gold Circle, a division of
Federated Department Stores, as Senior Buyer - Ladies Sportswear
(1982-1986) and by Richman Gordman as Buyer - Children's and Men's
(1975-1982).
Jed L. Norden has been the Company's Senior Vice President -
Human Resources since July, 1985. He also served May as Vice
President - Executive Development (1984-1985). Prior to joining
May, Mr. Norden was employed by Ingersoll-Rand, as General Manager -
Personnel and Facilities (1982-1984), Manager - Engineered Pump Group
(1978-1982), Manager - Corporate Personnel (1977-1978), Corporate
Manager - Organization Development (1976- 1977), Manager - Corporate
Recruiting (1975-1976), and Manager - Employee Relations Automatic
Production Systems Division (1973-1975).
Harris Mustafa has been the Company's Senior Vice President -
Merchandise Distribution since May, 1995. He has also served the
Company as Vice President - Financial Planning/Purchasing (1990-
1995), Assistant Controller (1989-1990), Director - Store Finance
(1989), Director - Seasonal Planning/Analysis (1987-1989) and
Assistant Controller (1987). Before joining the Company, Mr.
Mustafa was employed by the Target division of Dayton Hudson as
Manager - Audit (1983-1987), Senior Financial Analyst (1981-1983),
Internal Auditor (1979-1981), Assistant Merchandise Controller
(1978-1979) and Assistant Buyer (1977-1978).
Stephen Farley has been the Company's Senior Vice President -
Marketing since July, 1994. He has also served the Company as Vice
President - Marketing (1993-1994) and as Vice President -
Advertising (1992-1993). Prior to joining the Company, Mr. Farley
was employed by Earl Palmer Brown as Executive Vice President of
Client Services (1989-1992), by Pizza Hut, Inc. as Senior Director
(1987-1989), by Saatchi and Saatchi as Management Supervisor (1983-
1987), and by N.W. Ayer, Inc. as Account Executive (1980-1983).
Curtis H. Barlow has been the Company's Senior Vice President
- - Real Estate/Construction since December, 1993. Prior to joining
the Company, Mr. Barlow was employed by The Vons Companies, Inc. as
Senior Vice President - Real Estate (1992-1993), and by Wal-Mart
Stores, Inc. as Vice President - Real Estate (1986-1992) and
Director - Real Estate (1984-1986). Between 1977 and 1984, Mr.
Barlow served in other positions of increasing responsibility
within the Wal-Mart organization.
INDEMNIFICATION OF OFFICERS AND DIRECTORS
The Payless Charter provides that any director or officer of
the Company who is made a party to any action, suit or proceeding
in connection with services to the Company or its subsidiaries will
be indemnified against expenses, judgments, fines and amounts paid
in settlement to the maximum extent permitted by Missouri law. In
addition, the Payless Charter authorizes the Company to purchase
officer and director liability insurance and to create a trust
fund, grant a security interest or use other means, including
33
<PAGE> 44
contractual arrangements, to ensure the payment of amounts owed
pursuant to the Company's indemnification obligation.
Section 351.355(1) of the GBCL provides that a corporation may
indemnify a director, officer, employee or agent of the corporation
in any action, suit or proceeding other than an action by or in the
right of the corporation, against expenses (including attorney's
fees), judgments, fines and settlement amounts actually and
reasonably incurred by him in connection with such action, suit or
proceeding if he acted in good faith and in a manner he reasonably
believed to be in or not opposed to the best interests of the
corporation and, with respect to any criminal action, had no
reasonable cause to believe his conduct was unlawful. Section
351.355(2) provides that the corporation may indemnify any such
person in any action or suit by or in the right of the corporation
against expenses (including attorneys' fees) and settlement amounts
actually and reasonably incurred by him in connection with the
defense or settlement of the action or suit if he acted in good
faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the corporation, except that he
may not be indemnified in respect of any matter in which he has
been adjudged liable for negligence or misconduct in the
performance of his duty to the corporation, unless authorized by
the court. Section 351.355(3) provides that a corporation shall
indemnify any such person against expenses (including attorneys'
fees) actually and reasonably incurred by him in connection with
the action, suit or proceeding if he has been successful in the
defense of such action, suit or proceeding and if such action, suit
or proceeding is one for which the corporation may indemnify him
under Section 351.355(1) or (2). Section 351.355(7) provides that
a corporation shall have the power to give any further indemnity to
any such person, in addition to the indemnity otherwise authorized
under Section 351.355, provided such further indemnity is either
(i) authorized, directed or provided for in the articles of
incorporation of the corporation or any duly adopted amendment
thereof or (ii) is authorized, directed or provided for in any
bylaw or agreement of the corporation which has been adopted by a
vote of the shareowners of the corporation, provided that no such
indemnity shall indemnify any person from or on account of such
person's conduct which was finally adjudged to have been knowingly
fraudulent, deliberately dishonest or willful.
The Company expects to enter into indemnification agreements
with each director and certain executive officers of the Company
providing, among other things, for the indemnities described above.
Similar indemnification agreements may be entered into from time to
time with additional officers of the Company.
The Company expects to have in place a policy of insurance
under which the directors and officers of the Company are insured,
subject to the limits of the policy, against certain losses, as
defined in the policy, arising from claims made against such
directors and officers by reason of any wrongful acts, as defined
in the policy, in their respective capacities as directors or
officers.
34
<PAGE> 45
EXECUTIVE COMPENSATION
The following table summarizes compensation expected to be
paid to the Company's Chief Executive Officer and the five other
most highly compensated executive officers (the "named executive
officers") for services to be rendered in all capacities in fiscal
year 1996.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
SUMMARY COMPENSATION TABLE <F1>
Annual Compensation Long-Term Compensation
-----------------------------------------------------------------
Awards Payouts
------------------------------------
Restricted Long Term All Other
Name & Principal Stock Stock Incentive Compensation
Position Year Salary<F2> Bonus<F3> Awards<F4> Options Payouts<F8> <F9>
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Steven J. Douglass 1996 $587,500 $120,000 -- xxxx<F5> $128,400 $xx,xxx
Chairman of the Board and 62,500<F6>
Chief Executive Officer 12,500<F7>
Richard A. Jolosky 1996 $450,000 $90,000 -- 62,500<F6> $96,300 $xx,xxx
President 12,500<F7>
Duane L. Cantrell 1996 $292,481 $58,995 -- xxxx<F5> $62,591 $xx,xxx
Senior Vice President- 5,000<F6>
Retail Operations 2,500<F7>
Bryan P. Collins 1996 $289,916 $58,478 -- xxxx<F5> $62,042 $xx,xxx
Senior Vice President- 5,000<F6>
GMM 2,500<F7>
Jed L. Norden 1996 $266,825 $53,820 -- xxxx<F5> $57,101 $xx,xxx
Senior Vice President- 5,000<F6>
Human Resources 2,500<F7>
Ullrich E. Porzig 1996 $266,825 $53,820 -- 5,000<F6> $57,101 $xx,xxx
Senior Vice President- 2,500<F7>
Chief Financial Officer
- -------------------------------------------------------------------------------------------------------------------------------
<FN>
<F1> The Summary Compensation Table does not reflect certain non-
cash compensation made available to the named executive officers
for the fiscal year because the aggregate amounts of such
compensation are below the required disclosure thresholds.
<F2> The table reflects annualized amounts expected to be paid to the
named executive officers or deferred by the named executive
officers during fiscal 1996. Annual salary changes for each of the
named executive officers and for all salaried associates normally
occur on May 1 of each year.
<F3> "Bonus" reflects the annual portion of the bonus payable under
the Company's Executive Incentive Compensation Plan for Payless
Executives, assuming performance at the "target" level. See "-
Performance Based Bonus Plans." The bonuses will be paid or
deferred under the Company's Deferred Compensation Plan, which
provides that all deferrals will be distributed to participants in
lump sum cash payments immediately following a change in control of
the Company (as defined in the plan).
<F4> It is expected that on or about the Distribution Date the
following restricted stock awards will be made to the named
executive officers under the Company's Spin-Off Stock Plan: Mr.
Douglass - 22,500 shares, Mr. Jolosky - 16,875 shares, Mr. Cantrell
- - 7,125 shares, Mr. Collins - 7,063 shares, Mr. Norden - 6,500
shares and Mr. Porzig - 6,500 shares. As of the date of the award,
the value of such restricted stock will be equal to the market
price of the Common Stock on such date multiplied by the number of
shares granted to the named executive officer. See "--Spin-Off
Stock Plan and Spin-Off Cash Plan."
35
<PAGE> 46
<F5> It is expected that on or about the Distribution Date options to
acquire the number of shares of Common Stock listed above will be
granted under the 1996 Stock Incentive Plan in exchange for options
to acquire May common stock previously granted to the executive.
See "--1996 Stock Incentive Plan" for a discussion of the terms and
conditions of these options.
<F6> It is expected that on or about the Distribution Date options to
acquire the number of shares of Common Stock listed above will be
granted under the 1996 Stock Incentive Plan. These options will
have a term of 10 years and 25% of the options will become
exercisable on each of the first through fourth anniversaries of
the Distribution Date. These options will have an exercise price
equal to the average of the high and low trading prices of the
Common Stock on the NYSE for each of the first 30 days on which
trading in the Common Stock occurs.
<F7> It is expected that shortly after the Distribution Date options
to acquire the number of shares of Common Stock listed above will
be granted under the 1996 Stock Incentive Plan. These options will
have a term of 10 years and 25% of the options will become
exercisable on each of the first through fourth anniversaries of
the grant date. The options will have an exercise price equal to
the market price of the Common Stock on the date the options are
granted.
<F8> "Long-Term Incentive Payouts" represent the long-term portion
of the bonus payable under the Executive Incentive Compensation
Plan for Payless Executives, assuming performance at the "target"
level and a stock price adjustment based on a 7% stock price
increase. The bonuses will be paid or deferred under the Company's
Deferred Compensation Plan. See note 3, above, and "-Performance
Based Bonus Plans."
<F9> "All other Compensation" represents the Company's estimated
contribution to the named executive officer's account in the
Company's Profit Sharing Plan and a cash payment paid to the named
executive officer under the Company's Spin-Off Cash Plan. See "--
Spin-Off Stock Plan and Spin-Off Cash Plan."
</TABLE>
PERFORMANCE BASED BONUS PLANS
The Company has two performance based bonus plans that cover
approximately 400 associates. Each plan links a major portion of
each associate's potential total pay to the associate's performance
and to the Company's performance.
EXECUTIVE INCENTIVE COMPENSATION PLAN FOR PAYLESS EXECUTIVES.
The Executive Incentive Compensation Plan for Payless Executives
will apply to 12 associates, including the named executive
officers. Participants will be eligible to receive annual cash
awards (for individual fiscal years) and long-term cash awards (for
three-year long-term performance periods; long-term performance
periods will be phased in following the Distribution, so that the
initial long-term performance period will cover fiscal 1996, the
second long-term performance period will cover 1996-7 and long-term
performance periods after that will cover three fiscal years).
These awards will be based upon attaining earnings per share and
return on net assets (RONA) performance standards relating to the
Company as a whole and also based on the performance of the Common
Stock price over the long-term performance periods. In addition,
awards are expected to be subject to an automatic upward or
downward adjustment to reflect the Company's performance as
compared to the performance of a group of competitors. The plan
will be administered by the Compensation and Nominating Committee
of the board of directors (the "Committee"). The performance
standards are expected to be set by the Committee at the beginning
of the measurement periods and are expected to be measured by the
Committee after the close of the measurement periods. The maximum
annual award payable under the plan's formula will be 30% of the
executive's base salary and the maximum long-term award payable
under the plan's formula will be 45% of the executive's average
base salary over the long-term performance period. The awards for
the named executive officers may also be adjusted downward on a
discretionary basis by the Committee.
PERFORMANCE INCENTIVE PLAN. The Company's Performance
Incentive Plan applies to over 388 associates of the Company and
its subsidiaries. Participants may receive annual cash awards
based upon attaining certain measures of performance tailored to
the participant's job. Performance standards are set at the
beginning of the fiscal year and measured after the close of the
fiscal year. The maximum annual award payable under the plan's
formula ranges from 5% to 50% of the associate's base salary.
36
<PAGE> 47
1996 STOCK INCENTIVE PLAN
No associates of the Company will be eligible to receive
options under any May stock option plan for fiscal 1996 or any
future year. Prior to the Distribution Date, May, as sole
shareowner of the Company, will approve the 1996 Stock Incentive
Plan. Under the plan, the Company may issue stock options,
restricted stock, performance restricted stock, stock appreciation
rights and performance units.
Executives who have stock options from May that are
exercisable before the Distribution Date may elect to waive all of
their rights under those May options, in which case the Company
will grant the executive an option for 1.25 shares of Common Stock
for each share of May common stock that is subject to a May option
that the executive waives. In addition, May options that become
exercisable after the Distribution Date will lapse. However, the
Company will grant executives an option for 1.25 shares of Common
Stock for each share of May common stock that is subject to a May
option that lapses. Each of these new Company options will have a
term of 10 years, and 50% of the options will become exercisable on
each of the first and second anniversaries of the Distribution
Date. These options will have an exercise price equal to the
average of the high and low trading prices of the Common Stock on
the NYSE for each of the first 30 days on which trading in the
Common Stock occurs.
SPIN-OFF STOCK PLAN AND SPIN-OFF CASH PLAN
The Company will have a Spin-off Stock Plan under which
approximately 375,000 shares of restricted Common Stock will be
issued to approximately 130 associates on or about the Distribution
Date. Under the plan, associates will be granted shares of
restricted stock, and generally they must remain employed by the
Company through the vesting dates in order for the forfeiture
restrictions to lapse. Restrictions lapse on one-third of the
shares covered by the grants on each of the Distribution Date, the
first anniversary of the Distribution Date and the second
anniversary of the Distribution Date. The plan provides that, in
the event of a change in control (as defined in the plan), the
restrictions will lapse on all remaining shares.
The Company will have a Spin-off Cash Plan under which
approximately 600 associates are eligible to receive cash payments
of amounts ranging from 10% to 37.5% of their base salary.
Generally, associates must remain employed by the Company through
the payment dates in order to be entitled to payment. One-half of
the cash payments will be made on each of the first and second
anniversaries of the Distribution Date. The plan provides that, in
the event of a change in control (as defined in the plan), the cash
payments will be accelerated.
EMPLOYMENT AGREEMENTS, TERMINATION OF EMPLOYMENT AND CHANGE IN
CONTROL AGREEMENTS
Each of the named executive officers is a party to an
employment agreement with the Company. The employment agreements
will expire on or before April 30, 2000. The agreements provide
for an annual salary at the annual rates shown in the table, with
increases subject to the discretion of the board of directors of
the Company. Prior to the Distribution, the Company entered into
severance agreements with each of the named executive officers.
The agreements provide that the executive is entitled to benefits
if (i) a "change in control" of the Company occurs and (ii) during
the 180 days following such change in control, the executive
determines in good faith that, as a result of the change in
control, he is unable to execute his duties effectively. Following
that 180 day period, employment must be actually or constructively
terminated other than for cause or disability during the term of
the agreement for benefits to be payable. Under the severance
agreements, a "change in control" would include any of the
following events: (i) any "person," as defined in the Exchange Act,
acquires 50% or more of the Company's voting securities, (ii) a
majority of the Company's directors are replaced during a three-
year period; or (iii) shareowners approve certain mergers, or a
liquidation, or sale of all or substantially all of the Company's
assets.
The severance agreements provide a lump sum payment equal to
three times the sum of (i) base salary at termination or, if
greater, base salary immediately prior to the change in control
plus (ii) target bonus with maximum share price adjustment for the
year in which the change in control occurs. Each agreement also
provides 36 months of continued medical and life insurance benefits
and, if the terminated executive is within five years of his or her
eligibility date, eligibility in the Company's post-retirement life
and medical insurance benefits. The agreements with officers who
are subject to Section 16(b) of the
37
<PAGE> 48
Exchange Act provide for a cash payment in cancellation of stock options. The
agreement with the Chairman and Chief Executive Officer provides a "tax
gross-up" payment to ensure that the above mentioned payments are not subject
to net reduction due to imposition of excise taxes which are
payable under Section 4999 of the Code. The agreement with the
President provides for 50% of such payment. The Company
established a trust which would be funded upon a potential change
in control to provide the benefits under the severance agreements
and which would, upon an actual change in control, become
irrevocable.
PROFIT SHARING PLAN
On or prior to the Distribution Date, Company associates will
become eligible to participate in a new profit sharing plan (the
"Payless Profit Sharing Plan"). Prior thereto, Company associates
will be eligible to participate in The May Department Stores
Company Profit Sharing Plan (the "May Plan"). As of the effective
date of the Payless Profit Sharing Plan, associates' balances in
the May Plan, including amounts invested in May common stock, will
be transferred to the Payless Profit Sharing Plan. Since shares of
Common Stock will be distributed in connection with the
Distribution to the trustee of the Payless Profit Sharing Plan on
shares of May common stock held for the Company associates'
accounts, it is anticipated that approximately [ ] shares of
Common Stock will be owned by the Payless Profit Sharing Plan for
the accounts of Company associates as of the Distribution Date.
The Payless Profit Sharing Plan will link its benefits to the
Company's performance each year and to the value of the Common
Stock. Generally, the Company will contribute 2.5% of its pretax
net profits to the Payless Profit Sharing Plan each year.
Associates will be able to voluntarily contribute to the Payless
Profit Sharing Plan on both a before-tax and after-tax basis.
Associates will be able to direct that the Company's contribution
to their accounts and/or their voluntary contributions be invested
in a Company Common Stock fund, or one of several other funds.
RETIREMENT PLAN AND SUPPLEMENTARY RETIREMENT PLAN
The Company will not have a retirement plan. However, Company
associates who are covered by the May Retirement Plan as of the
Distribution will continue to vest in the benefits earned under
that plan. Benefits accrued through the Distribution Date
(expressed as a single life annuity payable beginning at age 65)
will be "frozen" and paid out in the future.
The Company will have a supplementary retirement plan (the
"Supplementary Plan") covering, generally, associates who, at one
time, have compensation in a calendar year equal to at least twice
the amount of "wages" then subject to the payment of old age,
survivor and disability insurance Social Security taxes. Under the
Supplementary Plan, covered associates will become entitled to a
single life annuity retirement benefit equal to (i) 2% of the
average of the highest three out of the last five fiscal years of
final annual salary and bonuses (reported as Salary, Bonus and
Long-Term Incentive Payouts in the Summary Compensation Table)
multiplied by their years of service, up to a maximum of 25 years,
(ii) reduced by primary Social Security benefits, by Company-
provided benefits provided under the Payless Profit Sharing Plan
and by Company-provided benefits under plans operated by May which
may be payable to the associate, and, if appropriate, by amounts to
reflect early retirement. The minimum benefit under the
Supplementary Plan is expected to be the amount of Company-provided
benefits which would have been payable under the Payless Profit
Sharing Plan and under the May Retirement Plan, determined without
regard to any statutory limits, less the amount of Company-provided
benefits actually payable under those plans.
The Supplementary Plan will provide that, in the event of a
change in control (as defined in the plan), vesting will be
accelerated in limited circumstances and benefits will not be
forfeitable. The Company will establish a trust which will be
funded upon a potential change in control to provide accrued
benefits under the Supplementary Plan and which will, upon an
actual change in control, become irrevocable.
The following table shows the estimated aggregate annual
benefits payable upon retirement at normal retirement age (65)
(assuming a retirement in 1996) for persons in specified
compensation and years of service classifications covered by the
Company's Profit Sharing Plan and, if eligible, the Supplementary
Plan. The named executive officers are expected to have, as of the
end of 1996, the following years of
38
<PAGE> 49
service, respectively: Mr. Douglass, 20 years; Mr. Jolosky, 19 years; Mr.
Cantrell, 18 years; Mr. Collins, 14 years; Mr. Norden, 12 years; and Mr.
Porzig, 11 years.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------
Average
Annual Years of Service
Earnings
- ------------------------------------------------------------------------
20 25 30 35
<S> <C> <C> <C> <C>
$ 500,000 $188,893 $236,116 $236,116 $236,116
$ 600,000 $226,671 $283,339 $283,339 $283,339
$ 700,000 $264,450 $330,563 $330,563 $330,563
$ 800,000 $302,229 $377,786 $377,786 $377,786
$ 900,000 $340,007 $425,009 $425,009 $425,009
$1,000,000 $377,786 $472,323 $472,232 $472,232
- ------------------------------------------------------------------------
</TABLE>
BENEFICIAL OWNERSHIP OF MANAGEMENT
The following table sets forth information with respect to the
shares of Common Stock which are expected to be beneficially owned
by each director and named executive officer of the Company and by
all directors and officers of the Company as a group as of the
Distribution Date based on their respective holdings of May common
stock as of [---------, 1996] and shares of restricted Common Stock
expected to be granted on or about the Distribution Date. See
"EXECUTIVE COMPENSATION." Based upon such data, no director or
executive officer will beneficially own, as of the Distribution
Date, more than 5% of the shares of the Common Stock outstanding at
such date.
<TABLE>
<CAPTION>
Amount and Nature of
Name Beneficial Ownership Percentage
- ------------------------------------------------------------------------
<S> <C>
Steven J. Douglass <F*>
Richard A. Jolosky <F*>
Duane L. Cantrell <F*>
Bryan P. Collins <F*>
Jed L. Norden <F*>
Ullrich E. Porzig <F*>
Thomas A. Hays <F*>
[to be named] <F*>
Howard R. Fricke <F*>
Robert L. Stark <F*>
All directors and executive
officers as a group (17 persons) <F*>
<F*> Less than 1%
</TABLE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The only shareowner of the Company prior to the Distribution
Date is May. After the Distribution Date, May will own no shares
of Common Stock.
Based on information which has been obtained from May's
records and a review of statements filed with the Securities and
Exchange Commission pursuant to Section 13(g) of the Exchange Act
with respect to May common stock and received by May prior to April
[ ], 1996, no person known to May will be the beneficial owner of
more than 5% of the Common Stock upon completion of the
Distribution other than as set forth below:
39
<PAGE> 50
<TABLE>
<CAPTION>
Number of
Shares of Common Percent of Class
Stock as of the as of the
Name and Address Distribution Date Distribution Date
---------------- ----------------- -----------------
<S> <C> <C>
The Bank New York, Inc. 5.x%
Trustee for the May Plan
One Wall Street
New York, New York 10286
Oppenheimer Group, Inc. 5.4%
Oppenheimer Tower
World Financial Center
New York, New York 10281
</TABLE>
The May Plan provides for an investment fund which is invested
in shares of May common stock (the "May Common Stock Fund"). As of
the Record Date, the trust under the May Plan is expected to own
approximately [ ] shares of May common stock ([ ]% of
the outstanding shares of May common stock). As a result of the
Distribution, the May Plan trust will own approximately [5%] of the
outstanding Common Stock on the Distribution Date. The terms of
the May Plan require that the May Common Stock Fund be invested
solely in shares of May common stock and sufficient cash for
liquidity. Common Stock distributed to the May Common Stock Fund
and owned by the trust following the Distribution will be
systematically liquidated by the trustee, after which time the May
Plan trust will own no shares of the Common Stock.
The Payless Profit Sharing Plan provides for an investment
fund which is invested in shares of May common stock (the "Payless
Profit Sharing Plan May Common Stock Fund"). As of the Record
Date, the trust under the Payless Profit Sharing Plan is expected
to own approximately [ ] shares of May common stock (less
than 1% of the shares of May common stock outstanding) in the
Payless Profit Sharing Plan May Common Stock Fund. As a result of
the Distribution, the Payless Profit Sharing Plan trust will own
Common Stock. Under the terms of the Payless Profit Sharing Plan,
those shares will be transferred to accounts of the Company's
associates in an investment fund which is to be invested in Common
Stock. Thereafter, those shares will be subject to the terms of
the Payless Profit Sharing Plan.
TRANSACTIONS BETWEEN THE COMPANY AND MAY
The Company and May plan to enter into a number of agreements
for the purpose of defining the ongoing relationship between them.
These agreements will be developed in connection with the
repositioning of the Company by May and therefore are not likely to
be the result of arm's-length negotiation between independent
parties. Additional or modified agreements, arrangements and
transactions may be entered into by the Company, May and May's
subsidiaries after completion of the Distribution. Any such future
agreements, arrangements and transactions will be determined
through negotiations on an arm's-length basis between the Company
and May or May's subsidiaries, as the case may be.
In the past, May has provided certain services to the Company,
including employee benefit design, insurance, legal, taxes, import
and treasury services. The Company intends to perform or secure
these services independently in the future. However, for a limited
period of time, May may continue to provide certain corporate
services until such independent arrangements can be completed. The
following is a summary of certain past, present and anticipated
future agreements, arrangements and transactions between the
Company and May.
40
<PAGE> 51
MASTER LEASE AGREEMENT
May leases (and the Company subleases from May) approximately
365 of the Company's stores under sale-leaseback arrangements with
third parties entered into from time to time, beginning in 1984.
The Company and May expect to enter into up to approximately 25
additional leases under such arrangements during 1996. The Company
and May anticipate entering into a master lease agreement or
agreements which will define the ongoing relationship between them
with respect to those lease arrangements.
TAX SHARING AGREEMENT
Through the Distribution Date, the results of operations of
the Company and its domestic subsidiaries that are at least 80%
owned by the Company (the "Company Group") will be included in
May's consolidated Federal income tax returns ("May Consolidated
Federal Returns"). In connection with the Distribution, May and
the Company will enter into a Tax Sharing Agreement (the "Tax
Sharing Agreement") that provides, among other things, for the
allocation between May and the Company of Federal, state, local and
foreign tax liabilities for all periods through the Distribution
Date. Generally, the Company will be responsible for the portion
of any deficiencies of May assessed with respect to all periods up
to and including the Distribution Date that give rise to a tax
benefit to the Company in a post-Distribution period. Furthermore,
the Tax Sharing Agreement provides that if the Distribution fails
to qualify as a tax-free distribution as a result of any event
occurring prior to the second anniversary of the Distribution Date
that results from the breach of certain covenants made by the
Company in the Tax Sharing Agreement or involves either the stock
or assets (or any combination thereof) of any member of the Company
Group, then the Company must indemnify and hold May harmless, on an
after-tax basis, from any tax liability imposed upon it in
connection with the Distribution. The Tax Sharing Agreement also
prohibits the Company from entering into certain transactions or
disposing of substantially all of its assets prior to the second
anniversary of the Distribution Date in the absence of a prior
opinion of independent tax counsel or receipt of a private letter
ruling from the Internal Revenue Service (the "Service") that such
transaction or disposition will not cause the Distribution to be a
taxable transaction.
DESCRIPTION OF CAPITAL STOCK
AUTHORIZED CAPITAL STOCK
Prior to the Distribution Date, the Company intends to file
the Payless Charter with the Secretary of State of the State of
Missouri, and the board of directors of the Company intends to
adopt the Payless Bylaws. Under the Payless Charter, the total
number of shares of all classes of stock that the Company has
authority to issue is 145,000,000, of which 120,000,000 are shares
of Common Stock, par value $.01 per share, and 25,000,000 are
shares of preferred stock, par value $.01 per share (the "Preferred
Stock"). No shares of Preferred Stock will be issued in connection
with the Distribution, although [ ] shares of Series A
Junior Participating Preferred Stock will be reserved for issuance
in connection with the Rights Agreement (as defined below). Based
on the number of shares of May common stock outstanding at
April [ ], 1996, approximately [ ] million shares of
Common Stock constituting approximately [ %] of the authorized
Common Stock, will be issued to shareowners of May.
COMMON STOCK
The owners of Common Stock will be entitled to one vote for
each share on all matters voted on by shareowners, including the
election of directors, and the owners of such shares will possess
all voting power, except as otherwise required by law or provided
in any resolution adopted by the board of directors of the Company
with respect to any series of Preferred Stock. The Common Stock
will not have cumulative voting rights. It is currently expected
that the first annual meeting of shareowners of the Company
following the Distribution will be held in May, 1997. Subject to
any preferential or other rights of any outstanding series of
Preferred Stock that may be designated by the board of directors of
the Company, the owners of Common Stock will be entitled to such
dividends as may be declared from time to time by the board of
directors of the Company from funds available therefor. See
"CERTAIN CONSIDERATIONS - Dividend Policy." In the event of
liquidation, dissolution or winding up of the Company, owners of
Common Stock will be entitled to receive pro rata all assets of the
Company available for distribution to such owners remaining after
41
<PAGE> 52
payment of liabilities and liquidation preference of any
outstanding Preferred Stock. Owners of Common Stock have no rights
to convert their Common Stock into any other securities and there
are no redemption or sinking fund provisions with respect to such
shares. All of the outstanding shares of Common Stock are fully
paid and nonassessable, and the shares of Common Stock to be issued
in connection with the Distribution, when issued, will be fully
paid and nonassessable. Additional shares of Common Stock may be
issued without shareowner approval, other than such approval as may
be required by applicable stock exchange rules.
PREFERRED STOCK
The board of directors of the Company will be authorized to
provide for the issuance of shares of Preferred Stock, in one or
more classes or series, and to fix for each such class or series
such voting powers, designations, preferences and relative,
participating, optional and other special rights, and such
qualifications, limitations or restrictions thereon, as are stated
in the resolutions adopted by the board of directors of the Company
providing for the issuance of such class or series and as are
permitted by the GBCL. The Company has no present plans to issue
any of the Preferred Stock. See "PURPOSES AND EFFECTS OF CERTAIN
PROVISIONS OF THE CHARTER, THE BYLAWS AND THE RIGHTS AGREEMENT --
Preferred Stock."
NO PREEMPTIVE RIGHTS
No owner of any stock of the Company of any class authorized
at the Distribution Date will then have any preemptive right to
subscribe to any securities of the Company of any kind or class.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is The
Bank of New York.
PURPOSES AND EFFECTS OF CERTAIN PROVISIONS OF
THE CHARTER, THE BYLAWS AND THE RIGHTS AGREEMENT
GENERAL
The Payless Charter, the Payless Bylaws and the Rights Agree-
ment, dated as of ---------- ----, 1996, between the Company and
The Bank of New York, as Rights Agent (the "Rights Agreement"),
contain certain provisions that could make more difficult the
acquisition of control of the Company by means of a tender offer,
open market purchases, a proxy contest or otherwise. Set forth
below is a description of such provisions in the Payless Charter,
the Payless Bylaws and the Rights Agreement. Such description is
intended as a summary only and is qualified in its entirety by
reference to the Payless Charter, the Payless Bylaws and the Rights
Agreement, the forms of which are included as exhibits to the
Registration Statement of which this Information Statement forms a
part.
CLASSIFIED BOARD OF DIRECTORS; REMOVAL OF DIRECTORS. The
Payless Charter provides that the number of directors shall be not
less than three nor more than 15, with the exact number of
directors to be determined from time to time by a majority of the
entire board of directors. The directors shall be divided into
three classes, as nearly equal in number as is reasonably possible,
serving staggered three-year terms so that directors' initial terms
will expire at the annual meeting of the Company's shareowners held
in 1997, 1998 and 1999, respectively. Starting with the 1997
annual meeting of the Company's shareowners, one class of directors
will be elected each year for a three-year term. See "MANAGEMENT
- -- Directors."
The Company believes that a classified board of directors will
help to assure the continuity and stability of the Company's board
of directors and the Company's business strategies and policies as
determined by the board of directors of the Company, since a
majority of the directors at any given time will have had prior
experience as directors of the Company. The Company believes that
this in turn will permit the board to represent more effectively
the interests of shareowners.
42
<PAGE> 53
With a classified board of directors, at least two annual
meetings of shareowners, instead of one, will generally be required
to effect a change in a majority of the members of the board of
directors. As a result, the classification of the board of
directors of the Company may discourage proxy contests for the
election of directors, unsolicited tender offers or purchases of a
substantial block of the Common Stock because it could prevent an
acquiror from obtaining control of the board of directors of the
Company in a relatively short period of time. In addition,
pursuant to the Payless Charter, a director may be removed only for
cause and only by the affirmative vote of owners of two-thirds of
the outstanding shares of Common Stock entitled to vote thereon.
As a result, a classified board of directors delays shareowners who
do not agree with the policies of the board of directors from
replacing directors, unless they can demonstrate that the directors
should be removed for cause and obtain the requisite vote. Such a
delay may help ensure that the board of directors of the Company,
if confronted with a proxy contest or an unsolicited proposal for
an extraordinary corporate transaction, will have sufficient time
to review the proposal and appropriate alternatives to the proposal
and to act in what it believes is the best interest of the
Company's shareowners.
FILLING VACANCIES ON THE BOARD. The Payless Charter provides
that vacancies on the board of directors may be filled only by a
majority of the board of directors then in office, even if less
than a quorum or by the sole remaining director. Accordingly, the
board of directors could temporarily prevent any shareowner from
obtaining majority representation on the board of directors by
enlarging the board of directors and filling the new directorships
with its own nominees.
SPECIAL MEETINGS; LIMITATIONS ON SHAREOWNER ACTION BY WRITTEN
CONSENT. The Payless Charter provides that shareowner action can
be taken only at an annual or special meeting of shareowners. The
Payless Charter provides that special meetings of shareowners may
be called only by the board of directors, the Chairman of the board
of directors, or the President. Shareowners are not permitted to
call a special meeting or to require that the board of directors
call a special meeting of shareowners. Moreover, the business
permitted to be conducted at any special meeting of shareowners is
limited to the purpose or purposes specified in the written notice
of such meeting.
Pursuant to the GBCL and the Payless Bylaws, any action by
written consent of shareowners in lieu of a meeting must be
unanimous. The provision of the GBCL and the Bylaws requiring
unanimity for shareowner action by written consent gives all the
shareowners of the Company entitled to vote on a proposed action
the opportunity to participate in such action and will prevent the
owners of a majority of the voting power of the Company from using
the written consent procedure to take shareowner action. Moreover,
a shareowner cannot force shareowner consideration of a proposal
over the opposition of the board of directors, the Chairman of the
board of directors or the President by calling a special meeting of
the shareowners.
BUSINESS COMBINATION PROVISION. In addition to any
affirmative vote required by the GBCL or otherwise, the Payless
Charter requires the approval of a majority of the outstanding
shares of Voting Stock of the Company (as defined therein),
excluding Voting Stock held by any Interested Shareholder (defined
generally as the beneficial owner of 20% or more of the Voting
Stock of the Company), or any Affiliate (as defined therein) or
Associate (as defined therein) of such Interested Shareholder, as
a condition of certain "Business Combination" (as defined therein)
transactions with or for the benefit of an Interested Shareholder,
unless (i) certain price criteria are satisfied, or (ii) the
Business Combination transaction was approved by the board of
directors of the Company prior to such Interested Shareholder's
Stock Acquisition Date (as defined therein), or the purchase of
stock made by such Interested Shareholder on such Interested
Shareholder's Stock Acquisition Date had been approved by the board
of directors of the Company prior to such Interested Shareholder's
Stock Acquisition Date, or (iii) the Business Combination had been
approved by a majority of the outstanding Voting Stock not
beneficially owned by such Interested Shareholder or any Affiliate
or Associate of such Interested Shareholder no earlier than five
years after such Interested Shareholder's Stock Acquisition Date.
The price criteria under the Payless Charter relate to the minimum
value to be paid to the owners of Common Stock.
AMENDMENT OF CERTAIN CHARTER AND BYLAW PROVISIONS. The
Payless Charter provides that the Payless Bylaws may only be
amended by a vote of two-thirds of the entire board of directors.
The Payless Charter provides that any proposal to amend, repeal or
adopt any provision of the Payless Charter must be
43
<PAGE> 54
approved by the affirmative vote of the owners of at least two-thirds of the
outstanding shares of the Company.
ADVANCE NOTICE PROVISIONS FOR SHAREOWNER PROPOSALS AND
SHAREOWNER NOMINATIONS. The Payless Bylaws establish an advance
notice procedure with regard to business to be brought before an
annual or special meeting of shareowners of the Company (the
"Business Procedure") and with regard to the nomination, other than
by or at the direction of the board of directors, of candidates for
election as directors (the "Nomination Procedure").
The Business Procedure provides that at an annual or special
meeting only such business may be conducted as has been specified
in the notice of meeting, brought before the meeting by or at the
direction of the board of directors, otherwise properly brought
before the meeting by or at the direction of the board of
directors, or by a shareowner who has given timely written notice
to the Company's corporate secretary (the "Secretary") of such
shareowner's intention to bring such business before the meeting.
The Nomination Procedure provides that only persons who are
nominated by or at the direction of the board of directors, by a
nominating committee or person appointed by the board of directors,
or by a shareowner who has given timely written notice to the
Secretary prior to the meeting at which directors are to be
elected, will be eligible for election as directors. Under the
Business Procedure or the Nomination Procedure, to be timely,
notice must be delivered to or mailed and received at the principal
executive offices of the Company not less than 75 days nor more
than 90 days prior to the meeting; provided, however, that in the
event that less than 90 days' notice or prior public disclosure of
the date of the meeting is given or made to shareowners, notice by
the shareowner to be timely must be so received not later than the
close of business on the 15th day following the day on which such
notice of the date of the meeting was mailed or such public
disclosure was made, whichever was first.
Under the Nomination Procedure, a shareowner's notice to the
Company proposing to nominate a person for election as a director
must contain certain information (i) about each proposed nominee,
including, without limitation, (a) the name, age, business address
and residence address of the nominee, (b) the principal occupation
or employment of the nominee, (c) the class and number of shares of
Common Stock which are beneficially owned by the nominee and (d)
any other information relating to the nominee that is required to
be disclosed in solicitations of proxies for election of directors
pursuant to the Regulation 14A under the Exchange Act and (ii)
about the shareowner proposing to nominate such person, including,
without limitation, (a) the name and record address of the
shareowner and (b) the class and number of shares of Common Stock
which are beneficially owned by the shareowner. Under the Business
Procedure, a shareowner's notice relating to the conduct of
business other than the nomination of directors at an annual
meeting must contain certain information (i) about such business
and about the proposing shareowner including, without limitation,
(a) a brief description of the business desired to be brought
before the meeting and the reasons for conducting such business at
the meeting, (b) the name and record address of the proposing
shareowner, (c) the class and number of shares of Common Stock
owned by the proposing shareowner and (d) a description of any
material interest of the shareowner in such business. If the
chairman of the meeting determines that a person was not nominated
in accordance with the Nomination Procedure, such person will not
be eligible for election as a director and such nomination shall be
disregarded. If such chairman determines that business was not
properly brought before such meeting in accordance with the
Business Procedure, such business will not be transacted at such
meeting.
By requiring advance notice of nominations by shareowners, the
Nomination Procedure will afford the board of directors a
meaningful opportunity to consider the qualifications of the
proposed nominees and, to the extent deemed necessary or desirable
by the board of directors, to inform shareowners about such
qualifications. By requiring advance notice of proposed business,
the Business Procedure will provide a more orderly procedure for
conducting annual meetings of shareowners and, to the extent deemed
necessary or desirable by the board of directors, will provide the
board of directors with a meaningful opportunity to inform
shareowners, prior to such meeting, of any business proposed to be
conducted at such meeting, together with any recommendation of the
board of directors' position as to action to be taken with respect
to such business, so as to enable shareowners better to determine
whether they desire to attend such a meeting or grant a proxy to
the board of directors as to the disposition of any such business.
Although the Payless Bylaws do not give the board of directors any
power to approve or disapprove shareowner nominations for the
election of directors or proposals for action, they may have the
effect of precluding a contest for the
44
<PAGE> 55
election of directors or the consideration of shareowner proposals if the
proper procedures are not followed, and of discouraging or deterring a third
party from conducting a solicitation of proxies to elect its own slate of
directors or to approve its proposal without regard to whether
consideration of such nominees or proposals might be harmful or
beneficial to the Company and its shareowners.
PREFERRED STOCK
The Payless Charter authorizes the board of directors of the
Company to establish one or more classes or series of Preferred
Stock and to determine, with respect to any class or series of
Preferred Stock such voting powers, designations, preferences and
relative, participating, optional and other special rights, and
such qualifications, limitations or restrictions thereon, as are
stated in the resolutions adopted by the board of directors of the
Company providing for the issuance of such series and as are
permitted by the GBCL.
The Company believes that the availability of the Preferred
Stock will provide the Company with increased flexibility in
structuring possible future financings and acquisitions and in
meeting other corporate needs that might arise. Having such
authorized shares available for issuance will allow the Company to
issue shares of Preferred Stock without the expense and delay of a
special shareowners meeting. The authorized shares of Preferred
Stock, as well as shares of Common Stock, will be available for
issuance without further action by the Company's shareowners,
unless such action is required by applicable law or the rules of
any stock exchange on which the Company's securities may be listed.
Although the board of directors of the Company has no intention at
the present time of doing so, it would have the power (subject to
applicable law) to issue a series of Preferred Stock that could,
depending on the terms of such series, impede the completion of a
merger, tender offer or other takeover attempt. For instance,
subject to applicable law, such series of Preferred Stock might
impede a business combination by including class voting rights that
would enable the holder to block such a transaction. The board of
directors will make any determination to issue such shares based on
its judgment as to the best interests of the Company and its share-
owners. The board of directors, in so acting, could issue Pre-
ferred Stock having terms which could discourage an acquisition
attempt or other transaction that some, or a majority, of the
shareowners might believe to be in their best interests or in which
shareowners might receive a premium for their stock over the then
market price of such stock. See "--Rights Agreement."
CONTROL SHARE ACQUISITION STATUTE
Under the control share acquisition statute of the GBCL, a
potential acquiror must notify the target corporation that it has
acquired or proposes to acquire capital stock of the target
corporation which would cause the acquiror to move into one of
several defined ranges of voting power (20% to 33%, 33% to 50%, 51%
to 100%). Without the approval of a majority of the outstanding
shares not owned by the acquiror, officers or employee-directors,
the control shares do not receive voting rights.
RIGHTS AGREEMENT
On ------, 1996, the board of directors of the Company adopted
the Rights Agreement and declared a dividend distribution of one
right for each outstanding share of Common Stock (the "Rights").
Each Right entitles the registered owner to purchase from the
Company one one-hundredth of a share of Series A Junior
Participating Preferred Stock, par value $.01 per share (the
"Series A Preferred Stock"), at a purchase price of $[ ] per one-
one hundredth of a share, subject to adjustment. The following
description of the Rights is a summary of the material terms
thereof. A copy of the Rights Agreement, dated -----, 1996 (the
"Rights Agreement"), between the Company and The Bank of New York,
as Rights Agent, is filed as an exhibit to the Registration
Statement of which this Information Statement forms a part.
The Rights will be attached to all outstanding shares of
Common Stock and will be represented by the certificates
representing such shares until a "Rights Distribution Date" occurs.
A "Rights Distribution Date" will occur upon the earlier of (i) 10
business days following a public announcement that a person or
group of affiliated or associated persons (an "Acquiring Person")
has acquired, or obtained the right to acquire, beneficial
ownership of 20% or more of the outstanding shares of Common Stock
(the "Stock Acquisition Date"), or (ii) 10 business days (or such
later date as the board of directors shall determine) following the
commencement of a tender or exchange offer that would result in a
person or group
45
<PAGE> 56
beneficially owning 20% or more of such outstanding shares of Common Stock
(the "Tender Offer Date") or (iii) 10 business days following the declaration
by the board of directors that a person has become an "Adverse Person" upon a
determination that such person has become the beneficial owner of a
substantial amount of Common Stock (but in no event less than 15% of the
outstanding Common Stock) and that such beneficial ownership is
intended to cause the Company to repurchase such Common Stock or to
take action intended to provide such person with short-term
financial gain or is causing, or is reasonably likely to cause, a
material adverse impact on the business or prospects of the
Company.
Until the Rights Distribution Date, (i) the Rights will be
evidenced by the Common Stock certificates and will be transferred
with and only with such Common Stock certificates, (ii) the Common
Stock certificates will contain a notation incorporating the Rights
Agreement by reference, and (iii) the surrender for transfer of any
certificates for Common Stock outstanding will also constitute the
transfer of the Rights associated with the Common Stock represented
by such certificates. Pursuant to the Rights Agreement, the
Company reserves the right to require prior to the occurrence of a
Triggering Event (as defined below) that, upon any exercise of
Rights, a number of Rights be exercised so that only whole shares
of Series A Preferred Stock will be issued (or fractions that are
integral multiples of one one-hundredth of a share).
The Rights are not exercisable until the Rights Distribution
Date and will expire at the close of business on , 2006, or
such later date as the board of directors establishes under certain
circumstances, unless earlier redeemed by the Company as described
below.
As soon as practicable after the Rights Distribution Date,
Rights Certificates will be mailed to holders of record of the
Common Stock as of the close of business on the Rights Distribution
Date and, thereafter, the separate Rights Certificates alone will
represent the Rights. Except as otherwise determined by the board
of directors, only shares of Common Stock outstanding prior to the
Rights Distribution Date will be issued with Rights.
Each share of Series A Preferred Stock purchased upon exercise
of the Rights will be entitled to a minimum preferential quarterly
dividend payment equal to the greater of (i) $1.00 per share, and
(ii) 100 times the dividend, if any, declared per share of Common
Stock. In the event of liquidation, the owners of the Series A
Preferred Stock will be entitled to a minimum preferential
liquidation payment equal to the greater of (a) $10 per share and
(b) 100 times the payment made per share of Common Stock. Each
share of Series A Preferred Stock will have 100 votes and will vote
together with the Common Stock. In the event of any merger,
consolidation or other transaction in which shares of Common Stock
are exchanged, each share of Series A Preferred Stock will be
entitled to receive 100 times the amount per share of Common Stock
received in such merger, consolidation or other transaction. These
rights are protected by customary antidilution provisions. The
shares of Series A Preferred Stock will, if issued, be junior to
any other series of Preferred Stock which may be authorized and
issued by the Company, unless the terms of any such other series
provide otherwise. Because of the nature of the Series A Preferred
Stock's dividend, liquidation and voting rights, the value of one
one-hundredth of a share of Series A Preferred Stock purchasable
upon the exercise of each Right should approximate the value of one
share of Common Stock.
In the event that (i) any Person becomes the beneficial owner
of 20% or more of the then outstanding shares of Common Stock
(unless such acquisition is made pursuant to a tender or exchange
offer for all outstanding shares of the Company, upon terms and
conditions determined by a majority of the Continuing Directors (as
defined below) to be in the best interest of the Company and its
stockholders (a "Qualifying Offer")) or (ii) the board of directors
declares a person to be an Adverse Person, each owner of a Right
(other than an Acquiring Person or an Adverse Person, certain
related parties and transferees) will thereafter have the right to
receive, upon exercise, Common Stock (or, in certain circumstances,
cash, property or other securities of the Company), having a value
equal to two times the exercise price of the Right. For example,
at an exercise price of $50 per Right, each Right not owned by an
Acquiring Person, an Adverse Person or by certain related parties
or transferees following the event set forth above would entitle
its owner to purchase $100 worth of Common Stock (or other
consideration, as noted above) for $50. Assuming that the Common
Stock had a per share market price of $10 at such time, the owner
of each valid Right would be entitled to purchase 10 shares of
Common Stock for $50. The Rights are not exercisable following the
occurrence of any of the events described above until such time as
the Rights are no longer
46
<PAGE> 57
redeemable by the Company as described below. Notwithstanding any of the
foregoing, following the occurrence of any of the events set forth in this
paragraph, all Rights that are, or (under certain circumstances specified in
the Rights Agreement) were, beneficially owned by any Acquiring Person
or Adverse Person or by certain related parties or transferees will
be null and void.
In the event that at any time following the Stock Acquisition
Date, (i) the Company is acquired in a merger or business
combination transaction in which the Company is not the surviving
corporation (other than a merger consummated pursuant to a
Qualifying Offer); (ii) the Company is the surviving corporation in
a consolidation or pursuant to which all or part of the outstanding
shares of Common Stock are changed or exchanged for stock or other
securities of any other person or cash or any other property; or
(iii) more than 50% of the combined assets or earning power is sold
or transferred (in each case other than certain consolidations
with, mergers with and into, or sales of assets or earning power by
or to subsidiaries of the Company as specified in the Rights
Agreement), each owner of a Right (except Rights which have
previously been voided as set forth above) shall thereafter have
the right to receive, upon exercise thereof, common stock of the
acquiring company having a value equal to two times the exercise
price of the Right. The events described in this paragraph and in
the preceding paragraph are referred to as the "Triggering Events."
In order to prevent dilution, the Purchase Price payable, the
number and kind of shares covered by each Right and the number of
Rights outstanding are subject to adjustment from time to time (i)
in the event of a stock dividend on, or a subdivision, combination
or reclassification of, the Series A Preferred Stock, (ii) if
owners of Series A Preferred Stock are granted certain rights or
warrants to subscribe for Series A Preferred Stock or securities
convertible into Series A Preferred Stock at less than the current
market price of the Series A Preferred Stock, or (iii) upon the
distribution to holders of the Series A Preferred Stock of
evidences of indebtedness, cash (excluding regular quarterly cash
dividends), assets (other than dividends payable in Series A
Preferred Stock) or subscription rights or warrants (other than
those referred in (ii) immediately above).
With certain exceptions, no adjustments in the Purchase Price
will be required until cumulative adjustments amount to at least 1%
of the Purchase Price. No fractional shares of Series A Preferred
Stock are required to be issued (other than fractions which are
integral multiples of one one-hundredth of a share of Series A
Preferred Stock) and, in lieu thereof, the Company may make an
adjustment in cash based on the market price of the Series A
Preferred Stock on the trading day prior to the date of exercise.
At any time until ten business days following the Stock
Acquisition Date, the Company may redeem the Rights in whole, but
not in part, at a price of $.01 per Right (payable in cash, shares
of Common Stock or other consideration deemed appropriate by the
board of directors). The Company may not redeem the Rights if the
board of directors has previously determined a person to be an
Adverse Person. Immediately upon the action of the board of
directors ordering redemption of the Rights, the Rights will
terminate and the only right of the owners of Rights will be to
receive the $.01 redemption price.
For purposes of the Rights Agreement, the term "Continuing
Director" means any member of the board of directors of the Company
who was a member of the board on the Distribution Date, and any
person who is subsequently elected to the board if such person is
recommended or approved by a majority of the Continuing Directors,
but shall not include an Acquiring Person, an Adverse Person or an
affiliate or associate of an Acquiring Person, or Adverse Person or
any representative of the foregoing entities.
Until a Right is exercised, the owner thereof, as such, will
have no rights as a shareowner of the Company, including, without
limitation, the right to vote or to receive dividends.
Any of the provisions of the Rights Agreement may be amended
by the board of directors of the Company prior to the Rights
Distribution Date, other than the redemption price and the number
of one-hundredths of a share of Series A Preferred Stock for which
a right is exercisable, and the Purchase Price may not be reduced.
After the Rights Distribution Date, the provisions of the Rights
Agreement may be amended by the board in order to cure any
ambiguity, to make changes which do not adversely affect the
interests of owner of Rights (excluding the interests of any
Acquiring Person or Adverse Person) or to shorten or lengthen any
time period under the Rights Agreement, except that no amendment to
adjust the time period governing redemption may be made at such
time as the Rights are not redeemable. The Final
47
<PAGE> 58
Expiration Date (as defined in the Rights Agreement) may be extended and the
Purchase Price may be increased at any time prior to a Stock Acquisition Date
or a Tender Offer Date.
The Rights have certain anti-takeover effects. They may
reduce or eliminate (i) "two-tiered" or other partial offers which
do not offer fair value for all of the Common Stock; (ii) the
accumulation by a third party of 20% or more of the Common Stock in
open-market or private purchases in order to influence or control
the business and affairs of the Company without paying an
appropriate premium for a controlling position in the Company; and
(iii) the accumulation of shares of Common Stock by third parties
in market transactions for the primary purpose of attempting to
cause the Company to be sold. In addition, the Rights will cause
substantial dilution to a person or group that attempts to acquire
the Company in a manner defined as a Triggering Event unless the
offer is conditioned on a substantial number of Rights being
acquired. The Rights should not, however, affect any prospective
offeror willing to make an offer for all outstanding shares of
Common Stock and other voting securities at a price and on terms
which are in the best interests of the Company and its shareowners
as determined by the board of directors or affect any prospective
offeror willing to negotiate with the board of directors because as
part of any negotiated transaction the Rights would either be
redeemed or otherwise made inapplicable to the transaction. The
Rights should not interfere with any merger or other business
combination approved by the board of directors since the board of
directors may, at its option, at any time until ten business days
following a Stock Acquisition Date, redeem all, but not less than
all, of the then outstanding Rights at the $.01 redemption price.
THE DISTRIBUTION
REASONS FOR THE DISTRIBUTION
May is engaged primarily in the department store business.
The Company is engaged in the self-service, affordably priced,
family shoe business. The board of directors and management of May
believe that today's business environment requires management to
focus on a single retail segment. In recent years, May has
undertaken a program to strengthen its competitive position in its
core department store business by concentrating May's management
and financial resources on the department store business. Over the
years, May has implemented several strategic elements of this plan,
including (i) increasing its internal investments in the department
store business, (ii) acquiring other department store businesses
and department store assets and (iii) disposing of many of its
other lines of business, including its shopping center business,
its catalog showroom business and its discount department store
business. In addition, May believes that the Company must
implement a more effective incentive and benefit program designed
to better attract, retain and motivate its associates by offering
economic rewards tied more directly to the performance of the
Company than the incentive arrangements that are currently in
effect.
Currently, May's outstanding common stock is widely held and
publicly traded. Each of May's shareowners owns less than 5% of
May's outstanding common stock, except for the May Plan, which owns
approximately [ ]% of the common stock and the Oppenheimer Group,
Inc., which owns or controls approximately 5.4% of the outstanding
May common stock. Consequently, the value of May's equity is
determined in the public market, based on the performance of May,
as a whole. Since May is engaged primarily in the department store
business, the value of May's equity primarily reflects the market's
view of the performance of May's department store business and does
not adequately reflect the performance of the Company.
Distributing the shares of Common Stock to the shareowners of
May will permit the creation of (i) a separate profit sharing plan
that will be funded based on the Company's performance and offer
associates the opportunity to invest in Common Stock and (ii) a
separate stock incentive plan under which
- stock options may be granted (permitting the Company's
executives to buy Common Stock),
- shares of restricted Common Stock of the Company may be
issued to the Company's senior executives, and
48
<PAGE> 59
- performance units may be credited to the accounts of the
Company's senior executives,
all of which will provide employees of the Company and its
subsidiaries with equity incentives directly linked to the
performance of the Company and its stock, rather than to the
performance of May's department store business with which they are
not involved. These incentive plans will help the Company to
better attract, retain and motivate its management.
MANNER OF EFFECTING THE DISTRIBUTION
The general terms and conditions relating to the Distribution
will be set forth in a Distribution Agreement, dated as of
, 1996 (the "Distribution Agreement"), between May
and the Company.
May will effect the Distribution on the Distribution Date by
providing for the delivery of the shares of Common Stock to the
Distribution Agent for distribution to the owners of record of May
common stock on the Record Date. The Distribution will be made on
the basis of [------] share of Common Stock for every share of May
common stock (------------ shares of Common Stock for each 100
shares of May common stock) outstanding on the Record Date. The
actual total number of shares of Common Stock to be distributed
will depend on the number of shares of May common stock outstanding
on the Record Date. The shares of Common Stock will be fully paid
and nonassessable, and the owners thereof will not be entitled to
preemptive rights. See "DESCRIPTION OF CAPITAL STOCK."
Certificates representing the shares of Common Stock will be mailed
to May shareowners on or about May [ ], 1996.
No certificates or scrip representing fractional shares of
Common Stock will be issued to May shareowners as part of the
Distribution. The Distribution Agent will aggregate fractional
shares into whole shares and sell them in the open market at then
prevailing prices on behalf of owners who otherwise would be
entitled to receive fractional share interests, and such persons
will receive instead a cash payment in the amount of their pro rata
share of the total proceeds, net of selling expenses. See "THE
DISTRIBUTION - Federal Income Tax Consequences of the
Distribution." Such sales are expected to be made as soon as
practicable after the Record Date. NONE OF MAY, THE COMPANY OR THE
DISTRIBUTION AGENT WILL GUARANTEE ANY MINIMUM SALE PRICE FOR THE
SHARES OF COMMON STOCK, AND NO INTEREST WILL BE PAID ON THE
PROCEEDS.
After the Distribution, owners of May common stock will
continue to own their shares of May common stock and, if such
shareowners were shareowners of record on the Record Date, they
will have also received shares of Common Stock. No owner of May
common stock will be required to pay any cash or other
consideration for the shares of Common Stock received in the
Distribution or to surrender or exchange shares of May common stock
in order to receive shares of Common Stock. The Distribution will
not affect the number of, or the Rights attached to, outstanding
shares of May common stock.
After the Distribution, May will own no shares of Common Stock
and the Company will operate as an independent, publicly owned
corporation.
FEDERAL INCOME TAX CONSEQUENCES OF THE DISTRIBUTION
May will receive a tax opinion from its counsel, Skadden,
Arps, Slate, Meagher & Flom, concluding that the Distribution will
qualify as a tax-free transaction under Section 355 of the Code.
Such opinion, however, is not binding on the Service or a court.
Accordingly, there can be no assurance that the Service will not
challenge such conclusion or that a court will not sustain such
challenge.
CONSEQUENCES OF QUALIFICATION AS A TAX-FREE DISTRIBUTION. The
following is a summary of the material Federal income tax
consequences of the Distribution assuming that it qualifies as a
tax-free transaction:
(1) Pursuant to Section 355 of the Code, May shareowners will
not recognize any income, gain or loss upon the receipt of the
shares of Common Stock (except in connection with cash received in
lieu of fractional shares) pursuant to the Distribution. A May
shareowner who receives cash in lieu of fractional shares as a
result of the sale of such shares by the Distribution Agent will be
treated as if such fractional
49
<PAGE> 60
shares have been received by the May shareowner as part of the Distribution
and then sold by such shareowner. Accordingly, such shareowner will recognize
gain or loss equal to the difference between the amount of cash so received
and the amount of tax basis allocable (as described below) to such
fractional shares. Such gain or loss will be capital gain or loss,
provided that such fractional shares would have been held by such
shareowner as a capital asset at the time of the Distribution.
(2) A May shareowner's tax basis for the May common stock
with respect to which shares of Common Stock are received will be
apportioned between such May shares and such shares of Common Stock
(including any fractional shares) in proportion to the fair market
values of each on the date the shares of Common Stock are
distributed to the May shareowners. Such allocation must be
calculated separately for each block of May shares (shares
purchased at the same time and at the same cost) with respect to
which the shares of Common Stock are received. The holding period
for the shares of Common Stock received in the Distribution will
include the period during which such May shares were held (provided
that such May shares were held as a capital asset at the time of
the Distribution).
(3) Neither May nor the Company will recognize any income,
gain or loss as a result of the Distribution.
Treasury regulations governing Section 355 of the Code require
that each May shareowner who receives shares of Common Stock
pursuant to the Distribution attach a statement to the Federal
income tax return that will be filed by the shareowner for the
taxable year in which such shareowner receives the shares in the
Distribution, which statement shows the applicability of Section
355 of the Code to the Distribution. May will provide each May
shareowner with information necessary to comply with this
requirement.
CONSEQUENCES OF FAILURE TO QUALIFY AS A TAX-FREE DISTRIBUTION.
May does not intend to seek a ruling from the Service as to the
Federal income tax treatment of the Distribution. Rather, as
stated above, May has received an opinion from its counsel,
Skadden, Arps, Slate, Meagher & Flom, that the Distribution will
qualify as a tax-free transaction under Section 355 of the Code.
If the Service were to challenge such treatment successfully and a
court were ultimately to hold that the Distribution failed to
qualify as a tax-free transaction under Section 355 of the Code,
the following Federal income tax consequences would result:
Each May shareowner would be considered to have received a
taxable dividend includable in income in an amount equal to the
fair market value on the Distribution Date of the shares received
in the Distribution plus the amount of any cash received in lieu of
fractional shares. In general, if certain conditions are met, any
amount received by a corporate owner of May common stock that is
treated as a dividend would be eligible for the dividends-received
deduction.
In addition, a shareowner's basis in the shares of Common
Stock received in the Distribution would equal the fair market
value of the shares on the date the shares are distributed to the
May shareowner, and the shareowner's holding period for the shares
will begin on the date after the date of the Distribution. In such
event, a May shareowner's basis and holding period for the May
common stock would not be affected by the Distribution.
If the Distribution is considered a taxable transaction, May
would recognize gain, but not loss, in the amount equal to the
difference between the fair market value of the shares of Common
Stock distributed and May's basis in the shares. Pursuant to the
Tax Sharing Agreement, if the Distribution fails to qualify as a
tax-free distribution under certain circumstances for which the
Company is responsible, the Company is obligated to indemnify and
hold May harmless, on an after-tax basis, from any tax liability
imposed upon it in connection with the Distribution, which
liability would be material to the Company. See "TRANSACTIONS
BETWEEN THE COMPANY AND MAY - Tax Sharing Agreement."
THE SUMMARY OF FEDERAL INCOME TAX CONSEQUENCES SET FORTH ABOVE
IS FOR GENERAL INFORMATION ONLY AND MAY NOT BE APPLICABLE TO
SHAREOWNERS WHO RECEIVED THEIR SHARES THROUGH THE EXERCISE OF AN
OPTION, THE GRANT OF A RESTRICTED SHARE OF STOCK OR OTHERWISE AS
COMPENSATION OR WHO ARE NOT CITIZENS OR RESIDENTS OF THE UNITED
STATES OR WHO ARE OTHERWISE SUBJECT TO SPECIAL TREATMENT UNDER THE
CODE. ALL SHAREOWNERS SHOULD CONSULT THEIR TAX
50
<PAGE> 61
ADVISORS AS TO THE PARTICULAR TAX CONSEQUENCES OF THE DISTRIBUTION TO THEM,
INCLUDING THE APPLICABILITY AND EFFECT OF STATE, LOCAL AND FOREIGN TAX LAWS.
LISTING AND TRADING OF THE SHARES OF COMMON STOCK
Application will be made to list the shares of Common Stock on
the NYSE under the symbol "PSS." The Company expects that
initially it will have approximately [ ] owners of
record of the shares of Common Stock, based on the number of
shareowners of record of May on April ---, 1996.
A "when-issued" trading market is expected to develop shortly
before the Record Date. The term "when-issued" means that shares
can be traded prior to the time certificates are actually available
or issued. Prices at which the shares of Common Stock may trade on
a "when-issued" basis or after the Distribution cannot be
predicted. See "CERTAIN CONSIDERATIONS - Absence of Prior Trading
Market for the Common Stock."
The shares of Common Stock distributed to May shareowners will
be freely transferable, except for shares received by persons who
may be deemed to be "affiliates" of the Company under the
Securities Act of 1933, as amended (the "Securities Act"). Persons
who may be deemed to be affiliates of the Company after the
Distribution generally include individuals or entities that
control, are controlled by, or are under common control with, the
Company and may include the directors and principal executive
officers of the Company as well as any principal shareowner of the
Company. Persons who are affiliates of the Company will be
permitted to sell their shares of Common Stock only pursuant to an
effective registration statement under the Securities Act or an
exemption from the registration requirements of the Securities Act,
such as the exemption afforded by Rule 144 thereunder.
INDEPENDENT PUBLIC ACCOUNTANTS
The board of directors of the Company expects to appoint
Arthur Andersen LLP as the Company's independent public accountants
to audit the Company's financial statements for the fiscal year
1996. Arthur Andersen LLP has served as May's independent public
accountants throughout the periods covered by the financial
statements included in this Information Statement.
51
<PAGE> 62
<TABLE>
<CAPTION>
PAYLESS SHOESOURCE, INC. AND SUBSIDIARIES
- ------------------------------------------------------------------------
INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------
<S> <C>
Report of Independent Public Accountants F-2
Consolidated Statement of Earnings for the
Fiscal Years 1995, 1994 and 1993 F-3
Consolidated Balance Sheet as of February 3, 1996
and January 28, 1995 F-4
Consolidated Statement of Cash Flows for the
Fiscal Years 1995, 1994 and 1993 F-5
Notes to Consolidated Financial Statements F-6
</TABLE>
F-1
<PAGE> 63
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
Payless ShoeSource, Inc. (a Missouri corporation) and subsidiaries
as of February 3, 1996, and January 28, 1995, and the related
consolidated statements of earnings and cash flows for each of the
three fiscal years in the period ended February 3, 1996. 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 Payless
ShoeSource, Inc. and subsidiaries as of February 3, 1996, and
January 28, 1995, and the results of their operations and their
cash flows for each of the three fiscal years in the period ended
February 3, 1996, in conformity with generally accepted accounting
principles.
Arthur Andersen LLP
Kansas City, Missouri
February 19, 1996
F-2
<PAGE> 64
<TABLE>
<CAPTION>
PAYLESS SHOESOURCE, INC. AND SUBSIDIARIES
- ------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF EARNINGS
- ------------------------------------------------------------------------
(millions)
1995<F*> 1994 1993
-------- -------- --------
<S> <C> <C> <C>
NET RETAIL SALES $2,330.3 $2,116.4 $1,966.5
-------- -------- --------
Cost of sales 1,688.7 1,489.8 1,366.1
Selling, general and
administrative expenses 479.9 408.4 378.7
Interest expense, net 1.0 1.1 0.9
Special and nonrecurring items 71.8 - -
-------- -------- --------
Total cost of sales
and expenses 2,241.4 1,899.3 1,745.7
-------- -------- --------
Earnings before income
taxes 88.9 217.1 220.8
Provision for income taxes 34.9 85.6 88.0
-------- -------- --------
NET EARNINGS $ 54.0 $ 131.5 $ 132.8
======== ======== ========
<FN>
<F*>1995 contains 53 weeks.
See the Notes to Consolidated Financial Statements.
</TABLE>
F-3
<PAGE> 65
<TABLE>
<CAPTION>
PAYLESS SHOESOURCE, INC. AND SUBSIDIARIES
- ------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEET
- ------------------------------------------------------------------------
(millions) February 3, January 28,
1996 1995
----------- -----------
<S> <C> <C>
ASSETS
Current Assets:
Cash $ 4.6 $ 6.6
Accounts receivable, net 4.4 4.6
Merchandise inventories 398.0 393.9
Other current assets 43.9 20.4
----------- -----------
Total Current Assets 450.9 425.5
Property and Equipment:
Land 6.5 7.7
Buildings and leasehold improvements 564.6 550.2
Furniture, fixtures and equipment 278.7 271.0
Property under capital leases 18.7 20.9
----------- -----------
Total property and equipment 868.5 849.8
Accumulated depreciation and amortization (308.5) (259.2)
----------- -----------
Property and equipment, net 560.0 590.6
Goodwill 2.9 2.9
Other Assets 0.5 0.8
----------- -----------
Total Assets $ 1,014.3 $ 1,019.8
=========== ===========
LIABILITIES AND EQUITY
Current Liabilities:
Current maturities of capital
lease obligations $ 1.2 $ 1.5
Accounts payable 65.0 101.5
Accrued expenses 152.7 79.7
----------- -----------
Total Current Liabilities 218.9 182.7
Capital Lease Obligations 10.3 11.6
Deferred Income Taxes 8.9 9.2
Other Liabilities 23.3 22.4
Equity:
May equity investment 752.9 793.9
----------- -----------
Total Liabilities and Equity $ 1,014.3 $ 1,019.8
=========== ===========
See the Notes to Consolidated Financial Statements.
</TABLE>
F-4
<PAGE> 66
<TABLE>
<CAPTION>
PAYLESS SHOESOURCE, INC. AND SUBSIDIARIES
- ------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF CASH FLOWS
- ------------------------------------------------------------------------
(millions)
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net earnings $ 54.0 $ 131.5 $ 132.8
Adjustments for noncash items
included in earnings:
Depreciation and amortization 95.3 77.0 67.0
Deferred income taxes (noncurrent) (0.3) 11.7 (1.4)
Special and nonrecurring charges 71.8 - -
Tax benefit on special and
nonrecurring charges (28.2) - -
Accounts receivable, net 0.2 (0.6) (1.3)
Merchandise inventories (4.1) (20.4) (58.1)
Other current assets 4.7 (6.9) 0.5
Accounts payable (36.5) 11.1 25.5
Accrued expenses 1.2 26.4 (7.6)
Other assets and liabilities, net 1.2 4.3 10.5
------- ------- -------
Total Operating Activities 159.3 234.1 167.9
------- ------- -------
INVESTING ACTIVITIES:
Capital expenditures (95.4) (255.2) (139.8)
Disposition of property and equipment 30.7 21.5 23.0
Other - (1.3) -
------- ------- -------
Total Investing Activities (64.7) (235.0) (116.8)
------- ------- -------
FINANCING ACTIVITIES
Repayment of capital lease
obligations (1.6) (1.4) (1.7)
Net transactions with May (95.0) 1.4 (42.9)
------- ------- -------
Total Financing Activities (96.6) - (44.6)
------- ------- -------
INCREASE (DECREASE) IN CASH (2.0) (0.9) 6.5
CASH, BEGINNING OF YEAR 6.6 7.5 1.0
------- ------- -------
CASH, END OF YEAR $ 4.6 $ 6.6 $ 7.5
======= ======= =======
- ------------------------------------------------------------------------
Cash paid during the year:
Interest $ 1.0 $ 1.2 $ 1.2
Income taxes - - -
- ------------------------------------------------------------------------
See the Notes to Consolidated Financial Statements.
</TABLE>
F-5
<PAGE> 67
- ------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.
DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION. Payless
ShoeSource, Inc. ("Company"), a Missouri corporation, was founded
in 1956. The Company is the largest footwear retailer in the United
States. The Company operated as of February 3, 1996, 4,549 self-
service, affordably priced, family shoe stores, of which 773 include
Payless Kids expansions. The Company's stores are located in 49
states, the District of Columbia, Puerto Rico and the United States
Virgin Islands. The Company utilizes a network of vendors and
factories in 13 foreign countries and the United States to source
its products which are manufactured to meet the Company's demanding
specifications and standards. Factories in the People's Republic
of China have been a source of approximately 80% of the Company's
merchandise.
On January 17, 1996, May announced that it anticipates distributing
the Company's outstanding shares of common stock (the "Common
Stock") to shareowners of May common stock ("the Distribution").
Upon consummation of the Distribution, the Company will become
independent of May. The consolidated financial statements include
the accounts of the Company and all wholly owned subsidiaries.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts. While the
financial statements reflect all available information and
management's judgement 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. All dollar amounts in these notes are stated in
millions, unless otherwise noted.
FISCAL YEAR. The Company's fiscal year ends on the Saturday closest
to January 31. Fiscal year 1995 ended on February 3, 1996 and
included 53 weeks. Fiscal years 1994 and 1993 ended on January 28,
1995, and January 29, 1994, respectively, and both included 52
weeks. References to years in these financial statements and notes
relate to fiscal years rather than calendar years.
NET RETAIL SALES. Net retail sales (sales) represent the sales of
all stores operated during the period, are net of returns and
exclude sales tax.
COST OF SALES. Cost of sales includes the cost of merchandise sold
and buying and occupancy costs.
ADVERTISING COSTS. Advertising costs are expensed at the time the
advertising takes place. Included in selling, general and
administrative expenses were advertising and sales promotion costs
of $60.6, $53.4, and $46.3 in 1995, 1994 and 1993, respectively.
Other current assets included $0.6 and $0.6 in 1995 and 1994,
respectively, for prepaid advertising and sales promotion costs.
INCOME TAXES. The Company is included in a consolidated tax return
filed by May for Federal tax purposes. Income taxes as shown in the
consolidated statement of earnings represent the provision
calculated on a separate return basis. Effective with the beginning
of 1993, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 109, "Accounting for Income Taxes." The
cumulative effect of adopting SFAS No. 109 was insignificant and,
therefore, no adjustments were reflected in the financial
statements. SFAS No. 109 requires income taxes to be 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 and tax basis of assets and
liabilities.
F-6
<PAGE> 68
Adjustments to deferred taxes resulting from statutory rate changes
flow through the tax provision in the year of the change.
ACCOUNTS RECEIVABLE. Sales are made for cash or third party credit
and therefore no customer trade receivables exist. Accounts
receivable represents amounts due for damage claims, wholesale of
shoes to liquidators, and sublease rentals. Accounts receivable is
shown net of a collectibility allowance of $0.7 and $0.5, in 1995
and 1994, respectively.
MERCHANDISE INVENTORIES. Merchandise inventories are valued by the
retail method and are stated on the lower of cost or market basis.
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 at the dates of acquisition.
Substantially all amounts are amortized using the straight-line
method over a 40-year period. Goodwill is presented net of
accumulated amortization of $1.7 and $1.6 in 1995 and 1994,
respectively.
DERIVATIVES POLICY. The Company's policy is to use financial
derivatives only to reduce risk in conjunction with specific
business transactions. 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.
2. RELATIONSHIP WITH PARENT. May has provided services to the
Company, including legal, benefit administration, risk management
and insurance, income and payroll tax management and treasury
services. These financial statements include specific charges from
May for legal and risk management and insurance services based upon
utilization and are representative of May's actual cost. These
charges were $4.2, $3.6 and $3.1 in fiscal years 1995, 1994 and
1993, respectively. These costs could have been different had the
Company operated as an independent company during these periods.
These financial statements do not include general corporate overhead
allocations for benefit administration, income and payroll tax
management and treasury services. Accordingly, these financial
statements may not be indicative of the cost structure had the
Company operated as an independent company during these periods.
These allocations were $7.2, $6.6 and $6.0 in fiscal years 1995,
1994 and 1993, respectively.
Historically, cash collected by the Company in excess of store
operating needs was transferred to May on a daily basis and all of
the Company's cash requirements were funded by May. The cumulative
net impact of these cash transfers and other intercompany
transactions have historically been recorded as an intercompany
payable to May. Intercompany transactions include amounts paid by
May for Federal, state and local income taxes, payroll taxes and
worker's compensation and general liability claims. Accordingly,
these financial statements may not be indicative of the debt or
investment structure and related interest expense or income that
might have resulted had the Company operated as an independent
company.
All intercompany debt owed to May was contributed to May equity
investment as of February 3, 1996, and therefore, has been deemed
to be part of the May equity investment in all periods presented.
The Company will continue to use May to process and settle the
worker's compensation and general liability claims incurred prior
to the Distribution in accordance with various agreements. The
charges for these services will approximate May's cost of providing
the services.
F-7
<PAGE> 69
3. SPECIAL AND NONRECURRING ITEMS. During the 1995 fourth quarter,
in connection with the Distribution, the Company committed to close
or relocate approximately 450 unprofitable stores. In addition, the
Company implemented a plan to reduce central office overhead by
means of census reduction. A pretax special and nonrecurring charge
of $71.8 was recorded for these initiatives.
The special and nonrecurring charge is comprised of the following:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------
Non-
Cash Cash Total
- -------------------------------------------------------------------------
<S> <C> <C> <C>
Property and equipment write-off
and other store closing costs $ 38.2 $ 29.9 $ 68.1
Employee severance costs 3.7 - 3.7
------ ------ ------
Total $ 41.9 $ 29.9 $ 71.8
- -------------------------------------------------------------------------
</TABLE>
The non-cash expenses represent the write-off of leasehold
improvements, fixtures and equipment upon store closing or
relocation. Management anticipates that the special and
nonrecurring items will be completed in one year.
In March 1995, Statement of Financial Accounting Standards (SFAS)
No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of," was issued. This statement
requires that long-lived assets and certain identifiable intangibles
to be held and used or disposed of by an entity be reviewed for
impairment whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable. The
statement is effective for fiscal years beginning after December 15,
1995; however, May, and therefore the Company, adopted this statement
in 1995. There is no impact to the Company in addition to the
amounts reflected in the special and nonrecurring items.
In connection with the Distribution, the Company has a Spin-off
Stock Plan and a Spin-off Cash Plan. Under these retention
programs, the Company will pay out up to 375,000 shares of
restricted stock with no exercise price and cash payments of amounts
ranging from 10% to 37.5% of associates' base salaries. These
retention incentives are contingent upon continued employment for
up to two years subsequent to the Distribution Date. The expense
related to these incentives will be expensed as earned during the
retention period. Estimates of these expenses (unaudited) by fiscal
year are as follows:
<TABLE>
<CAPTION>
<S> <C>
1996 $ 10.4
1997 4.1
1998 0.7
</TABLE>
4. MAY EQUITY INVESTMENT. The following analyzes May's investment
in the Company for the fiscal years presented:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
1995 1994 1993
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of the fiscal year $ 793.9 $ 661.0 $ 571.1
Net earnings 54.0 131.5 132.8
Net transactions with May (95.0) 1.4 (42.9)
------- -------- -------
Balance at end of fiscal year $ 752.9 $ 793.9 $ 661.0
- -------------------------------------------------------------------------------
</TABLE>
May equity investment includes the original investment in the
Company and the net intercompany payable from the Company reflecting
transactions described in Note 2.
F-8
<PAGE> 70
5. PROFIT SHARING. Associates of the Company participated in The
May Department Stores Company Profit Sharing Plan ("May Plan"), a
qualified profit sharing plan which covers substantially all
associates who are paid for 1,000 hours or more in a year and have
attained age 21. The May Plan is a defined contribution plan which
provides for discretionary matching allocations at a variable
matching rate generally based upon changes in May's annual earnings
per share, as defined in the May Plan. During the period when
Company associates were covered under the May Plan, May allocated
employer contribution expense to the Company based upon its
associate contributions and an estimate of the annual variable match
rate. The Company's expense under the May Plan was $1.8, $2.3 and
$2.3 in 1995, 1994 and 1993, respectively.
6. PENSION. Associates of the Company participated in The May
Department Stores Company Retirement Plan ("May Retirement Plan")
covering substantially all associates who are paid for 1,000 hours
or more in a year and have attained age 21. The May Retirement Plan
is noncontributory and provides benefits based upon years of service
and pay during employment. Pension expense was charged to the
Company by May based upon the Company's actuarially determined
portion of service costs. The expense charged to the Company was
$3.6, $2.8 and $2.3 in 1995, 1994 and 1993, respectively.
Company associates who were covered by the May Retirement Plan prior
to the Distribution Date will continue to vest in the benefits
earned under that plan. Benefits accrued through the Distribution
Date will be "frozen" and paid out in the future.
7. TAXES. The provision for income taxes and related percent of
pretax earnings for the last three years were as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
1995 1994 1993
- --------------------------------------------------------------------------------------------------
$ % $ % $ %
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Current Provision:
Federal $ 50.7 $ 62.6 $ 64.1
State and local 11.0 15.1 15.8
------- ------- ------- -------- ------- --------
Taxes currently payable 61.7 69.4% 77.7 35.8% 79.9 36.2%
Deferred Provision:
Federal (22.0) 6.5 6.6
State and local (4.8) 1.4 1.5
------- ------- ------- -------- ------- --------
Deferred taxes (26.8) (30.1)% 7.9 3.6% 8.1 3.6%
------- ------- ------- -------- ------- --------
Total Provision $ 34.9 39.3% $ 85.6 39.4% $ 88.0 39.8%
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
</TABLE>
The reconciliation between the statutory Federal income tax rate and the
effective income tax rate for the last three years follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------
1995 1994 1993
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory Federal income tax rate 35.0% 35.0% 35.0%
State and local income taxes 7.0 7.6 7.8
Federal tax benefit of state and
local income taxes (2.5) (2.6) (2.7)
Other, net (0.2) (0.6) (0.3)
------ ------ ------
Effective income tax rate 39.3% 39.4% 39.8%
- ---------------------------------------------------------------------------
</TABLE>
F-9
<PAGE> 71
Major components of deferred tax assets and (liabilities) were as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------
February 3, January 28,
1996 1995
- -----------------------------------------------------------------------
<S> <C> <C>
Accrued expenses and reserves $ 40.3 $ 13.4
Depreciation/amortization and
basis differences (14.5) (14.5)
Other deferred income tax
liabilities, net 5.1 5.1
------- -------
Net deferred income taxes 30.9 4.0
Net current deferred
income tax assets 39.8 13.2
------- -------
Noncurrent deferred income taxes $ (8.9) $ (9.2)
- -----------------------------------------------------------------------
</TABLE>
Net current deferred income tax assets are included in other current
assets in the accompanying balance sheet.
Taxes other than income taxes consisted of:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------
1995 1994 1993
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Payroll $ 31.4 $ 27.4 $ 24.7
Real estate and personal property 31.2 26.2 22.7
------ ------ ------
Total $ 62.6 $ 53.6 $ 47.4
- ----------------------------------------------------------------------------
</TABLE>
8. OTHER CURRENT ASSETS. In addition to net current deferred income tax
assets, other current assets consisted of prepaid expenses and supply
inventories.
9. ACCRUED EXPENSES. Components of accrued expenses included:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------
February 3, January 28,
1996 1995
- -----------------------------------------------------------------------
<S> <C> <C>
Special and nonrecurring charges $ 68.4 $ -
Insurance costs 29.0 24.0
Taxes other than income 19.8 14.2
Construction costs 11.2 18.5
Interest and rent expense 9.3 5.6
Salaries, wages and employee benefits 4.8 5.2
Accrued escalating rent (current portion) 3.0 2.9
Advertising expenses 1.7 1.9
Other operating expenses 5.5 7.4
------- -------
Total $ 152.7 $ 79.7
- -----------------------------------------------------------------------
</TABLE>
F-10
<PAGE> 72
10. LEASE OBLIGATIONS. The Company leases substantially all of its stores.
Rental expense for the Company's operating leases consisted of:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------
1995 1994 1993
- -----------------------------------------------------------------------
<S> <C> <C> <C>
Minimum rentals $ 221.3 $ 184.7 $ 161.4
Contingent rentals based on sales 3.0 4.2 4.9
------- ------- -------
Real property rentals 224.3 188.9 166.3
Equipment rentals 0.7 0.6 0.7
------- ------- -------
Total $ 225.0 $ 189.5 $ 167.0
- -----------------------------------------------------------------------
</TABLE>
The Company has certain lease agreements that include escalating rents over
the lease term. Cumulative expense recognized on the straight-line basis in
excess of cumulative payments is $26.3, and is included in accrued expenses
and other liabilities.
Future minimum lease payments at February 3, 1996, were as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
Capital Operating
Leases Leases Total
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
1996 $ 2.4 $ 214.5 $ 216.9
1997 2.4 195.0 197.4
1998 2.4 176.9 179.3
1999 2.4 158.5 160.9
2000 1.5 136.8 138.3
After 2001 6.9 337.2 344.1
------ --------- ---------
Minimum lease payments 18.0 $ 1,218.9 $ 1,236.9
--------- ---------
Less imputed interest component 6.5
------
Present value of net minimum
lease payments of which $1.2
is included in current liabilities $ 11.5
- ------------------------------------------------------------------------------
</TABLE>
The present value of operating leases was $885.5 at February 3, 1996.
Property under capital leases is summarized as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------
February 3, January 28,
1996 1995
- ----------------------------------------------------------------------------
<S> <C> <C>
Cost $ 18.7 $ 20.9
Accumulated amortization (11.7) (12.8)
------- -------
Total $ 7.0 $ 8.1
- ----------------------------------------------------------------------------
</TABLE>
F-11
<PAGE> 73
11. QUARTERLY RESULTS (UNAUDITED). Summarized quarterly data for 1995 and
1994 is as follows:
<TABLE>
<CAPTION>
1995
------------------------------------------------------------------------ ----------
Quarter First Second Third Fourth Year
------------------------------------------------------------------------ ----------
<S> <C> <C> <C> <C> <C>
Net Retail Sales $ 569.6 $ 622.7 $ 586.4 $ 551.6 $ 2,330.3
--------- --------- --------- -------- ----------
Cost of Sales $ 403.6 $ 445.7 $ 421.9 $ 417.5 $ 1,688.7
--------- --------- -------- -------- ----------
Net Earnings (Loss) $ 26.5 $ 34.2 $ 25.7 $ (32.4)<F1> $ 54.0<F1>
--------- --------- --------- -------- ----------
<F1> Net earnings, excluding special and nonrecurring items, are $11.1 and
$97.5, respectively.
</TABLE>
<TABLE>
<CAPTION>
1994
------------------------------------------------------------------------ ------------
Quarter First Second Third Fourth Year
------------------------------------------------------------------------ ------------
<S> <C> <C> <C> <C> <C>
Net Retail Sales $ 516.7 $ 544.6 $ 540.1 $ 515.0 $ 2,116.4
------------- ------------- -------- ------------ -----------
Cost of Sales $ 356.5 $ 381.6 $ 376.2 $ 375.5 $ 1,489.8
------------- ------------- -------- ------------ -----------
Net Earnings $ 34.4 $ 37.3 $ 34.5 $ 25.3 $ 131.5
------------- ------------- -------- ------------ -----------
</TABLE>
F-12
<PAGE> 74
<TABLE>
EXHIBIT INDEX
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE
------ ----------- ----
<C> <S> <C>
2.1 Distribution Agreement, dated as of ,
1996, between The May Department Stores Company ("May")
and the Registrant.<F*>
3.1 Amended and Restated Articles of Incorporation of the
Registrant.<F*>
3.2 Amended and Restated By-Laws of the Registrant.<F*>
4.1 Rights Agreement, dated as of , 1996,
between the Registrant and The Bank of New York, as
Rights Agent.<F*>
10.1 Tax Sharing Agreement, dated as of , 1996,
between May and the Registrant.<F*>
10.2 Master Sublease, dated as of , 1996,
between May and the Registrant.<F*>
10.3 Payless ShoeSource, Inc. 1996 Stock Incentive Plan.<F*>
10.4 Payless ShoeSource, Inc. Spin-Off Stock Plan.<F*>
10.5 Payless ShoeSource, Inc. Spin-Off Cash Plan.<F*>
10.6 Payless ShoeSource, Inc. Restricted Stock Plan for
Non-Management Directors.<F*>
10.7 Form of Employment Agreement between the Registrant and
certain executives of Registrant.<F*>
10.8 Payless ShoeSource, Inc. Supplementary Retirement
Plan.<F*>
10.9 Payless ShoeSource, Inc. Profit Sharing Plan.<F*>
10.10 Payless ShoeSource, Inc. Deferred Compensation Plan.<F*>
10.11 Payless ShoeSource, Inc. Executive Incentive
Compensation Plan for Payless Executives.<F*>
10.12 Form of Management Severance Agreement.<F*>
10.13 Form of Indemnification Agreement.<F*>
21.1 Subsidiaries of the Registrant.<F*>
<FN>
- ------------------
<F*> To be filed by amendment.
</TABLE>
<PAGE> 75
INSIDE BACK COVER
MAP [to come]
