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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark one)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended February 1, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________ to ______________
Commission File Number 1-11633
PAYLESS SHOESOURCE, INC.
(Exact name of registrant as specified in its charter)
Missouri 48-0674097
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
3231 Southeast Sixth Street, Topeka, Kansas 66607-2207
(Address of principal executive offices) (Zip Code)
(913) 233-5171
(Registrant's telephone number,
including area code)
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
- - ------------------- -----------------------
Common Stock, par value $.01 per share New York Stock Exchange
Preferred stock purchase rights New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not
be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part
III of this Form 10-K or any amendment to this Form 10-K. [ x ]
The aggregate market value of registrant's common stock held by
non-affiliates based on the closing price of $40.50 on April 14,
1997 was $1,616,745,218.
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Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date:
39,919,635 shares of common stock, $.01 par value, as of April 14,
1997.
Documents incorporated by reference:
1. Portions of Registrant's 1996 Annual Report to Shareowners are
incorporated into Part II.
2. Portions of Registrant's 1997 Proxy Statement for the Annual
Meeting to be held on May 23, 1997, are incorporated into Part
III.
PART I
Item 1. Business
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General
Payless ShoeSource, Inc. ("Payless" or "Company") is the largest
family footwear retailer in the United States with more than $2.3
billion in sales in 1996. The Company sold approximately 195
million pairs of shoes in 1996, and served more than 130 million
customers.
As of February 1, 1997, the Company operated 4,236 Payless stores
in 50 states, the District of Columbia, Puerto Rico and the U.S.
Virgin Islands. The Company's stores feature fashionable, quality
footwear for men, women and children, including athletic, casual,
dress, sandals, work boots and slippers.
Recent Developments
During 1996, the Company opened 171 new Payless stores and closed
484 Payless stores. The Company opened 4 new Payless stores in
Alaska, the only state where the Company had not previously
operated any facilities. The Company also announced the planned
open market repurchase, pursuant to Rule 10b-18 of the Securities
Exchange Act of 1934, of up to $150 million of common stock during
1997-98, contingent upon receipt of a favorable ruling from the
Internal Revenue Service and market conditions. The favorable
ruling was subsequently received on April 8, 1997. In addition, the
Company completed a repurchase of 460,000 shares of its common
stock in 1996. As discussed below, in late 1996 the Company
initiated the purchase of the Parade of Shoes division of J. Baker,
Inc., which consisted of 186 stores operating in 14 states. This
transaction was consummated in March, 1997.
History
The Company was founded in Topeka, Kansas in 1956 with a strategy
of selling low cost, high quality family footwear on a self-service
basis. In 1962, Volume Distributors, as the Company was known at
the time, became a public company and its shares were registered on
the New York Stock Exchange. In 1979, the Company (then called
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"Volume Shoe Corporation") was acquired by The May Department
Stores Company of St. Louis, Missouri. The Company changed its name
to Payless ShoeSource, Inc. in 1991. On May 4, 1996, Payless became
an independent company as a result of its spin-off from The May
Department Stores Company. Payless is traded on the New York
Stock Exchange under the symbol "PSS."
Payless Stores
The average size of the Company's Payless stores is 3,400 square
feet. Each store carries approximately 10,000 pairs of shoes and
more than 600 styles. Payless stores operate in a variety of real
estate venues formats, including shopping malls, central business
districts, free-standing buildings and strip centers. Of the 4,236
Payless locations open at the end of fiscal 1996, 748 incorporated
a concept called "Payless Kids" which consists of an additional
approximately 1,000 square feet of selling space devoted to an
expanded assortment of children's shoes. These stores are located
throughout the country and include wider aisles, children-friendly
seating and an entertainment center for children.
The Company's Payless stores operate successfully in rural,
suburban and urban environments. The 10 states with the largest
concentrations of the Company's Payless stores are identified
below:
No. of
Payless
State Stores
----- -------
California 654
Texas 368
Florida 282
New York 267
Illinois 196
Pennsylvania 196
Ohio 187
Michigan 154
New Jersey 116
Washington 106
Other 1,712
Total 4,236
The Company's Payless stores are highly automated, each with an
electronic point of sale register and a back office computer which
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
describing promotional and display requirements.
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The Company's Payless retail operations are directed centrally by
a senior officer and 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 directors and a small support staff.
Each Payless store has a manager and approximately five associates.
The stores are organized into districts. District managers, to
whom the store managers report, themselves 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, merchandising
support and other more general support services, are provided from
the Company's headquarters.
Parade of Shoes Stores
The Company's Parade of Shoes division, which was acquired in
March, 1997, from J. Baker, Inc., of Canton, Massachusetts,
emphasizes the retail sale of quality, primarily leather, women's
shoes. The Company operates the 186 Parade of Shoes store chain as
a division separate from the Payless chain. J. Baker reported sales
for the chain of $123 million in 1996.
Parade of Shoes stores are self-service and feature fashionable
women's dress, casual and athletic footwear priced in the $20 to
$40/pair range. Major markets include Boston, New York City,
Chicago, Philadelphia and Washington, D.C. The average size of a
Parade of Shoes store is 2,300 square feet. These stores operate
in a variety of real estate venues including shopping malls,
central business districts, free-standing buildings and strip
centers.
Employees
During 1996, the Company's average number of employees was
approximately 24,000, including approximately 13,000 full-time
associates and 11,000 part-time associates. Approximately 650 of
the Company's distribution center associates are covered by
collective bargaining agreements. Management believes it has a
good relationship with all employees.
The Company is led by a team of senior management executives who
have an average of 16 years of retail industry experience,
including an average of eight years with the Company.
Products
The Company's Payless stores offer a broad assortment of
fashionable footwear to meet the needs of its customers including
basic, seasonal and fashion shoes in dress, casual, athletic and
work boot categories. Shoes are constructed with leather, canvas
and man-made materials. Styling is updated regularly to keep pace
with proven fashion trends. During fiscal 1996, the Company's
Payless shoes sold at an average retail price of $11.38/pair, with
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one-third of its women's footwear and two-thirds of its children's
footwear selling at $9.99 or less. In addition to shoes, the
Company's stores offer accessories, including handbags, shoe polish
and hosiery.
The Company's 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 and factory
representatives to design, select, produce, inspect and distribute
footwear and accessories for the Company. The Company believes
that it has good relationships with its vendors.
Customers
The Company sells footwear to women, men and children of all age
groups and from households with incomes that represent
approximately 85% of the United States population. The Company has
significant market penetration with its target customers: women
between the ages of 18 and 64. The Company believes that more than
40% of its target customers, regardless of household income,
purchased at least one pair of shoes from the Company last year.
The Company maintains a leadership position in the children's
category as well, selling more pairs of children's shoes than any
other U.S. footwear retailer.
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 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 favorable prices in conveniently located stores;
however, the Company is facing increased competition from certain
national discount mass-merchandisers.
Seasonality
The retail footwear market is characterized by four high volume
seasons: Easter, early Summer, back-to-school and Christmas. The
Company must increase inventory levels during these periods to
support the increased demand for seasonal styles. Unseasonable
weather patterns may affect planned sales of seasonal products such
as sandals and boots.
Purchasing
The Company utilizes a network of vendors and factories in 13
foreign countries and the United States to procure its products
which are manufactured to meet the Company's specifications and
standards. The strength of the Company's relationships with
vendors and factories, some dating back over 40 years, has allowed
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the Company to adapt quickly 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 the People's Republic of
China ("China") are a source of approximately 80% of the Company's
merchandise. The Company does not purchase "seconds" or "overruns"
and does not own any manufacturing facilities. 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 and Brazil. Management
believes it has good relationships with its suppliers.
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
office, arranges directly with factories for the design, selection,
production management, inspection and distribution of
approximately one-third of the shoes acquired for the Company.
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.
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 Company stands behind
the quality of the shoes it sells to its customers by permitting
return of purchased merchandise with proper documentation.
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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, for worldwide laboratory testing of materials and
components, and for performing in-factory product inspections to
ensure 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 ongoing process
to qualify and approve new factories, while continually assessing
existing factory service and quality of performance. New factories
must meet specified quality standards for 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 the factory runs 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. This process
is designed to ensure on-time deliveries of merchandise with
minimum lead time and without 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 distribution system provides it a
competitive advantage. The Company's merchandise distribution
teams are able to track shoes by the pair from order placement
through sale to the customer by the use of perpetual inventory,
product planning and retail price management systems. These
systems are maintained by experienced information systems personnel
and are enhanced regularly to improve the product distribution
process. Distribution analysts review sales and inventory by size
and style to maintain 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 in-store product
levels by style, color and size. This facility operates seven
days-a-week and has sufficient capacity to support more than 5,000
stores. 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.
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Industry Segments
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. The moderate
priced segment, which is dominated by specialty shoe chains and
mass merchants, is declining, in part due to improved product
quality in the value priced segment and price competition from the
high priced segment.
Based on industry data, the United States footwear market is
estimated to be $33 billion and one 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. Industry data suggests that the quality offered
in the value priced segment has improved significantly over the
last 15 years, causing the doubling of this segment's share of the
market.
The Company considers itself part of the low-priced segment of the
footwear industry. In 1996, the Company's share of the estimated
$33 billion United States footwear market was 7 percent; this share
has grown consistently over the past four decades.
Trademarks
The Company owns certain trademarks which it uses in its business,
including "Payless," "Payless ShoeSource," "Payless Kids," and
"Parade of Shoes." The Company owns all rights to the yellow and
orange logo used in its Payless ShoeSource signs and advertising.
In the United States, the Company has registered over 100 key marks
and owns over 50 common law marks under which it markets private
label merchandise in its Payless ShoeSource stores and owns over
30 registered and common law marks under which it markets private
label merchandise in its Parade of Shoes stores. All of the
Company's registered trademarks may be renewed indefinitely.
Marketing
The Company's marketing efforts are multi-dimensional, including
nationally broadcast television advertising, national magazine
advertisements, local market radio and newspaper inserts in support
of major promotional periods. In addition to media support, the
Company utilizes in-store promotional materials, including posters,
signs and point of sale items. Also, the Company advertises its
business through promotional funds, media funds, merchants'
associations and similar efforts offered by various landlords from
whom the Company leases its stores.
The Company's marketing staff is augmented by a full-service advertising
concern that provides creative services, media purchase and consumer
research.
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Environment
Compliance with federal, state and local provisions which have been
enacted or adopted 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.
Government Contracts
No material portion of the Company's business is subject to
renegotiation of profits or termination of contracts or
subcontracts at the election of the U.S. government.
Directors of the Company
Listed below are the names and principal occupations of the
Company's Directors:
Name Principal Occupation
---- --------------------
Steven J. Douglass Chairman of the Board and Chief
Executive Officer of the Company
Howard R. Fricke Chairman of the Board, President and
Chief Executive Officer of The
Security Benefit Group of Companies
(life and other insurance)
Thomas A. Hays Retired, formerly Deputy Chairman of
The May Department Stores Company
Richard A. Jolosky President of the Company
Michael E. Murphy Vice Chairman and Chief Administrative
Officer of Sara Lee Corporation (food
products)
Robert L. Stark Dean of The Regents Center at the
University of Kansas
Executive Officers of the Company
Listed below are the names and ages of the executive officers of
the Company and offices held by them with the Company.
Name Age Position and Title
---- --- ------------------
Steven J. Douglass 47 Chairman of the Board and Chief
Executive Officer
Richard A. Jolosky 62 President and Director of the
Company
Duane L. Cantrell 41 Executive Vice President-Retail
Operations
Bryan P. Collins 43 Senior Vice President and
Division Director for Parade of
Shoes
Stephen Farley 42 Senior Vice President-
Marketing
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Gerald F. Kelly, Jr. 49 Senior Vice President-Logistics/
Information Services
Harris Mustafa 43 Senior Vice President-Merchandise
Distribution
Jed L. Norden 46 Senior Vice President-Human
Resources
Ullrich E. Porzig 51 Senior Vice President and Chief
Financial Officer
William J. Rainey 50 Senior Vice President, General
Counsel and Secretary
Thomas L. Rinehart 42 Senior Vice President and
General Merchandise Manager-Men's
Gary M. Stone 48 Senior Vice President-Store
Development
Larry M. Strecker 38 Senior Vice President of the
Company and Managing Director
of Payless ShoeSource
International
Michael S. Wilkes 43 Senior Vice President and
General Merchandise Manager-Children's
Steven J. Douglass has served as Chairman of the Board, Chief
Executive Officer and Director of the Company since May, 1996, the
date on which the Company's shares were distributed in a spin-off
by The May Department Stores Company to its shareowners. 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).
Richard A. Jolosky has served as 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), and Chief Executive Officer
of the Richard Allen Company (1992-1995). Mr. Jolosky has served
as a Director of the Company since May, 1996.
Duane L. Cantrell has served as Executive Vice President-Retail
Operations since April, 1997 and as Senior Vice President-Retail
Operations (1995-1997). He was the Company's Senior Vice
President-Merchandise Distribution and Planning (1992-1995) and
Senior Vice President-Merchandise Distribution (1990-1992). Mr.
Cantrell has been employed by the Company since 1978.
Bryan P. Collins has served as Senior Vice President and Division
Director for Parade of Shoes since December, 1996. Prior to that
he was Senior Vice President and General Merchandise Manager-Women's
since January, 1994. He also served the Company as Senior
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Vice President-General Merchandise Manager-Women's Seasonal/Leisure
(October, 1991- January, 1994). Mr. Collins has been employed by
the Company since 1991 and was previously employed by the Company
(1975-1985).
Stephen Farley has served as Senior Vice President-Marketing since
July, 1994. Prior to that he was Vice President-Marketing (1993-1994)
and 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).
Gerald F. Kelly, Jr. has served as Senior Vice President-Logistics/
Information Services since February, 1996. Prior to that
he was Senior Vice President-Information Services and Chief
Financial Officer (1990-1996) and Senior Vice President-Information
Services (1986-1990).
Harris Mustafa has served as Senior Vice President-Merchandise
Distribution since May, 1995. Prior to that he was Vice President-
Financial Planning/Purchasing (1990-1995). Mr. Mustafa has been
employed by the Company since 1987.
Jed L. Norden has served as Senior Vice President-Human Resources
since July, 1985.
Ullrich E. Porzig has served as Senior Vice President and Chief
Financial Officer since February, 1996. Between 1993 and 1996, Mr.
Porzig was Senior Vice President-Financial Officer and Treasurer of
Petro Stopping Centers L.P. From 1982 to 1993 he was employed by
The May Department Stores Company in various capacities including
Senior Vice President-Chief Financial Officer of the Company from
1986 to 1988 and Senior Vice President-Finance of Foley's (1988-1993).
William J. Rainey has served as Senior Vice President, General
Counsel and Secretary since April, 1996. Prior to joining the
Company, Mr. Rainey served as Executive Vice President, General
Counsel and Secretary of Fourth Financial Corporation (1994-1996)
and Vice President, General Counsel of Cabot Corporation (1991-1993).
Thomas L. Rinehart has served as Senior Vice President and General
Merchandise Manager-Men's since December, 1992. Before joining the
Company, he was employed by the Custom Shop as President and Chief
Operating Officer (1992) and by Club International as President and
Chief Executive Officer (1991-1992).
Gary M. Stone has served as Senior Vice President-Store Development
since February, 1997. Prior to joining the Company, Mr. Stone was
employed by Pepsico, Inc. as Senior Vice President and General
Manager (1995-1997) and Vice President, Asset Development (1991-1995).
Larry M. Strecker has served as Senior Vice President of the
Company and Managing Director of Payless ShoeSource International
since April, 1996. Prior to that, he was Vice President of
Worldwide Sourcing (1993-1996). Before joining the Company, Mr.
Strecker was employed by Frito-Lay as Director of Service and
Distribution (1991-1993).
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Michael S. Wilkes has served as Senior Vice President and General
Merchandise Manager-Children's since January, 1994. Prior to that
he was Senior Vice President-General Merchandise Manager-Women's
Dress/Casual (1990-1994). Mr. Wilkes has been employed by the
Company since 1986.
Item 2. Properties
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The Company leases substantially all of its stores. 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. Its
Payless stores average approximately 3,400 square feet. The
Company owns and operates a 305,000 square foot central office
building and a 765,000 square foot distribution facility both of
which are located in Topeka, Kansas.
Item 3. Legal Proceedings
- - --------------------------
There are no material pending legal proceedings, other than
ordinary routine litigation incidental to the business, to which
registrant or any of its subsidiaries is a party or of which any of
their property is the subject.
Item 4. Submission of Matters to a Vote of Security Holders
- - ------------------------------------------------------------
There were no matters submitted to a vote of security holders
during the 13 weeks ended February 1, 1997.
PART II
Item 5. Market for Company's Common Equity and Related Shareowner
- - ------------------------------------------------------------------
Matters
- - -------
There were approximately 70,000 shareowners of record of the
Company's common stock as of February 1, 1997. The information set
forth under the headings "Common Stock and Market Prices" (page 15)
and "Shareowner Information - Common Stock" (page 28) in the
Company's 1996 Annual Report to Shareowners is incorporated herein
by reference.
Item 6. Selected Financial Data
- - --------------------------------
The information set forth under the heading "Summary of Selected
Historical Financial Information" (page 25) of the Company's 1996
Annual Report to Shareowners is incorporated herein by reference.
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Item 7. Management's Discussion and Analysis of Financial
- - ----------------------------------------------------------
Condition and Results of Operations
- - -----------------------------------
The information set forth under the heading "Management's
Discussion and Analysis" (pages 12-15) of the Company's 1996 Annual
Report to Shareowners is incorporated herein by reference.
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Item 8. Financial Statements and Supplementary Data
- - ----------------------------------------------------
The Financial Statements (pages 16-18), "Notes to Consolidated
Financial Statements" (pages 19-23) and "Report of Independent
Public Accountants" (page 24) of the Company's 1996 Annual Report
to Shareowners are incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants on
- - ---------------------------------------------------------
Accounting and Financial Disclosure
- - -----------------------------------
None.
PART III
Item 10. Directors and Executive Officers of the Company
- - ---------------------------------------------------------
a) Directors - The information set forth under the heading "The
Election of Directors" on pages 1-3 of the Company's Proxy
Statement dated April 14, 1997 is incorporated herein by reference.
b) Executive Officers - Information regarding the Executive
Officers of the Company as of April 14, 1997 is set forth in Item
1 of this report under the caption "Executive Officers of the
Company."
Item 11. Executive Compensation
- - -------------------------------
The information required by Item 402 of Regulation S-K is
incorporated herein by reference from the Company's Proxy Statement
dated April 14, 1997, as follows: page 3, "Compensation of
Directors;" page 4, "Compensation Committee Interlocks and Insider
Participation;" pages 5-6, the description of long term awards
under the captions "Bonus Opportunities," "Long-Term Stock
Incentives," "Spin-off Arrangements," and pages 21-23, under the
captions "Annual Awards" and "Long Term Awards;" and pages 9-15,
under the caption "Executive Compensation."
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Item 12. Security Ownership of Certain Beneficial Owners and
- - ------------------------------------------------------------
Management
- - ----------
The information required by Item 403 of Regulation S-K is
incorporated herein by reference from the Company's Proxy Statement
dated April 14, 1997, as follows: pages 25-26, "Beneficial Stock
Ownership of Directors, Nominees, Executive Officers and Persons
Owning More than Five Percent of Common Stock."
Item 13. Certain Relationships and Related Transactions
- - -------------------------------------------------------
Not applicable.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on
- - ----------------------------------------------------------------
Form 8-K
- - --------
(a) Documents filed as part of this report:
(1) Financial Statements. The following financial
statements are incorporated herein by reference to the
Company's 1996 Annual Report to Shareowners:
Page in
Annual Report
-------------
Financial Statements-
Consolidated Statements of Earnings for
the three fiscal years ended
February 1, 1997 16
Consolidated Statements of Shareowners'
Equity for the three fiscal years
ended February 1, 1997 16
Consolidated Balance Sheets -
February 1, 1997, and February 3, 1996 17
Consolidated Statements of Cash Flows
for the three fiscal years ended
February 1, 1997 18
Notes to Consolidated Financial Statements 19-23
Report of Independent Public Accountants 24
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(3) Exhibits:
Number Description
- - ------ -----------
2.1 Distribution Agreement, dated as of April 2, 1996,
between The May Department Stores Company ("May")
and the Registrant.1
3.1 Amended and Restated Articles of Incorporation of
the Registrant.2
3.2 Amended and Restated Bylaws of the Registrant.*
4.1 Rights Agreement, dated as of April 2, 1996,
between the Registrant and The Bank of New York, as
Rights Agent.1
10.1 Tax Sharing Agreement, dated April 2, 1996,
between May and the Registrant.3
10.2 Sublease, dated as of April 2, 1996, between May
and the Registrant.1
10.3 Multi-Currency Credit Agreement, dated as of April
22, 1996, among the Registrant, several financial
institution and Bank of America National Trust and
Savings Association.4
10.4 Administrative Services Agreement, dated as of
April 2, 1996, between May and the Registrant.1
10.5 Payless ShoeSource, Inc. 1996 Stock Incentive Plan,
as amended.5
10.6 Payless ShoeSource, Inc. Spin-Off Stock Plan.1
10.7 Payless ShoeSource, Inc. Spin-Off Cash Plan.1
10.8 Payless ShoeSource, Inc. Restricted Stock Plan for
Non-Management Directors.1
10.9 Form of Employment Agreement between the Registrant and
certain executives of the Registrant. The Registrant has
entered into Employment Agreements in the form contained
in this exhibit with each of the named executive
officers which expire at various dates on or before May
31, 2001, and which provide for annual base salaries at
rates not less than the amounts presently paid to them.1
10.10 Payless ShoeSource, Inc. Supplementary Retirement Plan.1
10.11 Payless ShoeSource, Inc. Profit Sharing Plan.1
10.12 Payless ShoeSource, Inc. Deferred Compensation Plan.
10.13 Payless ShoeSource, Inc. Executive Incentive
Compensation Plan for Payless Executives.6
15
<PAGE>
10.14 Form of Management Severance Agreement. The Registrant
has entered into Severance Agreements with the named
executive officers in the form contained in this
exhibit.1 The agreement with Mr. Douglass also provides
for 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 Internal Revenue Code. The
agreement with Mr. Jolosky provides for 50% of such
payment.
10.15 Form of Indemnification Agreement.1
11.1 Computation of Net Earnings Per Share.*
12.1 Computation of Ratio of Earnings to Fixed Charges.*
13.1 Payless ShoeSource, Inc. 1996 Annual Report to
Shareowners (only those portions specifically
incorporated by reference shall be deemed filed with the
Commission).*
21.1 Subsidiaries of Registrant*
23.1 Consent of Independent Public Accountants.*
24.1 Power of Attorney
27.1 Financial Data Schedule*
* Filed herewith
1) Incorporated by reference from the correspondingly numbered Exhibit to
Registrant's Registration Statement on Form 10 Dated February 23, 1996
as amended through April 15, 1996.
2) Incorporated by reference from Exhibit 3.1 of the Registrant's Form
10-Q (file Number 1-11633) for the quarter ended May 4, 1996.
3) Incorporated by reference from Exhibit 10.1 of the Registrant's Form
10-Q (file Number 1-11633) for the quarter ended May 4, 1996.
4) Incorporated by reference from Exhibit 10.2 of the Registrant's Form
10-Q (file Number 1-11633) for the quarter ended May 4, 1996.
5) Incorporated by reference from Appendix A(pages A-1 to A-13)
Registrant's April 14, 1997, Proxy Statement relating to its May 23,
1997 annual meeting of shareowners.
6) Incorporated by reference from Exhibit 10.5 of the Registrant's Form
10-Q (file Number 1-11633) for the quarter ended May 4, 1996.
(3) Reports on Form 8-K: None
All other schedules and exhibits of the Company for which provision
is made in the applicable regulations of the Securities and Exchange
Commission have been omitted, as they are not required or are
inapplicable or the information required thereby has been given
otherwise.
16
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
PAYLESS SHOESOURCE, INC.
Date: April 24, 1997 By: /s/ Ullrich E. Porzig
----------------------------------
Ullrich E. Porzig
Senior Vice President and
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on
behalf of registrant and in the capacities and on the dates
indicated.
Principal Executive Officer:
Date: April 24, 1997 By: /s/ Steven J. Douglass
----------------------------------
Steven J. Douglass
Chairman and
Chief Executive Officer
Principal Financial and
Accounting Officer:
Date: April 24, 1997 By: /s/ Ullrich E. Porzig
----------------------------------
Ullrich E. Porzig
Senior Vice President and
Chief Financial Officer
17
<PAGE>
Directors:
Date: April 24, 1997 By: /s/ Steven J. Douglass*
----------------------------------
Steven J. Douglass
Chairman and
Chief Executive Officer
Date: April 24, 1997 By: /s/ Richard A. Jolosky*
----------------------------------
Richard A. Jolosky
President and Director
Date: April 24, 1997 By: /s/ Howard R. Fricke*
----------------------------------
Howard R. Fricke
Director
Date: April 24, 1997 By: /s/ Thomas A. Hays*
----------------------------------
Thomas A. Hays
Director
Date: April 24, 1997 By: /s/ Michael E. Murphy*
----------------------------------
Michael E. Murphy
Director
Date: April 24, 1997 By: /s/ Robert L. Stark*
----------------------------------
Robert L. Stark
Director
*Executed by William J. Rainey, attorney-in-fact, on behalf of the
indicated Director pursuant to Power of Attorney dated April 17,
1997.
18
<PAGE>
<PAGE>
Exhibit 3.2
AMENDED AND RESTATED BYLAWS
OF
PAYLESS SHOESOURCE, INC.
(Amended and Restated as of March 20, 1997)
ARTICLE I
OFFICES
Section 1. The registered office of the Corporation
shall be in the City of St. Louis, State of Missouri, or at such
other place within the State of Missouri as the Board of Directors
may at any time and from time to time designate.
Section 2. The Corporation may also have offices at such
other places both within and without the State of Missouri as the
Board of Directors may from time to time determine or the business
of the Corporation may require.
ARTICLE II
MEETINGS OF SHAREHOLDERS
Section 1. All meetings of the shareholders shall be held
either within or without the State of Missouri as shall be
designated from time to time by the Board of Directors and stated
in the notice of the meeting or in a duly executed waiver of notice
thereof.
Section 2. The annual meeting of shareholders shall be held
at such place within or without the State of Missouri, at such hour
and on such date, not earlier than May 1 and not later than July 10
in each year as the Board of Directors may specify in the call of
such meeting, at which meeting the shareholders shall elect by a
plurality vote directors as described in Article III below, by a
majority of shares entitled to vote thereon and represented in
person or by proxy at the meeting, and transact such other business
as may properly be brought before the meeting.
Section 3. Except as otherwise required by law, written
notice of the annual meeting stating the place, date and hour of
the meeting shall be given by mail, postage prepaid, not less than
ten or more than seventy days before the date of the meeting, to
each shareholder entitled to vote at such meeting at such address
as shall appear on the books of the Corporation.
Section 4. The Secretary of the Corporation shall prepare and
make, at least ten days before every meeting of shareholders, a
complete list of the shareholders entitled to vote at the meeting,
arranged in alphabetical order, and showing the address of each
shareholder and the number of shares registered in the name of each
shareholder. Such list shall be open to the examination of any
shareholder, for any purpose germane to the meeting, during
ordinary business hours, for a period of at least ten days prior to
<PAGE>
the meeting, at the registered office of the Corporation. The list
shall also be produced and kept open at the time and place of the
meeting during the whole time thereof, and may be inspected by any
shareholder who is present.
Section 5. Special meetings of the shareholders, for any
purpose or purposes, may be called by the Board of Directors, the
Chairman of the Board of Directors, or the President. Special
meetings of shareholders may not be called by any other person or
persons. The business transacted at a special meeting of
shareholders shall be confined to the purpose or purposes specified
in the notice therefor.
Section 6. Except as otherwise required by law, written
notice of a special meeting stating the place, date and hour of the
meeting and the purpose or purposes for which the meeting is
called, shall be given by mail, postage prepaid, not less than ten
nor more than seventy days before the date of the meeting, to each
shareholder entitled to vote at such meeting at such address as
shall appear on the books of the Corporation.
Section 7. The holders of a majority of the stock issued and
outstanding and entitled to vote at any meeting, present in person
or represented by proxy, shall constitute a quorum at all meetings
of the shareholders for the transaction of business except as
otherwise provided by law or by the Articles of Incorporation. If,
however, such quorum shall not be present or represented at any
meeting of the shareholders, the shareholders entitled to vote
thereat, present in person or represented by proxy even though less
than a quorum, shall have the power successively to adjourn the
meeting to a specified date not longer than ninety days after such
adjournment, without notice other than announcement at the
meeting. At such adjourned meeting at which a quorum shall be
present or represented, any business may be transacted which might
have been transacted at the meeting as originally called. If the
adjournment is for more than thirty days, a notice of the adjourned
meeting shall be given to each shareholder of record entitled to
vote at the meeting.
For purposes of determining a quorum, shares represented by a
proxy which directs that the shares abstain from voting or that a
vote be withheld on a matter shall be deemed to be represented at
the meeting; shares as to which voting instructions are given as to
at least one of the matters be voted on shall also be deemed to be
so represented; if the proxy states how shares will be voted in the
absence of instructions by the shareholder, such shares shall be
deemed to be represented at the meeting.
Section 8. When a quorum is present at any meeting, the vote
of the holders of a majority of the stock having voting power
present in person or represented by proxy shall decide any question
brought before such meeting, unless the question is one upon which
by express provision of law or the Articles of Incorporation, a
different vote is required, in which case such express provision
shall govern and control the decision of such question. Shares
represented by a proxy which directs that the shares abstain from
voting or that a vote be withheld on a matter shall not be deemed
to be represented at the meeting as to such matter. Shares
2
<PAGE>
represented by a proxy as to which voting instructions are not
given as to one or more matters to be voted on shall not be deemed
to be represented at the meeting for purposes of the vote as to
such matter or matters. A proxy which states how shares will be
voted in the absence of instructions by the shareholder as to any
matter shall be deemed to give voting instructions as to such
matter.
Section 9. Except as otherwise provided by the Articles of
Incorporation, each shareholder of record shall at every meeting of
the shareholders be entitled to one vote for each share of capital
stock of the Corporation entitled to vote thereat held by such
shareholder. Such votes may be cast in person or by proxy, but no
proxy shall be valid after eleven months from the date of its
execution unless otherwise provided in the proxy. Subject to
applicable law, the Board of Directors shall prescribe the rules
and regulations for voting at all meetings of the shareholders;
provided, however, the vote for the election of directors, and upon
the direction of the presiding officer of the meeting, the vote on
any other question before the meeting, shall be by written ballot.
Section 10. Except as otherwise provided by the Articles of
Incorporation, any action required or permitted to be taken at any
annual or special meeting of shareholders may be taken without a
meeting of the shareholders only if consents in writing, setting
forth the action so taken, are signed by all of the shareholders
entitled to vote with respect to the subject matter thereof.
Section 11. To be properly brought before the annual or any
special shareholders' meeting, business must be either (a)
specified in the notice of meeting (or any supplement thereto)
given by or at the direction of the Board of Directors, (b)
otherwise properly brought before the meeting by or at the
direction of the Board of Directors, or (c) otherwise properly
brought before the meeting by a shareholder. In addition to any
other applicable requirements, for business to be properly brought
before the annual or any special shareholders' meeting by a
shareholder, the shareholder must have given timely notice thereof
in writing to the Secretary of the Corporation. To be timely, a
shareholder's notice must be delivered to or mailed and received at
the principal executive offices of the Corporation 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
shareholders, notice by the shareholder 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 first
occurs. Such shareholder's notice to the Secretary shall set forth
as to each matter the shareholder proposes to bring before the
meeting (i) a brief description of the business desired to be
brought before the meeting and the reasons for conducting such
business at the meeting, (ii) the name and record address of the
shareholder proposing such business, (iii) the class and number of
shares of common stock of the Corporation which are beneficially
owned by the shareholder and (iv) any material interest of the
shareholder in such business.
3
<PAGE>
Notwithstanding anything in these Bylaws to the contrary, no
business shall be conducted at the annual or any special meeting
except in accordance with the procedures set forth in this Section
11, provided, however, that nothing in this Section 11 shall be
deemed to preclude discussion by any shareholder of any business
properly brought before the meeting.
The chairman of the meeting shall, if the facts warrant,
determine and declare to the meeting that business was not properly
brought before the meeting in accordance with the provisions of
this Section 11, and if he should so determine and declare, any
such business not properly brought before the meeting shall not be
transacted.
Section 12. Except as provided in Section 3 of Article III,
only persons who are nominated in accordance with the following
procedures shall be eligible for election as directors. Nominations
of persons for election to the Board of Directors of the
Corporation at the annual meeting may be made at the meeting by or
at the direction of the Board of Directors, by any nominating
committee or person appointed by the Board of Directors or by any
shareholder of the Corporation entitled to vote for the election of
directors at the meeting who complies with the notice procedures
set forth in this Section 12. Such nominations, other than those
made by or at the direction of the Board of Directors, shall be
made pursuant to timely notice in writing to the Secretary of the
Corporation. To be timely, a shareholder's notice must be delivered
to or mailed and received at the principal executive offices of the
Corporation 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 shareholders, notice by the shareholder 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 first occurs. Such shareholder's notice to the Secretary
shall set forth (a) as to each person whom the shareholder proposes
to nominate for election or re-election as a director, (i) the
name, age, business address and residence of the person, (ii) the
principal occupation or employment of the person, (iii) the class
and number of shares of common stock of the Corporation which are
beneficially owned by the person, and (iv) any other information
relating to the person that is required to be disclosed in
solicitations for proxies for election of directors pursuant to
Regulation 14A under the Securities Exchange Act of 1934, as
amended; and (b) as to the shareholder giving the notice (i) the
name and record address of the shareholder and (ii) the class and
number of shares of common stock of the Corporation which are
beneficially owned by the shareholder. Such notice shall be
accompanied by the executed consent of each nominee to serve as a
director if so elected. The Corporation may require any proposed
nominee to furnish such other information as may reasonably be
required by the Corporation to determine the eligibility of such
proposed nominee to serve as a director of the Corporation.
4
<PAGE>
The chairman of the meeting shall, if the facts warrant,
determine and declare to the meeting that a nomination was not made
in accordance with the foregoing procedure, and if he should
so determine and declare, the defective nomination shall be
disregarded.
ARTICLE III
DIRECTORS
Section 1. Except as otherwise required by law or the
Articles of Incorporation, the business and affairs of the
Corporation shall be managed by or under the direction of the Board
of Directors.
Section 2. The number of directors of the Corporation shall
be fixed in the manner provided in the Articles of Incorporation.
Except as otherwise provided in Section 3 of this Article III, the
directors of the Corporation shall be elected by the shareholders
of the Corporation, and at each such election the nominees
receiving the greatest number of votes, up to the number of
directors then to be elected, shall be the persons then elected.
Section 3. Except as otherwise required by the Articles of
Incorporation, any vacancy in the Board of Directors resulting from
any increase in the number of directors and any other vacancy
occurring in the Board of Directors may be filled by the Board of
Directors acting by a majority of the directors then in office,
although less than a quorum, or by the sole remaining director, and
any director so elected to fill a vacancy shall hold office until
the next election of directors by the shareholders of the
Corporation (subject, however, to such director's earlier death,
resignation, disqualification or removal from office). In no event
shall a decrease in the number of directors shorten the term of any
incumbent director.
Section 4. The Board of Directors may hold its meetings, both
regular and special, and cause the books of the Corporation to be
kept, either within or without the State of Missouri at such place
or places as they may from time to time determine or as otherwise
may be provided in these Bylaws.
Section 5. Subject to Section 8 of this Article III there
shall be an annual meeting of the Board of Directors on the day of
the annual meeting of shareholders in each year or as soon
thereafter as convenient, such annual meeting to be at such place
and time (and, if applicable, on such date) as the Chairman of the
Board or the Chief Executive Officer shall designate by written
notice to the directors, and regular meetings shall be held on such
dates and at such times and places either as the directors shall by
resolution provide or as the Chairman of the Board or the Chief
Executive Officer shall designate by written notice to the
directors. Except as above provided, no notice of said annual
meeting or such regular meetings of the Board of Directors need be
given.
5
<PAGE>
Section 6. Special meetings of the Board of Directors may be
called by the Chairman of the Board, the Chief Executive Officer,
the President, the Secretary or the Treasurer and shall be called
by one of the foregoing officers on the written request of a
majority of the entire Board of Directors specifying the object or
objects of such special meeting. In the event that one of the
foregoing officers shall fail to call a meeting within two days
after receipt of such request, such meeting may be called in like
manner by the directors making such request. The person or persons
calling the special meeting may fix the place, either within or
without the State of Missouri, as a place for holding the meeting.
Notice of each special meeting, stating the date, place and time
of the meeting and the purpose or purposes for which it is called,
shall be deposited in the regular or overnight mail, sent by
telecopy, telegram or delivered by hand to each director not later
than the day preceding the date of such meeting, or on such shorter
notice as the person or persons calling such meeting may deem
necessary or appropriate in the circumstances.
Section 7. At all meetings of the Board of Directors a
majority of the entire Board of Directors in office shall
constitute a quorum for the transaction of business and the act of
a majority of the directors present at any meeting at which there
is a quorum shall be the act of the Board of Directors, except as
may be otherwise specifically provided by law, the Articles of
Incorporation or by these Bylaws. If a quorum, shall not be present
at any meeting of the Board of Directors, the directors present
thereat may adjourn the meeting from time to time, without notice
other than announcement at the meeting, until a quorum shall be
present.
Section 8. Except as otherwise required by the Articles of
Incorporation or these Bylaws, any action required or permitted to
be taken by the Board of Directors at any meeting of the Board of
Directors or of any committee thereof may be taken without a
meeting, if all members of the Board or committee, as the case may
be, consent thereto in writing. The Secretary shall file the
consents with the minutes of proceedings of the Board of Directors
or the committee as the case may be.
Section 9. Any one or more members of the Board of Directors,
or any committee designated by the Board of Directors, may
participate in a meeting of the Board of Directors or such
committee by means of a conference telephone or similar
communications equipment by means of which all persons
participating in the meeting can hear each other at the same time.
Participation in a meeting pursuant to this Section 9 shall
constitute presence in person at such meeting.
Section 10. The Board of Directors may, by resolution passed
by a majority of the entire Board, designate one or more
committees, each committee to consist of two or more of the
directors of the Corporation. The Board may designate one or more
directors as alternate members of any committee, who may replace
any absent or disqualified member at any meeting of the committee.
Any such committee, to the extent allowed by law and as provided in
the resolution, shall have and may exercise all of the powers and
6
<PAGE>
authority of the Board of Directors in the management of the
business and affairs of the Corporation, and may authorize the seal
of the Corporation to be affixed to all papers which may require
it. Such committee or committees shall have such name or names as
may be determined from time to time by resolution adopted by the
Board of Directors.
Section 11. Each committee of the Board shall keep regular
minutes of its meetings and report the same to the Board of
Directors when required.
Section 12. Directors and members of committees may receive
such compensation for their services, and such reimbursement of
expenses, as the Board of Directors may from time to time
determine. Nothing herein contained shall be construed to preclude
any director from serving the Corporation in any other capacity and
receiving compensation therefor.
Section 13. No contract or transaction between the
Corporation and one or more of its directors or officers, or
between the Corporation and any other corporation, partnership,
association, or other organization in which one or more of its
directors or officers are directors or officers, or have a
financial interest, shall be void or voidable solely for this
reason, or solely because the director or officer is present at or
participates in the meeting of the Board of Directors or committee
thereof which authorizes the contract or transaction, or solely
because his or their votes are counted for such purpose if (a) the
material facts as to his or their relationship or interest and as
to the contract or transaction are disclosed or are known to the
Board of Directors or the committee and the Board of Directors or
the committee in good faith authorizes the contract or transaction
by the affirmative votes of a majority of the disinterested
directors, even though the disinterested directors be less than a
quorum; or (b) the material facts as to his or their relationship
or interest and as to the contract or transaction are disclosed or
are known to the shareholders entitled to vote thereon, and the
contract or transaction is specifically approved in good faith by
vote of the shareholders; or (c) the contract or transaction is
fair as to the Corporation as of the time it is authorized or
approved by the Board of Directors, a committee thereof or the
shareholders. Common or interested directors may be counted in
determining the presence of a quorum at a meeting of the Board of
Directors or of a committee which authorizes the contract or
transaction.
Section 14. As used in these Bylaws generally, the term
"entire Board of Directors" means the total number of directors
which the Corporation would have if there were no vacancies.
ARTICLE IV
NOTICES
Section 1. Whenever written notice is required by law, the
Articles of Incorporation or these Bylaws, to be given to any
director, committee member or shareholder, such requirement shall
not be construed to mean personal notice, but such notice may be
7
<PAGE>
given in writing, by mail addressed to such director, committee
member or shareholder, at his address as it appears on the records
of the Corporation, with postage thereon prepaid and such notice
shall be deemed to be given at the time when the same shall be
deposited in the United States mail. Written notice may also be
given personally or by telecopy, telegram, telex or cable or by
overnight mail. An affidavit of the Secretary or an Assistant
Secretary or of the transfer agent of the Corporation that the
notice has been given shall, in the absence of fraud, be prima
facie evidence of the facts stated therein.
Section 2. Whenever any notice is required by law, the
Articles of Incorporation or these Bylaws, to be given to any
director, committee member or shareholder, a waiver thereof in
writing, signed by the person or persons entitled to said notice,
whether before or after the time stated therein, shall be deemed
equivalent thereto.
ARTICLE V
OFFICERS
Section 1. The officers of the Corporation elected by the
Board of Directors shall consist of the Chairman of the Board, a
President and a Secretary and such other officers as the Board of
Directors may deem necessary and proper, including, without
limitation, one or more Executive Vice Presidents, one or more
Senior Vice Presidents, one or more Vice Presidents, a
Treasurer, and one or more Assistant Secretaries or Assistant
Treasurers. The Board of Directors shall elect the Chairman of the
Board, the President and the Secretary at its first meeting held
after each annual meeting of shareholders and may elect such other
officers from time to time as it deems necessary or advisable. Any
two or more of such offices, excepting the offices of President and
Secretary, may be held by the same person, but no officer shall
execute, acknowledge, or verify any instrument on behalf of the
Corporation in more than one capacity.
Section 2. The Chairman of the Board, the President and such
other officer or officers as the Board may from time to time by
resolution designate may appoint one or more Vice Presidents, a
Controller, and one or more Assistant Controllers, Assistant
Secretaries and Assistant Treasurers, who shall also be officers of
the Corporation.
Section 3. The Board of Directors may determine or provide
the method of determining the compensation of all officers.
Section 4. The officers of the Corporation shall hold office
until their successors are chosen and qualify, or until their
earlier resignation or removal. Any officer elected or appointed by
the Board of Directors may be removed at any time by the Board of
Directors. Any vacancy occurring in any office of the Corporation
that was filled by the Board of Directors pursuant to Article V,
Section 1 also shall be filled by the Board of Directors.
8
<PAGE>
Section 5. Each officer of the Corporation shall be subject
to the control of the Board of Directors and shall have such duties
in the management of the Corporation as may be provided by
appropriate resolution of the Board of Directors and/or provided in
these Bylaws.
Section 6. Powers of attorney, proxies, waivers of notice of
meeting, consents and other instruments relating to securities
owned by the corporation may be executed in the name of and on
behalf of the Corporation by the Chairman of the Board, the
President or any Vice President and any such officer may, in the
name of and on behalf of the Corporation, take all such action as
any such officer may deem advisable to vote in person or by proxy
at any meeting of security holders of any corporation in which the
Corporation may own securities and at any such meeting shall
possess and may exercise any and all rights and power incident to
the ownership of such securities and which, as the owner thereof,
the Corporation might have exercised and possessed if present. The
Board of Directors may, by resolution, from time to time confer
like powers upon any other person or persons.
Section 7. Any officer, if required by the Board of
Directors, shall give bond in such sum and with such security as
the Board of Directors may require for the faithful performance of
duties.
Section 8. In the case of the absence of any officer of the
Corporation, or for any other reason that the Board may deem
sufficient, the Board of Directors may delegate the powers or
duties of such officer to any other officer or to any other
director, or to any other person for the time being.
ARTICLE VI
CERTIFICATES OF STOCK
Section 1. Every holder of stock in the Corporation shall be
entitled to have a certificate signed in the name of the
Corporation by the Chairman of the Board, the President or a
Vice-President and the Treasurer or an Assistant Treasurer, or the
Secretary or an Assistant Secretary. Such certificate shall certify
the number of shares owned by such holder in the Corporation.
Section 2. Where a certificate is countersigned by (i) a
transfer agent other than the Corporation or its employee, or (ii)
a registrar other than the Corporation or its employee, any other
signature on the certificate may be a facsimile. In case any
officer, transfer agent or registrar who has signed or whose
facsimile signature has been placed upon a certificate shall have
ceased to be such officer, transfer agent or registrar before such
certificate is issued, it may be issued by the Corporation with the
same effect as if he were such officer, transfer agent or registrar
at the date of issue.
Section 3. The Board of Directors may direct a new
certificate or certificates to be issued in place of any
certificate or certificates theretofore issued by the Corporation
alleged to have been lost, stolen or destroyed, upon the making of
9
<PAGE>
an affidavit of that fact by the person claiming the certificate of
stock to be lost, stolen or destroyed. When authorizing such
issuance of a new certificate or certificates, the Board of
Directors may, in its discretion and as a condition precedent to
the issuance thereof, require the owner of such lost, stolen or
destroyed certificate or certificates, or his legal representative,
to advertise the same in such manner as the Board of Directors
shall require and/or to give the Corporation a bond in such sum as
it may direct and with such surety as it may approve, as indemnity
against any claim that may be made against the Corporation with
respect to the certificate alleged to have been lost, stolen or
destroyed.
Section 4. Upon surrender to the Corporation or the transfer
agent of the Corporation of a certificate for shares duly endorsed
or accompanied by proper evidence of succession, assignment or
authority to transfer, it shall be the duty of the Corporation to
issue a new certificate to the person entitled thereto, cancel the
old certificate and record the transaction upon its books.
Section 5. In order that the Corporation may determine the
shareholders entitled to notice of or to vote at any meeting of
shareholders or any adjournment or postponement thereof, or
entitled to receive payment of any dividend or other distribution
or allotment of any rights, or entitled to exercise any rights in
respect of any change, conversion or exchange of stock or for the
purpose of any other lawful action, the Board of Directors may fix,
in advance, a record date, which shall not be more than seventy days
before the date of such meeting, nor more than seventy days prior to
any other action; provided, however that if the Board of Directors
does not set a record date for the determination of the shareholders
entitled to notice of, and to vote at, a meeting of shareholders,
only the shareholders of record at the close of business on the
twentieth day preceding the date of the meeting shall be entitled
to notice of, and to vote at, the meeting and any adjournment or
postponement of the meeting. A determination of shareholders of
record entitled to notice of or to vote at a meeting of
shareholders shall apply to any adjournment or postponement of the
meeting.
Section 6. The Corporation shall be entitled to recognize the
exclusive right of a person registered on its books as the owner of
shares to receive dividends, and to vote as such owner, and to hold
liable for calls and assessments a person registered on its books
as the owner of shares, and shall not be bound to recognize any
equitable or other claim to or interest in such share or shares on
the part of any other person, whether or not it shall have express
or other notice thereof, except as otherwise provided by law.
ARTICLE VII
GENERAL PROVISIONS
Section 1. Dividends upon the capital stock of the
Corporation, subject to the provisions of the Articles of
Incorporation, if any, may be declared by the Board of Directors at
any regular or special meeting. Pursuant to law, dividends may be
paid in cash, in property, or in shares of the capital stock.
10
<PAGE>
Section 2. Before payment of any dividend, there may be set
aside out of any funds of the Corporation available for dividends
such sum or sums as the directors may from time to time, in their
absolute discretion, deem proper as a reserve or reserves to meet
contingencies, or for equalizing dividends, or for repairing or
maintaining any property of the Corporation, or for any proper
purpose, and the directors may modify or abolish any such reserve
in the manner in which it was created.
Section 3. All checks or demands for money and all notes and
other obligations of the Corporation shall be signed by such
officer or officers or such other person or persons as the Board of
Directors may at any time and from time to time designate.
Section 4. The fiscal year of the Corporation shall end on
the Saturday closest to the 31st day of January in each year.
Section 5. The corporate seal shall consist of the words
"PAYLESS SHOESOURCE, INC. MISSOURI" arranged in a circular form
around the words and figures "Corporate Seal 1961" and shall be
kept by the Secretary. The seal may be used by causing it or a
facsimile thereof to be impressed or affixed or reproduced or
otherwise.
ARTICLE VIII
AMENDMENTS
These Bylaws may be amended, altered, changed or rescinded, in
whole or in part, or new Bylaws may be adopted, in the manner
provided in the Articles of Incorporation.
The substance of such amendment, alteration, change,
rescission or adoption or the subject matter thereof shall be
submitted in writing at a preceding meeting of the Board of
Directors or notice thereof shall be given to the directors at
least ten days before; waiver of notice by any director being
deemed equivalent to such notice to him.
11
<PAGE>
<PAGE>
Exhibit 11.1
PAYLESS SHOESOURCE, INC.
------------------------
COMPUTATION OF NET EARNINGS PER SHARE
-------------------------------------
FOR THE LAST THREE FISCAL YEARS
-------------------------------
Feb. 1, Feb. 3, Jan. 28,
(Thousands, except per share) 1997 1996 1995
-------- -------- --------
Net earnings $107,702 $ 53,960 $131,453
Common shares outstanding 40,220 40,365 40,365
-------- -------- --------
Net earnings per share $ 2.68 $ 1.34 $ 3.26
======== ======== ========
Primary Computation:
- - --------------------
Net earnings $107,702 $ 53,960 $131,453
Common shares outstanding 40,220 40,365 40,365
Net effect of dilutive stock
options based on the treasury
stock method 87 0 0
-------- -------- --------
Outstanding shares for primary
earnings per share 40,307 40,365 40,365
======== ======== ========
Primary earnings per share $ 2.67 $ 1.34 $ 3.26
======== ======== ========
Fully Diluted Computation:
- - --------------------------
Net earnings $107,702 $ 53,960 $131,453
Common shares outstanding 40,220 40,365 40,365
Net effect of dilutive stock
options based on the treasury
stock method 131 0 0
-------- -------- --------
Outstanding shares for fully
diluted earnings per share 40,351 40,365 40,365
======== ======== ========
Fully Diluted earnings per share $ 2.67 $ 1.34 $ 3.26
======== ======== ========
Note: The Company's fiscal 1995 and 1994 outstanding shares were
calculated on the number of Company shares issued and outstanding as of
May 4, 1996, the date of the spin-off from The May Department Stores
Company.
<PAGE>
<PAGE>
Exhibit 12.1
PAYLESS SHOESOURCE, INC.
------------------------
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
-------------------------------------------------
FOR THE LAST THREE FISCAL YEARS
-------------------------------
Feb. 1, Feb. 3, Jan. 28,
(Thousands) 1997 1996 1995
-------- -------- --------
Earnings Available for Fixed Charges:
- - -------------------------------------
Pretax earnings $179,159 $ 88,932 $217,077
Fixed Charges (Interest expense plus
interest component of rent) 81,576 88,432 82,582
-------- -------- --------
$260,735 $177,364 $299,659
======== ======== ========
Fixed Charges:
- - --------------
Gross interest expense $ 1,166 $ 979 $ 1,109
Interest factor attributable
to rent expense 80,410 87,453 81,473
-------- -------- --------
81,576 88,432 82,582
======== ======== ========
Ratio of Earnings to Fixed Charges 3.2 2.0 3.6
======== ======== ========
Note: All costs and expenses of the Company relating to special retention
costs and the special non-recurring charge associated with the spin-off are
included in the above calculation. Excluding these costs, the fixed charge
coverage would be 3.4x, 2.8x, and 3.6x, respectively.
<PAGE>
<PAGE>
Exhibit 13.1
[The following "Management's Discussion and Analysis" section is a
reproduction of the same section included in the paper format Annual
Report on pages 12-15.]
Management's Discussion and Analysis
- - ------------------------------------
(dollars in millions, except per share, shoe prices and where otherwise
noted)
Payless ShoeSource (Payless) is reporting its first year of sales and
earnings as an independent public company. On May 4, 1996, Payless was spun
off from The May Department Stores Company (May) in a tax-free distribution
to May shareowners.
Sales in fiscal 1996 were $2.33 billion, an increase of 1.4 percent over 1995
sales of $2.30 billion on a 52-week basis. Store-for-store sales for 1996
increased 3.6 percent. Store-for-store sales increases for the four quarters
of fiscal 1996 were 5.3 percent, 5.0 percent, 1.5 percent and 2.5 percent,
respectively. During 1996 Payless closed 484 underperforming stores and
opened 171 stores, which included 37 relocated stores. The cost of the store
closing program was recorded as a charge to earnings in the fourth quarter of
1995. Year-end store count for 1996 was 4,236 compared with 4,549 in 1995.
Payless achieved $2.68 in earnings per share from operations in 1996, a 100
percent increase over last year's $1.34 ($2.42 excluding special and
nonrecurring items). Net earnings totaled $107.7 compared with $54.0 last
year ($97.5 excluding special and nonrecurring items). Return on sales was
4.6 percent in 1996 and 2.3 percent in 1995. Return on equity was 14.3
percent in 1996 and 6.8 percent in 1995 (computed as net earnings divided by
beginning shareowners' equity). Return on net assets was 15.5 percent in 1996
and 13.9 percent in 1995.
On January 14, 1997, Payless announced the acquisition of the Parade of Shoes
division (Parade) from J. Baker, Inc. The acquisition was completed on March
10, 1997. Parade sells women's footwear and accessories in 186 stores in 14
states. Parade offers fashionable leather private-label footwear, priced $20
to $40 a pair, in self-service stores. Parade had sales of $123 in 1996.
Payless plans to operate Parade as a separate division supported by existing
Payless sourcing, distribution, information systems, real estate and
financial organizations.
Our expansion plans for 1997 include 50 net new Payless stores, 200 remodels
and the recently completed acquisition of Parade. The 1997-2000 expansion
plans include adding 150 net Payless stores and 250 Parade stores. During
this period, Payless will invest $220 for new stores and will spend an
additional $98 to remodel existing stores. These are the major components of
a $455 capital plan.
The following discussion summarizes the significant factors affecting the
Payless operating results for the fiscal years ended February 1, 1997 (1996),
February 3, 1996 (1995) and January 28, 1995 (1994). Results for 1995 and
1994 have been restated as if Payless were an independent public entity. This
discussion and analysis should be read in conjunction with the financial
statements and notes to the financial statements included in this annual
report.
Review of Operations
NET EARNINGS
Net earnings totaled $107.7 in 1996, compared to $54.0 in 1995 and $131.5 in
1994. Total company return on sales was 4.6 percent, 2.3 percent and 6.2
percent for 1996, 1995 and 1994, respectively. Excluding the special and
nonrecurring items, 1995 net earnings were $97.5 and return on sales was 4.2
percent.
Results for the past three years were as follows:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------
1996<F1> 1995<F1> 1994<F1>
% of % of % of
$ Sales $ Sales $ Sales
- - ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net retail sales $2,333.7 100.0 $2,330.3 100.0 $2,116.4 100.0
Cost of sales 1,660.9 71.1 1,693.4 72.7 1,492.3 70.5
Selling,
general and
administrative
expenses 487.3 20.9 475.2 20.4 405.9 19.2
Special and
nonrecurring
items 12.6<F2> .5 71.8<F3> 3.1 -- --
Interest (income)
expense, net (6.2) (.2) 1.0 -- 1.1 --
--------------------------------------------------------------------------
Earnings before
income taxes 179.1 7.7 88.9 3.8 217.1 10.3
--------------------------------------------------------------------------
Provision for
income taxes 71.4 39.9<F4> 34.9 39.3<F4> 85.6 39.4<F4>
Net earnings $ 107.7 4.6 $ 54.0<F3> 2.3 $ 131.5 6.2
==========================================================================
Earnings
per share $ 2.68 $ 1.34 $ 3.26
======================================================================================================
<FN>
<F1>The Payless fiscal year ends on the Saturday closest to January 31.
Fiscal year 1995 contains 53 weeks.
<F2>Executive retention costs associated with the spin-off.
<F3>During the 1995 fourth quarter, in connection with the spin-off, Payless
committed to close or relocate underperforming stores during 1996.
<F4>Effective income tax rate.
</TABLE>
12
<PAGE>
NET RETAIL SALES
Net retail sales, on a 52-week basis, represent the sales of stores operating
during the period. Sales percent increases (decreases) for 1996 and 1995 were
as follows:
<TABLE>
<CAPTION>
- - --------------------------------------------------------------
1996 vs. 1995 1995 vs. 1994
Store-for- Store-for-
Total Store<F*> Total Store<F*>
- - --------------------------------------------------------------
<S> <C> <C> <C>
1.4% 3.6% 8.8% (3.7)%
==============================================================
<FN>
<F*>Store-for-store sales represent sales of those stores open during compar-
able periods.
</TABLE>
The 1996 stronger sales and store-for-store increases reflect the benefits
from a more balanced merchandising strategy, plus consolidation in the
footwear industry, including the closing of 484 underperforming stores by
Payless during the year.
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 Companies and a sales decline in the
Payless Mexican border stores caused by the devaluation of the peso.
Average sales per store were as follows:
<TABLE>
<CAPTION>
(dollars in thousands)
- - ---------------------------------------------------------
1996 1995
vs. 1995 vs. 1994
1996 1995 1994 Increase (Decrease)
- - ---------------------------------------------------------
<C> <C> <C> <C> <C>
$538 $511 $534 5.3% (4.3)%
=========================================================
</TABLE>
COST OF SALES
Cost of sales includes cost of merchandise sold, buying and occupancy costs.
Cost of sales was $1,660.9 in 1996 compared with $1,693.4 in 1995, a 1.9
percent decrease. As a percent of net retail sales, cost of sales was 71.1
percent in 1996 compared with 72.7 percent in 1995. Higher gross margins in
1996 reflect improved markdown performance obtained by paring back promotions
where possible, while minimizing the impact on sales. Occupancy expense rates
were also reduced due to the closure of underperforming stores.
Cost of sales was $1,693.4 in 1995 compared with $1,492.3 in 1994, a 13.5
percent increase. As a percent of net retail sales, cost of sales was 72.7
percent in 1995 compared with 70.5 percent in 1994. The drop in
store-for-store sales caused an increase in occupancy cost as a percent of
sales. Payless also took additional markdowns to reduce carryover of aged
product.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (SG&A)
Selling, general and administrative expenses were $487.3 in 1996 compared
with $475.2 in 1995, a 2.5 percent increase. As a percent of net retail
sales, selling, general and administrative expenses were 20.9 percent for
1996 compared with 20.4 percent in 1995. The increase was due principally to
four factors. First, payroll was increased in the stores to improve the work
schedule of our managers, which decreased turnover rates from 35 percent in
1995 to 19 percent in 1996. Second, there were added costs associated with
being an independent company. Third, costs related to the Payless
performance-based compensation program were higher as a result of the
stronger store-for-store sales in 1996. Fourth, advertising was increased in
the fourth quarter of 1996 to support sales during the shortened holiday
season.
Selling, general and administrative expenses were $475.2 in 1995 compared
with $405.9 in 1994, a 17.1 percent increase. The increase was due
principally to a 15.1 percent increase in the average number of stores. As a
percent of net
13
<PAGE>
retail sales, selling, general and administrative expenses were 20.4 percent
compared to 19.2 percent in 1994, resulting from a 3.7 percent decline in
store-for-store sales. coupled with relatively fixed store staffing costs.
INTEREST (INCOME) EXPENSE
During 1996 interest income was generated by short-term investment of
available cash balances. In 1995 and 1994, cash received by Payless in excess
of store operating needs was transferred to May on a daily basis; therefore,
no interest income was generated. Interest expense is primarily related to
capitalized lease obligations.
<TABLE>
<CAPTION>
------------------------------
1996 1995 1994
- - ------------------------------------------------------------------------
<S> <C> <C> <C>
Interest expense $ 1.2 $1.0 $1.1
Interest income (7.4) -- --
-----------------------------
Interest (income) expense, net $(6.2) $1.0 $1.1
========================================================================
</TABLE>
SPECIAL AND NONRECURRING ITEMS
During the 1995 fourth quarter, in connection with the spin-off, Payless
committed to close or relocate underperforming stores in 1996. In addition,
Payless implemented a plan to reduce central office overhead by means of a
personnel reduction and initiation of expense control programs. A pretax
special and nonrecurring charge of $71.8 was recorded for these initiatives.
During 1996 Payless closed or relocated 484 underperforming stores and
restructured the central office at a cost of $48.8. The remaining $23.0
reserve will be used to cover remaining lease buyouts, holding costs and
fixed asset write-offs for the stores closed in 1996. In addition, it will
fund closing costs of an estimated 40 additional underperforming stores to be
closed in the spring of 1997.
In connection with the spin-off, Payless initiated a Spin-off Stock Plan and
a Spin-off Cash Plan as retention programs. Under these Plans, Payless
committed to pay out 408,558 shares of restricted stock and cash payments
ranging from 10 percent to 37.5 percent of certain associates' base salaries.
These retention incentives are contingent upon continued employment for up to
two years after May 4, 1996. The costs related to these incentives are being
expensed as earned during the retention period: $12.6 in 1996, $4.6 in 1997
and $0.8 in 1998.
INCOME TAXES
The effective income tax rates were 39.9 percent, 39.3 percent and 39.4
percent in 1996, 1995 and 1994, respectively.
The increase in the 1996 effective income tax rate to 39.9 percent from
39.3 percent in 1995 relates to slightly higher state income tax rates and
the discontinuation of the Federal Targeted Jobs Tax Credit. The decrease in
the 1995 effective income tax rate to 39.3 percent from 39.4 percent in 1994
relates to slightly lower state income tax rates.
IMPACT OF INFLATION
Historically, sales growth and earnings for Payless have not been materially
impacted by inflation.
Review of Financial Condition
RETURN ON EQUITY
Return on equity is the company's principal measure in evaluating performance
for shareowners and ability to invest shareowners' funds profitably. Return
on beginning equity was 14.3 percent in 1996 compared with 6.8 percent in
1995 (12.3 percent excluding the nonrecurring charge) and 19.8 percent in
1994. The 1995 and 1994 returns on beginning equity were computed using
financial results stated as if Payless were an independent public company.
The 1996 debt-to-capitalization ratio (including present value of future
minimum rental payments under operating leases - PVOL) was 49 percent
compared to 54 percent for 1995.
RETURN ON NET ASSETS
Return on net assets measures performance independent of capital structure.
Return on net assets represents pretax earnings before net interest expense
and the interest component of operating leases, divided by beginning of year
net assets (including PVOL). Return on net assets was 15.5 percent in 1996
compared with 13.9 percent in 1995 and 20.9 percent
in 1994.
CASH FLOW
Cash flow from operations shows continuing strength, as cash flow from
operations was $231.6 in 1996. This was 9.9 percent of net sales in 1996
compared with 6.8 percent in 1995 and 11.1 percent in 1994. Internally
generated funds will continue to be the most important component of the
company's capital resources and are expected to fund capital expansion.
Sources and (uses) of cash flows are summarized below:
<TABLE>
<CAPTION>
------------------------------------------
1996 1995 1994
- - ------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Activities:
Net earnings and noncash items $200.9 $192.6 $ 220.2
Change in working capital 30.7 (33.3) 13.9
------------------------------------------
Total operating activities 231.6 159.3 234.1
------------------------------------------
Total investing activities (32.9) (64.7) (235.0)
------------------------------------------
Total financing activities (9.7) (96.6) --
------------------------------------------
Increase (Decrease) in cash
and cash equivalents $189.0 $ (2.0) $ (0.9)
====================================================================================
</TABLE>
14
<PAGE>
Cash flow from operations increased $72.3 in 1996 from 1995 primarily due to
working capital changes. Inventories decreased $43.2 from 1995 levels as a
result of reduction of inventory associated with the closing of unprofitable
stores, combined with concerted efforts to increase inventory turnover and
reduce the amount of aged inventory. Accounts payable increased due to timing
of merchandise purchases. These increases in working capital were partially
offset by decreased accrued liabilities, which resulted primarily from the
$48.8 decrease in the store closing reserve.
CAPITAL EXPENDITURES
Payless emphasizes return on net assets and internal rate of return as the
principal financial measures in evaluating investments in new stores and
remodels.
In 1996 Payless capital expenditures totaled $73.4, including $33.3 for new
stores, $20.6 for remodels of existing stores and $19.5 for other necessary
improvements. This was offset by increased store disposals in 1996 totaling
$40.5, resulting from the store closing activity.
Capital expenditures in 1997 are estimated to be $130.0 including $65.0 to
open new Payless and Parade of Shoes stores, $26.0 to remodel existing stores
and $39.0 to make other necessary improvements.
FINANCING ACTIVITIES
On September 10, 1996, the Payless Board of Directors authorized the
repurchase of up to 460,000 shares of outstanding Payless common stock to
avoid the dilutive impact of shares issued under the company's benefit
programs. This repurchase was completed on October 23, 1996.
On January 14, 1997, the Payless Board of Directors authorized the repurchase
of up to an additional $150 million of outstanding Payless common stock in
open-market transactions, subject to receipt of a favorable tax ruling from
the Internal Revenue Service and market conditions. The purchased shares will
be held in the treasury for future employee benefit plan funding, future
acquisitions by the company and other corporate purposes.
Prior to being an independent public company, cash received by Payless in
excess of store operating needs was transferred to May on a daily basis. The
debt and investment levels prior to the spin-off may not be indicative of
debt and investment levels had Payless operated as an independent public
company during these periods.
AVAILABLE CREDIT
Payless has in place a $200 million revolving credit facility with a bank
syndication group on which no amounts were outstanding February 1, 1997.
FINANCIAL CONDITION RATIOS
The debt-to-capitalization ratio was 1 percent, 1 percent and 2 percent at
the end of 1996, 1995 and 1994, respectively. For purposes of the
debt-to-capitalization ratio, total debt is defined as current and long-term
capital lease obligations. Capitalization is defined as current and long-term
capital lease obligations, noncurrent deferred income taxes and shareowners'
equity. The debt-to-capitalization ratio, including the present value of future
minimum rental payments under operating leases as debt and as capitalization,
would be 49 percent, 54 percent and 55 percent in 1996, 1995 and 1994,
respectively.
Fixed charge coverage, excluding special and nonrecurring items, was 3.4x,
2.8x and 3.6x in 1996, 1995 and 1994, respectively. Fixed charge coverage is
defined as earnings before income taxes, gross interest expense and the
interest component of rent expense, divided by gross interest expense and the
interest component of rent expense. The fixed charge coverage, including
special and nonrecurring items, was 3.2x and 2.0x in 1996 and 1995,
respectively.
COMMON STOCK AND MARKET PRICES
The company's common stock is listed on the New York Stock Exchange. The
quarterly per-share price ranges of the common stock for 1996 were:
<TABLE>
<CAPTION>
-------------------------------
1996
Market Price
Quarter<F*> High Low
- - ------------------------------------------------------
<S> <C> <C>
Second $34 $25
Third 37 7/8 31 3/8
Fourth 41 3/4 33 1/4
Year 41 3/4 25
======================================================
<FN>
<F*>Payless ShoeSource was a subsidiary of The May Department Stores Company for
the first quarter of 1996.
</TABLE>
Payless has not paid a dividend on its common shares since its spin-off from
May in May 1996. Payless has no present intention of commencing dividend
payments.
As of February 1, 1997, there were approximately 70,000 Payless common
shareowners.
15
<PAGE>
[The following "Consolidated Statements of Earnings" section is a
reproduction of the same named section included in the paper format
Annual Report on pages 16-18.]
<TABLE>
Consolidated Statements of Earnings
- - -----------------------------------
(dollars in millions, except per share)
<CAPTION>
--------------------------------------------
1996 1995<F*> 1994
- - ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net retail sales $2,333.7 $2,330.3 $2,116.4
--------------------------------------------
Cost of sales 1,660.9 1,693.4 1,492.3
Selling, general and administrative expenses 487.3 475.2 405.9
Special and nonrecurring items 12.6 71.8 --
Interest (income) expense, net (6.2) 1.0 1.1
--------------------------------------------
Total cost of sales and expenses 2,154.5 2,241.4 1,899.3
--------------------------------------------
Earnings before income taxes 179.1 88.9 217.1
Provision for income taxes 71.4 34.9 85.6
--------------------------------------------
Net earnings $ 107.7 $ 54.0 $ 131.5
============================================
Net earnings per common share $ 2.68 $ 1.34 $ 3.26
================================================================================================
<FN>
<F*>1995 contains 53 weeks.
See Notes to Consolidated Financial Statements.
</TABLE>
<TABLE>
Consolidated Statements of Shareowners' Equity
- - ----------------------------------------------
(dollars in millions, shares in thousands, unless otherwise noted)
<CAPTION>
-------------------------------------------------------------------------------------------
Outstanding Additional Unearned Total
Common Stock Paid-in Restricted Retained Shareowners'
Shares Dollars Capital Stock Earnings Equity
- - --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 29, 1994 -- $-- $ -- $ -- $661.1 $661.1
Net earnings -- 131.5 131.5
Net transfers with May -- 1.3 1.3
-------------------------------------------------------------------------------------------
Balance at January 28, 1995 -- -- -- -- 793.9 793.9
Net earnings -- -- -- -- 54.0 54.0
Net transfers with May -- -- -- (95.0) (95.0)
-------------------------------------------------------------------------------------------
Balance at February 3, 1996 -- -- -- -- 752.9 752.9
Net earnings -- -- -- 107.7 107.7
Shares issued, spin-off 39,971 .4 -- -- (.4) --
Stock issued under restricted
stock plan, net 409 -- 12.0 (12.0) -- --
Amortization of unearned
restricted stock -- -- -- 8.9 -- 8.9
Purchase of common stock (460) -- -- -- (16.5) (16.5)
-------------------------------------------------------------------------------------------
Balance at February 1, 1997 39,920 $.4 $12.0 $ (3.1) $843.7 $853.0
==========================================================================================================================
</TABLE>
Outstanding common stock excludes shares held in treasury. At February 1,
1997, 39.9 million shares were outstanding and 1.1 million shares were held in
treasury. At May 4, 1996, 40.4 million shares were outstanding and .6 million
shares were held in treasury.
See Notes to Consolidated Financial Statements.
16
<PAGE>
<TABLE>
Consolidated Balance Sheets
- - ---------------------------
(dollars in millions)
<CAPTION>
-------------------------------
February 1, February 3,
1997 1996
- - -------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 193.6 $ 4.6
Accounts receivable 4.4 4.4
Merchandise inventories 354.8 398.0
Other current assets 5.4 4.2
Current deferred income taxes 34.0 39.7
-------------------------------
Total current assets 592.2 450.9
Property and equipment:
Land 5.3 6.5
Buildings and leasehold improvements 545.1 574.0
Furniture, fixtures and equipment 275.7 278.7
Property under capital leases 8.0 9.3
-------------------------------
Total property and equipment 834.1 868.5
Accumulated depreciation and amortization (331.6) (308.5)
-------------------------------
Property and equipment 502.5 560.0
Goodwill 2.8 2.9
Other assets 0.4 0.5
-------------------------------
Total assets $1,097.9 $1,014.3
===============================
Liabilities and Shareowners' Equity
Current liabilities:
Current maturities of capital lease obligations $ 1.3 $ 1.3
Accounts payable 82.9 65.0
Accrued expenses 119.1 152.6
-------------------------------
Total current liabilities 203.3 218.9
Capital lease obligations 8.2 10.3
Deferred income taxes 6.1 8.9
Other liabilities 27.3 23.3
Shareowners' Equity:
Common stock, $.01 par value, 41,000,000 shares authorized
and issued; 39,919,635 shares outstanding .4 --
Additional paid-in capital 12.0 --
Unearned restricted stock (3.1) --
May equity investment -- 752.9
Retained earnings 843.7 --
-------------------------------
Total shareowners' equity 853.0 752.9
-------------------------------
Total liabilities and shareowners' equity $1,097.9 $1,014.3
=================================================================================================
See Notes to Consolidated Financial Statements.
</TABLE>
17
<PAGE>
<TABLE>
Consolidated Statements of Cash Flows
- - -------------------------------------
(dollars in millions)
<CAPTION>
------------------------------------------
1996 1995 1994
- - ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Activities:
Net earnings $107.7 $ 54.0 $ 131.5
Adjustments for noncash items included in net earnings:
Depreciation and amortization 90.3 95.3 77.0
Deferred income taxes 2.9 (0.3) 11.7
Special and nonrecurring items -- 71.8 --
Tax benefit on special and nonrecurring charges -- (28.2) --
Accounts receivable, net 0.1 0.2 (0.6)
Merchandise inventories 43.2 (4.1) (20.4)
Other current assets (1.1) 4.7 (6.9)
Accounts payable 17.9 (36.5) 11.1
Accrued expenses (33.5) 1.2 26.4
Other assets and liabilities, net 4.1 1.2 4.3
------------------------------------------
Total operating activities 231.6 159.3 234.1
------------------------------------------
Investing Activities:
Capital expenditures (73.4) (95.4) (255.2)
Disposition of property and equipment 40.5 30.7 21.5
Other -- -- (1.3)
------------------------------------------
Total investing activities (32.9) (64.7) (235.0)
------------------------------------------
Financing Activities:
Repayment of capital lease obligations (2.1) (1.6) (1.3)
Purchase of common stock, net (7.6) -- --
Net transactions with May -- (95.0) 1.3
------------------------------------------
Total financing activities (9.7) (96.6) --
------------------------------------------
Increase (Decrease) in cash and cash equivalents 189.0 (2.0) (0.9)
Cash and cash equivalents, beginning of year 4.6 6.6 7.5
------------------------------------------
Cash and cash equivalents, end of year $193.6 $ 4.6 $ 6.6
==========================================
Cash paid during the year:
Interest $ 1.4 $ 1.0 $ 1.2
Income taxes 67.5 -- --
============================================================================================================
See Notes to Consolidated Financial Statements.
</TABLE>
18
<PAGE>
[The following "Notes to Consolidated Financial Statements" section is a
reproduction of the same named section included in the paper format Annual
Report on pages 19-23.]
Notes to Consolidated Financial Statements
- - ------------------------------------------
(dollars in millions, except per share)
Summary of Significant Accounting Policies
DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Payless ShoeSource, Inc., a Missouri corporation, is the largest family
footwear retailer in the United States. As of February 1, 1997, Payless
operated 4,236 self-service family shoe stores. Payless stores are located in
all 50 states, the District of Columbia, Puerto Rico and the U.S. Virgin
Islands. Payless utilizes a network of agents with factories in 13 foreign
countries and the United States to source its products, which are
manufactured to meet the Payless specifications and standards. Factories in
the People's Republic of China are a source of approximately 80 percent of
Payless merchandise.
Payless was a subsidiary of The May Department Stores Company until its
spin-off was completed on May 4, 1996. The consolidated financial statements
for all years presented include entire fiscal year results and the accounts of
Payless and all wholly owned subsidiaries.
FISCAL YEAR
The Payless fiscal year ends on the Saturday closest to January 31. Fiscal
year 1996 ended on February 1, 1997, and included 52 weeks. Fiscal year 1995,
which included 53 weeks, ended February 3, 1996. Fiscal 1994 ended on January
28, 1995, and included 52 weeks. References to years in these financial
statements and notes relate to fiscal years rather than calendar years.
RECLASSIFICATION
Certain reclassifications have been made to prior year balances to conform
with current year presentation.
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, buying and occupancy
costs.
EARNINGS PER SHARE
For 1996 earnings per share is computed by dividing net earnings by the
average common shares outstanding during the period. For periods presented
before 1996, earnings per share has been calculated using the number of
common shares as of May 4, 1996, the date of the spin-off from May. Average
common shares outstanding are 40.2, 40.4 and 40.4 million in 1996, 1995 and
1994, respectively.
CASH AND CASH EQUIVALENTS
Payless considers all highly liquid investments with an original maturity of
three months or less to be cash equivalents. Cash equivalents are stated at
cost, which approximates fair value.
ACCOUNTS RECEIVABLE
Sales are made for cash or third party credit; therefore, no customer trade
receivables exist. Accounts receivable represents amounts due for damage
claims, wholesale of shoes to liquidators and sublease rentals.
MERCHANDISE INVENTORIES
Merchandise inventories are valued by the retail method and are stated at the
lower of cost, determined using the first-in, first-out (FIFO) basis, or
market.
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 $1.8 and $1.7 in 1996 and 1995,
respectively.
PREOPENING EXPENSES
Costs associated with the opening of new stores are expensed during the year
incurred.
INCOME TAXES
Payless was included in the consolidated tax return filed by May for federal,
state and local income tax purposes for the years prior to 1996 and will be
included in May's 1996 tax return for the period from February 4, 1996,
through May 4, 1996. The provision for income taxes for those periods is
calculated on a separate return basis.
LONG-LIVED ASSETS
During 1995 Payless adopted Financial Accounting Standards Board 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. Impairment
charges did not have a material effect on the financial statements in 1996.
No impairment charges were recognized in 1995.
19
<PAGE>
ADVERTISING COSTS
Advertising costs are expensed at the time the advertising takes place.
Included in selling, general and administrative expenses are advertising and
sales promotion costs of $66.4, $60.6 and $53.4 in 1996, 1995 and 1994,
respectively.
DERIVATIVES POLICY
The Payless 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
transactions occur.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts. While the financial statements reflect all
available information and management's judgment and estimates of current
conditions and circumstances and are prepared with the assistance of
specialists within and outside Payless, actual results could differ from
those estimates.
Relationship with May
Prior to 1996, May provided various services to Payless, including legal,
benefit administration, risk management and insurance, income and payroll tax
management, and treasury services. In anticipation of the spin-off, Payless
became solely responsible for substantially all of these services at the
beginning of 1996. May continued to provide tax and treasury services until
the spin-off was complete. 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 $0.4, $4.2 and $3.6 in fiscal years 1996, 1995 and 1994, respectively.
These costs could have been different had Payless operated as an independent
company during these periods.
Prior to February 4, 1996, cash collected by Payless in excess of store
operating needs was transferred to May on a daily basis, and all of the
Payless cash requirements were funded by May. The cumulative net impact of
these cash transfers and other intercompany transactions were recorded as an
intercompany payable to May. Intercompany transactions include amounts paid
by May for federal, state and local income taxes, payroll taxes and workers'
compensation and general liability claims. Accordingly, the 1995 and 1994
financial statements may not be indicative of the debt or investment
structure and related interest expense or income that might have resulted had
Payless 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 1995.
Quarterly Results (Unaudited)
Quarterly results of operations are determined in accordance with the annual
accounting policies and include certain items based upon estimates for the
entire year.
Summarized quarterly results for the last two years are as
follows:
<TABLE>
<CAPTION>
------------------------------------------------------
1996
Quarter First Second Third Fourth Year
- - ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net retail sales $601.4 $632.5 $576.8 $523.0 $2,333.7
Cost of sales<F1> 427.1 443.0 408.0 382.6 1,660.9
Net earnings $ 24.2 $ 38.9 $ 29.4 $ 15.1 $ 107.7
======================================================
Earnings per
common share $ .60 $ .96 $ .74 $ .38 $ 2.68
====================================================================================
<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<F1> 404.2 447.2 425.1 416.8 1,693.4
Net earnings<F2> $ 26.5 $ 34.2 $ 25.7 $(32.4) $ 54.0
======================================================
Earnings per
common share $ .66 $ .84 $ .64 $ (.80) $ 1.34
====================================================================================
<FN>
<F1>Certain expenses related to asset disposals have been reclassified from
SG&A to cost of sales for 1995 and 1996.
<F2>Net earnings, excluding special and nonrecurring items, are $11.1 for the
fourth quarter and $97.5 for the full year.
</TABLE>
Special and Nonrecurring Items
During the 1995 fourth quarter, in connection with the spin-off, Payless
committed to close or relocate underperforming stores during 1996. In
addition, Payless implemented a plan to reduce central office overhead by
means of a personnel reduction and initiation of expense control programs. A
pretax special and nonrecurring charge of $71.8 was recorded for these
initiatives. During 1996, Payless closed or relocated 484 underperforming
stores and restructured the central office at a cost of $48.8. The remaining
$23.0 reserve will be used to cover remaining lease buyouts, holding costs
and fixed asset
20
<PAGE>
write-offs for the stores closed in 1996. In addition, it will fund closing
costs of an estimated 40 additional underperforming stores to be closed in the
spring of 1997.
In connection with the spin-off, Payless initiated a Spin-off Stock Plan and
a Spin-off Cash Plan as retention programs. Under these plans, Payless
committed to pay out 408,558 shares of restricted stock and cash payments
ranging from 10 percent to 37.5 percent of certain associates' base salaries.
These retention incentives are contingent upon continued employment for up to
two years after May 4, 1996. The costs related to these incentives are being
expensed as earned during the retention period: $12.6 in 1996, and $4.6 in
1997, and $0.8 in 1998.
Profit Sharing
As of April 1, 1996, Payless associates began to participate in the Payless
Profit Sharing Plan (Payless Plan). Substantially all of the associates'
balances in The May Department Stores Company Profit Sharing Plan (May
Plan), including amounts invested in May common stock, were transferred to
the Payless Plan.
Contributions to the Payless Plan are related to Payless performance each
year. At management's discretion each year, Payless expects to contribute 2.5
percent of its pretax net earnings to the Payless Plan. Associates may
voluntarily contribute to the Payless Plan on both a before-tax and after-tax
basis. Total profit sharing expense was $4.6 in 1996. Payless profit sharing
expenses under the May Plan were $1.8 and $2.3 in 1995 and 1994,
respectively.
Retirement
Payless has no tax-qualified retirement plan. Before the spin-off, May
Retirement Plan expenses were charged to Payless by May based upon the
actuarially determined portion of Payless service costs. The expense charged
to Payless was $3.6 in 1995, and $3.1 in 1994.
Payless associates who were covered by the May Retirement Plan prior to the
spin-off date will continue to vest in the benefits earned under that plan.
Benefits accrued through the spin-off date have been "frozen" and will be
paid out in the future.
Payless has a supplementary retirement plan (Supplementary Plan) generally
covering associates who, at one time, had 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. The
Supplementary Plan is unfunded. The accumulated benefit obligation of $1.6 is
included in other liabilities at February 1, 1997.
Taxes
The provision for income taxes for the last three years consists of the
following:
<TABLE>
<CAPTION>
--------------------------------------
1996 1995 1994
- - ---------------------------------------------------------------------
<S> <C> <C> <C>
Current provision:
Federal $49.2 $50.7 $62.6
State and local 11.4 11.0 15.1
--------------------------------------
Taxes currently payable 60.6 61.7 77.7
--------------------------------------
Deferred provision:
Federal 8.7 (22.0) 6.5
State and local 2.1 (4.8) 1.4
--------------------------------------
Deferred taxes 10.8 (26.8) 7.9
--------------------------------------
Total provision $71.4 $34.9 $85.6
=====================================================================
</TABLE>
21
<PAGE>
The reconciliation between the statutory federal income tax rate and the
effective income tax rate for the last three years is as follows:
<TABLE>
<CAPTION>
---------------------------------
1996 1995 1994
- - ------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory federal income tax rate 35.0% 35.0% 35.0%
State and local income taxes 7.5 7.0 7.6
Federal tax benefit of state and
local income taxes (2.6) (2.5) (2.6)
Other, net (0.0) (0.2) (0.6)
---------------------------------
Effective income tax rate 39.9% 39.3% 39.4%
========================================================================
</TABLE>
Major components of deferred tax assets and (liabilities) are as follows:
<TABLE>
<CAPTION>
------------------------------
February 1, February 3,
1997 1996
- - ---------------------------------------------------------------------------------
<S> <C> <C>
Accrued expenses and reserves $ 39.4 $ 40.3
Depreciation/amortization and basis differences (13.8) (14.5)
Other deferred income tax liabilities, net 2.3 5.0
------------------------------
Net deferred income taxes 27.9 30.8
Net current deferred income tax assets 34.0 39.7
------------------------------
Noncurrent deferred income taxes $ (6.1) $ (8.9)
=================================================================================
</TABLE>
Taxes other than income taxes consist of:
<TABLE>
<CAPTION>
------------------------------------
1996 1995 1994
- - ----------------------------------------------------------------------------
<S> <C> <C> <C>
Payroll $31.1 $31.4 $27.4
Real estate and personal property 29.7 31.2 26.2
------------------------------------
Total $60.8 $62.6 $53.6
============================================================================
</TABLE>
Accrued Expenses
Components of accrued expenses include:
<TABLE>
<CAPTION>
---------------------------
February 1, February 3,
1997 1996
- - ------------------------------------------------------------------------
<S> <C> <C>
Insurance costs $ 30.1 $ 27.3
Special and nonrecurring charges 23.0 68.4
Profit sharing, bonus, retention 19.9 2.6
Taxes other than income 14.2 19.3
Construction costs 14.1 9.6
Other operating expenses 8.5 16.7
Interest and rent expense 5.8 5.7
Salaries, wages and employee benefits 3.5 3.0
---------------------------
Total $119.1 $152.6
========================================================================
</TABLE>
Lines of Credit
Payless has in place a $200 unsecured revolving credit facility with a bank
syndication group. At February 1, 1997, there were no amounts outstanding.
Lease Obligations
Payless leases substantially all of its stores. Rental expense for the
Payless operating leases consist of:
<TABLE>
<CAPTION>
---------------------------------------
1996 1995 1994
- - ------------------------------------------------------------------------------
<S> <C> <C> <C>
Minimum rentals $217.8 $221.3 $184.7
Contingent rentals based on sales 2.7 3.0 4.2
---------------------------------------
Real property rentals 220.5 224.3 188.9
Equipment rentals 0.8 0.7 0.6
---------------------------------------
Total $221.3 $225.0 $189.5
==============================================================================
</TABLE>
Payless 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 $27.3, and is included in accrued expenses
and other liabilities.
Future minimum lease payments at February 1, 1997, are as follows:
<TABLE>
<CAPTION>
------------------------------------------
Capital Operating
Leases Leases Total
- - ------------------------------------------------------------------------------------
<S> <C> <C> <C>
1997 $ 2.2 $ 196.9 $ 199.1
1998 2.2 180.0 182.2
1999 2.2 162.9 165.1
2000 1.4 142.6 144.0
2001 1.4 117.7 119.1
After 2002 4.7 257.5 262.2
------------------------------------------
Minimum lease payments $14.1 $1,057.6 $1,071.7
==========================================
Less imputed interest component 4.6
------------------------------------------
Present value of net minimum
lease payments of which $1.3
is included in current liabilities $ 9.5
====================================================================================
</TABLE>
At February 1, 1997, the present value of operating leases was $817.9.
Property under capital leases is summarized as follows:
<TABLE>
<CAPTION>
-----------------------------
February 1, February 3,
1997 1996
- - ----------------------------------------------------------------
<S> <C> <C>
Cost $ 8.0 $ 9.3
Accumulated amortization (5.6) (6.0)
-----------------------------
Total $ 2.4 $ 3.3
================================================================
</TABLE>
Stock Compensation Plans
Under the Payless 1996 Stock Incentive Plan (the Plan), officers and key
employees may be granted stock options and other stock-based awards. A total
of 2,800,000 shares of Payless common stock has been authorized to be issued
under the Plan. As of February 1, 1997, options for 499,344 shares were
outstanding under the Plan, including options for 185,994 shares, which
represent options that had previously been issued to Payless employees under
the stock incentive plan of The May Department Stores Company and were
22
<PAGE>
converted to options under the Payless Plan at the rate of 1.25 Payless
options for every May option. The Payless options converted from May options
and some of the options granted to senior officers of Payless have an
exercise price equal to the average of the high and low trading prices of
Payless stock for each of the first 30 days on which the stock was traded.
All other options have an exercise price equal to the average of the high and
low trading prices of the stock on the date the option is granted. Options
converted from May become exercisable in installments of 50 percent per year
in each of the first two anniversaries of the grant date. The remaining
options become exercisable in installments of 25 percent per year on each of
the first through the fourth anniversaries of the grant date. All options
have a term of 10 years.
The changes in outstanding stock options for the year ended February 1, 1997,
were as follows:
<TABLE>
<CAPTION>
-------------------------
Weighted
Number Average
of Exercise
Shares Price
- - ------------------------------------------------------------------------------------
<S> <C> <C>
Outstanding at beginning of period (May 4, 1996) -- --
Converted from May options 191,463 $27.03
Granted 321,850 $28.10
Canceled 13,969 $27.58
- - ------------------------------------------------------------------------------------
Outstanding at end of year 499,344 $27.70
====================================================================================
</TABLE>
Payless applies Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees, in accounting for its Plan. Accordingly, no
compensation expense has been recognized for its stock-based compensation
plans other than for restricted stock and performance-based awards. Had
compensation cost for the Payless stock options been determined based upon
the fair value at the grant date for awards under its Plan consistent with
the methodology prescribed under Statement of Financial Accounting Standards
No. 123, Accounting for Stock-Based Compensation, net earnings and earnings
per share for Payless would have been reduced by approximately $2.1, or $.05
per share, respectively. Options outstanding at February 1, 1997, have a
weighted average contractual life of nine years, and there are no shares
exercisable. The weighted average fair value of the options granted during
1996 is estimated at $15.83 on the date of grant using the Black-Scholes
option-pricing model with the following assumptions: expected dividend yield
of zero, volatility of 30 percent, risk-free interest rate of 6.47 percent
and an expected life of 10 years.
Payless also has established restricted stock programs that are designed to
retain key management employees and directors. Total shares authorized under
these programs were 975,000, of which 408,558 shares were outstanding at
February 1, 1997. The majority of shares were issued under the spin-off
retention plan of which one-third of the shares were immediately vested at
the time of the spin-off. An additional one-third vest on May 4, 1997, and
the remainder on May 4, 1998, provided an employee is still employed by
Payless on those dates. Compensation expense is recognized over the
restricted period, and was $8.9 for the year ending February 1,1997.
Shareowner Rights Plan
Payless has a shareowner rights plan under which a right is attached to each
share of Payless common stock. The rights become exercisable only under
certain circumstances involving actual or potential acquisitions of Payless
common stock by a person or affiliated persons. Depending on the
circumstances, if the rights become exercisable, the holder may be entitled
to purchase units of Payless preference stock, shares of Payless common stock
or shares of the common stock of the acquiring person. The rights will remain
in existence until April 30, 2006, unless they are terminated, extended,
exercised or redeemed.
23
<PAGE>
[The following "Report of Independent Public Accountants" section is a
reproduction of the same named section included in the paper format Annual
Report on page 24.]
Report of Independent Public Accountants
- - ----------------------------------------
To the Board of Directors and Shareowners of Payless ShoeSource, Inc.:
We have audited the accompanying consolidated balance sheet of Payless
ShoeSource, Inc. (a Missouri corporation) and subsidiaries as of February 1,
1997, and February 3, 1996, and the related consolidated statements of
earnings, shareowners' equity and cash flows for each of the three fiscal
years in the period ended February 1, 1997. These financial statements are
the responsibility of the Payless 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 1, 1997, and February 3, 1996, and the results of
their operations and their cash flows for each of the three fiscal years in
the period ended February 1, 1997, in conformity with generally accepted
accounting principles.
/s/ Arthur Andersen LLP
Arthur Andersen LLP
St. Louis, Missouri
February 21, 1997
24
<PAGE>
[The following "Summary of Selected Historical Financial Information"
section is a reproduction of the same named section included in the paper
format Annual Report on pages 25-26.]
Summary of Selected Historical Financial Information
- - ----------------------------------------------------
(dollars in millions, except per share)
The following table presents selected historical financial information for
Payless. The information presented below reflects periods during which
Payless did not operate as an independent company, and, accordingly, certain
assumptions were made in preparing this financial information. Therefore, this
information may not necessarily reflect the consolidated results of operations
or financial position that would have existed if Payless had been an independent
company during the periods shown or the future performance of Payless as an
independent company. The financial information below should be read in
conjunction with the consolidated financial statements and the notes in this
annual report.
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------
Fiscal Year<F*> 1996 1995 1994 1993 1992 1991
- - ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Statement of Earnings Data:
Net retail sales $2,333.7 $2,330.3 $2,116.4 $1,966.5 $1,787.8 $1,547.5
Cost of sales<F1> 1,660.9 1,693.4 1,492.3 1,367.6 1,225.9 1,058.3
Selling, general and
administrative expenses<F1> 487.3 475.2 405.9 377.2 349.6 308.9
Interest (income) expense, net (6.2) 1.0 1.1 0.9 0.8 1.3
Special and nonrecurring items 12.6<F2> 71.8<F3> -- -- -- --
-----------------------------------------------------------------------------
Total cost of sales and expenses 2,154.6 2,241.4 1,899.3 1,745.7 1,576.3 1,368.5
-----------------------------------------------------------------------------
Earnings before income taxes 179.1 88.9 217.1 220.8 211.5 179.0
Provision for income taxes 71.4 34.9 85.6 88.0 80.4 68.2
-----------------------------------------------------------------------------
Net earnings $ 107.7 $ 54.0<F3> $ 131.5 $ 132.8 $ 131.1 $ 110.8
=============================================================================
Balance Sheet Data:
Working capital $ 388.9 $ 232.0 $ 242.8 $ 253.5 $ 206.1 $ 191.7
Property and equipment, net 502.5 560.0 590.6 433.9 383.9 343.5
Total assets 1,097.9 1,014.3 1,019.8 840.8 732.7 692.7
Total debt 9.5 11.5 13.1 14.5 16.1 16.9
Total equity<F4> 853.0 752.9 793.9 661.0 571.1 530.9
=============================================================================
Other Financial Data:
Capital expenditures $ 73.4 $ 95.4 $ 255.2 $ 139.8 $ 119.3 $ 145.6
Present value of operating leases 817.9 885.5 952.1 779.9 688.1 554.0
Earnings before interest, income taxes,
depreciation and amortization<F5> 263.2 185.2 295.2 288.7 245.2 226.1
Net retail sales growth 1.4%<F6> 10.1% 7.6% 10.0% 15.5% 13.3%
Store-for-store sales growth 3.6% (3.7)% (0.2)% 1.7% 2.8% 2.6%
Number of stores (at year-end) 4,236 4,549 4,435 3,779 3,570 3,295
=====================================================================================================================
<FN>
<F*> The Payless fiscal year ends on the Saturday closest to January 31. Fiscal
year 1995 includes 53 weeks.
<F1> Certain expenses related to asset disposals have been reclassified from
SG&A to cost of sales for all years.
<F2> Payless incurred executive retention costs associated with the spin-off
that established Payless as an independent public company.
<F3> During the 1995 fourth quarter, in connection with the spin-off, Payless
committed to close or relocate underperforming stores during 1996.
In addition, Payless committed to restructure its central office and
other personnel. The 1995 net earnings, excluding special and
nonrecurring items, is $97.5.
<F4> Prior to 1996, total equity was the total May equity investment.
<F5> 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 consolidated financial
statements and the accompanying notes.
<F6> Growth percentage based on a 52-week comparison.
</TABLE>
25
<PAGE>
Management's Responsibilty
- - --------------------------
Report of Management
Management is responsible for the preparation, integrity and objectivity of
the financial information included in this annual report. The financial
statements have been prepared in conformity with generally accepted
accounting principles applied on a consistent basis.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts. Although the financial statements reflect
all available information and management's judgment and estimates of current
conditions and circumstances, prepared with the assistance of specialists
within and outside Payless, actual results could differ from those estimates.
Management has established and maintains a system of accounting and controls
to provide reasonable assurance that assets are safeguarded against loss from
unauthorized use or disposition, that the accounting records provide a
reliable basis for the preparation of financial statements, and that such
financial statements are not misstated due to material fraud or error. The
system of controls includes the careful selection of associates, the proper
segregation of duties and the communication and application of formal
policies and procedures that are consistent with high standards of accounting
and administrative practices. An important element of this system is a
comprehensive internal audit program.
Management continually reviews, modifies and improves its systems of
accounting and controls in response to changes in business conditions and
operations and in response to recommendations in the reports prepared by the
independent public accountants and internal auditors.
Management believes that it is essential for Payless to conduct its business
affairs in accordance with the highest ethical standards and in conformity
with the law. This standard is described in the company's policies on
business conduct, which are publicized throughout Payless.
Audit and Finance Committee of the Board of Directors
The Board of Directors, through the activities of its Audit and Finance
Committee, participates in the reporting of financial information by Payless.
The committee meets regularly with management, the internal auditors and the
independent public accountants. The committee reviewed the scope, timing and
fees for the annual audit and the results of the audit examinations completed
by the internal auditors and independent public accountants, including the
recommendations to improve certain internal controls and the follow-up
reports prepared by management. The independent public accountants and
internal auditors have free access to the committee and the Board of
Directors and attend each meeting of the committee.
The members of the Audit and Finance Committee are Thomas A. Hays, Michael E.
Murphy and Robert L. Stark. The Audit and Finance Committee reports the
results of its activities to the full Board of Directors.
Forward-looking Statements
From time to time, Payless may publish forward-looking statements relating to
such matters as anticipated financial perform-ance, business prospects,
technological developments, new products, future store openings, possible
strategic alternatives and similar matters. The Private Securities Litigation
Reform Act of 1995 provides a safe harbor for forward-looking statements. In
order to comply with the terms of the safe harbor, Payless notes that a
variety of factors could cause its actual results and experience to differ
materially from the anticipated results or other expectations expressed in
the Payless forward-looking statements. The risks and uncertainties that may
affect the operations, performance, development and results of the company's
business include, but are not limited to, the following: changes in consumer
spending patterns; consumer preferences and overall economic conditions; the
impact of competition and pricing; changes in weather patterns; the financial
condition of the suppliers and manufacturers from whom Payless sources its
merchandise; changes in existing or potential duties, tariffs or quotas;
availability of suitable store locations and appropriate terms; and the
ability to hire and train associates.
26
<PAGE>
[The following "Shareowner Information" section is a reproduction of the
same named section included in the paper format Annual Report on page 28.]
Shareowner Information
- - ----------------------
CORPORATE HEADQUARTERS
Payless ShoeSource, Inc.
3231 S.E. Sixth Street
Topeka, KS 66607-2207
(913) 233- 5171
1997 ANNUAL MEETING
The Annual Meeting of Shareowners will be
held at 10:00 a.m., Central Time, on Friday,
May 23, 1997, at:
Bradbury Thompson Center
Washburn University
1700 S.W. College
Topeka, KS
COMMON STOCK
Shares of Payless ShoeSource are listed and traded
on the New York Stock Exchange. The trading symbol
is PSS.
INFORMATION REQUESTS
Copies of the company's annual report to shareowners, the Form 10-K annual
report to the Securities and Exchange Commission (SEC), the Form 10-Q
quarterly reports to the SEC, monthly sales releases and quarterly earnings
releases are available free of charge to shareowners by writing to Corporate
Communications/ Investor Relations at the corporate headquarters or
by calling the number shown above.
PAYLESS SHOESOURCE ON THE INTERNET
Recent press releases issued by the company and other information are
available on our World Wide Web home page. Visit us at
http://www.paylessshoesource.com.
SHAREOWNER INQUIRIES
Shareowner inquiries regarding stock transfer, lost
certificates or address changes should be directed to
the stock transfer agent and registrar, The Bank of
New York, as shown below.
Please address shareholder inquiries to:
Shareholder Relations Department - 11E
The Bank of New York
P.O. Box 11258
Church Street Station
New York, NY 10286
(800) 524-4458
Please send certificates for transfer and address
changes to:
Receive and Deliver Department - 11W
The Bank of New York
P.O. Box 11002
Church Street Station
New York, NY 10286
The e-mail address for the bank is:
[email protected].
Securities analysts, shareowners and investment professionals should direct
inquiries regarding Payless ShoeSource and its business to Steve Frazier,
Vice President - Corporate Development, at the corporate headquarters by
calling (913) 295-6078.
28
<PAGE>
<PAGE>
Exhibit 21.1
PAYLESS SHOESOURCE INC. AND SUBSIDIARIES
----------------------------------------
SUBSIDIARIES OF REGISTRANT
--------------------------
The corporations listed below are subsidiaries of Registrant, and
all are included in the consolidated financial statements of
Registrant as subsidiaries (unnamed subsidiaries, considered in the
aggregate as a single subsidiary, would not constitute a
significant subsidiary):
Jurisdiction
in which
Name organized
-------------------------------------- --------------
Payless ShoeSource Distribution, Inc. Kansas
Payless ShoeSource Merchandising, Inc. Kansas
Payless ShoeSource Worldwide, Inc. Kansas
<PAGE>
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
-----------------------------------------
As independent public accountants, we hereby consent to the
incorporation of our reports included or incorporated by
reference in this Form 10-K for the year ended February 1, 1997,
into the Company's previously filed Registration Statements on
Form S-8 (No. 333-02559).
ARTHUR ANDERSEN LLP
St. Louis, Missouri
April 24, 1997
<PAGE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
EXHIBIT 27 -- THIS SCHEDULE CONTAINS SUMMARY FINANCIAL
INFORMATION EXTRACTED FROM PAYLESS SHOESOURCE, INC. CONDENSED
CONSOLIDATED STATEMENT OF EARNINGS FOR THE 52 WEEKS ENDED FEB 1,
1997, AND CONDENSED CONSOLIDATED BALANCE SHEET AS OF FEB 1, 1997,
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<CIK> 0001008802
<NAME> PAYLESS SHOESOURCE, INC.
<MULTIPLIER> 1,000
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-01-1997
<PERIOD-START> FEB-04-1996
<PERIOD-END> FEB-01-1997
<CASH> 193,600<F1>
<SECURITIES> 0<F2>
<RECEIVABLES> 4,400<F3>
<ALLOWANCES> 0<F3>
<INVENTORY> 354,800
<CURRENT-ASSETS> 592,200
<PP&E> 834,100
<DEPRECIATION> 331,600
<TOTAL-ASSETS> 1,097,900
<CURRENT-LIABILITIES> 203,300
<BONDS> 8,200<F4>
<COMMON> 400
0
0
<OTHER-SE> 852,600<F5>
<TOTAL-LIABILITY-AND-EQUITY> 1,097,900
<SALES> 2,333,700<F6>
<TOTAL-REVENUES> 2,333,700
<CGS> 1,660,900
<TOTAL-COSTS> 1,660,900
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (6,200)
<INCOME-PRETAX> 179,100
<INCOME-TAX> 71,400
<INCOME-CONTINUING> 107,700
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 107,700
<EPS-PRIMARY> 2.67<F7>
<EPS-DILUTED> 2.67<F7>
<FN>
<F1>Includes cash equivalent securities.
<F2>Any "securities" are shown under "Cash".
<F3>Receivables are net after deduction of allowances.
<F4>Consists of Capital Lease Obligations.
<F5>Reflects Retained Earnings and Additional Paid In Capital.
<F6>Reflects net sales.
<F7>Expressed in dollars.
</FN>
<PAGE>
</TABLE>
<PAGE>
EXHIBIT 24.1
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Steven J. Douglass, Ullrich E.
Porzig, and William J. Rainey, and each or any one of them acting alone,
as his true and lawful attorney-in-fact and agent, with full power of
substitution for him and in his name, place and stead, in any and all
capacities, to sign the Payless ShoeSource, Inc. Annual Report on Form
10-K for the fiscal year ended February 1, 1997, and any amendments
thereto and to file the same, with all exhibits thereto and other
documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorney-in-fact and agent full power and
authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises to perfect and complete
such filing(s), as fully to all the intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said
attorney-in-fact and agent, or his substitute, may lawfully do or cause
to be done by virtue thereof.
Dated this 17th day of April, 1997.
/s/ Steven J. Douglass
---------------------------
Steven J. Douglass
/s/ Richard A. Jolosky
---------------------------
Richard A. Jolosky
/s/ Howard R. Fricke
---------------------------
Howard R. Fricke
/s/ Thomas A. Hays
---------------------------
Thomas A. Hays
/s/ Michael E. Murphy
---------------------------
Michael E. Murphy
/s/ Robert L. Stark
---------------------------
Robert L. Stark
<PAGE>
