<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 or 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For The Quarterly Period Ended October 31, 1998
Commission File Number 1-14770
(formerly File Numbers 1-11633 and 333-50577)
PAYLESS SHOESOURCE, INC.
(Exact name of registrant as specified in its charter)
Delaware 43-1813160
(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)
(785) 233-5171
(Registrant's telephone number,
including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15 (d) of the
Securities Exchange Act of 1934 during the preceding 12 months and
(2) has been subject to such filing requirements for the past 90
days. YES X NO
------- -------
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Common Stock, $.01 par value
33,620,928 shares as of November 28, 1998
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PART 1 - FINANCIAL INFORMATION
ITEM 1 - Financial Statements
PAYLESS SHOESOURCE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited)
(Dollars in millions)
Oct. 31, Nov. 1, Jan. 31,
ASSETS 1998 1997 1998
- ------ -------- -------- --------
Current Assets:
Cash and cash equivalents $ 102.4 $ 217.3 $ 210.0
Merchandise inventories 353.3 331.7 324.6
Current deferred income taxes 7.7 11.9 16.9
Other current assets 17.5 12.6 11.4
-------- -------- --------
Total current assets 480.9 573.5 562.9
Property and Equipment:
Land 6.0 5.4 4.3
Buildings and leasehold
improvements 603.9 572.6 559.3
Furniture, fixtures and
equipment 306.5 295.0 279.7
Property under capital leases 7.5 7.6 7.5
-------- -------- --------
Total property and equipment 923.9 880.6 850.8
Accumulated depreciation
and amortization (429.0) (393.3) (364.1)
-------- -------- --------
Property and equipment 494.9 487.3 486.7
Deferred income taxes 24.2 15.9 19.9
Other assets 3.5 3.5 3.5
-------- -------- --------
Total Assets $1,003.5 $1,080.2 $1,073.0
======== ======== ========
LIABILITIES AND SHAREOWNERS' EQUITY
- -----------------------------------
Current Liabilities:
Current maturities of
capital lease obligations $ 1.5 $ 1.3 $ 1.4
Accounts payable 84.1 88.7 63.8
Accrued expenses 125.7 115.2 112.9
-------- -------- --------
Total current liabilities 211.3 205.2 178.1
Capital lease obligations 5.2 6.7 6.5
Other liabilities 48.8 50.6 52.0
Shareowners' Equity:
Common stock 0.3 0.4 0.4
Additional paid-in capital 21.0 20.7 21.0
Unearned restricted stock (5.5) (8.6) (7.6)
Retained earnings 722.4 805.2 822.6
-------- -------- --------
Total shareowners' equity 738.2 817.7 836.4
Total Liabilities and
Shareowners' Equity $1,003.5 $1,080.3 $1,073.0
======== ======== ========
See Notes to Condensed Consolidated Financial Statements.
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PAYLESS SHOESOURCE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF EARNINGS
(Unaudited)
(Millions, except per share)
13 Weeks Ended 39 Weeks Ended
--------------------- ---------------------
Oct. 31, Nov. 1, Oct. 31, Nov. 1,
1998 1997 1998 1997
--------- --------- --------- ---------
Net Retail Sales $ 643.1 $ 635.7 $ 2,047.1 $ 1,997.4
Cost of sales 441.0 443.4 1,394.6 1,388.6
Selling, general and
administrative
expenses 147.4 138.5 457.7 429.4
Interest (income)
expense, net (1.3) (1.9) (6.0) (6.1)
--------- --------- --------- ---------
Earnings before income
taxes 56.0 55.7 200.8 185.5
Provision for income
taxes 22.3 22.2 80.1 74.0
--------- --------- --------- ---------
Net Earnings $ 33.7 $ 33.5 $ 120.7 $ 111.5
========= ========= ========= =========
Basic Earnings
per Share $ 0.98 $ 0.89 $ 3.35 $ 2.87
========= ========= ========= =========
Diluted Earnings
per Share $ 0.98 $ 0.88 $ 3.31 $ 2.84
========= ========= ========= =========
Basic Weighted Average
Shares Outstanding 34.4 37.5 36.1 38.8
========= ========= ========= =========
Diluted Weighted Average
Shares Outstanding 34.5 38.1 36.4 39.2
========= ========= ========= =========
See Notes to Condensed Consolidated Financial Statements.
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PAYLESS SHOESOURCE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(Dollars in millions) 39 Weeks Ended
--------------------
Oct. 31, Nov. 1,
1998 1997
-------- --------
Operating Activities:
Net earnings $ 120.7 $ 111.5
Adjustments for noncash items
included in net earnings:
Depreciation and amortization 69.9 67.6
Amortization of unearned
restricted stock 2.1 3.2
Deferred income taxes 4.9 0.1
Merchandise inventories (28.7) 23.2
Other current assets (6.1) (2.8)
Accounts payable 20.3 5.7
Accrued expenses 12.8 16.7
Other assets and liabilities, net (3.4) 2.3
-------- --------
Total Operating Activities 192.5 227.5
-------- --------
Investing Activities:
Capital expenditures (84.9) (59.3)
Disposition of property and equipment 6.7 6.9
-------- --------
Total Investing Activities (78.2) (52.4)
-------- --------
Financing Activities:
Repayment of capital lease
obligations (1.2) (1.4)
Purchases of common stock (220.7) (150.0)
-------- --------
Total Financing Activities (221.9) (151.4)
-------- --------
Increase (Decrease) in Cash
and Cash Equivalents (107.6) 23.7
Cash and Cash Equivalents,
Beginning of Year 210.0 193.6
Cash and Cash Equivalents, -------- --------
End of Period $ 102.4 $ 217.3
======== ========
Cash paid during the period:
Interest $ 0.8 $ 1.8
Income Taxes 62.3 58.9
See Notes to Condensed Consolidated Financial Statements.
4
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PAYLESS SHOESOURCE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Basis of Presentation
Payless ShoeSource, Inc., a Missouri corporation ("Payless") and its
subsidiaries were reorganized into a Delaware holding company structure
effective June 1, 1998 through a merger (the "Merger") with Payless
Merger Corp., a Missouri corporation, which was an indirect wholly-owned
subsidiary of Payless and a wholly-owned subsidiary of Payless
ShoeSource, Inc., a Delaware corporation (the "Company"). The Company
formerly was a wholly-owned subsidiary of Payless immediately prior to
the merger. Each of the Company and Payless Merger Corp. were organized
in connection with the Merger. Pursuant to the Merger, Payless became
a wholly-owned subsidiary of the Company and is the principal operating
subsidiary of the Company. The transaction was accounted for as a
reorganization of entities under common control (similar to a pooling of
interest). As a result, immediately following the effective time of the
Merger the Company and its subsidiaries had the same consolidated net
worth as Payless and its subsidiaries had immediately prior to the
Merger.
For purposes of these Notes to Condensed Consolidated Financial
Statements, "Registrant", "New Payless" or "the Company" refers to
Payless ShoeSource, Inc., a Delaware corporation, and its subsidiaries,
unless the context otherwise requires.
Note 2. Interim Results. These Condensed Consolidated Financial
Statements (Unaudited) of the Company have been prepared in accordance
with the instructions to Form 10-Q of the Securities and Exchange
Commission and should be read in conjunction with the Notes to the
Consolidated Financial Statements (pages 19-24) in the Company's 1997
Annual Report. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant
to such rules and regulations. In the opinion of management, the
Condensed Consolidated Financial Statements (Unaudited) are fairly
presented and all adjustments (consisting only of normal recurring
adjustments) necessary for a fair statement of the results for the
interim periods have been included; however, certain items are included
in these statements based upon estimates for the entire year. The
results for the nine month period ended October 31, 1998, are not
necessarily indicative of the results that may be expected for the year
ending January 30, 1999.
Note 3. Inventories. Merchandise inventories are valued at the retail
method and are stated at the lower of cost, determined using the first-
in, first-out (FIFO) basis, or market.
Note 4. Parade of Shoes. In March 1997, the Company acquired inventory
and trademarks, and assumed leases on 186 stores of the Parade of Shoes
division ("Parade") from J. Baker, Inc. The purchase price was
approximately $28 million in cash. Parade sells women's footwear and
accessories in 14 states, Puerto Rico and the District of Columbia. The
Company is operating Parade as a separate division supported by existing
Payless sourcing, distribution, information systems, real estate and
financial organizations.
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The Parade acquisition has been accounted for as a purchase, and
accordingly, the operating results of the acquired stores have been
included in the Company's consolidated results since the date of
acquisition.
Note 5. Earnings Per Share. Basic earnings per share was computed by
dividing net earnings by the weighted average number of shares of common
stock outstanding during the period. Diluted earnings per share include
the effect of conversions of stock options.
Note 6. Reclassifications. Certain reclassifications have been made to
prior year balances to conform with the current year presentation.
Note 7. Foreign Currency Translation. Local currencies are the
functional currencies for all subsidiaries. Accordingly, assets and
liabilities of foreign subsidiaries are translated at the rate of
exchange at the balance sheet date. Income and expense items of these
subsidiaries are translated at average rates of exchange. The foreign
currency translation was immaterial for the third quarter of 1998 and
1997.
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations
The following discussion summarizes the significant factors affecting
operating results for the quarters ended October 31, 1998 (1998) and
November 1, 1997 (1997). This discussion and analysis should be read in
conjunction with the Condensed Consolidated Financial Statements
(Unaudited) and Notes to the Condensed Consolidated Financial Statements
included in this Form 10-Q and the Notes to the Consolidated Financial
Statements contained in the Company's 1997 Annual Report, for the year
ended January 31, 1998.
Review of Operations
Net Earnings
Net earnings totaled $33.7 million in the third quarter of 1998, up 0.6%
from $33.5 million in the third quarter of 1997. For the first nine
months of 1998, net earnings were $120.7 million compared with $111.5
million in the 1997 period, an 8.3% increase.
The following table presents the components of costs and expenses, as a
percent of net retail sales, for the third quarter and first nine months
of 1998 and 1997.
First
Third Quarter Nine Months
------------- -------------
1998 1997 1998 1997
------ ------ ------ ------
Cost of sales 68.6% 69.8% 68.1% 69.5%
Selling, general and
administrative expenses 22.9 21.8 22.4 21.5
Interest (income)/expense, net (.2) (.3) (.3) (.3)
------ ------ ------ ------
Earnings before income taxes 8.7% 8.7% 9.8% 9.3%
====== ====== ====== ======
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Effective income tax rate 39.9% 39.9% 39.9% 39.9%
====== ====== ====== ======
Net Earnings 5.2% 5.3% 5.9% 5.6%
====== ====== ====== ======
Net Retail Sales
Net retail sales represent the sales of stores operating during the
period. Same-store sales represent sales of stores open during
comparable periods. During the third quarter of 1998 total sales
increased 1.2 percent from the third quarter of 1997, consisting of a
3.2 percent decrease in unit volume and a 4.5 percent increase in
average selling prices. For the first nine months of 1998 total sales
increased 2.5 percent from same period of 1997, consisting of a 1.6
percent decrease in unit volume and a 4.1 percent increase in average
selling prices. Sales percent increases (decreases) are as follows:
Third Quarter First Nine Months
------------------ ------------------
1998 1997 1998 1997
-------- -------- -------- --------
Net Retail Sales 1.2% 10.2% 2.5% 10.3%
Same-Store Sales (1.9%) 5.2% (0.1%) 6.3%
Cost of Sales
Cost of sales includes cost of merchandise sold, buying and occupancy
costs. Cost of sales was $441.0 million in the 1998 third quarter, down
0.5% from $443.4 million in the 1997 third quarter. For the first nine
months of 1998, cost of sales was $1.395 billion, a 0.4% increase from
$1.389 billion in the 1997 period.
For the third quarter and first nine months, cost of sales, as a percent
of net retail sales, declined 1.2 percent to 68.6 percent and 1.4
percent to 68.1 percent, respectively. Gross margin improvement in the
third quarter and the first nine months of the year was primarily due to
improvements in the merchandising mix, control of freight costs, and
improvement in product costs.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were $147.4 million in the
1998 third quarter, up 6.4 percent from $138.5 million in the 1997 third
quarter. For the first nine months of 1998, selling, general and
administrative expenses were $457.7 million compared with $429.4 million
in the 1997 period, a 6.6 percent increase.
As a percent of net retail sales, selling, general and administrative
expenses were 22.9 percent during the third quarter of 1998 compared
with 21.8 percent in the third quarter of 1997. For the first nine
months of 1998, selling, general and administrative expenses as a
percent of net retail sales were 22.4 percent in 1998 compared with 21.5
percent in 1997.
The increase during the third quarter of 1998 was attributed to negative
leverage on store payroll due to a decline in same-store sales and
increases in systems expenses.
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The increase during the first nine months of 1998 was attributed to an
increase in advertising expense, negative leverage due to below plan
results at Parade of Shoes, and investments in Payless systems to
support future growth, to enhance distribution capabilities and to
implement the Payless Year 2000 program as discussed under "Year 2000
Readiness Disclosure" below.
Stock Compensation Plans
The stock compensation plans established by the Company are accounted
for by applying Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees. Accordingly, no compensation expense has
been recognized for stock-based compensation plans other than for
restricted stock and performance-based awards. Had compensation cost
for the Payless stock options been determined under Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation, net earnings and earnings per share for the third quarter
of 1998 and 1997 would have been reduced by approximately $1.6 million,
or $0.05 per share and $5.7 million, or $0.15 per share, respectively.
For the first nine months of fiscal 1998 and 1997 net earnings and
earnings per share would have been reduced by approximately $4.5
million, or $0.12 per share and $11.9 million, or $0.31 per share,
respectively.
Cash Flow
Cash flow from operations during the nine months ended October 31, 1998,
was $192.5 million. This figure represented 9.4 percent of net retail
sales during the first nine months of 1998 compared with 11.4 percent
during the first nine months of 1997. Internally generated funds are
expected to 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:
39 Weeks Ended
-------------------
Oct. 31, Nov. 1,
(Dollars in millions) 1998 1997
-------- --------
Net earnings
and noncash items $ 197.6 $ 182.4
Working capital
decrease (increase) (5.1) 45.1
Investing activities (78.2) (52.4)
Purchases of common stock (220.7) (150.0)
Other financing activity (1.2) (1.4)
-------- --------
Increase (decrease) in cash
and cash equivalents $ (107.6) $ 23.7
======== ========
Capital Expenditures
Capital expenditures during the first nine months of 1998 totaled $84.9
million with an additional $27.8 million estimated to be incurred during
the remainder of fiscal year 1998. The Company anticipates that cash
flow from operations and the Company's existing credit facility should
be sufficient to finance projected capital expenditures.
Financing Activities
During the third quarter of 1998, the Company acquired 1.5 million
shares of its common stock for an aggregate price of $67.9 million.
8
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On October 8, 1998, the Board of Directors authorized the expansion of
the Company's share repurchase program to a total of $500 million
dollars worth of the Company's common stock. This expansion increased
the prior $150 million authorization of the Company's Board of Directors
announced on August 10, 1998.
Available Credit
The Company has in place a $200 million unsecured revolving credit
facility with a bank syndication group on which no amounts were drawn
down as of October 31, 1998.
Financial Condition Ratios
A summary of key financial information for the periods indicated is as
follows:
Oct. 31, Nov. 1, Jan. 31,
1998 1997 1998
-------- -------- --------
Current Ratio 2.3 2.6 3.2
Debt-to-Capitalization Ratio* 0.9% 1.0% 1.0%
Fixed Charge Coverage** 4.1x 3.7x 3.5x
* Debt-to-capitalization has been computed by dividing total debt,
which includes current and long-term capital lease obligations, by
capitalization, which includes current and long-term capital lease
obligations, non-current deferred income taxes and equity. The
debt-to-capitalization ratio, including the present value of
future minimum rental payments under operating leases as debt and
capitalization, would be 53.7%, 50.9% and 50.1% respectively, for
the periods referred to above.
** Fixed charge coverage, which is presented for the trailing 52
weeks in each period ended above, 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 Company's fixed charge coverage ratio for the 52 weeks ended October
31, 1998 increased as compared with the 52 week period ended November 1,
1997, due primarily to increased net earnings.
Store Activity
At the end of the third quarter of 1998, the Company operated 4,327
Payless ShoeSource stores in 50 states, Canada, the District of
Columbia, Guam, Saipan, Puerto Rico and the U.S. Virgin Islands and 212
Parade of Shoes stores. The following table presents the change in
store count for the third quarter and first nine months of 1998 and
1997.
Payless ShoeSource First
Third Quarter Nine Months
------------- ------------
1998 1997 1998 1997
----- ----- ----- -----
Beginning of quarter/year 4,293 4,223 4,256 4,236
Stores opened 71 53 178 116
Stores closed (37) (33) (107) (109)
----- ----- ----- -----
Ending store count 4,327 4,243 4,327 4,243
===== ===== ===== =====
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Parade of Shoes First
Third Quarter Nine Months
------------- ------------
1998 1997 1998 1997
----- ----- ----- -----
Beginning of quarter/year 211 183 175 0
Stores acquired 0 0 0 186
Stores opened 10 2 51 4
Stores closed (9) (2) (14) (7)
----- ----- ----- -----
Ending store count 212 183 212 183
===== ===== ===== =====
Year 2000 Readiness Disclosure
Many existing computer programs were designed and developed without
regard for the Year 2000 and beyond. If not corrected, these computer
applications could fail or create erroneous results before or at the
Year 2000. For the Company, this could disrupt product purchasing and
distribution, store operations, finance and other support areas and
affect the Company's ability to timely deliver product to stores,
thereby causing potential lost sales opportunities and additional
expenses.
The Company's State of Readiness
The Company has created a Year 2000 Steering Committee comprised of
various senior management members and a Year 2000 Project Management
Office. This group is responsible for planning and monitoring the
Company's overall Year 2000 program and for reporting on a regular basis
to the Company's Board of Directors. The Company's Year 2000 program
encompasses both information and non-information systems within the
Company as well as investigation of the readiness of the Company's
significant business partners. The Company has engaged an international
consulting firm to evaluate and assist in the monitoring of its Year
2000 program. The outside consulting firm provides periodic updates on
the Company's progress to the Company's Board of Directors.
Internally Engineered Systems. With assistance from another
international consulting firm, the Company has evaluated and continues
to evaluate the extent to which modifications to its internally
engineered computer systems will be necessary to accommodate the Year
2000 and is modifying its internally engineered computer systems to
enable continued processing of data into and beyond the Year 2000. This
phase of the Company's Year 2000 program is nearing completion and the
Company anticipates completing remediation and testing of its internally
engineered computer systems by the end of the second quarter of fiscal
1999.
Purchased Systems. The Company has inventoried the types of purchased
hardware and software systems used within the enterprise and is
obtaining, where feasible, contractual warranties from system vendors
that their products are or will be Year 2000 compliant. This phase of
the Company's Year 2000 program is expected to be completed by the end
of 1998. The Company requires Year 2000 contractual warranties from all
vendors of new software and hardware. In addition, the Company is
testing newly purchased significant computer hardware and software
systems in an effort to ensure their Year 2000 compliance.
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Business Partners. The Company has communicated with most of its
suppliers, banks and other business partners or vendors seeking
assurances they will be Year 2000 compliant. Although no method exists
for achieving certainty that any business' significant partners will
function without disruption in the Year 2000, the Company's goal is to
obtain as much detailed information as possible about its significant
partners' Year 2000 plans and to identify those companies which appear
to pose a significant risk of failure to perform their obligations to
the Company as a result of the Year 2000. The Company expects to have
compiled detailed information regarding all of its significant business
partners by December 1998. The Company is planning, where appropriate,
to review such significant partners throughout 1999 to confirm their
level of preparedness for the Year 2000 and to make adjustments where
necessary to avoid utilization of those partners who present an
unacceptable level of risk.
The Company currently is not dependent on a single source for any
products or services. In the event a significant supplier, bank or
other business partner or vendor is unable to provide products or
services to the Company due to a Year 2000 failure, the Company believes
it has adequate alternate sources for such products or services. There
can be no guarantee, however, that similar or identical products or
services would be available on the same terms and conditions or that the
Company would not experience some adverse effects as a result of
switching to such alternate sources.
Embedded Systems. The Company is taking inventory of and will test
significant non-computer equipment (non-information technology)
throughout the enterprise to determine whether it is date sensitive.
Where appropriate, the Company will seek contractual protections or make
contingency plans in an effort to minimize any adverse effect on any
such equipment due to the Year 2000. The Company plans to have
completed its inventory of its non-computer equipment by the end of 1998
and to have fully tested such equipment by the Spring of 1999.
Costs to Address the Year 2000
Spending for modifications is being expensed as incurred and is not
expected to have a material impact on the Company's results of
operations or cash flows. The cost of the Company's Year 2000 program
is being funded with cash flows from operations. The Company's total
Year 2000 expenditures (including external and internal expenditures)
are estimated to be in the range of $8-10 million. While the foregoing
estimate does include internal costs, the Company does not separately
track all of the internal costs incurred by it for the Year 2000
program. Such costs are principally the related payroll costs for the
Company's Year 2000 Program Management Office and other internal
resources who are also contributing their efforts to the Year 2000
program. The largest single Year 2000 expenditure to date has been
consulting fees incurred in the context of the remediation of the
Company's internally engineered computer systems as discussed above. To
date, the Company has expended approximately 90% of its estimated total
Year 2000 expenditures, although the percentage expended cannot
necessarily be taken as an indication of the Company's degree of
completion of its Year 2000 program.
11
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Risk Analysis
Like most large business enterprises, the Company is dependent upon its
own internal computer technology and relies upon timely performance by
its business partners. As noted above, a large-scale Year 2000 failure
could impair the Company's ability to timely deliver product to stores,
resulting in potential lost sales opportunities and additional expenses.
Neither the precise magnitude of such lost sales opportunities and
additional expenses nor the exact costs of carrying out contingency
plans has yet been ascertained by the Company. The Company's Year 2000
program seeks to identify and minimize this risk and includes testing of
its internally engineered systems and purchased hardware and software,
to ensure, to the extent feasible, all such systems will function before
and after the Year 2000. The Company is continually refining its
understanding of the risk the Year 2000 poses to its significant
business partners based upon information obtained through its surveys
and interviews. That refinement will continue throughout 1998 and 1999.
Contingency Plans
Following its risk analysis as described above, the Company's Year 2000
program includes a contingency planning phase in which appropriate plans
will be made to attempt to minimize disruption to the Company's
operations in the event of a Year 2000 failure. The Company is
formulating plans to handle a variety of failure scenarios, including
failures of its internal systems, as well as failures of significant
business partners. The level of planning required is a function of the
risks ascertained through the Company's investigative efforts. The
Company anticipates contingency planning across the enterprise will be
completed by the Summer of 1999.
While no assurances can be given, because of the Company's extensive
efforts to formulate and carry-out an effective Year 2000 program, the
Company believes its program will be completed on a timely basis and
should effectively minimize disruption to the Company's operations due
to the Year 2000.
Cautionary Statement Regarding Forward-Looking Statements
This report contains, and from time to time, the Company may publish,
forward-looking statements relating to such matters as anticipated
financial performance, business prospects, technological developments,
new products, future store openings, possible strategic alternatives and
similar matters. Also, statements including the words "expects,"
"anticipates," "intends," "plans," "believes," "seeks," or variations of
such words and similar expressions are forwarding-looking statements.
The Company 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 its 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;
changes in consumer preferences and overall economic conditions; the
impact of competition and pricing; changes in weather patterns; Year
2000 matters as discussed herein; the financial condition of the
suppliers and manufacturers from whom the Company sources its
merchandise; changes in existing or potential duties, tariffs or quotas;
changes in relationships between the United States and foreign
countries, economic and political instability in foreign countries or
12
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restrictive actions by the governments of foreign countries in which
suppliers and manufacturers from whom the Company sources are located;
changes in trade and foreign tax laws; fluctuations in currency exchange
rates; availability of suitable store locations and appropriate terms;
the ability to hire and train associates; and general economic, business
and social conditions. All subsequent written and oral forward-looking
statements attributable to the Company or persons acting on its behalf
are expressly qualified in their entirety by these cautionary
statements. The Company does not undertake any obligation to release
publicly any revisions to such forward-looking statements to reflect
events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events.
PART II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits:
Number Description
------ -----------
3.1 Restated Certificate of Incorporation of Registrant
(incorporated by reference from exhibit 3.1 to
Registrant's Current Report on Form 8-K (File No.
1-14770) filed June 3, 1998).
3.2 Amended and Restated Bylaws of Registrant (incorporated
by reference from exhibit 3.2 to Registrant's Current
Report on Form 8-K (File No. 1-14770) filed June 3,
1998).
10.15 Amendment No. 1 to the Amended and Restated Multicurrency
Credit Agreement dated as of November 23, 1998, among
Payless ShoeSource, Inc., a Missouri corporation, Payless
ShoeSource, Inc. (formerly Payless ShoeSource Holdings,
Inc.), a Delaware corporation, Payless ShoeSource
Finance, Inc. (formerly PSS Investment II, Inc.), a
Nevada corporation, the several financial institutions
signatory thereto, and Bank of America National Trust and
Savings Association, individually and as agent.*
11.1 Computation of Net Earnings Per Share*
27.1 Financial Data Schedule*
* Filed herewith
(b) Reports on Form 8-K - None
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Company has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
PAYLESS SHOESOURCE, INC.
Date: 12/8/98 /s/ Steven J. Douglass
--------------- --------------------------------
Steven J. Douglass
Chairman and
Chief Executive Officer
Date: 12/8/98 /s/ Ullrich E. Porzig
--------------- --------------------------------
Ullrich E. Porzig
Senior Vice President and
Chief Financial Officer
14
<PAGE>
<PAGE>
Exhibit 11
PAYLESS SHOESOURCE, INC.
------------------------
COMPUTATION OF NET EARNINGS PER SHARE
-------------------------------------
13 Weeks Ended 39 Weeks Ended
------------------- --------------------
Oct. 31, Nov. 1, Oct. 31, Nov. 1,
(Thousands, except per share) 1998 1997 1998 1997
-------- -------- -------- --------
Basic Computation:
- ------------------
Net earnings $ 33,688 $ 33,493 $120,747 $111,508
Weighted average common
shares outstanding 34,377 37,473 36,060 38,816
-------- -------- -------- --------
Basic earnings per share $ 0.98 $ 0.89 $ 3.35 $ 2.87
======== ======== ======== ========
Diluted Computation:
- --------------------
Net earnings $ 33,688 $ 33,493 $120,747 $111,508
Weighted average common
shares outstanding 34,377 37,473 36,060 38,816
Net effect of dilutive stock
options based on the treasury
stock method 111 661 372 396
-------- -------- -------- --------
Outstanding shares for diluted
earnings per share 34,488 38,134 36,432 39,212
======== ======== ======== ========
Diluted earnings per share $ 0.98 $ 0.88 $ 3.31 $ 2.84
======== ======== ======== ========
Note: Basic earnings per share is computed by dividing net earnings by
the weighted average number of shares of common stock outstanding during
the period. Diluted earnings per share includes the effect of conversions
of options.
<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 39 WEEKS ENDED OCTOBER
31, 1998, AND CONDENSED CONSOLIDATED BALANCE SHEET AS OF OCTOBER
31, 1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0001060232
<NAME> PAYLESS SHOESOURCE,INC.
<MULTIPLIER> 1,000
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-30-1999
<PERIOD-START> FEB-01-1998
<PERIOD-END> OCT-31-1998
<CASH> 102,400<F1>
<SECURITIES> 0<F2>
<RECEIVABLES> 7,900<F3>
<ALLOWANCES> 0<F3>
<INVENTORY> 353,300
<CURRENT-ASSETS> 480,900
<PP&E> 923,900
<DEPRECIATION> 429,000
<TOTAL-ASSETS> 1,003,500
<CURRENT-LIABILITIES> 211,300
<BONDS> 5,200<F4>
<COMMON> 300
0
0
<OTHER-SE> 737,900<F5>
<TOTAL-LIABILITY-AND-EQUITY> 1,003,500
<SALES> 2,047,100<F6>
<TOTAL-REVENUES> 2,047,100
<CGS> 1,394,600
<TOTAL-COSTS> 1,394,600
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (6,000)
<INCOME-PRETAX> 200,800
<INCOME-TAX> 80,100
<INCOME-CONTINUING> 120,700
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 120,700
<EPS-PRIMARY> 3.35<F7>
<EPS-DILUTED> 3.31<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 10.15
AMENDMENT NO. 1 TO AMENDED AND RESTATED CREDIT AGREEMENT
---------------------------------------------------------
This Amendment (this "Amendment") is entered into as of November
23, 1998 among Payless ShoeSource, Inc., a Missouri corporation (the
"Company"), Payless ShoeSource, Inc. (formerly Payless ShoeSource
Holdings, Inc.), a Delaware corporation ("Holdco"), Payless
ShoeSource Finance, Inc. (formerly PSS Investment II, Inc.), a Nevada
corporation ("Nevada"), the several financial institutions signatory
hereto, and Bank of America National Trust and Savings Association,
individually and as agent (the "Agent").
RECITALS
--------
A. The Company, Holdco, Nevada, the Agent and certain
financial institutions (the "Banks") are party to that certain
Amended and Restated Multicurrency Credit Agreement dated as of
May 22, 1998 (the "Credit Agreement"). Unless otherwise specified
herein, capitalized terms used in this Amendment shall have the
meanings ascribed to them by the Credit Agreement.
B. The Company, Holdco, Nevada, the Agent and the undersigned
Banks wish to amend the Credit Agreement on the terms and conditions
set forth below.
Now, therefore, in consideration of the mutual execution hereof
and other good and valuable consideration, the parties hereto agree
as follows:
1. Amendment to Credit Agreement. Upon this Amendment
becoming effective in accordance with Section 3 below, the Credit
Agreement shall be amended as follows:
(a) The definitions of "Level I Status", "Level II
Status", "Level III Status" and "Level IV Status" in Article I of the
Credit Agreement are amended in their entirety to read as follows:
"Level I Status" exists at any date if at such date the
Fixed Charge Coverage Ratio is greater than 2.25:1.0 and Level IV
Status does not exist.
"Level II Status" exists at any date if at such date the
Fixed Charge Coverage Ratio is less than or equal to 2.25:1.0 but
greater than 2.0:1.0 and Level IV Status does not exist.
"Level III Status" exists at any date if at such date the
Fixed Charge Coverage Ratio is less than or equal to 2.0:1.0 but
greater than 1.75:1.0 and Level IV Status does not exist.
"Level IV Status" exists at any date if at such date (a)
the Fixed Charge Coverage Ratio is less than or equal to 1.75:1.0 or
(b) the ratio of (i) Total Debt to (ii) Total Capitalization is equal
to or greater than 55%.
<PAGE>
(b) Section 2.12(b) of the Credit Agreement is amended in
its entirety to read as follows:
"(b) Commitment and Utilization Fees. The Company
shall pay to the Agent for the account of each Bank a commitment
fee equal to the Applicable Commitment Fee Percentage times the
actual daily unused portion of such Bank's Commitment, computed
on a quarterly basis in arrears on the last Business Day of each
calendar quarter based upon the daily utilization for that
quarter as calculated by the Agent. For purposes hereof, each
Bank's Commitment shall be deemed utilized to the extent of its
Pro Rata Share of all outstanding Loans and L/C Obligations.
Such commitment fee shall accrue from the Closing Date to the
Revolving Termination Date and shall be due and payable
quarterly in arrears on the last Business Day of each calendar
quarter commencing with the first calendar quarter ending after
the Closing Date through the Revolving Termination Date, with
the final payment to be made on the Revolving Termination Date;
provided that, in connection with any reduction or termination
of Commitments under Section 2.06, the accrued commitment fee
calculated for the period ending on such date shall also be paid
on the date of such reduction or termination, with the following
quarterly payment being calculated on the basis of the period
from such reduction or termination date to such quarterly
payment date. The commitment fees provided in this subsection
shall accrue at all times after the above-mentioned commencement
date, including at any time during which one or more conditions
in Article V are not met. The Company also agrees to pay to the
Agent for the pro-rata account of each Bank a utilization fee
for each day on which the Effective Amount of all Loans
outstanding plus the Effective Amount of all L/C Obligations
outstanding is greater than 50% of the aggregate Commitments,
from the date hereof to and including the later of the Revolving
Termination Date and the date all Loans and L/C Obligations are
paid in full. Such utilization fee shall be equal to .05%
multiplied by the aggregate outstanding Effective Amount of all
Loans and L/C Obligations on such day and shall be payable
quarterly in arrears on the last Business Day of each calendar
quarter commencing December 31, 1998 through the Revolving
Termination Date, with the final payment to be made on the
Revolving Termination Date."
(c) Section 2.13(b) of the Credit Agreement is amended in
its entirety to read as follows:
"(b) For purposes of determining utilization of each
Bank's Commitment in order to calculate the commitment fee
and/or utilization fee due under subsection 2.12(b), the amount
of any outstanding Offshore Currency Loan on any date shall be
determined based upon the Dollar Equivalent amount as of the
most recent Computation Date with respect to such Offshore
Currency Loan."
(d) Section 8.05(e) of the Credit Agreement shall be
renumbered as Section 8.05(f) and amended in its entirety to read as
follows:
2
<PAGE>
"(f) Other Indebtedness of such Loan Party and its
Subsidiaries so long as after giving pro forma effect to the
incurrence of such Indebtedness as if such Indebtedness had been
incurred on the last date of the most recently completed fiscal
quarter the ratio of (i) Total Debt to (ii) Total Capitalization
would not have been greater than 70%; provided, however, that
the amount of such other Indebtedness which is Indebtedness of
Subsidiaries (exclusive of Indebtedness of the Company or Nevada
(so long as Nevada is not a Subsidiary of the Company) and
Indebtedness owing to Holdco or its Subsidiaries) shall at no
time exceed an amount equal to 5% of Holdco's Consolidated
Tangible Net Worth at such time; provided further, however, that
solely for purposes of computations under this subsection
8.05(e), all such other Indebtedness outstanding at the time of
such incurrence shall be included in the definitions of "Total
Debt" and "Total Capitalization"."
(e) The word "and" shall be deleted at the end of Section
8.05(d) and a new Section 8.05(e) shall be added to the Credit
Agreement to read as follows:
"(e) Indebtedness of the Company of up to $200,000,000
which is private placement indebtedness so long as after giving
pro forma effect to the incurrence of such Indebtedness as if
such Indebtedness had been incurred on the last date of the most
recently completed fiscal quarter the ratio of (i) Total Debt to
(ii) Total Capitalization would not have been greater than 70%;
provided however, that the covenants and conditions placed upon
the Company pursuant to such private placement indebtedness,
taken as a whole, shall be no more restrictive than those placed
upon the Company by the Credit Agreement; provided further, that
solely for purposes of computations under this subsection
8.05(e), all such other Indebtedness outstanding at the time of
such incurrence shall be included in the definitions of "Total
Debt" and "Total Capitalization"; and "
(f) Section 8.07(f) of the Credit Agreement shall be
amended in its entirety to read as follows:
"(f) Guaranty Obligations of such Loan Party or
of any Guarantor with respect to any Indebtedness permitted
pursuant to subsections 8.05(e) or (f);"
(g) Section 8.12 of the Credit Agreement is amended in its
entirety to read as follows:
"8.12 Financial Covenants.
(a) Fixed Charge Coverage Ratio. For the period of
four consecutive fiscal quarters ending on the last day of each
fiscal quarter, Holdco shall not permit the Fixed Charge
Coverage Ratio to be less than 1.60:1.0.
(b) Leverage Ratio. Holdco shall not permit the
ratio of (i) Total Debt to (ii) Total Capitalization to be
greater than 70% as of the last day of any fiscal quarter.
3
<PAGE>
(c) Consolidated Tangible Net Worth. Holdco shall not
permit Consolidated Tangible Net Worth as of the last day of any
fiscal quarter to be less than $500,000,000."
2. Representations and Warranties of the Company, Holdco
and Nevada. Each of the Company, Holdco and Nevada represents and
warrants that:
(a) The execution, delivery and performance by such
party of this Amendment have been duly authorized by all
necessary corporate action and this Amendment constitutes the
legal, valid and binding obligation of such party, enforceable
against such party in accordance with its respective terms,
except as enforceability may be limited by applicable
bankruptcy, insolvency, or similar laws affecting the
enforcement of creditors' rights generally or by equitable
principles relating to enforceability;
(b) Each of the representations and warranties
contained in the Credit Agreement is true and correct on and as
of the date hereof as if made on the date hereof (except to the
extent such representations and warranties expressly refer to an
earlier date, in which case they were true and correct as of
such earlier date); and
(c) After giving effect to this Amendment, no Default
or Event of Default has occurred and is continuing.
3. Effectiveness. This Amendment shall become effective
upon the execution and delivery hereof by the Company, Holdco, Nevada
and the Required Banks and the delivery to the Agent of the following
documents and the satisfaction of the following conditions:
(a) Reaffirmation of Subsidiary Guaranty. A reaffirmation
of guaranty in the form of Exhibit A hereto duly executed by
each of the Subsidiary Guarantors.
(b) Reaffirmation of Parent Guaranty. A reaffirmation of
guaranty in the form of Exhibit B hereto duly executed by each
of the Parent Guarantors.
(c) Bank Fees. The Company shall have paid to the Agent
for the pro-rata benefit of each Bank consenting to this
Amendment prior to October 29, 1998 an amendment fee equal to
.05% of each such consenting Bank's Commitment.
(d) Other Fees. The Company shall have paid to the Agent
such other fees as shall have been separately agreed to between the
Company and the Agent.
4. Reference to and Effect Upon the Credit Agreement.
(a) Except as specifically amended above, the Credit
Agreement and the other Loan Documents shall remain in full force and
effect and are hereby ratified and confirmed.
4
<PAGE>
(b) The execution, delivery and effectiveness of this
Amendment shall not operate as a waiver of any right, power or remedy
of the Agent or any Bank under the Credit Agreement or any Loan
Document, nor constitute a waiver of any provision of the Credit
Agreement or any Loan Document, except as specifically set forth
herein. Upon the effectiveness of this Amendment, each reference in
the Credit Agreement to "this Agreement", "hereunder", "hereof",
"herein" or words of similar import shall mean and be a reference to
the Credit Agreement as amended hereby.
5. Costs and Expenses. The Company hereby affirms its
obligation under Section 11.04 of the Credit Agreement to reimburse
the Agent for all reasonable out-of-pocket costs and expenses
incurred by the Agent in connection with the preparation and
execution of this Amendment, including but not limited to the
attorneys' fees and time charges of attorneys for the Agent with
respect thereto.
6. GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED BY,
AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF ILLINOIS;
PROVIDED THAT THE AGENT AND THE BANKS SHALL RETAIN ALL RIGHTS ARISING
UNDER FEDERAL LAW.
7. Headings. Section headings in this Amendment are
included herein for convenience of reference only and shall not
constitute a part of this Amendment for any other purposes.
8. Counterparts. This Amendment may be executed in any
number of counterparts, each of which when so executed shall be
deemed an original but all such counterparts shall constitute one and
the same instrument.
[Signature Pages Follow]
5
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Amendment to be duly executed and delivered by their proper and duly
authorized officers as of the day and year first above written.
PAYLESS SHOESOURCE, INC., (Formerly
Payless Shoesource Holdings, Inc.) a
Delaware corporation
By: /s/ Steven J. Douglass
------------------------------------
Name: Steven J. Douglass
----------------------------------
Title: Chairman and Chief Executive
---------------------------------
Officer
---------------------------------
PAYLESS SHOESOURCE FINANCE, INC.
(formerly PSS INVESTMENT II, INC.), a
Nevada corporation
By: /s/ Ullrich E. Porzig
------------------------------------
Name: Ullrich E. Porzig
----------------------------------
Title: Senior Vice President and Chief
---------------------------------
Financial Officer
---------------------------------
PAYLESS SHOESOURCE, INC.,
a Missouri corporation
By: /s/ Steven J. Douglass
------------------------------------
Name: Steven J. Douglass
----------------------------------
Title: Chairman and Chief Executive
---------------------------------
Officer
---------------------------------
By: /s/ Ullrich E. Porzig
------------------------------------
Name: Ullrich E. Porzig
----------------------------------
Title: Senior Vice President and Chief
---------------------------------
Financial Officer
---------------------------------
6
<PAGE>
BANK OF AMERICA NATIONAL TRUST AND
SAVINGS ASSOCIATION, as a Bank
By: /s/ Bridget A. Garavalia
------------------------------------
Name: Bridget A. Garavalia
----------------------------------
Title: Managing Director
---------------------------------
BANK OF AMERICA NATIONAL TRUST AND
SAVINGS ASSOCIATION, as Agent
By: /s/ Bridget A. Garavalia
------------------------------------
Name: Bridget A. Garavalia
----------------------------------
Title: Managing Director
---------------------------------
NATIONSBANK, N.A.
By: /s/ Bridget A. Garavalia
------------------------------------
Name: Bridget A. Garavalia
----------------------------------
Title: Managing Director
---------------------------------
THE BANK OF NEW YORK
By: /s/ Charlotte Sohn
------------------------------------
Name: Charlotte Sohn
----------------------------------
Title: Vice President
---------------------------------
COMMERCE BANK, N.A.
By: /s/ Jeffrey R. Gray
------------------------------------
Name: Jeffrey R. Gray
----------------------------------
Title: Vice President
---------------------------------
7
<PAGE>
FIRST UNION NATIONAL BANK
By: /s/ Randal D. Southern
------------------------------------
Name: Randal D. Southern
----------------------------------
Title: Vice President
---------------------------------
THE FIRST NATIONAL BANK OF CHICAGO
By: /s/ Catherine A. Muszynski
------------------------------------
Name: Catherine A. Muszynski
----------------------------------
Title: Vice President
---------------------------------
WELLS FARGO BANK, N.A.
By: /s/ Donald A. Hartmann and
------------------------------------
/s/ Steven A. Newell
------------------------------------
Name: Donald A. Hartmann and
----------------------------------
Steven A. Newell
----------------------------------
Title: Senior Vice President and
---------------------------------
Assistant Vice President
---------------------------------
PNC BANK, NATIONAL ASSOCIATION
By: /s/ James A. Wiehe
------------------------------------
Name: James A. Wiehe
----------------------------------
Title: Assistant Vice President
---------------------------------
8
<PAGE>
UNION BANK OF CALIFORNIA, N.A.
By: /s/ J. William Bloore
------------------------------------
Name: J. William Bloore
----------------------------------
Title: Vice President
---------------------------------
UMB BANK, n.a.
By: /s/ Douglas F. Page
------------------------------------
Name: Douglas F. Page
----------------------------------
Title: Executive Vice President
---------------------------------
ROYAL BANK OF CANADA
By: /s/ Karen T. Hull
------------------------------------
Name: Karen T. Hull
----------------------------------
Title: Retail Group Manager
---------------------------------
MARINE MIDLAND BANK
By: /s/ Steven Trepiccione
------------------------------------
Name: Steven Trepiccione
----------------------------------
Title: Vice President - Officer #9435
---------------------------------
9
<PAGE>
EXHIBIT A
---------
REAFFIRMATION OF SUBSIDIARY GUARANTY
------------------------------------
Each of the undersigned acknowledges receipt of a copy of
Amendment No. 1 dated November 23, 1998 (the "Amendment") to the
Amended and Restated Multicurrency Credit Agreement dated as of May
22, 1998, among Payless ShoeSource, Inc., Payless ShoeSource, Inc.
(formerly Payless ShoeSource Holdings, Inc.), Payless ShoeSource
Finance, Inc. (formerly PSS Investment II, Inc.), the several
financial institutions from time to time party thereto (the
"Banks") and Bank of America National Trust and Savings
Association, as Agent for the Banks, consents to the Amendment and
each of the Transactions referenced therein and hereby reaffirms
obligations under the Subsidiary Guaranty dated as of April 22,
1996 in favor of Agent, and the Banks.
PAYLESS SHOESOURCE MERCHANDISING, INC.
By: /s/ Michael S. Wilkes
-----------------------------------------
Title: President
--------------------------------------
PAYLESS SHOESOURCE DISTRIBUTION, INC.
By: /s/ Charles P. Guardiola
-----------------------------------------
Title: President
--------------------------------------
PAYLESS SHOESOURCE WORLDWIDE, INC.
By: /s/ H. Max Bennett
-----------------------------------------
Title: President
--------------------------------------
<PAGE>
EXHIBIT B
---------
REAFFIRMATION OF PARENT GUARANTY
--------------------------------
Each of the undersigned acknowledges receipt of a copy of
Amendment No. 1 dated November 23, 1998 (the "Amendment") to the
Amended and Restated Multicurrency Credit Agreement dated as of May
22, 1998, among Payless ShoeSource, Inc., Payless ShoeSource, Inc.
(formerly Payless ShoeSource Holdings, Inc.), Payless ShoeSource
Finance, Inc. (formerly PSS Investment II, Inc.), the several
financial institutions from time to time party thereto (the
"Banks") and Bank of America National Trust and Savings
Association, as Agent for the Banks, consents to the Amendment and
each of the Transactions referenced therein and hereby reaffirms
obligations under the Parent Guaranty dated as of May 11, 1998 in
favor of Agent, and the Banks.
PAYLESS SHOESOURCE, INC.,
a Delaware corporation
/s/ Steven J. Douglass
-------------------------------------------------
By: Steven J. Douglass
Title: Chairman and Chief Executive Officer
PAYLESS SHOESOURCE FINANCE, INC.,
(f/k/a PSS Investment II, Inc.)
a Nevada corporation
/s/ Richard A. Jolosky
------------------------------------------------
By: Richard A. Jolosky
Title: President
<PAGE>
