<PAGE> 1
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 July 31, 1999
Commission File Number 1-14770
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 AVENUE, 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
31,063,766 shares as of August 27, 1999
<PAGE> 2
PART 1 - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
PAYLESS SHOESOURCE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
(Dollars in millions)
<TABLE>
<CAPTION>
Jul. 31, Aug. 1, Jan. 30,
ASSETS 1999 1998 1999
- ------ --------------- --------------- ---------------
Current Assets:
<S> <C> <C> <C>
Cash and cash equivalents $ 205.3 $ 135.4 $ 123.5
Merchandise inventories 348.2 367.8 342.1
Current deferred income taxes 13.9 9.6 14.2
Other current assets 19.5 12.7 16.0
--------------- --------------- ---------------
Total current assets 586.9 525.5 495.8
Property and Equipment:
Land 7.5 6.0 6.3
Buildings and leasehold
improvements 621.6 591.8 594.8
Furniture, fixtures and
equipment 303.9 297.4 284.2
Property under capital leases 7.6 7.5 7.6
--------------- --------------- ---------------
Total property and equipment 940.6 902.7 892.9
Accumulated depreciation
and amortization (449.3) (408.2) (400.1)
--------------- --------------- ---------------
Property and equipment, net 491.3 494.5 492.8
Deferred income taxes 30.7 23.1 25.8
Other assets 4.4 3.5 3.5
--------------- --------------- ---------------
Total Assets $ 1,113.3 $ 1,046.6 $ 1,017.9
=============== =============== ===============
LIABILITIES AND SHAREOWNERS' EQUITY
- -----------------------------------
Current Liabilities:
Current maturities of
long-term debt $ 0.7 $ 1.5 $ 1.5
Accounts payable 72.0 96.5 75.5
Accrued expenses 137.0 120.4 117.9
--------------- --------------- ---------------
Total current liabilities 209.7 218.4 194.9
Long-term debt 126.7 5.3 72.0
Other liabilities 49.0 50.5 48.2
Shareowners' Equity:
Common stock 0.3 0.4 0.3
Additional paid-in capital 37.1 18.9 35.0
Unearned restricted stock (1.5) (6.3) (3.3)
Retained earnings 692.0 759.4 670.8
--------------- --------------- ---------------
Total shareowners' equity 727.9 772.4 702.8
Total Liabilities and
Shareowners' Equity $ 1,113.3 $ 1,046.6 $ 1,017.9
=============== =============== ===============
</TABLE>
See notes to condensed consolidated financial statements.
2
<PAGE> 3
PAYLESS SHOESOURCE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF EARNINGS
(UNAUDITED)
(Dollars in millions, except per share)
<TABLE>
<CAPTION>
13 Weeks Ended 26 Weeks Ended
----------------------------------- -----------------------------------
Jul. 31, Aug. 1, Jul. 31, Aug. 1,
1999 1998 1999 1998
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Net Retail Sales: $ 767.6 $ 723.1 $ 1,456.8 $ 1,404.1
Cost of sales 514.2 489.4 982.8 954.8
Selling, general and
administrative
expenses 168.2 154.2 329.7 309.1
Interest (income)
expense, net (0.2) (2.5) 0.2 (4.7)
--------------- --------------- --------------- --------------
Earnings before income
taxes 85.4 82.0 144.1 144.9
Provision for income
taxes 34.1 32.7 57.5 57.8
--------------- --------------- --------------- ---------------
Net Earnings $ 51.3 $ 49.3 $ 86.6 $ 87.1
=============== =============== =============== ===============
Diluted Earnings
per Share $ 1.61 $ 1.33 $ 2.70 $ 2.33
=============== =============== =============== ===============
Basic Earnings
per Share $ 1.62 $ 1.35 $ 2.71 $ 2.36
=============== =============== =============== ===============
Diluted Weighted Average
Shares Outstanding 31.9 37.0 32.1 37.4
=============== =============== =============== ===============
Basic Weighted Average
Shares Outstanding 31.6 36.5 31.9 36.9
=============== =============== =============== ===============
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE> 4
PAYLESS SHOESOURCE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
(Dollars in millions) 26 Weeks Ended
------------------------------------
Jul. 31, Aug. 1,
1999 1998
--------------- ---------------
<S> <C> <C>
Operating Activities:
Net earnings $ 86.6 $ 87.1
Adjustments for noncash items
included in net earnings:
Depreciation and amortization 48.3 46.3
Amortization of unearned
restricted stock 1.9 1.3
Deferred income taxes (4.6) 4.1
Merchandise inventories (6.1) (43.2)
Other current assets (3.5) (1.3)
Accounts payable (3.5) 32.7
Accrued expenses 19.1 7.5
Other assets and liabilities, net 0.0 (4.2)
--------------- ----------------
Total Operating Activities 138.2 130.3
--------------- ----------------
Investing Activities:
Capital expenditures (47.6) (56.0)
Disposition of property and equipment 0.8 1.7
--------------- ----------------
Total Investing Activities (46.8) (54.3)
--------------- ----------------
Financing Activities:
Issuance of long-term debt 55.0 0.0
Repayment of long-term debt (1.1) (1.2)
Purchases of common stock (65.0) (150.0)
Issuances of common stock 1.5 0.6
--------------- ----------------
Total Financing Activities (9.6) (150.6)
--------------- ----------------
Increase (Decrease) in Cash
and Cash Equivalents 81.8 (74.6)
Cash and Cash Equivalents,
Beginning of Year 123.5 210.0
--------------- ----------------
Cash and Cash Equivalents,
End of Period $ 205.3 $ 135.4
=============== ================
Cash paid during the period:
Interest $ 2.8 $ 0.5
Income Taxes 44.4 45.1
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE> 5
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 the Payless ShoeSource, Inc., a
Delaware corporation ("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 an indirect 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 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, the
"Registrant", or the "Company" refers to Payless ShoeSource, Inc., a Delaware
corporation, and its subsidiaries, unless the context otherwise requires.
NOTE 2. INTERIM RESULTS. The unaudited Condensed Consolidated Financial
Statements of the Company have been prepared in accordance with the instructions
to Form 10-Q of the United States Securities and Exchange Commission and should
be read in conjunction with the Notes to Consolidated Financial Statements
(pages 22-26) in the Company's 1998 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 unaudited Condensed Consolidated Financial statements 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 quarter and six month period ended July 31,
1999, are not necessarily indicative of the results that may be expected for the
fiscal year ending January 29, 2000.
NOTE 3. 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.
NOTE 4. LONG-TERM DEBT. In June, the Company completed a $55 million financing
through a private placement of unsecured notes issued by a wholly owned
subsidiary in five and ten year maturities. The financing consists of an
aggregate of $20 million of senior notes maturing in June 2004 at 7.34%, $15
million of senior notes maturing in June 2009 at 7.67%, with payments of
principal beginning in June 2003, and $20 million of senior notes maturing in
June 2009 at 7.78%.
5
<PAGE> 6
NOTE 5. EARNINGS PER SHARE. 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 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 second
quarter of 1999 and 1998.
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 July 31, 1999 (1999) and August 1, 1998 (1998).
This discussion and analysis should be read in conjunction with the unaudited
Condensed Consolidated Financial Statements and Notes to the Condensed
Consolidated Financial Statements included in this Form 10-Q.
REVIEW OF OPERATIONS
NET EARNINGS
Net earnings totaled $51.3 million in the second quarter of 1999, up 4.1% from
$49.3 million in the second quarter of 1998. For the first six months of 1999
net earnings were $86.6 million compared with $87.1 million in the 1998 period,
a 0.5% decrease.
The following table presents the components of costs and expenses, as a percent
of net retail sales, for the second quarter and first six months of 1999 and
1998.
First
Second Quarter Six Months
-------------- -------------
1999 1998 1999 1998
------ ------- ------ ------
Cost of sales 67.0% 67.7% 67.5% 68.0%
Selling, general and
administrative expenses 21.9 21.3 22.6 22.0
Interest (income)/expense, net (.0) (.3) .0 (.3)
---- ----- ---- -----
Earnings before income taxes 11.1% 11.3% 9.9% 10.3%
==== ==== ==== ====
Effective income tax rate 39.9% 39.9% 39.9% 39.9%
==== ==== ==== ====
Net Earnings 6.7% 6.8% 5.9% 6.2%
==== ==== ==== ====
6
<PAGE> 7
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 second quarter of 1999 total sales increased 6.2% over the second
quarter of 1998, consisting of a 7.0% increase in unit volume and a 0.8%
decrease in average selling prices. For the first six months of 1999 total sales
increased 3.8% over the same period in 1998, consisting of a 4.9% increase in
unit volume and a 1.1% decrease in average selling prices.
Sales percent increases (decreases) are as follows:
Second Quarter First Six Months
-------------- ----------------
1999 1998 1999 1998
---- ---- ---- ----
Net Retail Sales 6.2% 0.9% 3.8% 3.1%
Same-Store Sales 2.6% (1.5%) 0.3% 0.8%
COST OF SALES
Cost of sales includes cost of merchandise sold, buying and occupancy costs.
Cost of sales was $514.2 million in the second quarter of 1999, up 5.1% from
$489.4 million in the second quarter of 1998. For the first six months of 1999,
cost of sales was $982.8 million, a 2.9% increase from $954.8 million in the
1998 period.
For the second quarter and first six months, cost of sales, as a percent of net
retail sales, declined 0.7 percent to 67.0 percent and 0.5 percent to 67.5
percent, respectively. Gross margin improvement in the second quarter and the
first six months of the year was primarily due to continued improvements in our
merchandising margins driven by lower product costs and adjustments to our
merchandising mix.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses were $168.2 million in the second
quarter of 1999, up 9.1% from $154.2 million in the second quarter of 1998. For
the first six months of 1999, selling, general and administrative expenses were
$329.7 million compared with $309.1 million in the 1998 period, a 6.7% increase.
As a percent of net retail sales, selling, general and administrative expenses
were 21.9 percent during the second quarter of 1999 compared with 21.3 percent
in the second quarter of 1998. For the first six months of 1999, selling,
general and administrative expenses as a percent of net retail sales were 22.6
percent in 1999 compared with 22.0 percent in 1998.
The increase during the second quarter and the first six months of 1999 was
attributed to an increase in stores payroll due to higher hourly wage rates and
the increased store count.
CASH FLOW
Cash flow from operations during the six months ended July 31, 1999, was $138.2
million. This figure represented 9.5 percent of net retail sales during the
first six months of 1999 compared with 9.3 percent during the first six months
of 1998. Internally generated funds are expected to continue being 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:
7
<PAGE> 8
CAPITAL EXPENDITURES
Capital expenditures during the first six months of 1999 totaled $47.6 million
with an additional $66.4 million estimated to be incurred during the remainder
of fiscal year 1999. 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
In the second quarter of 1999, the Company acquired 0.6 million shares of its
common stock for an aggregate price of $31.3 million. For the first six months
of the year, the Company has acquired 1.3 million shares for an aggregate price
of $65.0 million.
In June 1999, the Company completed a $55 million dollar financing through a
private placement of unsecured notes issued by a wholly-owned subsidiary in five
and ten year maturities. Payments on $15 million of the ten year notes begins in
June 2003. Proceeds from the financing are intended to be used for general
corporate purposes including the funding of a portion of the company's stock
repurchase program.
AVAILABLE CREDIT
The Company has in place a $200 million unsecured revolving credit facility with
a bank syndication group. While no amounts had been drawn against the agreement
at July 31, 1999, the balance available to the Company was reduced by $11.4
million outstanding under a letter of credit.
FINANCIAL CONDITION RATIOS
A summary of key financial information for the periods indicated is as follows:
Jul. 31, Aug. 1, Jan. 30,
1999 1998 1999
-------- ------- --------
Current Ratio 2.8 2.4 2.5
Debt-Capitalization Ratio* 14.9% 0.9% 9.5%
Fixed Charge Coverage** 3.9x 3.9x 4.1x
* 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 57.0%, 52.5% and 56.8% 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. 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 4.0x, 4.0x, and 4.2x respectively, for the
periods referred to above.
8
<PAGE> 9
STORE ACTIVITY
At the end of the second quarter of 1999, the Company operated 4,413 Payless
ShoeSource stores in 50 states, Canada, the District of Columbia, Guam, Saipan,
Puerto Rico and the U.S. Virgin Islands and 214 Parade of Shoes stores. The
following table presents the change in store count for the second quarter and
first half of 1999 and 1998.
PAYLESS SHOESOURCE First
Second Quarter Six Months
-------------- -----------
1999 1998 1999 1998
---- ---- ---- ----
Beginning of quarter/year 4,387 4,269 4,357 4,256
Stores opened 63 60 127 107
Stores closed (37) (36) (71) (70)
----- ----- ----- -----
Ending store count 4,413 4,293 4,413 4,293
===== ===== ===== =====
PARADE OF SHOES First
Second Quarter Six Months
-------------- -----------
1999 1998 1999 1998
---- ---- ---- ----
Beginning of quarter/year 215 191 213 175
Stores opened 0 22 3 41
Stores closed (1) (2) (2) (5)
----- ----- ----- -----
Ending store count 214 211 214 211
===== ===== ===== =====
E-COMMERCE
On May 27, 1999 the Company launched its online store, Payless.com (sm). The
store's Internet address is http://www.payless.com. The online store offers
customers another way to take advantage of the value, quality, and selection
offered through the Company's Payless ShoeSource stores, with the added
convenience of online shopping.
SHOPKO
Effective July 23, 1999, the Company entered into an agreement with ShopKo
Stores, Inc. ("ShopKo") under which Payless will operate the shoe departments in
the ShopKo stores. Payless expects to begin operating the shoe departments in 13
ShopKo stores in late 1999, and expects to begin operating the shoe departments
in all ShopKo stores by the fall of 2000. The shoe departments will offer the
same footwear and accessories available in other Payless ShoeSource stores. The
Company estimates that the Payless ShoeSource shoe department will produce
approximately 50% of the revenue of a typical Payless ShoeSource store.
PARADE OF SHOES UPDATE
In light of the performance of Parade of Shoes during the first six months of
1999, the Company now plans to add approximately ten new Parade of Shoes stores
by the end of the fiscal year and anticipates adding another 50 stores in fiscal
year 2000.
9
<PAGE> 10
YEAR 2000 READINESS DISCLOSURE
Many existing computer programs were designed and developed without regard for
the implications of 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 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 systems and non-
information technology within the Company as well as investigation of the
readiness of the Company's significant business partners. The Company 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. The consulting firm has completed its work and the Company
anticipates completing remediation and testing of its internally engineered
computer systems using internal resources by the end of the third quarter of
fiscal 1999.
Purchased Systems. The Company inventoried the types of purchased hardware and
software systems used within the enterprise and has obtained, 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 complete.
The Company requires Year 2000 contractual warranties from all vendors of new
software and hardware. In addition, the Company is testing all significant newly
purchased computer hardware and software systems in an effort to ensure their
Year 2000 compliance.
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 has compiled detailed information regarding all of its significant
business partners. 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.
10
<PAGE> 11
The Company currently is not dependent on any 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 has inventoried 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 has fully tested such critical
non-computer equipment.
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 95 percent 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.
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 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.
11
<PAGE> 12
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 end of the
third quarter 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.
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, e-commerce initiatives, 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; successful implementations of new
technologies; 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 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 on acceptable terms; the ability to achieve expected advantages of
operating shoe departments in specialty discount stores, 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.
12
<PAGE> 13
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
There are no material pending legal proceedings, to which the Company or any of
its subsidiaries is a party or of which any of their property is the subject.
The Company and its subsidiaries are parties to ordinary private litigation
incidental to their business.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
<TABLE>
<CAPTION>
Number Description
------- ------------
<S> <C>
10.1 Payless ShoeSource, Inc. Executive Incentive Compensation Plan,
as amended*
10.2 Executive Incentive Compensation Plan For Annual Awards For
Merchandising and Retail Operations Functions, effective May 28,
1999*
11.1 Computation of Net Earnings Per Share*
27 Financial Data Schedule*
</TABLE>
* Filed herewith
(b) Reports on Form 8-K
NONE
13
<PAGE> 14
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: 9/9/99 /s/ Steven J. Douglass
--------- ---------------------------------
Steven J. Douglass
Chairman and
Chief Executive Officer
Date: 9/9/99 /s/ Ullrich E. Porzig
--------- ---------------------------------
Ullrich E. Porzig
Senior Vice President and
Chief Financial Officer
14
<PAGE> 15
Exhibit Index
Number Description
- ------ -----------
10.1 Payless ShoeSource, Inc. Executive Incentive Compensation
Plan, as amended
10.2 Executive Incentive Compensation Plan For Annual Awards For
Merchandising and Retail Operations Functions, effective
May 28, 1999
11.1 Computation of Net Earnings Per Share
27 Financial Data Schedule
<PAGE> 1
EXHIBIT 10.1
PAYLESS SHOESOURCE, INC.
EXECUTIVE INCENTIVE COMPENSATION PLAN
This document constitutes and sets forth the terms of the Payless
ShoeSource, Inc. Executive Incentive Compensation Plan for Payless Executives.
Section 1. PURPOSES OF THE PLAN. The purposes of the Plan are (i) to
provide a means to attract, retain and motivate talented personnel and (ii) to
provide to participating management employees added incentive for high levels of
performance and for additional effort to improve the Company's financial
performance. Payments of awards under this Plan are intended to qualify for tax
deductibility under the provisions of Section 162(m) of the Internal Revenue
Code of 1986, as amended (the "Code"). Notwithstanding any other provisions of
this Plan, if any decision must be made before a specified date in order for
payments to qualify for such tax deductibility under the tax rules in effect
from time to time, then such decision is to be made before such date.
Section 2. DEFINITIONS. Whenever used herein, the following terms shall
have the following meanings:
a. "Annual Award" means, for a Participant for a Fiscal Year,
the product of the Participant's Minimum Annual Compensation for such Fiscal
Year multiplied by the aggregate of:
i. the Participant's Annual EPS Factor for such Fiscal
Year, plus
ii. the Participant's Annual RONA Factor for such
Fiscal Year.
b. "Annual EPS Factor" means, for a Participant for a Fiscal
Year (i) five percent, if actual EPS Growth for such Fiscal Year equals or
exceeds the Participant's Threshold Annual EPS Growth Objective for such Fiscal
Year, plus (ii) ten percent multiplied by a fraction (not less than zero and not
greater than one), the numerator of which is the actual EPS Growth for such
Fiscal Year less the Participant's Threshold Annual EPS Growth Objective for
such Fiscal Year and the denominator of which is the Participant's Maximum
Annual EPS Growth Objective for such Fiscal Year less the Participant's
Threshold Annual EPS Growth Objective for such Fiscal Year; provided, however,
i. that the Annual EPS Factor shall be subject to
adjustment as provided in Section 6(b);
<PAGE> 2
ii. that the percentages referred to in this
definition may be adjusted by the Committee as provided in Section
4(b); and
iii. that the percentages referred to in this
definition may be adjusted by the Committee as provided in Section
4(c).
c. "Annual RONA Factor" means, for a Participant for a Fiscal
Year (i) five percent if actual RONA for such Fiscal Year equals or exceeds the
Participant's Threshold Annual RONA Objective for such Fiscal Year, plus (ii)
ten percent multiplied by a fraction (not less than zero and not greater than
one), the numerator of which is the actual RONA for such Fiscal Year less the
Participant's Threshold Annual RONA Objective for such Fiscal Year and the
denominator of which is the Participant's Maximum Annual RONA Objective for such
Fiscal Year less the Participant's Threshold Annual RONA Objective for such
Fiscal Year; provided, however,
i. that the Annual RONA Factor shall be subject to
adjustment as provided in Section 6(b);
ii. that the percentages referred to in this definition
may be adjusted by the Committee as provided in Section 4(b); and
iii. that the percentages referred to in this
definition may be adjusted by the Committee as provided in Section
4(c).
d. "Average Annual Compensation" means, for a Long-Term
Performance Period, the Participant's average annual salary rate during such
period, determined on a monthly basis, or such lesser amount as the Participant
and the Company shall agree to, in writing.
e. "Board" means the Board of Directors of the Company.
f. "Committee" means a committee designated by the Board,
which shall consist of not less than two members of the Board who shall be
appointed by and serve at the pleasure of the Board and who shall be "outside"
directors within the meaning of Section 162(m) of the Code.
g. "Company" means Payless ShoeSource, Inc., a Missouri
corporation, provided, that immediately after the effective time of the Merger
such term shall mean Payless ShoeSource, Inc. (formerly Payless ShoeSource
Holdings, Inc.), a Delaware corporation.
2
<PAGE> 3
h. "Disability" means the inability of a Participant to
perform the normal duties of the Participant's regular occupation.
i. "EPS Growth" means (i) for a Fiscal Year, the annual growth
rate in EPS measured from the immediately preceding Fiscal Year; and (ii) for a
Long-Term Performance Period, the compound annual growth rate in EPS measured
from the Fiscal Year immediately preceding the Long-Term Performance Period to
the last Fiscal Year in the Long-Term Performance Period. For purposes of this
definition, "EPS" for a Fiscal Year means the Company's EPS for such Fiscal Year
as reported in the Company's annual report to its shareholders for the year of
determination (or, in the event that such item is not included in such annual
report, such comparable figure as may be determined by the Committee) adjusted
by the Company's independent certified public accountants to exclude such
non-recurring or extraordinary items as the Committee shall determine are not
representative of the on-going operations of the Company.
j. "Fiscal Year" means the fiscal year of the Company.
k. "Long-Term Award" means, for a Participant for a Long-Term
Performance Period, the product of the Participant's Average Annual Compensation
for such period multiplied by the aggregate of:
i. the Participant's Long-Term EPS Factor for such
period, plus
ii. the Participant's Long-Term RONA Factor for such
period
as such product is adjusted in accordance with Section 5(b) of the Plan.
l. "Long -Term EPS Factor" means, for a Participant for a
Long-Term Performance Period, (i) five percent if actual EPS Growth for such
period equals or exceeds the Participant's Threshold Long-Term EPS Growth
Objective for such period, plus (ii) ten percent multiplied by a fraction (not
less than zero and not greater than one) the numerator of which is the actual
EPS Growth for such period less the Participant's Threshold Long-Term EPS Growth
Objective for such period and the denominator of which is the Participant's
Maximum Long-Term EPS Growth Objective for such period less the Participant's
Threshold Long-Term EPS Growth Objective for such period; provided, however,
i. that the Long-Term EPS Factor shall be subject to
adjustment as provided in Section 6(b); and
ii. that the percentages referred to in this
definition may be adjusted by the Committee as provided in Section
5(c).
3
<PAGE> 4
m. "Long-Term Performance Period" means three consecutive
Fiscal Years; provided, however, that the first Long-Term Performance Period
under the Plan shall be Fiscal Year 1996 and the second Long-Term Performance
Period under the Plan shall be Fiscal Years 1996 and 1997.
n. "Long-Term RONA Factor" means, for a Participant for a
Long-Term Performance Period (i) five percent if actual RONA for such period
equals or exceeds the Participant's Threshold Long-Term RONA Objective for such
period plus (ii) ten percent multiplied by a fraction (not less than zero and
not greater than one), the numerator of which is the actual RONA for such period
less the Participant's Threshold Long-Term RONA Objective for such period and
the denominator of which is the Participant's Maximum Long-Term RONA Objective
for such period less the Participant's Threshold Long-Term RONA Objective for
such period; provided, however,
i. that the Long-Term RONA Factor shall be subject to
adjustment as provided in Section 6(b); and
ii. that the percentages referred to in this
definition may be adjusted by the Committee as provided in Section
5(c).
o. "Market Value" means the average closing price of the
Stock on the New York Stock Exchange, Inc. during the month of February of the
year specified; provided, however, that "Market Value" for Fiscal Year 1996
means the arithmetic average of the high and low trading prices of the Stock on
the New York Stock Exchange for each of the first 30 trading days on which
trading in the Stock on that exchange occurs
p. "Minimum Annual Compensation" means, for a Fiscal Year,
the Participant's rate of minimum annual salary on the first day of the fiscal
month of November in the Fiscal Year.
q. "Participant" means an individual who has been designated
to participate in the Plan in accordance with Section 3 of the Plan.
r. "Plan" mean the Payless ShoeSource, Inc. Executive
Incentive Compensation Plan for Payless Executives.
s. "Relative Performance Rank" means, for a Fiscal Year or
for a Long-Term Performance Period, the relative rank of the Company (as among
the Company and a group of competitors designated by the Committee) based on the
EPS Growth and RONA, respectively, of all such corporations for such
corporations'
4
<PAGE> 5
comparable fiscal periods, as determined by the Committee. Relative Performance
Rank shall be determined based on data provided by the Company's independent
certified public accountants from publicly available information about all such
corporations, and adjusted by such independent certified public accountants for
comparability (adjustments for LIFO, major non-recurring transactions, etc.)
subject to the direction and approval of the Committee. The Committee may change
the number of competitors or corporations included in the group when, as a
result of extraordinary or unforeseen events, it is no longer appropriate for a
particular corporation to be included in the competitor group (such as when one
of the group ceases operations, merges with another corporation, files for
bankruptcy protection or significantly changes the nature of its business).
t. "Retirement" means, as to a Participant, retirement as
that word is defined in the Company's Profit Sharing Plan.
u. "RONA" means (i) for a Fiscal Year, the Company's return
on beginning net assets for such Fiscal Year as reported in the Company's annual
report to its shareowners for the year of determination (or, in the event that
such item is not included in such annual report, such comparable figure as may
be determined by the Committee) adjusted by the Company's independent certified
public accountants to exclude such non-recurring or extraordinary items as the
Committee shall determine are not representative of the ongoing operations of
the Company; and (ii) for a Long-Term Performance Period, the sum of the RONA
for each Fiscal Year in the Long-Term Performance Period divided by three.
v. "Stock" means the common stock of the Company.
w. "Subsidiary" means a subsidiary corporation of the Company
within the meaning of Section 425(f) of Code.
x. The terms "Maximum Annual EPS Growth Objective," "Maximum
Long-Term EPS Growth Objective," "Target Annual EPS Growth Objective," "Target
Long-Term EPS Growth Objective," "Threshold Annual EPS Growth Objective,"
"Threshold Long-Term EPS Growth Objective," "Maximum Annual RONA Objective,"
"Maximum Long-Term RONA Objective," "Target Annual RONA Objective," "Target
Long-Term RONA Objective," "Threshold Annual RONA Objective" and "Threshold
Long-Term RONA Objective" shall mean the respective objectives determined by the
Committee for each Participant pursuant to Section 7 of the Plan.
y. "Merger" means the merger of Payless Merger Corp., a
Missouri corporation and wholly-owned subsidiary of Payless ShoeSource, Inc.
(formerly Payless ShoeSource Holdings, Inc.), a Delaware corporation, with the
Company, pursuant to an
5
<PAGE> 6
Agreement and Plan of Merger among the Company, Payless Merger Corp. and Payless
ShoeSource, Inc. (formerly Payless ShoeSource Holdings, Inc.
Section 3. ELIGIBILITY. Management employees of the Company and its
Subsidiaries shall be eligible to participate in the Plan. The Committee may, in
its sole discretion, designate any such individual as a Participant for a
particular Fiscal Year and/or for a particular Long-Term Performance Period
before the end of such Fiscal Year and Long-Term Performance Period,
respectively. Designation of an individual as a Participant for any period shall
not require designation of such individual as a Participant in any other period,
and designation of one individual as a Participant shall not require designation
of any other individual as a Participant in such period or in any other period.
Section 4. ANNUAL AWARD.
a. Subject to the other provisions of the Plan, a Participant
for a Fiscal Year who is designated as such for an entire Fiscal Year shall be
entitled to an Annual Award for such Fiscal Year. Subject to the other
provisions of the Plan, a Participant for a Fiscal Year who is designated as
such for less than an entire Fiscal Year shall be entitled to a reduced Annual
Award for such Fiscal Year equal to the Annual Award for such Fiscal Year
multiplied by a fraction, the numerator of which shall be the number of complete
fiscal months between (i) the first day of the fiscal month in which occurs the
date as of which the Participant was so designated and (ii) the end of such
Fiscal Year and the denominator of which shall be twelve.
b. The Committee may change the percentages referred to in the
definitions of "Annual EPS Factor" and "Annual RONA Factor" for any Fiscal Year,
provided that the maximum Annual Award which may be paid under such different
percentage may not be greater than 45% of the Participant's Minimum Annual
Compensation for such Fiscal Year.
c. The percentages referred to in the definitions of "Annual
EPS Factor" and "Annual RONA Factor" may be adjusted by the Committee, in its
sole discretion, to provide that such percentages
i. with respect to the chairman of the Board and
chief executive officer of the Company may be up to two times the
percentages stated in such definitions (subject to a maximum of 37.5%
for each factor), and
ii. with respect to the president of the Company may
be up to one and two-thirds times the percentages stated in such
definitions (subject to a maximum of 31.25% for each factor).
6
<PAGE> 7
d. Notwithstanding any other provision of the Plan, the
maximum dollar amount of any Annual Award for any Participant for any Fiscal
Year shall not exceed $1,500,000.
SECTION 5. LONG-TERM AWARD.
a. Subject to the other provisions of the Plan, a Participant
for a Long-Term Performance Period who is designated as such for an entire
Long-Term Performance Period shall be entitled to a Long-Term Award for such
period. Subject to the other provisions of the Plan, a Participant for a
Long-Term Performance Period who is designated as such for less than an entire
Long-Term Performance Period shall be entitled to a reduced Long-Term Award for
such period equal to the Long-Term Award for such period multiplied by a
fraction, the numerator of which shall be the number of complete fiscal months
between (i) the first day of the fiscal month in which occurs the date as of
which the Participant was so designated and (ii) the end of such Long-Term
Performance Period and the denominator of which shall be thirty-six.
b. The Long-Term Award otherwise payable pursuant to Section
5(a) of the Plan for a Long-Term Performance Period shall be adjusted by
multiplying such Long-Term Award by a percentage equal to a fraction, the
numerator of which shall be the Market Value of the Stock in February of the
calendar year in which such Long-Term Performance Period ends and the
denominator of which shall be the Market Value of the Stock in February of the
calendar year in which such Long-Term Performance Period begins; provided,
however, that such percentage shall in no event be greater than one hundred
fifty percent nor less than seventy-five percent.
c. The percentages referred to in the definitions of
"Long-Term EPS Factor" and "Long-Term RONA Factor" may be adjusted by the
Committee, in its sole discretion, to provide that such percentages
i. with respect to the chairman of the Board and
chief executive officer of the Company may be up to two times the
percentages stated in such definitions (subject to a maximum of 37.5%
for each factor), and
ii. with respect to the president of the Company may
be up to one and two-thirds times the percentages stated in such
definitions (subject to a maximum of 31.25% for each factor).
d. Notwithstanding any other provision of the Plan, the
maximum dollar amount of any Long-Term Award for any Participant for any
Long-Term Performance Period shall not exceed $1,500,000.
7
<PAGE> 8
Section 6. ADJUSTMENTS.
a. Discretionary Adjustment of Awards. In the event that the
Committee determines, in its absolute discretion, that an Annual Award or a
Long-Term Award payable to a Participant in accordance with the other terms of
the Plan should be adjusted, upwards or downwards, based on all the facts and
circumstances known to the Committee at the time, then, the Committee may, in
its sole and absolute discretion, increase or decrease any such Annual Award or
Long-Term Award to such amount as it determines; provided, however, that the
Committee may not adjust upwards any Annual Award or Long-Term Award of any
Participant who is a "covered employee" (as defined in Section 162 (m) of the
Code and the regulations thereunder) with respect to the particular performance
period for which the Annual Award or Long-Term Award is being granted.
(b) Adjustment for Relative Rank. A Participant's Annual EPS
Factor, Annual RONA Factor, Long-Term EPS Factor and Long-Term RONA Factor shall
be adjusted in the following manner based upon the number of competitors in the
group of competitors used to determine the Company's Relative Performance Rank
and the Company's Relative Performance Rank therein:
Number of Competitor Companies (not including the Company)
<TABLE>
<CAPTION>
16 15 14 13 12 11 10 9 8 7 6 5 4
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Factor will be no less than 1st- 1st- 1st- 1st- 1st- 1st- 1st- 1st- 1st- 1st- 1st- 1st- 1st
"Target" if the Company's rank is: 4th 4th 4th 4th 3rd 3rd 3rd 3rd 2nd 2nd 2nd 2nd
Factor will be no less than 5th- 5th- 5th- 5th- 4th- 4th- 4th- 4th - 3rd- 3rd- 3rd 3rd 2nd
"Threshold" if the Company's rank 8th 8th 7th 7th 6th 6th 5th 5th 4th 4th
is:
Factor will be no higher than 14th- 13th- 12th- 11th- 11th- 10th- 9th- 8th- 8th- 7th- 6th- 5th- 5th
"Threshold" if the Company's rank 17th 16th 15th 14th 13th 12th 11th 10th 9th 8th 7th 6th
is:
</TABLE>
Section 7. ANNUAL AND LONG-TERM TARGETS. Threshold, target and maximum
annual and long-term objectives with respect to EPS Growth and with respect to
RONA shall be determined by the Committee as soon as practicable prior to the
commencement of each Fiscal Year and each Long-Term Performance Period for each
Participant or within the period permitted by applicable law. The Committee
shall cause the respective objectives for each Participant to be provided to
such Participant as soon thereafter as practicable. Such objectives shall remain
in effect for the entire Fiscal Year or Long-Term Performance Period, as
appropriate.
Section 8. PAYMENT OF AWARDS.
8
<PAGE> 9
a. Annual Awards for a Fiscal Year shall be payable in cash
within three months after the close of such Fiscal Year or as soon thereafter as
practicable.
b. Long-Term Awards for a Long-Term Performance Period shall
be payable in cash within three months after the close of such Long-Term
Performance Period or as soon thereafter as practicable.
c. A Participant may elect to defer all or a portion of an
award by making such election under the Deferred Compensation Plan with respect
to such award. Such election must be made not later than December 31 of the
calendar year preceding the commencement of the Fiscal Year or Long-Term
Performance Period, as appropriate.
d. The Company shall have the right to deduct any sums that
federal, state or local tax laws require to be withheld with respect to any
payment of awards.
e. Before any award is paid to a Participant who is a "covered
employee" (as defined in Section 162(m) of the Code and the regulations
thereunder), the Committee shall certify in writing that the material terms of
the Plan have been satisfied.
Section 9. TERMINATION OF EMPLOYMENT.
a. Death or Disability. In the event of either the death or
Disability of the Participant while employed (a "Section 9(a) Event"), the
Participant shall be entitled to the following:
i. An Annual Award with respect to the Fiscal Year in
which the Section 9(a) Event occurs equal to the Annual Award otherwise
payable (if any) for that Fiscal Year, prorated to the end of the
fiscal month in which such Section 9(a) Event occurs; and
ii. A Long-Term Award with respect to each Long-Term
Performance Period which includes the Fiscal Year of the Section 9(a)
Event; provided, however, that for purposes of this Section 9(a)(ii)
the Long-Term Award for any Long-Term Performance Period (1) shall be
determined at the end of the Fiscal Year in which the Section 9(a)
Event occurs, (2) shall be determined (and averages used in that
determination shall be calculated) based only on the Fiscal Year and
any preceding Fiscal Years otherwise included in the Long-Term
Performance Period and (3) shall be prorated to the end of the fiscal
month in which the Section 9(a) Event occurs.
9
<PAGE> 10
b. Retirement.
i. In the event of the Retirement of the Participant
with the written consent of the Company, such event shall be deemed to
be a Section 9(a) Event, and the Participant shall be entitled to an
Annual Award and to a Long-Term Award as provided in Section 9(a).
ii. In the event of the Retirement of the Participant
without the consent of the Company (a "Section 9(b)(ii) Event"), the
Participant shall be entitled to the following:
(1) An Annual Award with respect to the
Fiscal Year in which the Section 9(b)(ii) Event occurs equal
to the Annual Award otherwise payable (if any) for the Fiscal
Year, prorated to the end of the fiscal month in which the
Section 9(b)(ii) Event occurs; and
(2) No Long-Term Award following the Section
9(b)(ii) Event. The Participant shall forfeit any right or
entitlement to any award with respect to any Long-Term
Performance Period which has not been completed on the date of
the Section 9(b)(ii) Event. Any Long-Term Award for a period
which ended prior to the Section 9(b)(ii) Event shall remain
unaffected.
c. Termination of Employment.
i. In the event of the termination of employment of
the Participant not covered by Sections 9(a) or 9(b) above which occurs
at the end of the term of the Participant's then-current written
employment agreement (if any) with the Company or Subsidiary, or in the
event of such a termination of a Participant who has no current written
employment agreement with the Company or Subsidiary, such event shall
be deemed to be a Section 9(b)(ii) Event, and the Participant shall be
entitled to an Annual Award (but not to a Long-Term Award) as provided
in Section 9(b)(ii).
ii. In the event of the termination of employment of
the Participant not covered by Sections 9(a) or 9(b) above before the
end of the term of the Participant's then-current written employment
agreement (if any) with the Company or Subsidiary, with the written
consent of the Company (a "Section 9(c)(ii) Event"), the Participant
shall be entitled to the following:
(1) An Annual Award with respect to the
Fiscal Year in which the Section 9(c)(ii) Event occurs equal
to the actual award otherwise payable for the Fiscal Year (if
any); provided, however, that in
10
<PAGE> 11
the event that the term of the Participant's then-current
employment agreement is due to expire during that Fiscal Year,
then the Annual Award shall be prorated to the end of the
fiscal month in which such term is due to expire; and
(2) A Long-Term Award with respect to each
Long-Term Performance Period which includes the Fiscal Year of
the 9(c)(ii) Event equal to the Long-Term Award otherwise
payable with respect to each Long-Term Performance Period;
provided, however, that in the event that the term of the
Participant's then-current employment agreement (if any) with
the Company is otherwise due to expire during any such period,
then the Long-Term Award with respect to such period shall be
prorated to the end of the calendar month in which such term
is due to expire.
iii. In the event of the termination of employment of
the Participant not otherwise covered by this Section 9 before the end
of the term of the then-current written employment agreement (if any)
with the Company or Subsidiary, without the written consent of the
Company, the Participant shall not be entitled to any Annual Award or
to any Long-Term Award with respect to any Fiscal Year or Long-Term
Performance Period which has not been completed as of the date of such
termination of employment. The Participant shall forfeit any right or
interest in any award for any such Fiscal Year or Long-Term Performance
Period. Annual Awards and Long-Term Awards with respect to Fiscal Years
and Long-Term Performance Periods which ended prior to the date of such
termination of employment shall remain unaffected.
d. For purposes of this Section 9, the term "written consent
of the Company" shall refer to an express written consent of the Company, duly
executed by the Company, which, by its own terms, expressly refers to this
Section 9 of the Plan.
Section 10. CHANGES IN RESPONSIBILITIES. In the event that (i) the
duties of a Participant change and the Participant becomes eligible to
participate in another bonus plan of the Company, or (ii) the duties of an
employee who is a participant in another bonus plan of the Company change and
the employee is newly designated by the Committee as a Participant in this Plan,
then the maximum amount that such Participant would be entitled to receive under
the Plan shall be
a. the Annual Award determined in accordance with the
provisions of the Plan with respect to the entire Fiscal Year in which such
event occurred; and
11
<PAGE> 12
b. a Long-Term Award with respect to each Long-Term Performance
Period which has commenced at the time of the event, determined in accordance
with the provisions of the Plan, subject, in all events, to the Committee's
right to adjust such awards in accordance with and subject to the restrictions
set forth in Section 6(a), in its absolute discretion, which may be exercised in
such a way that the Committee deems fair and equitable based on the performance
of Participant while participating in the other bonus plan of the Company.
Section 11. RIGHTS OF PARTICIPANTS AND BENEFICIARIES.
a. Nothing contained in the Plan shall confer upon any
Participant any right to continue in the employ of the Company or constitute any
contract or agreement of employment or interfere in any way with the right of
the Company to terminate or change the conditions of employment.
b. The Company shall pay all amounts payable hereunder only to
the Participant or his or her personal representatives. In the event of the
death of a Participant, payments of all amounts otherwise due to the Participant
under the Plan shall be made to the Participant's beneficiary at the time of
death under the Company Paid Life Plan of Payless ShoeSource, Inc. or to such
other beneficiary as the Participant shall have designated, in writing, for
purposes of this Plan on a form provided by the Company.
c. Subject to the provisions of Section 11(d), rights to
payments under the Plan shall not be subject in any manner to anticipation,
alienation, sale, transfer, assignment, pledge, encumbrance, levy or charge, and
any attempt to do so shall be void; nor shall any such amounts be in any manner
liable for or subject to the debts, contracts, liabilities, engagements or torts
of the Participant or his or her beneficiaries.
d. Nothing in this Section 11 shall prohibit the personal
representatives of a Participant from designating that any amount that would
otherwise be distributed to the Participant's estate should be distributed in
accordance with the terms of the Participant's last will and testament or
pursuant to the laws of descent and distribution.
Section 12. UNFUNDED CHARACTER OF THE PLAN. The right of a Participant
to receive any Annual Award or Long-Term Award hereunder shall be an unsecured
claim against the general assets of the Company. Nothing in the Plan shall
require the Company to invest any amounts in Stock or in any other medium.
12
<PAGE> 13
Section 13. CHANGES IN CAPITAL STRUCTURE. In the event that there is
any change in the Stock through merger, consolidation, reorganization,
recapitalization, spin-off or otherwise, or if there shall be any dividend on
the Stock, payable in such Stock, or if there shall be a stock split or
combination of shares, then the fraction provided for in Section 5(b) of the
Plan shall be adjusted by the Committee as it deems desirable, in its absolute
discretion, to prevent dilution or enlargement of the rights of Participants.
The issuance of Stock for consideration and the issuance of Stock rights shall
not be considered a change in the Company's capital structure.
Section 14. AMENDMENT OR TERMINATION. The Committee may, by resolution,
amend or terminate the Plan at any time. Any amendment necessary to bring the
Plan into compliance with Section 162(m) of the Code and any regulations
thereunder shall not require shareowner approval and the effectiveness of such
amendment shall be as of the effective date of the provision in Section 162(m)
of the Code or regulations thereunder giving rise to the amendment. However, (i)
shareowner approval shall be sought for any changes to the Plan which would
require shareowner approval under Section 162(m) of the Code and (ii) except as
provided in the preceding sentence, the Committee may not, without the consent
of the Participant, amend or terminate the Plan in such a manner as to affect
adversely any Annual Award or Long-Term Award which would have been payable,
based on the terms of the Plan immediately prior to any such amendment or
termination, for any Fiscal Year or Long-Term Performance Period which has
already commenced as of the effective date of the amendment or termination.
13
<PAGE> 1
EXHIBIT 10.2
PAYLESS SHOESOURCE, INC.
EXECUTIVE INCENTIVE COMPENSATION PLAN
FOR ANNUAL AWARDS FOR
MERCHANDISING AND RETAIL OPERATIONS FUNCTIONS
Effective May 28, 1999
<PAGE> 2
PAYLESS SHOESOURCE, INC.
EXECUTIVE INCENTIVE COMPENSATION PLAN
FOR ANNUAL AWARDS FOR
MERCHANDISING AND RETAIL OPERATIONS FUNCTIONS
This document constitutes and sets forth the terms of the Payless
ShoeSource, Inc. Executive Incentive Compensation Plan for Annual Awards for
Merchandising and Retail Operations Functions.
Section 1. PURPOSES OF THE PLAN. The purposes of the Plan are (i) to
provide a means to attract, retain and motivate talented personnel and (ii) to
provide to participating management employees added incentive for high levels of
performance and for additional effort to improve the financial performance of
the Company.
Section 2. DEFINITIONS. Whenever used herein, the following terms shall
have the following meanings:
a. "Annual Award" means, for each Participant, for a Fiscal Year,
the product of the Participant's Minimum Annual Compensation for such
Fiscal Year multiplied by the aggregate of the applicable set of
factors listed in i to x below, as assigned to the Participant by the
Committee:
i. Category Gross Margin Rate Factor for such Fiscal Year
ii. Category Inventory Turnover Factor for such Fiscal Year
iii. Category Sales Factor for such Fiscal Year
iv. Company Gross Margin Rate Factor for such Fiscal Year
v. Company Sales Factor for such Fiscal Year
vi. Payless Gross Margin Rate Factor for such Fiscal Year
vii. Payless Inventory Turnover Factor for such Fiscal Year
viii. Payless Return on Sales Percentage Factor for such
Fiscal Year
ix. Payless Sales Factor for such Fiscal Year
x. PSSI Gross Margin Contribution Factor for such Fiscal
Year.
b. "Base Percent" means for each Participant and each applicable
Factor, the percentage set by the Committee.
c. "Category Gross Margin Rate Factor" means, for a Participant for
a Fiscal Year (i) zero percent, if actual Category Gross Margin Rate,
for the relevant category, for such Fiscal Year is less than the
Participant's Threshold Annual Category Gross Margin Rate Objective,
(ii) the Base Percent, if actual Category Gross Margin Rate, for the
relevant category, for such Fiscal Year equals or exceeds the
Participant's Threshold Annual Category Gross Margin Rate Objective
plus (iii) the Target Percent multiplied by a fraction (not less than
zero and not greater than one), the numerator of which is the actual
Category Gross Margin Rate, for the relevant category, for such Fiscal
Year less the Threshold Annual Category Gross Margin Rate Objective and
the denominator of which is the Participant's Maximum Annual Category
Gross Margin Rate Objective less the Threshold Annual Category Gross
Margin Rate Objective; provided, however, that the percentages referred
to in this Section 2(c) may be adjusted by the Committee as provided in
Section 4(b).
1
<PAGE> 3
d. "Category Inventory Turnover Factor" means, for a Participant for
a Fiscal Year (i) zero percent, if actual Category Inventory Turnover,
for the relevant category, for such Fiscal Year is less than the
Participant's Threshold Annual Category Inventory Turnover Objective,
(ii) the Base Percent, if actual Category Inventory Turnover, for the
relevant category, for such Fiscal Year equals or exceeds the
Participant's Threshold Annual Category Inventory Turnover Objective
plus (iii) the Target Percent multiplied by a fraction (not less than
zero and not greater than one), the numerator of which is the actual
Category Inventory Turnover, for the relevant category, for such Fiscal
Year less the Threshold Annual Category Inventory Turnover Objective
and the denominator of which is the Participant's Maximum Annual
Category Inventory Turnover Objective less the Threshold Annual
Category Inventory Turnover Objective; provided, however, that the
percentages referred to in this Section 2(d) may be adjusted by the
Committee as provided in Section 4(b).
e. "Category Sales Factor" means, for a Participant for a Fiscal
Year (i) zero percent, if actual Category Sales, for the relevant
category, for such Fiscal Year is less than the Participant's Threshold
Annual Category Sales Objective, (ii) the Base Percent, if actual
Category Sales, for the relevant category, for such Fiscal Year equals
or exceeds the Participant's Threshold Annual Category Sales Objective
plus (iii) the Target Percent multiplied by a fraction (not less than
zero and not greater than one), the numerator of which is the actual
Category Sales, for the relevant category, for such Fiscal Year less
the Threshold Annual Category Sales Objective and the denominator of
which is the Participant's Maximum Annual Category Sales Objective less
the Threshold Annual Category Sales Objective; provided, however, that
the percentages referred to in this Section 2(e) may be adjusted by the
Committee as provided in Section 4(b).
f. "Company Gross Margin Rate Factor" means, for a Participant for a
Fiscal Year (i) zero percent, if actual Company Gross Margin Rate, for
the relevant company, for such Fiscal Year is less than the
Participant's Threshold Annual Company Gross Margin Rate Objective,
(ii) the Base Percent, if actual Company Gross Margin Rate, for the
relevant company, for such Fiscal Year equals or exceeds the
Participant's Threshold Annual Company Gross Margin Rate Objective plus
(iii) the Target Percent multiplied by a fraction (not less than zero
and not greater than one), the numerator of which is the actual Company
Gross Margin Rate, for the relevant company, for such Fiscal Year less
the Threshold Annual Company Gross Margin Rate Objective and the
denominator of which is the Participant's Maximum Annual Company Gross
Margin Rate Objective less the Threshold Annual Company Gross Margin
Rate Objective; provided, however, that the percentages referred to in
this Section 2(f) may be adjusted by the Committee as provided in
Section 4(b).
g. "Company Sales Factor" means, for a Participant for a Fiscal Year
(i) zero percent, if actual Company Sales, for the relevant company,
for such Fiscal Year is less than the Participant's Threshold Annual
Company Sales Objective, (ii) the Base Percent, if actual Company Sales
, for the relevant company, for such Fiscal Year equals or exceeds the
Participant's Threshold Annual Company Sales Objective plus (iii) the
Target Percent multiplied by a fraction (not less than zero and not
greater than one), the numerator of which is the actual Company Sales,
for the relevant company, for such Fiscal Year less the Threshold
Annual Company Sales Objective and the denominator of which is the
Participant's Maximum Annual Company Sales Objective less the Threshold
Annual Company Sales Objective; provided, however, that the percentages
referred to in this Section 2(g) may be adjusted by the Committee as
provided in Section 4(b).
h. "Payless Gross Margin Rate Factor" means, for a Participant for a
Fiscal Year (i) zero percent, if actual Payless Gross Margin Rate for
such Fiscal Year is less than the Participant's Threshold Annual
Payless Gross Margin Rate Objective, (ii) the Base Percent, if actual
Payless Gross Margin Rate for such Fiscal Year equals or exceeds the
Participant's Threshold Annual Payless Gross Margin Rate plus (iii) the
Target Percent multiplied by a fraction (not less than zero and not
greater than one), the numerator of which is the actual Payless Gross
Margin Rate for such Fiscal Year less the Threshold Annual Payless
Gross Margin Rate Objective and the denominator of which is the
Participant's Maximum Annual Payless
2
<PAGE> 4
Gross Margin Rate Objective less the Threshold Annual Payless Gross
Margin Objective; provided, however, that the percentages referred to
in this Section 2(h) may be adjusted by the Committee as provided in
Section 4(b).
i."Payless Inventory Turnover Factor" means, for a Participant for a
Fiscal Year (i) zero percent, if actual Payless Inventory Turnover for
such Fiscal Year is less than the Participant's Threshold Annual
Payless Inventory Turnover Objective, (ii) the Base Percent, if actual
Payless Inventory Turnover for such Fiscal Year equals or exceeds the
Participant's Threshold Annual Payless Inventory Turnover Objective
plus (iii) the Target Percent multiplied by a fraction (not less than
zero and not greater than one), the numerator of which is the actual
Payless Inventory Turnover for such Fiscal Year less the Threshold
Annual Payless Inventory Turnover Objective and the denominator of
which is the Participant's Maximum Annual Payless Inventory Turnover
Objective less the Threshold Annual Payless Inventory Turnover
Objective; provided, however, that the percentages referred to in this
Section 2(i) may be adjusted by the Committee as provided in Section
4(b).
j. "Payless Return on Sales Percentage Factor" means, for a
Participant for a Fiscal Year (i) zero percent, if actual Payless
Return on Sales Percentage for such Fiscal Year is less than the
Participant's Threshold Annual Payless Return on Sales Percentage
Objective, (ii) the Base Percent, if actual Payless Return on Sales
Percentage for such Fiscal Year equals or exceeds the Participant's
Threshold Annual Payless Return on Sales Percentage Objective plus
(iii) the Target Percent multiplied by a fraction (not less than zero
and not greater than one), the numerator of which is the actual Payless
Return on Sales Percentage for such Fiscal Year less the Threshold
Annual Payless Return on Sales Percentage Objective and the denominator
of which is the Participant's Maximum Annual Payless Return on Sales
Percentage Objective less the Threshold Annual Payless Return on Sales
Percentage Objective; provided, however, that the percentages referred
to in this Section 2 (j) may be adjusted by the Committee as provided
in Section 4(b).
k. "Payless Sales Factor" means, for a Participant for a Fiscal Year
(i) zero percent, if actual Payless Sales for such Fiscal Year is less
than the Participant's Threshold Annual Payless Sales Objective, (ii)
the Base Percent, if actual Payless Sales for such Fiscal Year equals
or exceeds the Participant's Threshold Annual Payless Sales Objective
plus (iii) the Target Percent multiplied by a fraction (not less than
zero and not greater than one), the numerator of which is the actual
Payless Sales for such Fiscal Year less the Threshold Annual Payless
Sales Objective and the denominator of which is the Participant's
Maximum Annual Payless Sales Objective less the Threshold Annual
Payless Sales Objective; provided, however, that the percentages
referred to in this Section 2(k) may be adjusted by the Committee as
provided in Section 4(b).
l. "PSSI Gross Margin Contribution Factor" means, for a Participant
for a Fiscal Year (i) zero percent, if actual PSSI Gross Margin
Contribution for such Fiscal Year is less than the Participant's
Threshold Annual PSSI Gross Margin Contribution Objective, (ii) the
Base Percent, if actual PSSI Gross Margin Contribution for such Fiscal
Year equals or exceeds the Participant's Threshold Annual PSSI Gross
Margin Contribution Objective plus (iii) the Target Percent multiplied
by a fraction (not less than zero and not greater than one), the
numerator of which is the actual PSSI Gross Margin Contribution for
such Fiscal Year less the Threshold Annual PSSI Gross Margin
Contribution Objective and the denominator of which is the
Participant's Maximum Annual PSSI Gross Margin Contribution Objective
less the Threshold PSSI Gross Margin Contribution Objective; provided,
however, that the percentages referred to in this Section 2(l) may be
adjusted by the Committee as provided in Section 4(b).
m. "Board" means the Board of Directors of the Company.
n. "Committee" means the Compensation and Nominating Committee of
the Board; provided, however, the Compensation and Nominating Committee
of the Board may delegate its powers under this
3
<PAGE> 5
Plan, except for its powers specified in Section 12, to a management
committee ("Management Committee") comprised of the Chief Executive
Officer, the President and such other management personnel as the Chief
Executive Officer and the President may designate from time to time,
none of whom shall be eligible to participate in the Plan, in which
case the term "Committee" with respect to such Sections shall be deemed
to refer to the Management Committee.
o. "Company" means Payless ShoeSource, Inc., a Delaware corporation.
p. "Disability" means the inability of a Participant to perform the
normal duties of the Participant's regular occupation.
q. "Fiscal Year" means the fiscal year of the Company.
r. "Minimum Annual Compensation" means, for a Fiscal Year, (i) the
Participant's minimum annual salary rate as of November 1 of such
Fiscal Year or (ii) if a Participant is designated as such as of a date
after November 1 in such Fiscal Year, the Participant's minimum annual
salary rate as of such date; provided that if the Committee determines
that such compensation rate does not adequately reflect such
Participant's minimum annual salary rate for such Fiscal Year or if the
Fiscal Year does not contain a November 1 (as in a short year), then
the term shall mean the salary rate determined by the Committee in its
absolute discretion; provided further, that upon the written agreement
of the Participant and the Company, the term shall mean such lesser
amount as is agreed to by the parties.
s. "Target Percent" means for each Participant and each applicable
Factor, the maximum percentage of Minimum Annual Compensation that can
be earned with respect to each factor as set by the Committee less the
Base Percent.
t. "Participant" means an individual who has been designated to
participate in the Plan in accordance with Section 3 of the Plan.
u. "Plan" mean the Payless ShoeSource, Inc. Executive Incentive
Compensation Plan for Annual Awards for Merchandising and Retail
Operations Functions.
v. "Retirement" means, as to a Participant, retirement as that word
is defined in the Company's Profit Sharing Plan (or comparable plan of
a Subsidiary applicable to a Participant).
w. "Subsidiary" means a subsidiary corporation of the Company within
the meaning of Section 425(f) of the Internal Revenue Code.
x. The terms "Maximum Annual Category Gross Margin Rate Objective,"
"Threshold Annual Category Gross Margin Rate Objective," "Maximum
Annual Category Inventory Turnover Objective," "Threshold Annual
Category Inventory Turnover Objective," "Maximum Annual Category Sales
Objective," "Threshold Annual Category Sales Objective," "Maximum
Annual Company Gross Margin Rate Objective," "Threshold Annual Company
Gross Margin Rate Objective," "Maximum Annual Company Sales Objective,"
"Threshold Annual Company Sales Objective," "Maximum Annual Payless
Gross Margin Rate Objective," "Threshold Annual Payless Gross Margin
Rate Objective," "Maximum Annual Payless Inventory Turnover Objective,"
"Threshold Annual Payless Inventory Turnover Objective," "Maximum
Annual Payless Return on Sales Percentage Objective," "Threshold Annual
Payless Return on Sales Percentage Objective," "Maximum Annual Payless
Sales Objective," "Threshold Annual Payless Sales Objective," "Maximum
Annual PSSI Gross Margin Contribution Objective" and "Threshold Annual
PSSI Gross Margin Contribution Objective" shall mean the respective
objectives determined by the Committee for each Participant pursuant to
Section 6 of the Plan.
4
<PAGE> 6
y. The terms "Category Gross Margin Rate," "Category Inventory
Turnover," "Category Sales," "Company Gross Margin Rate," "Company
Sales," "Payless Gross Margin Rate," "Payless Inventory Turnover,"
"Payless Return on Sales Percentage," "Payless Sales" and "PSSI Gross
Margin Contribution" shall have the meaning ascribed to them in such
report(s) as the Company's management generally relies upon; provided,
however, that in the event any of these terms identify data which is
disclosed by the Company to the Securities Exchange Commission or the
New York Stock Exchange, the definition of such data, as disclosed,
shall be the meaning of the term.
Section 3. ELIGIBILITY. Management employees of the Company and its
Subsidiaries who are in the merchandising and retail operations functions of the
Company shall be eligible to participate in the Plan. The Committee may, in its
sole discretion, designate any such individual as a Participant for a particular
Fiscal Year before the end of such Fiscal Year. Designation of an individual as
a Participant for any period shall not require designation of such individual as
a Participant in any other period, and designation of one individual as a
Participant shall not require designation of any other individual as a
Participant in such period or in any other period.
Section 4. ANNUAL AWARD.
a. Subject to the other provisions of the Plan, a Participant for a
Fiscal Year who is designated as such for an entire Fiscal Year shall
be entitled to an Annual Award for such Fiscal Year. Subject to the
other provisions of the Plan, a Participant for a Fiscal Year who is
designated as such for less than an entire Fiscal Year shall be
entitled to a reduced Annual Award for such Fiscal Year equal to the
Annual Award for such Fiscal Year multiplied by a fraction, the
numerator of which shall be the number of complete fiscal months
between (i) the first day of the fiscal month in which occurs the date
as of which the Participant was so designated and (ii) the end of such
Fiscal Year and the denominator of which shall be twelve.
b. The Committee may change the percentages referred to in the
definitions of "Category Gross Margin Rate Factor," "Category Inventory
Turnover Factor," "Category Sales Factor," "Company Gross Margin Rate
Factor," "Company Sales Factor," "Payless Gross Margin Rate Factor,"
"Payless Inventory Turnover Factor," "Payless Return on Sales
Percentage Factor," "Payless Sales Factor" and "PSSI Gross Margin
Contribution Factor" for any Fiscal Year, provided that the maximum
Annual Award which may be paid under such different percentage may not
be greater than 45 percent of the relevant Participant's Minimum Annual
Compensation for such Fiscal Year.
Section 5. DISCRETIONARY ADJUSTMENT OF AWARDS.In the event that the
Committee determines, in its absolute discretion, that an Annual Award payable
to a Participant in accordance with the other terms of the Plan should be
adjusted, upwards or downwards, based on all the facts and circumstances known
to the Committee at the time, then, at any time prior to the closing of the
Company's books for a Fiscal Year, the Committee may, in its sole and absolute
discretion, increase or decrease any such Annual Award (for such Fiscal Year) to
such amount as it determines.
Section 6. ANNUAL TARGETS. For each Fiscal Year, (i) threshold, target and
maximum annual objectives, (ii) the Base Percent, and (iii) the Target Percent
with respect to Category Gross Margin Rate, Category Inventory Turnover,
Category Sales, Company Gross Margin Rate, Company Sales, Payless Gross Margin
Rate, Payless Inventory Turnover, Payless Return on Sales Percentage, Payless
Sales and PSSI Gross Margin Contribution, as applicable, shall be determined by
the Committee as soon as practicable after the commencement of such Fiscal Year
for each Participant. The Committee shall cause the respective objectives for
each Participant to be provided to such Participant as soon thereafter as
practicable. Such objectives shall remain in effect for the entire Fiscal Year,
unless the Committee determines, in its absolute discretion, that such
objectives should be modified.
5
<PAGE> 7
Section 7. PAYMENT OF AWARDS.
a. Annual Awards for a Fiscal Year shall be payable in cash within
three months after the close of such Fiscal Year or as soon thereafter
as practicable.
b. A Participant may elect to defer all or a portion of an award
under the Payless ShoeSource, Inc. Deferred Compensation Plan.
c. The Company shall have the right to deduct any sums that federal,
state or local tax laws require to be withheld with respect to any
payment of awards.
Section 8. TERMINATION OF EMPLOYMENT.
a. Death, Disability or Retirement. In the event of death or
disability of the Participant while employed and Retirement of the
Participant (each a "Section 8(a) Event"), the Participant shall be
entitled to an Annual Award with respect to the Fiscal Year in which the
Section 8(a) Event occurs equal to the Annual Award otherwise payable
(if any) for that Fiscal Year, prorated to the end of the fiscal month
in which such Section 8(a) Event occurs.
b. Termination of Employment other than Section 8(a).
i. In the event of the termination of employment of the
Participant not covered by Section 8(a) above which occurs at
the end of the term of the Participant's then-current written
employment agreement (if any) with the Company or Subsidiary,
or in the event of such a termination of a Participant who has
no current written employment agreement with the Company or
Subsidiary, such event shall be deemed to be a Section 8(a)
Event, and the Participant shall be entitled to an Annual
Award as provided in Section 8(a).
ii. In the event of the termination of employment of the
Participant not covered by Section 8(a) above before the end of
the term of the Participant's then-current written employment
agreement (if any) with the Company or Subsidiary, with the
written consent of the Company (a "Section 8(b)(ii) Event"), the
Participant shall be entitled to an Annual Award with respect to
the Fiscal Year in which the Section 8(b)(ii) Event occurs equal
to the actual award otherwise payable for the Fiscal Year (if
any); provided, however, that in the event that the term of the
Participant's then-current employment agreement is due to expire
during that Fiscal Year, then the Annual Award shall be prorated
to the end of the fiscal month in which such term is due to
expire.
iii. In the event of the termination of employment of the
Participant not otherwise covered by this Section 8 before the
end of the term of the Participant's then-current written
employment agreement (if any) with the Company or Subsidiary,
without the written consent of the Company, the Participant shall
not be entitled to any Annual Award with respect to any Fiscal
Year which has not been completed as of the date of such
termination of employment. The Participant shall forfeit any
right or interest in any award for any such Fiscal Year. Annual
Awards with respect to Fiscal Years which ended prior to the date
of such termination of employment shall remain unaffected.
c. For purposes of this Section 8, the term "written consent of the
Company" shall refer to an express written consent of the Company, duly
executed by the Company, which, by its own terms, expressly refers to
this Section 8 of the Plan.
6
<PAGE> 8
Section 9. TRANSFERS AND CHANGES IN RESPONSIBILITIES.
a. In the event that (i) a Participant's responsibilities are
changed or that a Participant is transferred from the Participant's
then-current operating division of the Company or Subsidiary to another
operating division of the Company or Subsidiary, and (ii) the
Participant remains employed by the Company or by a Subsidiary following
such change or transfer (a "Section 9 Event") and the Participant and
the Company either agree that the Section 9 Event is of such a character
that the Participant's participation in the Plan should cease as of the
date of such Section 9 Event or fail to agree on whether such Section 9
Event is of such a character, then any Annual Award to which the
Participant would otherwise be entitled under the terms of the Plan
shall be prorated to the date of such event.
b. In the event that a Section 9 Event occurs and the Participant
and the Company agree that such change or transfer is of such a
character that the Participant's participation should not cease as of
the date of such change or transfer, then any Annual Award to which the
Participant would be entitled under the terms of the Plan:
i. with respect to the portion of the Fiscal Year before such
event, shall be the pro rata portion of the Annual Award, if any,
otherwise payable to such Participant based on the Participant's
objectives and on the performance of the division, Subsidiary or
operation for which the Participant was employed before such
event, and
ii. with respect to the portion of the Fiscal Year after such
event, shall be the pro rata portion of the Annual Award, if any,
otherwise payable to such Participant based on the Participant's
objectives and on the performance of the division, Subsidiary or
operation for which the Participant was employed after such
event.
In the event that more than one such Section 9 Event shall occur in any one
Fiscal Year for any Participant, the Committee shall adjust any Annual Award in
such manner as the Committee shall determine, in its absolute discretion, to
reflect the purposes and intent of the Plan. Moreover, the Committee has the
right to adjust all awards pursuant to Section 5, in its absolute discretion,
which may be exercised in such a manner as the Committee deems fair and
equitable, based on the performance of the Participant while participating in
any other bonus or compensation plan of the Company.
Section 10. RIGHTS OF PARTICIPANTS AND BENEFICIARIES.
a. Nothing contained in the Plan shall confer upon any Participant
any right to continue in the employ of the Company or constitute any
contract or agreement of employment or interfere in any way with the
right of the Company to terminate or change the conditions of
employment.
b. So long as the Participant is alive, the Company shall pay all
amounts payable hereunder only to the Participant or his or her personal
representatives. In the event of the death of a Participant, payments of
all amounts otherwise due to the Participant under the Plan shall be
made to the Participant's beneficiary at the time of death under the
Company Paid Life Insurance Plan of Payless ShoeSource, Inc., if
applicable, or to such other beneficiary as the Participant shall have
designated, in writing, for purposes of this Plan on a form provided by
the Company or, in the absence of a designation of beneficiary, to the
Participant's estate.
c. Subject to the provisions of Section 10(d), rights to payments
under the Plan shall not be subject in any manner to anticipation,
alienation, sale, transfer, assignment, pledge, encumbrance, levy or
charge, and any attempt to do so shall be void; nor shall any such
amounts be in any manner liable for or subject to the debts, contracts,
liabilities, engagements or torts of the Participant or his or her
beneficiaries.
7
<PAGE> 9
d. Nothing in this Section 10 shall prohibit the personal
representatives of a Participant from designating that any amount that
would otherwise be distributed to the Participant's estate should be
distributed in accordance with the terms of the Participant's last will
and testament or pursuant to the laws of descent and distribution.
Section 11. UNFUNDED CHARACTER OF THE PLAN. The right of a Participant to
receive any Annual Award hereunder shall be an unsecured claim against the
general assets of the Company. Nothing in the Plan shall require the Company to
invest any amounts in the common stock of the Company or in any other medium.
Section 12. AMENDMENT OR TERMINATION. The Committee may, by resolution, amend
or terminate the Plan at any time provided, however, the Committee may not,
without the consent of the Participant, amend or terminate the Plan in such a
manner as to affect adversely any Annual Award which would have been payable,
based on the terms of the Plan immediately prior to any such amendment or
termination, for any Fiscal Year which has already commenced as of the effective
date of the amendment or termination.
Section 13. INTERPRETATION. Any interpretation of or dispute regarding the
meaning of any term hereof shall be as determined or resolved, as appropriate,
by the Committee in its absolute discretion.
8
<PAGE> 1
EXHIBIT 11
PAYLESS SHOESOURCE, INC.
COMPUTATION OF NET EARNINGS PER SHARE
<TABLE>
<CAPTION>
13 Weeks Ended 26 Weeks Ended
July 31, August 1, July 31, August 1,
(Thousands, except per share) 1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Basic Computation:
Net earnings $ 51,331 $ 49,301 $ 86,614 $ 87,059
Weighted average common
shares outstanding 31,605 36,495 31,923 36,901
-------- -------- -------- --------
Basic earnings per share $ 1.62 $ 1.35 $ 2.71 $ 2.36
======== ======== ======== ========
Diluted Computation:
Net earnings $ 51,331 $ 49,301 $ 86,614 $ 87,059
Weighted average common
shares outstanding 31,605 36,495 31,923 36,901
Net effect of dilutive stock
options based on the treasury
stock method 241 460 201 462
-------- -------- -------- --------
Outstanding shares for diluted
earnings per share 31,846 36,955 32,124 37,363
======== ======== ======== ========
Diluted earnings per share $ 1.61 $ 1.33 $ 2.70 $ 2.33
======== ======== ======== ========
</TABLE>
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.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
EXHIBIT 27 -- THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM PAYLESS SHOESOURCE, INC. CONDENSED CONSOLIDATED STATEMENT OF EARNINGS FOR
THE 26 WEEKS ENDED JULY 31, 1999, AND CONDENSED CONSOLIDATED BALANCE SHEET AS OF
JULY 31, 1999, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<CIK> 0001060232
<NAME> Payless Shoesource, Inc.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-29-2000
<PERIOD-START> JAN-31-1999
<PERIOD-END> JUL-31-1999
<CASH> 205,300<F1>
<SECURITIES> 0<F2>
<RECEIVABLES> 8,200<F3>
<ALLOWANCES> 0<F3>
<INVENTORY> 348,200
<CURRENT-ASSETS> 586,900
<PP&E> 940,600
<DEPRECIATION> 449,300
<TOTAL-ASSETS> 1,113,300
<CURRENT-LIABILITIES> 209,700
<BONDS> 126,700<F4>
0
0
<COMMON> 300
<OTHER-SE> 727,600<F5>
<TOTAL-LIABILITY-AND-EQUITY> 1,113,300
<SALES> 1,456,800<F6>
<TOTAL-REVENUES> 1,456,800
<CGS> 982,800
<TOTAL-COSTS> 982,800
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 200
<INCOME-PRETAX> 144,100
<INCOME-TAX> 57,500
<INCOME-CONTINUING> 86,600
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 86,600
<EPS-BASIC> 2.71<F7>
<EPS-DILUTED> 2.70<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 plus Long-Term Debt.
<F5>Reflects Retained Earnings and Additional Paid In Capital.
<F6>Reflects net sales.
<F7>Expressed in dollars.
</FN>
</TABLE>
