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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark one)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended January 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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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 SOUTH EAST SIXTH STREET, TOPEKA, KANSAS 66607-2207
(Address of principal executive offices) (Zip Code)
(785) 233-5171
(Registrant's telephone number,
including area code)
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
Common Stock, par value $.01 per share New York Stock Exchange
Preferred stock purchase rights New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of Registrant's Common Stock held by non-affiliates
based on the closing price of $46.625 on April 1, 1999 was $ 1,466,086,385 (The
New York Stock Exchange was closed on April 2, 1999).
The Registrant had 32,065,259 shares of $.01 par value Common Stock issued and
outstanding as of April 2, 1999.
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DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of Registrant's Annual Report to Shareowners for the fiscal
year ended January 30, 1999 (the "1998 Annual Report") are incorporated
into Part II, as described herein.
2. Portions of Registrant's 1999 Proxy Statement for the Annual Meeting to
be held on May 28, 1999, are incorporated into Part III, as described
herein. Such proxy statement will be filed within 120 days after the
end of the fiscal year covered by this annual report on Form 10-K.
This report contains, and from time to time the Registrant may publish,
forward-looking statements relating to such matters as anticipated financial
performance, business prospects, technological developments, new products,
future store openings, possible strategic alternatives and similar matters.
Also, statements including the words "expects," "anticipates," "intends,"
"plans," "believes," "seeks," or variations of such words and similar
expressions are forwarding-looking statements. The Registrant 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 Registrant'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
implementation of new technologies; Year 2000 matters, the financial condition
of the suppliers and manufacturers from whom the Registrant sources its
merchandise; changes in existing or potential duties, tariffs or quotas;
availability of suitable store locations and appropriate terms; the ability to
hire and train associates; and general economic, business and social conditions.
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Payless ShoeSource, Inc.
Form 10-K Annual Report
For the fiscal year ended January 30, 1999
PART I
Item 1. Business
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
PART II
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
PART III
Item 10. Directors and Executive Officers of the Company
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management
Item 13. Certain Relationships and Related Transactions
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
Signatures
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PART I
ITEM 1. BUSINESS
GENERAL
Payless ShoeSource, Inc., a Delaware corporation, together with its
subsidiaries, ("Payless," the "Company" or the "Registrant") is the largest
family footwear retailer in the United States with more than $2.62 billion in
sales in the fiscal year ended January 30, 1999 ("1998"). The Company sold
approximately 204 million pairs of shoes in 1998, and served more than 147
million customers.
As of January 30, 1999, the Company operated 4,357 Payless ShoeSource stores in
50 states, the District of Columbia, Puerto Rico, the U.S. Virgin Islands, Guam,
Saipan, and Canada. Payless ShoeSource stores feature fashionable, quality
footwear for men, women and children, including athletic, casual, dress,
sandals, work boots and slippers. In addition, the Company operated 213 Parade
of Shoes stores in 16 states. Parade of Shoes offers fashionable women's
footwear and accessories at moderate prices.
DEVELOPMENTS
During 1998, the Company opened 228 new Payless ShoeSource stores, including
stores in Canada, Guam and Saipan, and closed 127 underperforming stores. During
1998, Parade of Shoes opened 55 stores and closed 17 underperforming stores.
In January 1997, the Board of Directors of the Company authorized the repurchase
of up to $150 million of outstanding Common Stock of Payless in open-market
transactions. In September 1997, the Company completed this $150 million
repurchase (having repurchased approximately 2.8 million shares). In September
1997, the Board of Directors of the Company authorized a second repurchase of up
to $150 million of outstanding Common Stock in open-market transactions, subject
to market conditions and receipt of a favorable ruling from the Internal Revenue
Service (IRS). The Company received the favorable IRS ruling in March 1998. In
July 1998, the Company completed this $150 million repurchase (having purchased
approximately 2.2 million shares). In August 1998, the Board of Directors of the
Company authorized a third repurchase of up to $150 million of outstanding
Common Stock of Payless in open-market transactions. In October 1998, the third
$150 million repurchase was increased by the Board of Directors, on the same
terms, to $500 million. Between August 1, 1998 and October 31, 1998 the Company
repurchased 1.5 million shares. Between November 1, 1998 and January 30, 1999,
the Company repurchased 1.2 million shares. The aggregate cost of the 2.7
million repurchased shares was $122.9 million. The Company expects that any
repurchased shares will be held in treasury for general corporate purposes.
HISTORY
The Company was founded in Topeka, Kansas in 1956 with a strategy of selling low
cost, high quality family footwear on a self-service basis. In 1962, Volume
Distributors, as the Company was known at the time, became a public company. In
1979, the Company (then called Volume Shoe Corporation) was acquired by The May
Department Stores Company of St. Louis, Missouri ("May"). The Company changed
its name to Payless ShoeSource, Inc. in 1991. On May 4, 1996, Payless became an
independent public company incorporated in Missouri as a result of its spin-off
from May. In June 1998, Payless was reorganized into a holding company structure
with the retail operations centralized in Payless ShoeSource, Inc., a Missouri
corporation, the indirect, wholly-owned subsidiary of Payless
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ShoeSource, Inc., a Delaware corporation. The Company is listed for trading on
the New York Stock Exchange under the symbol "PSS."
PAYLESS SHOESOURCE STORES
The average size of the Company's Payless ShoeSource stores is approximately
3,400 square feet. Each store carries an average of 8,143 pairs of shoes
selected from approximately 600 styles offered throughout the Payless ShoeSource
chain. Payless ShoeSource stores operate in a variety of real estate formats,
including shopping malls, central business districts, free-standing buildings
and strip centers. Of the 4,357 Payless locations open at the end of 1998, 730
incorporated a "Payless Kids" area which consists of approximately an additional
1,000 square feet of selling space devoted to an expanded assortment of
children's shoes and seven were exclusively "Payless Kids" stores. The stores
that include a "Payless Kids" area and those that are dedicated "Payless Kids"
stores are located throughout the country, have wider aisles, children-friendly
seating and an entertainment center for children. Payless intends to phase out
the seven exclusively "Payless Kids" stores.
The Company's Payless ShoeSource stores operate in rural, suburban and urban
environments. The 11 states with the largest concentration of the Company's
Payless ShoeSource stores are identified below (along with the total number of
Payless ShoeSource stores):
NO. OF PAYLESS
STATE SHOESOURCE STORES
----- -----------------
California 652
Texas 376
Florida 276
New York 270
Pennsylvania 196
Illinois 195
Ohio 179
Michigan 153
New Jersey 122
Washington 102
Massachusetts 102
Other (including
non-U.S. stores) 1,734
-----
Total 4,357
The Company's Payless ShoeSource stores are highly automated, each with an
electronic point of sale register and a back office computer which not only
records transactions from the register, but also serves many other store
supporting functions including price look-up, accumulation of associate hours
worked and communications with the Company's headquarters in Topeka, Kansas.
Store associates receive regular weekly communications from the Company's
headquarters describing promotional and display requirements.
The Company's Payless ShoeSource operations are directed centrally by a senior
officer and a small support staff. In January 1999, the domestic Payless retail
operation was reorganized and consolidated from six divisions to four divisions.
The division headquarters are located in Atlanta, Baltimore, Chicago and Dallas.
Divisions are directed by a Division Senior Vice President, five operations
directors and a small support staff.
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Each Payless ShoeSource store has a manager and approximately five associates.
The stores are organized into districts. District managers, to whom the store
managers report, themselves report to the division offices and have full
responsibility for the stores in their district. Division offices also have loss
prevention and inventory control functions. Human resources, merchandising
support and other more general support services, are provided from the Company's
headquarters.
PARADE OF SHOES STORES
The Company's Parade division, which was acquired in March 1997, from J. Baker,
Inc., of Canton, Massachusetts, emphasizes the retail sale of fashionable,
quality, primarily leather, women's shoes. As of January 30, 1999, the Company
operated 213 Parade stores as a separate division supported by Payless sourcing,
distribution, information systems, real estate, human resources and financial
operations.
Major markets include Boston, New York City, Chicago, Philadelphia and
Washington, D.C. The average size of a Parade store is approximately 2,300
square feet. These stores operate in a variety of real estate formats including
shopping malls, central business districts and strip centers.
EMPLOYEES
During 1998, the Company's average number of employees was approximately 26,000,
including approximately 15,000 full-time associates and 11,000 part-time
associates. Approximately 540 of the Company's distribution center general
warehouse associates are covered by collective bargaining agreements. Management
believes it has a good relationship with all employees.
The Company is led by a team of senior management executives who have an average
of 17 years of retail industry experience, including an average of 12 years with
the Company and May.
PRODUCTS
The Company's Payless ShoeSource stores offer a broad assortment of fashionable,
quality footwear for men, women and children, including athletic, casual, dress,
sandals, work boots and slippers. Shoes are constructed with leather, canvas and
man-made materials. Styling is updated regularly in an effort to remain current
with proven fashion trends. During 1998, shoes sold at the Company's Payless
ShoeSource stores sold at an average retail price of $11.88/pair. In addition to
shoes, Payless ShoeSource stores offer accessories, including handbags, shoe
polish and hosiery. Parade stores are self-service and feature fashionable
women's dress, casual and athletic footwear priced in the $20 to $40/pair range.
The Company's merchandising effort is led by the President and three general
merchandise managers with an average of 19 years of retail experience. They
direct teams of buyers, planners and distributors that interact with agents and
factory representatives to design, select, produce, inspect and distribute
footwear and accessories to Payless ShoeSource and Parade stores.
CUSTOMERS
The Company sells footwear to women, men and children of all age groups. The
Company has significant market penetration with its target customers: women
between the ages of 18 and 64. The Company believes that more than 45% of its
target customers, regardless of household income, purchased at least one pair of
shoes from the Company last year. In 1998, the Company sold more pairs of
children's shoes than any other U.S. footwear retailer.
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SEASONALITY
The retail footwear market is characterized by four high volume seasons: Easter,
early Summer, back-to-school and Winter holiday. The Company must increase
inventory levels during these periods to support the increased demand for
seasonal styles. Unseasonable weather patterns may affect planned sales of
seasonal products such as sandals and boots.
PURCHASING
The Company, both on its own account and through its indirect, wholly-owned
subsidiary, Payless ShoeSource Merchandising, Inc., utilizes a network of agents
and factories in the United States and 10 foreign countries to obtain its
products. These products are manufactured to meet the Company's specifications
and standards. The strength of the Company's relationships with agents and
factories, some dating back over 40 years, has allowed the Company to revise its
sourcing strategies to reflect changing political and economic environments. In
the past, many of the Company's agents and factory owners have played
significant roles in developing production in new factories and in new countries
without compromising production capacity or product quality. Factories in the
People's Republic of China are a source of approximately 84% of the Company's
merchandise. There can be no assurance that a change in political climate with
or in China would not have a material adverse effect on the Company. The Company
does not purchase "seconds" or "overruns" and does not own any manufacturing
facilities. The Company closely integrates its merchandise purchasing
requirements with various manufacturers through its sourcing organization which
has offices in Kansas, Taiwan, China and Brazil. Management believes it has good
relationships with the entities from which it sources, although there can be no
assurance that such relationships will remain good or that such entities believe
that such relationships are good.
Worldwide, approximately sixty percent of the Company's merchandise on an at
cost basis is acquired through a network of third-party agents. Payless
ShoeSource International, Inc., the Company's indirect subsidiary in Taipei,
Taiwan, arranges directly with factories for the design, selection, production
management, inspection and distribution of approximately one-third of the shoes
acquired for the Company.
Risks inherent in foreign manufacturing (i.e., manufacturing outside the United
States) include economic and political instability, transportation delays and
interruptions, restrictive actions by foreign governments, the laws and policies
of the United States affecting importation of goods, including duties, quotas
and taxes, trade and foreign tax laws and fluctuations in currency exchange
rates. While the Company has not historically experienced material adverse
effects resulting from the occurrence of these types of risks, there is no
assurance that in the future the occurrence of these risks will not result in
increased costs and delays or disruption in product deliveries that could cause
loss of revenue and damage to customer relationships and have a material adverse
effect on the Company.
China currently enjoys "normal trade relations" ("NTR") status under United
States tariff laws. NTR status provides the most favorable level of United
States import duty rates. China's NTR status is annually reviewed by the United
States Congress. Extension of this status is subject to uncertainty every year.
The loss of NTR status for China would likely result in substantially increased
costs to the Company in the purchase of merchandise from China. The Company
believes, however, that its competitors in the footwear industry would be
similarly affected.
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QUALITY ASSURANCE
The Company's quality assurance organization sets standards and specifications
for product manufacture, performance and appearance. It communicates those
standards and specifications through its copyrighted quality assurance manual.
The Company stands behind the quality of the shoes it sells to its customers by
permitting return of purchased merchandise with proper documentation evidencing
purchase.
The quality assurance organization also provides technical design support for
the Company's direct purchasing function. It is responsible for review and
approval of agent and factory technical design, for worldwide laboratory testing
of materials and components, and for performing in-factory product inspections
to ensure that materials and factory production techniques are consistent with
Company specifications. The Company locates its field inspection personnel close
to the factories and freight consolidation facilities it uses throughout the
world.
PRODUCTION MANAGEMENT
The production management organization manages an ongoing process to qualify and
approve new factories, while continually assessing existing factory service and
quality of performance. New factories must meet specified quality standards for
shoe production and minimum capacity requirements. They must also agree to the
Company's production control processes and certify that neither they nor their
suppliers use forced or child labor. Factory performance must continually
improve or the factory runs the risk of being removed from the list of approved
factories. The production management organization utilizes a unique, internally
developed production control process by which the Company is electronically
linked to the factories and agents. This process is designed to ensure on-time
deliveries of merchandise with minimum lead time and without unnecessary costs.
The Company believes that maintaining strong factory relationships, improving
key factory performance factors and improving factory profitability is critical
to long-term sourcing stability. Its manufacturing services group, based in
Asia, provides direction and leadership to key factories in the areas of overall
productivity improvement and lead time reduction.
MERCHANDISE DISTRIBUTION
The Company believes that its distribution system provides it with a competitive
advantage. The Company's merchandise distribution teams are able to track shoes
by the pair from order placement through sale to the customer by the use of
perpetual inventory, product planning and retail price management systems. These
systems are maintained by experienced information systems personnel and are
enhanced regularly to improve the product distribution process. Distribution
analysts review sales and inventory by size and style to maintain availability
of product within the Company's stores.
The Company, through its indirect, wholly-owned subsidiary, Payless ShoeSource
Distribution, Inc., operates a single 795,000 square foot distribution center,
including office space, in Topeka, Kansas, capable of replenishing in-store
product levels by style, color and size. This facility, which currently handles
approximately 65 percent of the Company's distribution needs, operates seven
days-a-week. Management believes this facility is one of the most
highly-automated and cost-efficient distribution facilities in the footwear
industry. The remaining 35 percent of the Company's distribution needs are
handled by a third party facility in Los Angeles, California. The Company
believes its distribution center system has sufficient capacity to support more
than 5,000 stores. Stores generally receive new merchandise at least once a
week, in an effort to maintain a constant flow of new and replenished
merchandise.
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INDUSTRY SEGMENTS
The retail footwear industry can be divided into high, moderate and value-priced
segments. The high priced segment is controlled by department stores. The
moderate priced segment, which includes specialty shoe chains, mass
merchandisers, and junior department stores, has no single dominant competitor.
The value-priced segment is dominated by the Company and national discount
mass-merchandisers.
Based on industry data, the United States footwear market is estimated to be
$34.7 billion/year comprising over one billion pairs of footwear, and has
remained relatively constant in each respect over the past several years.
Industry data suggests that the quality offered in the value-priced segment has
improved significantly over the last 15 years. This improvement appears to be
the primary cause of the near doubling of this segment's share of the market
over the past 12 years based on dollar volume.
The Company considers itself part of the value-priced segment of the footwear
industry. In 1998, the Company's sales accounted for approximately 6.8 percent
of the total sales of the estimated $34.7 billion United States footwear market;
this percentage has grown over the past four decades.
COMPETITION
The Company operates in a highly competitive retail market competing primarily
with national and regional discount mass-merchandisers, as well as with other
self-service discount shoe stores and off-price outlet stores. Competition is
based on product selection, quality and availability, price, store location,
customer service and promotional activities. The Company believes that it has a
leadership position in the footwear market.
INTELLECTUAL PROPERTY
The Company, through its wholly-owned subsidiaries, owns certain copyrights,
trademarks and patents which it uses in its business and which it regards as
valuable assets. The trademarks include Payless(R), Payless ShoeSource(R),
Payless Kids(R), and Parade of Shoes(R). The Company owns all rights to the
yellow and orange logo used in its Payless ShoeSource signs and advertising. In
the United States, the Company has registered over 200 key marks and owns over
50 common law marks under which it markets private label merchandise in its
Payless ShoeSource stores. In addition, the Company owns over 50 registered and
common law marks under which it markets private label merchandise in its Parade
stores. The Company also owns registrations for Payless ShoeSource in over 50
foreign countries. All of the Company's registered trademarks may be renewed
indefinitely.
MARKETING
The Company's marketing efforts are multi-dimensional, including nationally
broadcast television advertising, newspaper and mail inserts in support of major
promotional periods. In addition to media support, the Company utilizes in-store
promotional materials, including posters, signs and point of sale items. Also,
the Company advertises its business through promotional funds, media funds,
merchants' associations and similar efforts offered by various landlords from
whom the Company leases its stores.
The Company's marketing staff is augmented by a full-service advertising concern
that provides creative services, media purchase and consumer research.
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ENVIRONMENT
Compliance with federal, state and local statutes, rules, ordinance, laws and
other provisions which have been enacted or adopted regulating the discharge of
materials into the environment, or otherwise relating to the protection of the
environment, has not had, and is not expected to have, a material effect on
capital expenditures, earnings or the competitive position of the Company.
FOREIGN OPERATIONS
In late 1997, the Company, through its indirect, wholly-owned subsidiary, PSS
Canada, Inc., opened its first store in Canada. By the end of fiscal year 1998,
the Company had opened 86 Canadian stores in major metropolitan areas.
DIRECTORS OF THE COMPANY
Listed below are the names and present principal occupations or, if retired,
most recent occupations of the Company's Directors:
<TABLE>
<CAPTION>
NAME PRINCIPAL OCCUPATION
---- --------------------
<S> <C>
Steven J. Douglass Chairman of the Board and Chief Executive Officer of the
Company
Richard A. Jolosky Vice Chairman of the Company
Daniel Boggan Jr. Senior Vice President of the National Collegiate Athletic
Association
Howard R. Fricke Chairman of the Board and Chief Executive Officer of The
Security Benefit Group of Companies
Thomas A. Hays Retired, formerly Deputy Chairman of The May Department
Stores Company
Ken C. Hicks President of the Company
Mylle B. Mangum Senior Vice President of CWT Holdings, Inc. (f/k/a Carlson
Wagonlit Travel)
Michael E. Murphy Retired, Formerly Vice Chairman and Chief Administrative
Officer of Sara Lee Corporation
Robert L. Stark Retired, Formerly Executive Vice President Hallmark Cards,
Inc.
</TABLE>
EXECUTIVE OFFICERS OF THE COMPANY
Listed below are the names and ages of the executive officers of the Company as
of May 28,1999 and offices held by them with the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION AND TITLE
---- --- ------------------
<S> <C> <C>
Steven J. Douglass 49 Chairman of the Board and Chief Executive
Officer
Richard A. Jolosky 64 Vice Chairman
Ken C. Hicks 46 President
Duane L. Cantrell 43 Executive Vice President - Retail Operations
Bryan P. Collins 45 Senior Vice President and Division Director
for Parade of Shoes
</TABLE>
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<TABLE>
<CAPTION>
<S> <C> <C>
Stephen Farley 44 Senior Vice President - Marketing
Gerald F. Kelly, Jr. 51 Senior Vice President - Logistics/Information
Services and Technology
Harris Mustafa 45 Senior Vice President - Merchandise
Distribution
Jed L. Norden 48 Senior Vice President - Human Resources
JoAnn Ogee 44 Senior Vice President - General Merchandise
Manager - Women's
Ullrich E. Porzig 53 Senior Vice President, Chief Financial Officer
and Treasurer
William J. Rainey 52 Senior Vice President, General Counsel and
Secretary
Thomas L. Rinehart 44 Senior Vice President - General Merchandise
Manager - Men's
Gary M. Stone 50 Senior Vice President - Store Development
Larry M. Strecker 40 Senior Vice President - Worldwide Sourcing
Michael S. Wilkes 45 Senior Vice President - General Merchandise
Manager - Children's
</TABLE>
STEVEN J. DOUGLASS has served as Chairman of the Board and Chief Executive
Officer of Payless since May 4, 1996, the date on which Payless Common Stock was
distributed in a spin-off by The May Department Stores Company ("May") to its
shareowners (the "Spin-off"). Mr. Douglass was also Chairman and Chief Executive
Officer of Payless from April, 1995 to the Spin-off. He joined Payless in 1993
and served as Senior Vice President/Director of Retail Operations from 1993 to
January, 1995 and as Executive Vice President/Director of Retail Operations from
January, 1995 to April, 1995. Prior to his association with Payless, Mr.
Douglass held several positions at divisions of May, serving as Chairman of May
Company, Ohio (1990-1993) and Senior Vice President and Chief Financial Officer
of J.W. Robinsons (1986-1990). Mr. Douglass is a director of The Security
Benefit Group of Companies. Mr. Douglass has served as a Director of Payless
since April 30, 1996.
RICHARD A. JOLOSKY has served as Vice Chairman of Payless since January 28,
1999. He served as President of Payless from 1996 through January, 1999. Mr.
Jolosky initially joined Payless in September, 1982, serving as Executive Vice
President-Merchandising (1982-1984) and then as President (1985-1988). Mr.
Jolosky was previously President and Chief Executive Officer of Silverman
Jewelry Company (1995-1996), and Chief Executive Officer of the Richard Allen
Company (1992-1995). Mr. Jolosky is a director of Stage Stores, Inc. and has
served as a Director of Payless since April 30, 1996.
KEN C. HICKS has served as President of the Company since January 28, 1999.
Before joining Payless, he was Executive Vice President and General Merchandise
Manager for Home Shopping Network, Inc. Prior to his association with Home
Shopping Network, Inc., Mr. Hicks held several positions with May serving as:
Senior Vice President and General Merchandise Manager of Foley's Department
Stores (1995-1998), Senior Vice President and General Merchandise Manager for
May Merchandising Company (1990-1995) and as Senior Vice President of Strategic
Planning for May (1987-1990). Mr. Hicks has served as a Director of Payless
since January 28, 1999.
DUANE L. CANTRELL has served as Executive Vice President-Retail Operations since
April, 1997 and as Senior Vice President-Retail Operations (1995-1997). He was
the Company's Senior Vice President-Merchandise Distribution and Planning
(1992-1995) and Senior Vice President-Merchandise Distribution (1990-1992). Mr.
Cantrell has been employed by the Company since 1978.
BRYAN P. COLLINS has served as Senior Vice President and Division Director for
Parade of Shoes since December, 1996. Prior to that he was Senior Vice President
and General Merchandise Manager-Women's since January, 1994. He also served the
Company as Senior Vice President and
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General Merchandise Manager-Women's Seasonal/Leisure (1991-1994). Mr. Collins
has been employed by the Company since 1991 and was previously employed by the
Company (1975-1985).
STEPHEN FARLEY has served as Senior Vice President-Marketing since July, 1994.
Prior to that he was Vice President-Marketing (1993-1994) and Vice
President-Advertising (1992-1993). Prior to joining the Company, Mr. Farley was
employed by Earl Palmer Brown as Executive Vice President of Client Services
(1989-1992).
GERALD F. KELLY, JR. has served as Senior Vice President-Logistics/Information
Services and Technology since February, 1996. Prior to that he was Senior Vice
President-Information Services and Chief Financial Officer (1990-1996) and
Senior Vice President-Information Services (1986-1990).
HARRIS MUSTAFA has served as Senior Vice President-Merchandise Distribution
since May, 1995. Prior to that he was Vice President-Financial
Planning/Purchasing (1990-1995). Mr. Mustafa has been employed by the Company
since 1987.
JED L. NORDEN has served as Senior Vice President-Human Resources since July,
1985. He served as Vice President-Executive Development of May (1984-1985).
Prior to joining May, Mr. Norden held various management positions with
Ingersoll-Rand, most recently serving as General Manager-Personnel and
Facilities (1982-1984).
JOANN OGEE has served as Senior Vice President and General Merchandise
Manager-Women's since May, 1997. Ms. Ogee served as Senior Vice President and
General Merchandise Manager, Intimate Apparel, Accessories, Footwear, Menswear
and Children's for Charming Shoppes, Inc. from October, 1993 to May, 1997. She
also worked as Senior Merchandiser for Victoria's Secret from June, 1990 to
October, 1993 and held several leadership positions during her fifteen years
with Macy's.
ULLRICH E. PORZIG has served as Senior Vice President, Chief Financial Officer
and Treasurer since April, 1998. He served as Senior Vice President and Chief
Financial Officer from February, 1996 to April, 1998 and from 1986 to 1988.
Between 1993 and 1996, Mr. Porzig was Senior Vice President, Chief Financial
Officer and Treasurer of Petro Stopping Centers L.P. From 1982 to 1993, he was
employed by May in various capacities including Senior Vice President-Finance
and Chief Financial Officer of Foley's (1988-1993).
WILLIAM J. RAINEY has served as Senior Vice President, General Counsel and
Secretary since April, 1996. Prior to joining the Company, Mr. Rainey served as
Executive Vice President, General Counsel and Secretary of Fourth Financial
Corporation (1994-1996) and Vice President, General Counsel of Cabot Corporation
(1991-1993).
THOMAS L. RINEHART has served as Senior Vice President and General Merchandise
Manager-Men's since December, 1992. Before joining the Company, he was employed
by the Custom Shop, Inc. as President and Chief Operating Officer (1992) and by
Club International, Inc. as President and Chief Executive Officer (1990-1991).
From 1976 to 1990, Mr. Rinehart was employed by Federated Department Stores in
various capacities, most recently serving as Vice President General Merchandise
Manager.
GARY M. STONE has served as Senior Vice President-Store Development since
February, 1997. Prior to joining the Company, Mr. Stone was employed by PepsiCo,
Inc. as Senior Vice President and General Manager-Restaurant Services
(1995-1997) and Vice President, Asset Development-Pizza Hut (1990-1995).
LARRY M. STRECKER has served as Senior Vice President-Worldwide Sourcing since
January, 1999. He formerly served as Senior Vice President and Managing Director
of Payless ShoeSource International (1996-1999), and Vice President of Worldwide
Sourcing (1993-1996). Before joining the
12
<PAGE> 13
Company, Mr. Strecker was employed by Frito-Lay, Inc. as Director of Service and
Distribution (1991-1993).
MICHAEL S. WILKES has served as Senior Vice President and General Merchandise
Manager-Children's since January, 1994. Prior to that he served as Senior Vice
President-General Merchandise Manager-Women's Dress/Casual (1990-1994). Mr.
Wilkes has been employed by the Company since 1986.
ITEM 2. PROPERTIES
The Company leases substantially all of its stores. The leases typically have a
primary term of 5 or 10 years, with one or two five-year renewal options. During
1999, approximately 693 of the Company's leases, including 170 leases which, as
of January 30, 1999, were month-to-month tenancies, are due to expire. Leases
usually require payment of base rent, applicable real estate taxes, common area
expenses and, in some cases, percentage rent based on the stores' sales volume.
Payless ShoeSource stores average approximately 3,400 square feet and Parade of
Shoes stores average approximately 2,300 square feet. The Company owns and
operates, directly or through its wholly-owned subsidiaries, a 305,000 square
foot central office building and a 795,000 square foot distribution facility,
including office space, both of which are located in Topeka, Kansas.
ITEM 3. 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the 13
weeks ended January 30, 1999.
PART II
ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED
SHAREOWNER MATTERS
There were approximately 45,000 owners of the Company's Common Stock as of April
2, 1999. The information set forth under the headings "Management's Discussion
and Analysis - Common Stock and Market Prices" and "Shareowner Information -
Common Stock" in the Company's 1998 Annual Report is incorporated herein by
reference.
ITEM 6. SELECTED FINANCIAL DATA
The information set forth under the heading "Summary of Selected Historical
Financial Information" of the Company's 1998 Annual Report is incorporated
herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The information set forth under the heading "Management's Discussion and
Analysis" of the Company's 1998 Annual Report is incorporated herein by
reference.
13
<PAGE> 14
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
None.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Statement of Earnings for the fiscal years 1996, 1997 and 1998,
the Consolidated Balance Sheet as of January 30, 1999 and January 31, 1998, the
Consolidated Statement of Shareowners' Equity, the Consolidated Statement of
Cash Flows for fiscal years 1996, 1997, 1998, the Notes to Consolidated
Financial Statements and the Report of Independent Public Accountants of the
Company's 1998 Annual Report to Shareowners are incorporated herein by
reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
a) Directors - The information set forth in the Company's definitive proxy
statement to be filed in connection with its Annual Meeting to be held on May
28, 1999 under the captions "Election of Directors - Directors and Nominees for
Directors" and "Additional Information - Section 16(a) Beneficial Ownership
Reporting Compliance" is incorporated herein by reference.
b) Executive Officers - Information regarding the Executive Officers of the
Company is as set forth in Item 1 of this report under the caption "Executive
Officers of the Company."
ITEM 11. EXECUTIVE COMPENSATION
The information set forth in the Company's definitive proxy statement to be
filed in connection with its Annual Meeting to be held on May 28, 1999 under the
captions "Election of Directors - The Board and Committees of the Board --
Compensation of Directors," "Compensation and Nominating Committee Report -
EICP" and "Executive Compensation" is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information set forth in the Company's definitive proxy statement to be
filed in connection with its Annual Meeting to be held on May 28, 1999 under the
caption "Election of Directors" is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
14
<PAGE> 15
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM
8-K
(a) Documents filed as part of this report:
(1) Financial Statements. The following financial statements are
incorporated herein by reference to the Company's
1998 Annual Report to Shareowners:
PAGE IN
ANNUAL REPORT
-------------
Financial Statements-
Consolidated Statement of Earnings for
the three fiscal years ended
January 30, 1999 18
Consolidated Balance Sheet -
January 30, 1999 and January 31, 1998 19
Consolidated Statement of Shareowners'
Equity for the three fiscal years
ended January 30, 1999 20
Consolidated Statement of Cash Flows
for the three fiscal years ended
January 30, 1999 21
Notes to Consolidated Financial Statements 22-26
Report of Independent Public Accountants 27
(2) Exhibits.
<TABLE>
<CAPTION>
Number Description
- ------ -----------
<S> <C>
3.1 Amended and Restated Certificate of Incorporation of the Registrant.(1)
3.2 Amended and Restated Bylaws of the Registrant.*
4 Stockholder Protection Rights Agreement, dated as of April 20, 1998, between the
Registrant and UMB Bank, n.a.(1)
10.1 Tax Sharing Agreement, dated April 2, 1996, between The May Department Stores
Company and the Registrant.(2)
10.2 Sublease, dated as of April 2, 1996, between The May Department Stores Company
and the Registrant.(3)
10.3 Amended and Restated Multicurrency Credit Agreement dated as
of May 22, 1998 (but effective as of the date of the
Reorganization, as defined therein), among Payless ShoeSource,
Inc., a Missouri corporation, Payless ShoeSource Holdings,
Inc., a Delaware corporation (now known as Payless ShoeSource,
Inc.), PSS Investment II, Inc. (now known as Payless
ShoeSource Finance, Inc.), several financial institutions and
Bank of America National Trust and Savings Association, as
Agent.(1)
</TABLE>
15
<PAGE> 16
<TABLE>
<S> <C>
10.4 Administrative Services Agreement, dated as of April 2, 1996, between The May
Department Stores Company and the Registrant.(3)
10.5 1996 Stock Incentive Plan of Registrant, as amended April 20,
1998, effective immediately prior to the effective time of the
Merger.(1)
10.6 Spin-Off Stock Plan, Payless ShoeSource, Inc.(3)
10.7 Spin-Off Cash Plan, Payless ShoeSource, Inc.(3)
10.8 Restricted Stock Plan for Non - Management Directors of Registrant, as amended
April 20, 1998, effective immediately prior to the effective time of the Merger (as
defined therein).(1)
10.9 Form of Employment Agreement between the Registrant and certain executives of the
Registrant. The Registrant has entered into Employment Agreements in the form
contained in this exhibit with each of the named executive officers which expire at
various dates on or before May 31, 2001, and which provide for annual base salaries at
rates not less than the amounts presently paid to them.(3)
10.10 Supplementary Retirement Plan of Registrant, as amended effective June 1, 1998 (1)
10.11 Profit Sharing Plan of Registrant, as amended and restated generally effective June 1,
1998. (1)
10.12 Deferred Compensation Plan of Registrant, as amended effective April 20, 1998,
effective immediately prior to the effective time of the Merger (as defined therein). (1)
10.13 Executive Incentive Compensation Plan of Registrant, as amended April 20, 1998,
effective immediately prior to the effective time of the Merger. (1)
10.14 Form of Management Severance Agreement. The
Registrant has entered into Severance Agreements with
the named executive officers in the form contained in
this exhibit. The agreement with Mr. Douglass also
provides for a "tax gross-up" payment to ensure that
the above-mentioned payments are not subject to net
reduction due to imposition of excise taxes which are
payable under Section 4999 of the Internal Revenue
Code. The agreements with Messrs. Jolosky and Hicks
provide for 50% of such payment. (4)
10.15 Form of Directors' and Officers' Indemnity Agreement of Registrant. (1)
10.16 Deferred Compensation Plan for Non - Management Directors of Registrant, as
amended April 20, 1998, effective immediately prior to the effective time of the
Merger. (1)
10.17 Executive Incentive Compensation Plan for Business Unit Management of Registrant,
as amended April 20, 1998, effective immediately prior to the effective time of the
Merger. (1)
</TABLE>
16
<PAGE> 17
<TABLE>
<S> <C>
10.18 Stock Appreciation and Phantom Stock Unit Plan for Payless ShoeSource International
Employees of Registrant, as amended April 20, 1998, effective immediately prior to
the effective time of the Merger. (1)
10.19 Profit Sharing Plan for Puerto Rico Associates of Registrant, as amended effective June
1, 1998. (1)
10.20 Stock Ownership Plan of Registrant, as amended effective June 1, 1998. (1)
10.21 Assumption Agreement, dated as of May 22, 1998, between Registrant and Payless.
(1)
10.22 Employment Agreement with Ken C. Hicks.*
11.1 Computation of Net Earnings Per Share.*
12.1 Computation of Ratio of Earnings to Fixed Charges.*
13.1 1998 Annual Report to Shareowners of Payless ShoeSource, Inc.
(only those portions specifically incorporated by reference
shall be deemed filed with the Commission).*
21.1 Subsidiaries of Registrant*
23.1 Consent of Arthur Andersen, LLP.*
27.1 Financial Data Schedule*
</TABLE>
* Filed herewith
1) Incorporated by reference from the Registrant's Form 8-K (File Number
1-11633) dated June 1, 1998.
2) Incorporated by reference from Exhibit 10.1 of the Registrant's Form
10-Q (File Number 1-11633) for the quarter ended May 4, 1996.
3) Incorporated by reference from the correspondingly numbered Exhibit to
Registrant's Registration Statement on Form 10 (File Number 1-11633)
dated February 23, 1996 as amended through April 15, 1996.
4) Incorporated by reference from the Registrants Form 10-K for fiscal
year 1997 (File Number 1-11633).
THE COMPANY WILL FURNISH TO SHAREOWNERS UPON REQUEST, AND WITHOUT CHARGE, A COPY
OF THE 1998 ANNUAL REPORT AND THE PROXY STATEMENT, PORTIONS OF WHICH ARE
INCORPORATED BY REFERENCE IN THE FORM 10-K. THE COMPANY WILL FURNISH ANY OTHER
EXHIBIT AT COST.
(b) Reports on Form 8-K:
On June 3, 1998, November 25, 1998 and January 29, 1999, the Company filed a
Current Report on Form 8-K, reporting on Item 5.
All other schedules and exhibits of the Company for which provision is made in
the applicable regulations of the Securities and Exchange Commission have been
omitted, as they are not required or are inapplicable or the information
required thereby has been given otherwise.
17
<PAGE> 18
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
PAYLESS SHOESOURCE, INC.
Date: April 9, 1999 By: /s/ Ullrich E. Porzig
----------------------
Ullrich E. Porzig
Senior Vice President,
Chief Financial Officer and
Treasurer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
By: /s/ Steven J. Douglass Date: April 9, 1999
-----------------------
Steven J. Douglass
Chairman, Chief Executive Officer
and Director
(Principal Executive Officer)
By: /s/ Ullrich E. Porzig Date: April 9, 1999
----------------------
Ullrich E. Porzig
Senior Vice President, Chief Financial
Officer and Treasurer
(Principal Financial and Accounting
Officer)
By: /s/ Richard A. Jolosky Date: April 9, 1999
-----------------------
Richard A. Jolosky
Vice Chairman and Director
By: /s/ Ken C. Hicks Date: April 9, 1999
----------------
Ken C. Hicks
President and Director
By: /s/ Daniel Boggan Jr. Date: April 9, 1999
----------------------
Daniel Boggan Jr.
Director
By: /s/ Howard R. Fricke Date: April 9, 1999
---------------------
Howard R. Fricke
Director
By: /s/ Thomas A. Hays Date: April 9, 1999
-------------------
Thomas A. Hays
Director
By: /s/ Mylle B. Mangum Date: April 9, 1999
--------------------
Mylle B. Mangum
Director
By: /s/ Michael E. Murphy Date: April 9, 1999
----------------------
Michael E. Murphy
Director
By: /s/ Robert L. Stark Date: April 9, 1999
-------------------
Robert L. Stark
Director
18
<PAGE> 19
EXHIBIT INDEX
Exhibit
Number Description
3.1 Amended and Restated Certificate of Incorporation of the
Registrant.(1)
3.2 Amended and Restated Bylaws of the Registrant.*
4 Stockholder Protection Rights Agreement, dated as of
April 20, 1998, between the Registrant and UMB Bank, n.a.(1)
10.1 Tax Sharing Agreement, dated April 2, 1996, between The May
Department Stores Company and the Registrant.(2)
10.2 Sublease, dated as of April 2, 1996, between The May
Department Stores Company and the Registrant.(3)
10.3 Amended and Restated Multicurrency Credit Agreement dated as
of May 22, 1998 (but effective as of the date of the
Reorganization, as defined therein), among Payless ShoeSource,
Inc., a Missouri corporation, Payless ShoeSource Holdings,
Inc., a Delaware corporation (now known as Payless ShoeSource,
Inc.), PSS Investment II, Inc. (now known as Payless
ShoeSource Finance, Inc.), several financial institutions and
Bank of America National Trust and Savings Association, as
Agent.(1)
10.4 Administrative Services Agreement, dated as of April 2, 1996,
between The May Department Stores Company and the Registrant.
(3)
10.5 1996 Stock Incentive Plan of Registrant, as amended April 20,
1998, effective immediately prior to the effective time of the
Merger.(1)
10.6 Spin-Off Stock Plan, Payless ShoeSource, Inc.(3)
10.7 Spin-Off Cash Plan, Payless ShoeSource, Inc.(3)
10.8 Restricted Stock Plan for Non - Management Directors of
Registrant, as amended April 20, 1998, effective immediately
prior to the effective time of the Merger (as defined
therein).(1)
10.9 Form of Employment Agreement between the Registrant and
certain executives of the Registrant. The Registrant has
entered into Employment Agreements in the form contained in
this exhibit with each of the named executive officers which
expire at various dates on or before May 31, 2001, and which
provide for annual base salaries at rates not less than the
amounts presently paid to them.(3)
10.10 Supplementary Retirement Plan of Registrant, as amended
effective June 1, 1998 (1)
10.11 Profit Sharing Plan of Registrant, as amended and restated
generally effective June 1, 1998. (1)
10.12 Deferred Compensation Plan of Registrant, as amended effective
April 20, 1998, effective immediately prior to the effective
time of the Merger (as defined therein). (1)
19
<PAGE> 20
10.13 Executive Incentive Compensation Plan of Registrant, as
amended April 20, 1998, effective immediately prior to the
effective time of the Merger. (1)
10.14 Form of Management Severance Agreement. The Registrant has
entered into Severance Agreements with the named executive
officers in the form contained in this exhibit. The agreement
with Mr. Douglass also provides for a "tax gross-up" payment
to ensure that the above-mentioned payments are not subject to
net reduction due to imposition of excise taxes which are
payable under Section 4999 of the Internal Revenue Code. The
agreements with Messrs. Jolosky and Hicks provide for 50% of
such payment. (4)
10.15 Form of Directors' and Officers' Indemnity Agreement of
Registrant. (1)
10.16 Deferred Compensation Plan for Non - Management Directors of
Registrant, as amended April 20, 1998, effective immediately
prior to the effective time of the Merger. (1)
10.17 Executive Incentive Compensation Plan for Business Unit
Management of Registrant, as amended April 20, 1998, effective
immediately prior to the effective time of the Merger. (1)
10.18 Stock Appreciation and Phantom Stock Unit Plan for Payless
ShoeSource International Employees of Registrant, as amended
April 20, 1998, effective immediately prior to the effective
time of the Merger. (1)
10.19 Profit Sharing Plan for Puerto Rico Associates of Registrant,
as amended effective June 1, 1998. (1)
10.20 Stock Ownership Plan of Registrant, as amended effective June
1, 1998. (1)
10.21 Assumption Agreement, dated as of May 22, 1998, between
Registrant and Payless. (1)
10.22 Employment Agreement with Ken C. Hicks.*
11.1 Computation of Net Earnings Per Share.*
12.1 Computation of Ratio of Earnings to Fixed Charges.*
13.1 1998 Annual Report to Shareowners of Payless ShoeSource, Inc.
(only those portions specifically incorporated by reference
shall be deemed filed with the Commission).*
21.1 Subsidiaries of Registrant*
23.1 Consent of Arthur Andersen, LLP.*
27.1 Financial Data Schedule*
* Filed herewith
1) Incorporated by reference from the Registrant's Form 8-K (File Number
1-11633) dated June 1, 1998.
2) Incorporated by reference from Exhibit 10.1 of the Registrant's Form
10-Q (File Number 1-11633) for the quarter ended May 4, 1996.
3) Incorporated by reference from the correspondingly numbered Exhibit to
Registrant's Registration Statement on Form 10 (File Number 1-11633)
dated February 23, 1996 as amended through April 15, 1996.
4) Incorporated by reference from the Registrants Form 10-K for fiscal
year 1997 (File Number 1-11633).
20
<PAGE> 1
EXHIBIT 3.2
AMENDED AND RESTATED BY-LAWS
OF
PAYLESS SHOESOURCE, INC.
(Amended and Restated as of March 18, 1999)
ARTICLE I
OFFICES
Section 1. The registered office of the Corporation in the State of Delaware
shall be at the office of Corporation Service Company at 1013 Centre Road in the
City of Wilmington, County of New Castle, or at such other place within the
State of Delaware as the Board of Directors may at any time and from time to
time designate.
Section 2. The Corporation may also have offices at such other places both
within and without the State of Delaware as the Board of Directors may from time
to time determine or the business of the Corporation may require.
ARTICLE II
MEETINGS OF STOCKHOLDERS
Section 1. All meetings of the stockholders shall be held either within or
without the State of Delaware as shall be designated from time to time by the
Board of Directors and stated in the notice of the meeting or in a duly executed
waiver of notice thereof.
Section 2. The annual meeting of stockholders for the election of directors
shall be held at such place within or without the State of Delaware, at such
hour and on such date, commencing in 1999, not earlier than May 1 in each year
as the Board of Directors may specify in the call of such meeting, at which
meeting the stockholders shall elect directors by a plurality of the votes of
the shares present in person or represented by proxy at the meeting and entitled
to vote on the election of directors and to transact such other business as may
properly be brought before the meeting.
<PAGE> 2
Section 3. Except as otherwise required by law, written notice of the annual
meeting stating the place, date and hour of the meeting shall be given by mail,
postage prepaid, not less than ten or more than sixty days before the date of
the meeting, to each stockholder entitled to vote at such meeting at such
address as shall appear on the books of the Corporation.
Section 4. The Secretary of the Corporation shall prepare and make, at least ten
days before every meeting of stockholders, a complete list of the stockholders
entitled to vote at the meeting, arranged in alphabetical order, and showing the
address of each stockholder and the number of shares registered in the name of
each stockholder. Such list shall be open to the examination of any stockholder,
for any purpose germane to the meeting, during ordinary business hours, for a
period of at least ten days prior to the meeting, either at a place within the
city where the meeting is to be held, which place shall be specified in the
notice of the meeting, or, if, not so specified, at the place where the meeting
is to be held. The list shall also be produced and kept open at the time and
place of the meeting during the whole time thereof, and may be inspected by any
stockholder who is present.
Section 5. Special meetings of the stockholders, for any purpose or purposes,
may be called by the persons specified in the Certificate of Incorporation. The
business transacted at a special meeting of stockholders shall be confined to
the purpose or purposes specified in the notice therefore.
Section 6. Except as otherwise required by law, written notice of a special
meeting stating the place, date and hour of the meeting and the purpose or
purposes for which the meeting is called, shall be given by mail, postage
prepaid, not less than ten or more than sixty days before the date of the
meeting, to each stockholder entitled to vote at such meeting at such address as
shall appear on the books of the Corporation.
-2-
<PAGE> 3
Section 7. At each meeting of stockholders, except where otherwise provided by
law or the Certificate of Incorporation or these By-laws, the holders of a
majority of the outstanding shares of stock entitled to vote on a matter at the
meeting, present in person or represented by proxy, shall constitute a quorum.
For purposes of the foregoing, where a separate vote by class or classes is
required for any matter, the holders of a majority of the outstanding shares of
such class or classes, present in person or represented by proxy, shall
constitute a quorum to take action with respect to that vote on that matter. Two
or more classes or series of stock shall be considered a single class if the
holders thereof are entitled to vote together as a single class at the meeting.
In the absence of a quorum of the holders of any class of stock entitled to vote
on a matter, the holders of such class so present or represented may, by
majority vote, adjourn the meeting of such class from time to time in the manner
provided by Section 8 of this Article II of these By-laws until a quorum of such
class shall be so present or represented. Shares of its own capital stock
belonging on the record date for the meeting to the Corporation or to another
corporation, if a majority of the shares entitled to vote in the election of
directors of such other corporation is held, directly or indirectly, by the
Corporation, shall neither be entitled to vote nor be counted for quorum
purposes; provided, however, that the foregoing shall not limit the right of the
Corporation to vote stock, including but not limited to its own stock, held by
it in a fiduciary capacity.
Section 8. Any meeting of stockholders, annual or special, may be adjourned from
time to time, to reconvene at the same or some other place, and notice need not
be given of any such adjourned meeting if the time and place thereof are
announced at the meeting at which the adjournment is taken. At the adjourned
meeting the Corporation may transact any business which might have been
transacted at the original meeting. If the adjournment is for more than thirty
days, or if after the adjournment a new record date is fixed for the adjourned
meeting, a notice of the adjourned meeting shall be given to each stockholder of
record entitled to vote at the meeting.
-3-
<PAGE> 4
Section 9. Other than in the election of directors, and other than as provided
by law or by the Certificate of Incorporation or these By-laws, the affirmative
vote of the holders of a majority of the shares present in person or represented
by proxy and entitled to vote on the subject matter shall be the act of the
stockholders. Each stockholder entitled to vote at a meeting of stockholders may
authorize another person or persons to act for such stockholder by proxy. A duly
executed proxy shall be irrevocable if it states that it is irrevocable and if,
and only as long as, it is coupled with an interest sufficient in law to support
an irrevocable power, regardless of whether the interest with which it is
coupled is an interest in the stock itself or an interest in the Corporation
generally. A stockholder may revoke any proxy which is not irrevocable by
attending the meeting and voting in person or by filing an instrument in writing
revoking the proxy or another duly executed proxy bearing a later date with the
Secretary of the Corporation.
Section 10. Except as otherwise provided by the Certificate of Incorporation,
each stockholder of record shall at every meeting of the stockholders be
entitled to one vote for each share of capital stock of the Corporation entitled
to vote thereat held by such stockholder. Such votes may be cast in person or by
proxy, but no proxy shall be valid after three years from the date of its
execution unless otherwise provided in the proxy. Subject to applicable law, the
Board of Directors shall prescribe the rules and regulations for voting at all
meetings of the stockholders.
Section 11. To be properly brought before the annual or any special
stockholders' meeting, business must be either (a) specified in the notice of
meeting (or any supplement thereto) given by or at the direction of the Board of
Directors, (b) otherwise properly brought before the meeting by or at the
direction of the Board of Directors, or (c) otherwise properly brought before an
annual meeting by a stockholder in accordance with the manner specified in these
By-laws. In addition to any other applicable requirements, for business to be
properly brought before the annual meeting by a stockholder, the stockholder
must have given
-4-
<PAGE> 5
timely notice thereof in writing to the Secretary of the Corporation. To
be timely, a stockholder's notice must be (i) delivered to or mailed and (ii)
received at the principal executive offices of the Corporation by the Secretary
of the Corporation not less than 75 days nor more than 90 days prior to the
meeting; provided, however, that in the event that less than 90 days' notice or
prior public disclosure of the date of the meeting is given or made to
stockholders generally, notice by the stockholder to be timely must be so
received not later than the close of business on the 15th day following the day
on which such notice of the date of the meeting was mailed or such public
disclosure was made, whichever first occurs. Such stockholder's notice to the
Secretary shall set forth as to each matter the stockholder proposes to bring
before the meeting (i) the text of the proposal to be presented and a brief
written statement of the reasons why such stockholder favors the proposal, (ii)
the name and record address of the stockholder proposing such business, (iii)
the class and number of shares of capital stock of the Corporation which are
beneficially owned by the stockholder and (iv) any material interest of the
stockholder in such business.
Notwithstanding anything in these by-laws to the contrary, no business shall be
conducted at the annual or any special meeting except in accordance with the
procedures set forth in this Section 11.
The chairman of the meeting shall, if the facts warrant, determine and declare
to the meeting that business was not properly brought before the meeting in
accordance with the provisions of this Section 11, and if he should so determine
and declare, any such business not properly brought before the meeting shall not
be transacted.
Section 12. Except as provided in Section 3 of Article III, only persons who are
nominated in accordance with the following procedures shall be eligible for
election as directors. Nominations of persons for election to the Board of
Directors of the Corporation at the annual meeting may be made at the meeting by
or at the direction of the Board of Directors, by any nominating committee or
person appointed
-5-
<PAGE> 6
by the Board of Directors or by any stockholder of the Corporation entitled to
vote for the election of directors at the meeting who complies with the notice
procedures set forth in this Section 12. Such nominations, other than those made
by or at the direction of the Board of Directors, shall be made pursuant to
timely notice in writing to the Secretary of the Corporation. To be timely, a
stockholder's notice must be delivered to or mailed and received at the
principal executive offices of the Corporation not less than 75 days nor more
than 90 days prior to the meeting; provided, however, that in the event that
less than 90 days' notice or prior public disclosure of the date of the meeting
is given or made to stockholders generally, notice by the stockholder to be
timely must be so received not later than the close of business on the 15th day
following the day on which such notice of the date of the meeting was mailed or
such public disclosure was made, whichever first occurs. Such stockholder's
notice to the Secretary shall set forth (a) as to each person whom the
stockholder proposes to nominate for election or re-election as a director, (i)
the name, age, business address and residence of the person, (ii) the principal
occupation or employment of the person, (iii) the class and number of shares of
capital stock of the Corporation which are beneficially owned by the person, and
(iv) any other information relating to the person that is required to be
disclosed in solicitations for proxies for election of directors pursuant to
Regulation 14A under the Securities Exchange Act of 1934, as amended, and, if
such information is different, the information regarding such person required by
paragraphs (a), (e) and (f) of Item 401 of Regulation S-K adopted by the
Securities and Exchange Commission (or the corresponding provisions of any
regulation subsequently adopted by the Securities and Exchange Commission
applicable to the Corporation); and (b) as to the stockholder giving the notice
(i) the name and record address of the stockholder and (ii) the class and number
of shares of capital stock of the Corporation which are beneficially owned by
the stockholder. Such notice shall be accompanied by the executed consent of
each nominee to serve as a director if so elected. The Corporation may require
any proposed nominee to furnish such other information as may reasonably be
required by the Corporation
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to determine the eligibility of such proposed nominee to serve as a director of
the Corporation.
The chairman of the meeting shall, if the facts warrant, determine and declare
to the meeting that a nomination was not made in accordance with the foregoing
procedure, and if he should so determine and declare, the defective nomination
shall be disregarded.
Section 13. Meetings of stockholders shall be presided over by the Chairman of
the Board, if any, or in the absence of the Chairman of the Board by the Vice
Chairman of the Board, if any, or in the absence of the Vice Chairman of the
Board by the Chief Executive Officer, or in the absence of the Chief Executive
Officer by the President, or in the absence of the President by a Vice
President, or in the absence of the foregoing persons by a chairman designated
by the Board of Directors, or in the absence of such designation by a chairman
chosen at the meeting. The Secretary, or in the absence of the Secretary an
Assistant Secretary, shall act as secretary of the meeting, but in the absence
of the Secretary and any Assistant Secretary the chairman of the meeting may
appoint any person to act as secretary of the meeting.
The order of business at each such meeting shall be as determined by the
chairman of the meeting. The chairman of the meeting shall have the right and
authority to prescribe such rules, regulations and procedures and to do all such
acts and things as are necessary or desirable for the proper conduct of the
meeting, including, without limitation, the establishment of procedures for the
maintenance of order and safety, limitations on the time allotted to questions
or comments on the affairs of the Corporation, restrictions on entry to such
meeting after the time prescribed for the commencement thereof and the opening
and closing of the voting polls.
Section 14. Prior to any meeting of stockholders, the Board of Directors, the
Chairman of the Board, the Chief Executive Officer, the President or the person
who will be presiding over such meeting shall appoint one or more inspectors to
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act at such meeting and make a written report thereof and may designate one or
more persons as alternate inspectors to replace any inspector who fails to act.
If no inspector or alternate is able to act at the meeting of stockholders, the
person presiding at the meeting shall appoint one or more inspectors to act at
the meeting. Each inspector, before entering upon the discharge of his or her
duties, shall take and sign an oath faithfully to execute the duties of
inspector with strict impartiality and according to the best of his or her
ability. The inspectors shall ascertain the number of shares outstanding and the
voting power of each, determine the shares represented at the meeting and the
validity of proxies and ballots, count all votes and ballots, determine and
retain for a reasonable period a record of the disposition of any challenges
made to any determination by the inspectors and certify their determination of
the number of shares represented at the meeting and their count of all votes and
ballots. The inspectors may appoint or retain other persons to assist them in
the performance of their duties. The date and time of the opening and closing of
the polls for each matter upon which the stockholders will vote at a meeting
shall be announced at the meeting. No ballot, proxy or vote, nor any revocation
thereof or change thereto, shall be accepted by the inspectors after the closing
of the polls. In determining the validity and counting of proxies and ballots,
the inspectors shall be limited to an examination of the proxies, any envelopes
submitted therewith, any information provided by a stockholder who submits a
proxy by telegram, cablegram or other electronic transmission from which it can
be determined that the proxy was authorized by the stockholder, ballots and the
regular books and records of the Corporation, and they may also consider other
reliable information for the limited purpose of reconciling proxies and ballots
submitted by or on behalf of banks, brokers, their nominees or similar persons
which represent more votes than the holder of a proxy is authorized by the
record owner to cast or more votes than the stockholder holds of record. If the
inspectors consider other reliable information for such purpose, they shall, at
the time they make their certification, specify the precise information
considered by them, including the person or persons from
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whom they obtained the information, when the information was obtained, the means
by which the information was obtained and the basis for the inspectors' belief
that such information is accurate and reliable.
ARTICLE III
DIRECTORS
Section 1. Except as otherwise required by law or the Certificate of
Incorporation, the business and affairs of the Corporation shall be managed by
or under the direction of the Board of Directors.
Section 2. The number of directors of the Corporation from time to time shall be
fixed in the manner provided in the Certificate of Incorporation.
Section 3. Except as otherwise required by the Certificate of Incorporation, any
vacancy in the Board of Directors resulting from any increase in the number of
directors and any other vacancy occurring in the Board of Directors may be
filled by the Board of Directors acting by a majority of the directors then in
office, although less than a quorum, or by the sole remaining director, and any
director so elected to fill a vacancy shall hold office for a term that shall
coincide with the term of the class to which such director shall have been
elected and such director's successor is elected and qualified or until such
director's earlier resignation or removal. Whenever the holders of any class or
classes of stock or series thereof are entitled to elect one or more directors
by the Certificate of Incorporation, vacancies and newly created directorships
of such class or classes or series may be filled by a majority of the directors
elected by such class or classes or series thereof then in office, or by the
sole remaining director so elected. In no event shall a decrease in the number
of directors shorten the term of any incumbent director.
Section 4. The Board of Directors may hold its meetings, both regular and
special, and cause the books of the Corporation to be kept, either within or
without the State of Delaware at such place or places as they may from time to
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time determine or as otherwise may be provided in these by-laws.
Section 5. Subject to Section 8 of this Article III there shall be an annual
meeting of the Board of Directors on the day of the annual meeting of
stockholders in each year or as soon thereafter as convenient, such annual
meeting to be at such place and time (and, if applicable, on such date) as the
Chairman of the Board or the Chief Executive Officer shall designate by written
notice to the directors, and regular meetings shall be held on such dates and at
such times and places either as the directors shall by resolution provide or as
the Chairman of the Board or the Chief Executive Officer shall designate by
written notice to the directors. Except as provided, no notice of said annual
meeting or such regular meetings of the Board of Directors need be given.
Section 6. Special meetings of the Board of Directors may be called by the
Chairman of the Board, the Chief Executive Officer, the President, the Secretary
or the Treasurer and shall be called by one of the foregoing officers on the
written request of a majority of the entire Board of Directors specifying the
object or objects of such special meeting. In the event that one of the
foregoing officers shall fail to call a meeting within two days after receipt of
such request, such meeting may be called in like manner by the directors making
such request. The person or persons calling the special meeting may fix the
place, either within or without the State of Delaware, as a place for holding
the meeting. Notice of each special meeting, stating the date, place and time of
the meeting and the purpose or purposes for which it is called, shall be
deposited in the regular or overnight mail, sent by telecopy, telegram or
delivered by hand to each director not later than the day preceding the date of
such meeting, or on such shorter notice as the person or persons calling such
meeting may deem necessary or appropriate in the circumstances.
Section 7. At all meetings of the Board of Directors a majority of the entire
Board of Directors in office shall constitute a quorum for the transaction of
business and the
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act of a majority of the directors present at any meeting at which there is a
quorum shall be the act of the Board of Directors, except as may be otherwise
specifically provided by law, the Certificate of Incorporation or by these
by-laws. If a quorum shall not be present at any meeting of the Board of
Directors, the directors present thereat may adjourn the meeting from time to
time, without notice other than announcement at the meeting, until a quorum
shall be present.
Section 8. Except as otherwise required by the Certificate of Incorporation or
these by-laws, any action required or permitted to be taken by the Board of
Directors at any meeting of the Board of Directors or of any committee thereof
may be taken without a meeting, if all members of the Board or committee, as the
case may be, consent thereto in writing and the writing or writings are filed
with the minutes of proceedings of the Board of Directors or the committee as
the case may be.
Section 9. Any one or more members of the Board of Directors, or any committee
designated by the Board of Directors, may participate in a meeting of the Board
of Directors or such committee by means of a conference telephone or similar
communications equipment by means of which all persons participating in the
meeting can hear each other at the same time. Participation in a meeting
pursuant to this Section 9 shall constitute presence in person at such meeting.
Section 10. The Board of Directors may, by resolution passed by a majority of
the entire Board, designate one or more committees, each committee to consist of
one or more of the directors of the Corporation. The Board may designate one or
more directors as alternate members of any committee, who may replace any absent
or disqualified member at any meeting of the committee. In the absence or
disqualification of a member of a committee, the member or members present at
any committee meeting and not disqualified from voting, whether or not such
member or members constitute a quorum, may unanimously appoint another member of
the board of directors to act at the meeting in
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the place of any absent or disqualified member. Any such committee, to the
extent allowed by law and as provided in the resolution, shall have and may
exercise all of the powers and authority of the Board of Directors in the
management of the business and affairs of the Corporation, and may authorize the
seal of the Corporation to be affixed to all papers which may require it. Such
committee or committees shall have such name or names as may be determined from
time to time by resolution adopted by the Board of Directors.
Section 11. Each committee of the Board shall keep regular minutes of its
meetings and report the same to the Board of Directors when required.
Section 12. Directors and members of committees may receive such compensation
for their services, and such reimbursement of expenses, as the Board of
Directors may from time to time determine. Nothing herein contained shall be
construed to preclude any director from serving the Corporation in any other
capacity and receiving compensation therefore.
Section 13. No contract or transaction between the Corporation and one or more
of its directors or officers, or between the Corporation and any other
corporation, partnership, association, or other organization in which one or
more of its directors or officers are directors or officers, or have a financial
interest, shall be void or voidable solely for this reason, or solely because
the director or officer is present at or participates in the meeting of the
Board of Directors or committee thereof which authorizes the contract or
transaction, or solely because his or their votes are counted for such purpose
if (a) the material facts as to his or their relationship or interest and as to
the contract or transaction are disclosed or are known to the Board of Directors
or the committee and the Board of Directors or the committee in good faith
authorizes the contract or transaction by the affirmative votes of a majority of
the disinterested directors, even though the disinterested directors be less
than a quorum; or (b) the material facts as to his or their relationship or
interest and as to the contract or transaction are disclosed or are
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known to the stockholders entitled to vote thereon, and the contract or
transaction is specifically approved in good faith by vote of the stockholders;
or (c) the contract or transaction is fair as to the Corporation as of the time
it is authorized, approved or ratified by the Board of Directors, a committee
thereof or the stockholders. Common or interested directors may be counted in
determining the presence of a quorum at a meeting of the Board of Directors or
of a committee which authorizes the contract or transaction.
Section 14. As used in these by-laws generally, the term "entire Board of
Directors" means the total number of directors which the Corporation would have
if there were no vacancies.
ARTICLE IV
NOTICES
Section 1. Whenever written notice is required by law, the Certificate of
Incorporation or these By-laws, to be given to any director, committee member or
stockholder, such requirement shall not be construed to mean personal notice,
but such notice may be given in writing, by mail addressed to such director,
committee member or stockholder, at his address as it appears on the records of
the Corporation, with postage thereon prepaid and such notice shall be deemed to
be given at the time when the same shall be deposited in the United States mail.
Written notice may also be given personally or by telecopy, telegram, telex or
cable or by overnight mail. An affidavit of the Secretary or an Assistant
Secretary or of the transfer agent of the Corporation that the notice has been
given shall, in the absence of fraud, be prima facie evidence of the facts
stated therein.
Section 2. Whenever any notice is required by law, the Certificate of
Incorporation or these By-laws, to be given to any director, committee member or
stockholder, a waiver thereof in writing, signed by the person or persons
entitled to said notice, whether before or after the time stated therein, shall
be deemed equivalent thereto. Attendance of
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a person at a meeting shall constitute a waiver of notice of such meeting,
except when the person attends a meeting for the express purpose of objecting,
at the beginning of the meeting, to the transaction of any business because the
meeting is not lawfully called or convened. Neither the business to be
transacted at, nor the purpose of, any regular or special meeting of the
stockholders, directors or members of a committee of directors need be specified
in any written waiver of notice unless so required by the Certificate of
Incorporation or these By-laws.
ARTICLE V
OFFICERS
Section 1. The officers of the Corporation elected by the Board of Directors
shall consist of a Chairman of the Board, a Chief Executive Officer, a President
and a Secretary and such other officers as the Board of Directors may deem
necessary and proper, including, without limitation, one or more Executive Vice
Presidents, one or more Senior Vice Presidents, one or more Vice Presidents, a
Treasurer, and one or more Assistant Secretaries or Assistant Treasurers. The
Board of Directors shall elect the Chairman of the Board, the Chief Executive
Officer, the President and the Secretary at its first meeting held after each
annual meeting of stockholders and may elect such other officers from time to
time as it deems necessary or advisable. Any two or more of such offices,
excepting the offices of President and Secretary, may be held by the same
person, but no officer shall execute, acknowledge, or verify any instrument on
behalf of the Corporation in more than one capacity.
Section 2. The Chairman of the Board, the Chief Executive Officer, the President
and such other officer or officers as the Board may from time to time by
resolution designate may appoint one or more Vice Presidents, a Controller, and
one or more Assistant Controllers, Assistant Secretaries and Assistant
Treasurers, who shall also be officers of the Corporation.
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Section 3. The Board of Directors may determine or provide the method of
determining the compensation of all officers.
Section 4. The officers of the Corporation shall hold office until their
successors are chosen and qualified, or until their earlier resignation or
removal. Any officer elected or appointed by the Board of Directors may be
removed at any time by the Board of Directors. Any vacancy occurring in any
office of the Corporation that was filled by the Board of Directors pursuant to
Article V, Section 1 also shall be filled by the Board of Directors.
Section 5. Each officer of the Corporation shall be subject to the control of
the Board of Directors and shall have such duties in the management of the
Corporation as may be provided by appropriate resolution of the Board of
Directors and/or provided in these By-laws.
Section 6. Powers of attorney, proxies, waivers of notice of meeting, consents
and other instruments relating to securities owned by the Corporation may be
executed in the name of and on behalf of the Corporation by the Chairman of the
Board, the Chief Executive Officer, the President or any Vice President and any
such officer may, in the name of and on behalf of the Corporation, take all such
action as any such officer may deem advisable to vote in person or by proxy at
any meeting of security holders of any corporation in which the Corporation may
own securities and at any such meeting shall possess and may exercise any and
all rights and power incident to the ownership of such securities and which, as
the owner thereof, the Corporation might have exercised and possessed if
present. The Board of Directors may, by resolution, from time to time confer
like powers upon any other person or persons.
Section 7. In the case of the absence of any officer of the Corporation, or for
any other reason that the Board may deem sufficient, the Board of Directors may
delegate the powers or duties of such officer to any other officer or to any
other director, or to any other person for the time being.
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ARTICLE VI
CERTIFICATES OF STOCK
Section 1. The shares of stock in the Corporation shall be represented by
certificates, provided that the Board of Directors may provide by resolution or
resolutions that some or all of any or all classes or series of the
Corporation's stock shall be uncertificated shares. Any such resolution shall
not apply to shares represented by a certificate theretofore issued until such
certificate is surrendered to the Corporation. Notwithstanding the adoption of
such a resolution by the Board of Directors, every holder of stock represented
by certificates, and upon request every holder of uncertificated shares, shall
be entitled to have a certificate signed by or in the name of the Corporation by
the Chairman or Vice Chairman of the Board, if any, or the President or a Vice
President, and by the Treasurer or an Assistant Treasurer, or the Secretary or
an Assistant Secretary, of the Corporation, representing the number of shares of
stock registered in certificate form owned by such holder. Any signature on such
certificate may be a facsimile. In case any officer, transfer agent or registrar
who has signed or whose facsimile signature has been placed upon a certificate
shall have ceased to be such officer, transfer agent or registrar before such
certificate is issued, it may be issued by the Corporation with the same effect
as if such person were such officer, transfer agent or registrar at the date of
issue.
If the Corporation is authorized to issue more than one class of stock or more
than one series of any class, the powers, designations, preferences and
relative, participating, optional or other special rights of each class of stock
or series thereof and the qualifications or restrictions of such preferences
and/or rights shall be set forth in full or summarized on the face or back of
the certificate which the Corporation shall issue to represent such class or
series of stock, provided that, except as otherwise provided by law, in lieu of
the foregoing requirements, there may be set forth on the face or back of the
certificate which the Corporation shall issue to represent such class or series
of stock a statement that the
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Corporation will furnish without charge to each stockholder who so requests the
powers, designations, preferences and relative, participating, optional or other
special rights of each class of stock or series thereof and the qualifications,
limitations or restrictions of such preferences and/or rights. Within a
reasonable time after the issuance or transfer of uncertificated shares, the
Corporation shall send to the registered owner thereof a written notice
containing the information required by law to be set forth or stated on
certificates or a statement that the Corporation will furnish without charge to
each stockholder who so requests the powers, designations, preferences and
relative, participating, optional or other special rights of each class of stock
or series thereof and the qualifications, limitations or restrictions of such
preferences and/or rights. The provisions of this paragraph will not apply to
the common stock of the Corporation so long as and to the extent that the
Corporation shall have only one class of common stock outstanding.
Except as otherwise expressly provided by law, the rights and obligations of the
holders of uncertificated shares and the rights and obligations of the holders
of certificates representing stock of the same class and series shall be
identical.
Section 2. The Corporation may issue a new certificate of stock or
uncertificated shares in the place of any certificate theretofore issued by it,
alleged to have been lost, stolen or destroyed, and the Corporation may require
the owner of the lost, stolen or destroyed certificate, or such owner's legal
representative, to give the Corporation a bond sufficient to indemnify it
against any claim that may be made against it on account of the alleged loss,
theft or destruction of any such certificate or the issuance of such new
certificate or uncertificated shares.
Section 3. In order that the Corporation may determine the stockholders entitled
to notice of or to vote at any meeting of stockholders or any adjournment
thereof, the Board of Directors may fix, in advance, a record date, which shall
not be more than sixty nor less than ten days before the
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date of such meeting, and which record date shall not precede the date upon
which the resolution fixing the record date is adopted by the Board of
Directors; provided, however that if the Board of Directors does not set a
record date for the determination of the stockholders entitled to notice of, and
to vote at, a meeting of stockholders, only the stockholders of record at the
close of business on the day next preceding the day on which notice is given
(or, if notice is waived, at the close of business on the day next preceding the
day on which the meeting is held) shall be entitled to notice of, and to vote
at, the meeting and any adjournment of the meeting. A determination of
stockholders of record entitled to notice of or to vote at a meeting of
stockholders shall apply to any adjournment of the meeting; provided, however,
that the Board of Directors may fix a new date for the adjourned meeting.
In order that the Corporation may determine the stockholders entitled to receive
payment of any dividend or other distribution or allotment of any rights, or
entitled to exercise any rights in respect of any change, conversion or exchange
of stock or for the purpose of any other lawful action, the Board of Directors
may fix, in advance, a record date, which shall not be more than sixty days
prior to such action, and which record date shall not precede the date upon
which the resolution fixing the record date is adopted by the Board of
Directors; provided, however that if the Board of Directors does not set a
record date in relation to such action, the record date for determining
stockholders for any such purpose shall be at the close of business on the day
on which the Board of Directors adopts the resolution relating thereto.
ARTICLE VII
GENERAL PROVISIONS
Section 1. All checks or demands for money and all notes and other obligations
of the Corporation shall be signed by such officer or officers or such other
person or persons as the Board of Directors may at any time and from time to
time designate.
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Section 2. The fiscal year of the Corporation shall end on the Saturday closest
to the 31st day of January in each year or shall otherwise be as determined by
the Board of Directors.
Section 3. The Corporation may have a corporate seal which shall have the name
of the Corporation inscribed thereon and shall be in such form as may be
approved from time to time by the Board of Directors and shall be kept by the
Secretary. The seal may be used by causing it or a facsimile thereof to be
impressed or affixed or reproduced or otherwise.
ARTICLE VIII
AMENDMENTS
These By-laws may be amended, altered, changed or rescinded, in whole or in
part, or new by-laws may be adopted, in the manner provided in the Certificate
of Incorporation.
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EXHIBIT 10.22
EMPLOYMENT AGREEMENT
THIS AGREEMENT is made and entered into on the 27th day of January, 1999, by
and between PAYLESS SHOESOURCE, INC. ("Payless") and Ken C. Hicks ("Executive").
In consideration of mutual promises and agreements set forth in this
Employment Agreement, Payless and Executive agree as follows:
1. (a) Payless agrees to employ Executive, and Executive agrees to render
personal services to Payless, for the period commencing on the date Executive is
placed on the payroll of Payless( the "Hire Date") through April 30, 2002 (the
"Contract Term") as President of Payless ShoeSource, Inc. and/or to perform such
other executive duties as may from time to time be required of Executive by
Payless. Executive agrees to resign from membership on the Board of Directors of
Payless and any of its subsidiaries if Executive should no longer be serving as
President of Payless. Executive represents and warrants that by entering into
this Agreement Executive will not rescind or otherwise breach any employment
agreement or other agreement with Executive's current employer or any prior
employer.
(b) Payless agrees to pay Executive basic compensation for such services
during the Contract Term at the annual rate of $500,000, payable in equal
bi-weekly installments, and in accordance with Paragraph 5, which annual rate
will be subject to an annual review during Payless' regularly scheduled review
time.
(c) If Executive is eligible to participate in one of Payless' bonus plans
(the "Incentive Plan"), then Executive shall be entitled to such Awards, if any,
which may be payable under the Incentive Plan, determined in accordance with and
subject to all of the terms and provisions of the Incentive Plan. For fiscal
1999 Executive is guaranteed a minimum payment for the long-term portion of his
bonus of $70,000.
(d) Payless shall reimburse Executive for all items of normal expense
incurred by Executive as an employee of Payless in accordance with Payless'
reimbursement policies in effect from time to time.
(e) The Executive Compensation Change Memorandum from time to time in effect,
as initialed on behalf of Payless and by Executive, is hereby incorporated by
reference herein and made a part hereof. In addition, Payless has adopted
certain employee benefit plans and has established certain arrangements
concerning executive perquisites which may, from time to time, confer rights and
benefits on the Executive in accordance with their terms, and Payless may, in
the future, adopt additional employee benefit plans and establish additional
arrangements concerning executive perquisites, and may in the future amend,
modify or terminate any of the aforesaid employee benefit plans and
arrangements, all in accordance with their terms and in accordance with
applicable law. Executive shall be entitled to whatever rights and benefits may
be conferred on Executive, from time to time in accordance with the terms of
such plans and arrangements, as they may be amended from time to time,
independent of this Agreement. All references to payment dates or vesting dates
in this Paragraph 1 shall require that Executive be employed by Payless on such
date to receive such payment or be vested in such benefit.
(f) Executive shall receive a cash signing bonus of $210,000, with $70,000
paid on the Hire Date, $70,000 paid on the first anniversary of the Hire Date
and $70,000 paid on the second anniversary of the Hire Date. These payments may
be deferred under Payless' Deferred Compensation Plan. Executive shall also
receive a cash payment on the Hire Date of $2,600.
(g) On the Hire Date, Payless shall grant to Executive options on 65,000
shares of Payless common stock. The options will vest 1/3 upon the earlier of
May 14, 2003 or when Payless stock price closes on the New York Stock Exchange
at $75/share or higher for 20 consecutive trading days, 1/3 upon the earlier of
May 14, 2003 or when Payless stock price closes on the New York Stock Exchange
at $95/share or higher
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for 20 consecutive trading days, and the remaining 1/3 of the options will vest
upon the earlier of May 14, 2005 or when Payless stock closes on the New York
Stock Exchange at $115/share or higher for 20 consecutive trading days. This
grant is subject to the terms and exercise provisions applicable to standard
stock option grants under Payless' Stock Incentive Plan.
(h) During each of May 2000 and May 2001, Payless shall grant to Executive
options on 17,500 shares of Payless common stock. Twenty-five percent of the
options will vest on each of the first four anniversaries of the grant date.
Each of these grants will be subject to the terms and exercise provisions
applicable to standard stock option grants under Payless' Stock Incentive Plan.
Executive will be eligible for future grants of stock options as may be made to
him under the terms of the Stock Incentive Plan.
(i) On the Hire Date, Executive shall receive 6,000 shares of restricted
Payless common stock under Payless' Stock Incentive Plan, with restrictions to
be released with respect to 3,000 of the shares on the first anniversary of the
Hire Date and 3,000 of the shares on the second anniversary of the Hire Date,
subject to the terms of that Plan.
(j) During May 2000, Executive shall receive 7,500 shares of restricted
Payless common stock under Payless' Stock Incentive Plan, with restrictions to
be released with respect to 2,500 shares on each of the first three
anniversaries of the grant date, subject to the terms of the Plan. Executive
will be eligible for future grants of restricted stock as may be made to him
under the terms of the Stock Incentive Plan.
2. (a) At all times during the Contract Term, Executive will:
(i) faithfully and diligently perform Executive's duties in conformity with
the directions of Payless and serve Payless to the best of Executive's
ability; and
(ii) devote Executive's undivided time and attention to the business of
Payless, subject to reasonable vacations in accordance with Payless' vacation
policy as it applies from time to time, to such extent as may be reasonably
necessary for the proper performance of the personal services to be rendered
by Executive under this Agreement; and
(iii) maintain Executive's residence in the Topeka, Kansas metropolitan area
or the environs thereof within reasonable access to the business activities
of Payless therein for the Contract Term.
(b) At all times during the Contract Term, Executive will not:
(i) engage in any activity which conflicts or interferes with or adversely
affects Executive's performance of Executive's duties hereunder, or
(ii) accept any other employment, whether as an Executive or as a consultant
or in any other capacity, and whether or not compensated therefor, or
(iii) violate the terms of any of the policies described in Payless' Policy
of Business Conduct distributed from time to time to Executive.
3. (a) At all times during the Contract Term and for a period of two years from
actual termination of employment or, if there is more than two years remaining
in the Contract Term at the time of termination of employment, for the remainder
of the Contract Term, Executive will not:
(i) directly or indirectly, own, manage, operate, finance, join, control, or
participate in the ownership, management, operation, financing or control of,
or be employed by or connected in any manner with any Competing Business, or
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(ii) solicit for employment, hire or offer employment to, or disclose
information to or otherwise aid or assist any other person or entity other
than Payless or any subsidiary of Payless in soliciting for employment,
hiring or offering employment to, any employee of Payless or any subsidiary
of Payless, or
(iii) take any action which is intended to harm Payless or its reputation,
which Payless reasonably concludes could harm Payless or its reputation or
which Payless reasonably concludes could lead to unwanted or unfavorable
publicity to Payless.
Ownership of an investment of less than the greater of $25,000 or 1% of any
class of equity or debt security of a Competing Business shall not constitute
ownership or participation in ownership in violation of Paragraph 3(a).
(b) The term "Competing Business" shall include, but not be limited to,
(i)any retail business with gross sales or revenue in the prior fiscal year
of more than $25 million (or which is a subsidiary, affiliate or joint
venture partner of a business with gross sales or revenue in the prior fiscal
year of more than $25 million) which sells footwear at retail to consumers at
price points competitive, or likely to be competitive with Payless (e.g.,
including, without limitation, Wal-Mart, K-Mart, Target, Bradley's, Ames,
Venture, Caldor, Mervyn's Pic-N-Pay, Foot Star, Inc., Edison, Aldo, Gennesco,
Venator, Famous Footwear, Shoe Carnival, Nine West, Kohl's, Liz Claiborne,
Big Five, J.C. Penney and Sears) within 20 miles of any Payless store or the
store of any wholesale customer of Payless in the United States, or anywhere
in any foreign country in which Payless has retail stores, franchisees or
wholesale customers;
(ii)any franchising or wholesaling business with gross sales or revenue in
the prior fiscal year of more than $25 million (or which is a subsidiary,
affiliate or joint venture partner of a business with gross sales or revenue
in the prior fiscal year of more than $25 million) which sells footwear at
wholesale to franchisees, retailers or other footwear distributors located
within 20 miles of any Payless store or the store of any wholesale customer
of Payless in the United States, or anywhere in any foreign country in which
Payless has retail stores, franchisees or wholesale customers:
(iii) any footwear manufacturing business with gross sales or revenue in the
prior fiscal year of more than $25 million (or which is a subsidiary,
affiliate or joint venture partner of a business with gross sales or revenue
in the prior fiscal year of more than $25 million) which sells footwear to
retailers or other footwear distributors located within 20 miles of any
Payless store or the store of any wholesale customer of Payless in the United
States, or anywhere in any foreign country in which Payless has retail
stores, franchisees, or wholesale customers; (e.g., including, without
limitation, Nine West, Dexter, Stride Rite, Liz Claiborne, Wolverine
Worldwide, Timberland, Nike, Reebok, K-Swiss, Keds and Adidas); or
(iv) any business which provides buying office services to any store or group
of stores or businesses referred to in Paragraph 3.(b) (i), 3. (b) (ii) and
3. (b) (iii).
(c) Background of non-compete restriction:
(i) Payless is one of the leading retail companies in North America, with
self-service shoe stores throughout the United States and its territories and
Canada; and
(ii) In connection with its business, Payless has expended a great deal of
time, money and effort to develop and maintain its confidential, proprietary
and trade secret information; this information, if misused or disclosed,
could be very harmful to Payless' business and its competitive position in
the marketplace; and
3
<PAGE> 4
(iii) Executive desires to be employed by Payless, to be eligible for
opportunities for advancement within Payless, to be eligible for potential
compensation increases and to be given access to confidential and proprietary
information of Payless necessary for Executive to perform Executive's job,
but which Payless would not make available to Executive but for Executive's
signing and agreeing to abide by the terms of this Agreement as a condition
of Executive's employment by Payless; and
(iv) Executive recognizes and acknowledges that Executive's position with
Payless provides Executive with access to Payless' confidential and
proprietary trade secret information and other confidential business
information; and
(v) Payless compensates its associates to, among other things, develop and
preserve goodwill and relationships on Payless' behalf and to develop and
preserve business information for Payless' exclusive ownership and use; and
(vi) long-term customer and supplier relationships often can be difficult to
develop and require a significant investment of time, effort and expense; and
(vii) Executive recognizes and acknowledges that if Executive's employment
with Payless were to cease, Payless needs certain protections in order to
ensure that Executive does not appropriate and use any confidential
information entrusted to Executive during the course of Executive's
employment by Payless or take any other action which could result in a loss
of Payless' goodwill that was generated on Payless' behalf and at its
expense, and, more generally, to prevent Executive from having an unfair
competitive advantage over Payless.
(d) Reasonableness of non-compete restriction. Executive acknowledges and
agrees that the restrictions in Paragraph 3(a) are reasonable and enforceable in
view of the background for the non-compete restriction set forth in Paragraph
3(c) and in view of, among other things,
(i) the markets in which Payless and its subsidiaries operate their business;
and
(ii) the confidential information to which Executive has access; and
(iii) Executive's training and background, which are such that neither
Payless nor Executive believe that the restraint will pose an undue hardship
on Executive; and
(iv) the fact that a Competing Business could benefit greatly if it were to
obtain Payless' confidential information; and
(v) the fact that Payless would not have adequate protection if Executive
were permitted to work for any Competing Business since Payless would be
unable to verify whether its confidential information was being disclosed or
misused; and
(vi) the limited duration of, the limited scope of, and the limited
activities prohibited by, the restrictions in Paragraph 3(a); and
(vii) Payless' legitimate interests in protecting its confidential
information, goodwill and relationships.
(e) If Executive violates Executive's obligations under Paragraph 3(a), then
Payless shall be entitled to an injunction and other relief provided for in this
Agreement to prevent such violation, and the time during which Executive
violated the obligations shall not count toward satisfying the time during which
the restriction shall apply. For example, if Executive were to join a competitor
at the end of the Contract Term in violation of the restrictions in Paragraph
3(a) and work for such competitor for one month before a court enjoined such
violation, then the two year time period of the restriction would begin when
such injunction were issued;
4
<PAGE> 5
the one month during which Executive violated such restriction would not count
toward the time that the restriction applies.
4. If Executive becomes Totally Disabled and remains continuously so Totally
Disabled for a period of 180 days, then Payless' obligations under this
Employment Agreement, at Payless' option, may be terminated by notice in writing
to that effect given during the continuance of such Total Disability, such
termination to take effect the later of (a) the last day of the month during
which such notice is given or (b) the last day of such 180 day period. If
Executive has made a previous election to participate in Payless' Long Term
Disability Plan (subject to the terms and provisions of that plan), then the
terms of that plan shall apply. "Total Disability" or "Totally Disabled" shall
mean the inability of Executive to perform the normal duties of Executive's job
under this Agreement.
5. (a) If Executive's employment terminates during the Contract Term by reason
of Executive's death or Total Disability, by Executive's voluntary termination
of employment or by Payless for Cause,
(i) Executive's basic compensation and employee benefits shall cease on the
date of such termination, except as otherwise provided herein or in any
applicable employee benefit plan or program; and
(ii) Executive (or Executive's legal representative(s)) shall be entitled to
such portion of any incentive compensation as shall be payable under the
terms of the Incentive Plan.
(b) In addition, if Executive's employment is terminated by reason of death,
then Executive's obligations under Paragraphs 1 and 2 shall cease on the
effective date of such termination.
(c) In addition, if Executive's employment is terminated by reason of Total
Disability, by Executive voluntarily or by Payless for Cause, then Executive's
obligations under Paragraphs 1 and 2 shall cease on the effective date of such
termination and Executive's obligations under Paragraphs 3 and 6 remain in full
force and effect, and Payless shall be entitled to all legal and equitable
rights and remedies under this Agreement, including all of its rights and
remedies referred to in Paragraph 8 of this Agreement, and Payless shall be
entitled to enjoin Executive from violating the provisions of Paragraphs 3 and 6
of this Agreement.
(d) If Executive's employment is terminated by Payless without Cause, then
(i) Executive's employment (and status as an employee) shall cease
immediately; and
(ii) Executive shall be entitled to continue to receive Executive's basic
compensation referred to in Paragraph 1(b) for the remainder of the Contract
Term, subject to the provisions of Paragraph 5(d)(vi); and
(iii) Executive shall be entitled to such portion of any incentive
compensation as shall be payable under the terms of the Incentive Plan; and
(iv) Executive shall be entitled to post-termination benefits that are
payable under Payless' employee benefit plans in accordance with their terms
based on Executive's service through, and termination of employment on, the
termination date, including any rights Executive may have to continued
participation in Payless' medical plans under COBRA; and
(v) except as expressly provided in this Paragraph 5(d), Executive's
post-termination obligations under this Agreement, including, without
limitation, the provisions of Paragraphs 3 and 6, shall continue to apply
following such termination; and
(vi) Executive shall use Executive's best efforts to find other employment
which does not violate the provisions of Paragraph 3 hereof. If Executive
accepts such other employment, Executive shall promptly
5
<PAGE> 6
notify Payless of such employment and of the compensation received, to be
received or receivable from Executive's subsequent employer attributable to
the remainder of the Contract Term, and all basic compensation otherwise
payable under Paragraph 5(d) for the remainder of the Contract Term shall be
reduced to the extent of Executive's similar compensation received, to be
received or receivable from such other employer or other business.
(e) "Cause" means
(i) an intentional act of fraud, embezzlement, theft or any other material
violation of law in connection with Executive's duties or in the course of
Executive's employment with Payless; or
(ii) intentional damage to assets of Payless; or
(iii) intentional disclosure of confidential information of Payless contrary
to the policy of Payless; or
(iv) breach of Executive's obligations under this Agreement; or
(iv) intentional engagement in any competitive activity which would
constitute a breach of Executive's duty of loyalty or of Executive's
obligations under this Agreement; or
(v) intentional breach of any policy of Payless; or
(vi) the willful and continued failure by Executive to substantially perform
Executive's duties with Payless (other than any such failure resulting from
Executive's incapacity due to physical or mental illness); or
(vii) the willful engaging by Executive in conduct which is demonstrably and
materially injurious to Payless, monetarily or otherwise.
For purposes of this Paragraph 5(e), an act, or a failure to act, shall not be
deemed "willful" or "intentional" unless it is done, or omitted to be done, by
Executive in bad faith or without reasonable belief that Executive's action or
omission was in the best interest of Payless. Failure to meet performance
standards or objectives, by itself, will not constitute "Cause".
(f) Executive agrees that, in addition to any other remedies, Payless shall
be permitted, as part of the computation of any final amount or amounts due to
Executive as wages, compensation, bonus, deferred compensation or otherwise, and
before any such amount shall be due and owing, to reduce any amount which
Payless may otherwise owe to Executive by any unpaid amount which Executive owes
to Payless.
6. (a) Executive will not, at any time, directly or indirectly, use or disclose
any of Payless' confidential information for any purpose except for authorized
use or disclosure within the scope of Executive's employment with Payless.
(b) At Payless' request and/or upon termination of Executive's employment
hereunder, Executive agrees to return to Payless all documents, records,
notebooks, computer diskettes and anything else containing Payless' confidential
information, including all copies thereof, then in Executive's possession, or
under Executive's custody or control.
(c) During the Contract Term and thereafter, Executive shall notify Payless
immediately of any unauthorized possession, use or knowledge of any of Payless'
confidential information. Executive shall
6
<PAGE> 7
promptly furnish details of such possession, use or knowledge to Payless, will
assist in preventing the reoccurrence of such possession, use or knowledge, and
shall cooperate with Payless in any litigation deemed necessary by Payless to
protect the confidential information.
(d) "Confidential information" means all non-public information pertaining to
Payless' business. Confidential information includes not only information
disclosed by Payless to Executive, but also information developed or learned by
Executive during the course of or as a result of employment with Payless, which
information shall be the property of Payless. All of Payless' confidential
information is and shall be deemed to be Payless' property. Payless'
confidential information includes, without limitation, information and documents
concerning Payless' processes; suppliers (including Payless' terms, conditions
and other business arrangements with suppliers); supplier and customer lists;
advertising and marketing plans and strategies; profit margins; seasonal plans,
goals, objectives and projections; compilations, analyses and projections
regarding Payless' divisions, stores, product segments, product lines,
suppliers, sales and expenses; files; trade secrets and patent applications
(prior to their being public); salary, staffing and employment information
(including information about performance of other executives); and "know-how,"
techniques or any technical information not of a published nature relating, for
example, to how Payless conducts its business.
(e) Executive agrees that Executive will not disclose to Payless, use or
induce Payless to use any proprietary information, trade secrets or confidential
business information of others. Executive represents and warrants that Executive
has returned all property, proprietary information, trade secrets and
confidential business information belonging to any prior employers.
7. (a) If any court of competent jurisdiction determines that, but for the
provisions of this Paragraph 7, any provision of this Agreement is illegal, void
as against public policy or otherwise unenforceable because it is deemed to be
overbroad, then such provision shall automatically be amended to the extent (but
only to the extent) necessary to make it sufficiently narrow in scope, time and
geographic area that it is not illegal, void as against public policy or
overbroad. All other remaining terms and provisions shall remain in full force
and effect.
(b) If Executive raises any question regarding the enforceability of any
aspect of this Agreement, including, without limitation, Paragraphs 3 or 6,
Executive specifically agrees that Executive will abide fully by such provisions
unless and until a court of competent jurisdiction has rendered a final judgment
that such provisions are not fully enforceable. Following any such final
judgment, Executive and Payless will abide fully by such judgment.
8. (a) Payless and Executive shall each be entitled to pursue all legal and
equitable rights and remedies to secure performance of the obligations and
duties of the other under this Agreement, and enforcement of one or more of such
rights and remedies shall in no way preclude Payless or Executive from pursuing
any and all other rights and remedies available to each of them.
(b) Executive acknowledges and agrees that the individualized services and
capabilities that Executive will render and provide to Payless during the
Contract Term are of a personal, special, unique, unusual, extraordinary and
intellectual character.
(c) Executive acknowledges and agrees that the restrictions in this Agreement
on Executive are reasonable in order to protect Payless' expectations and rights
under this Agreement and to provide Payless with the protections that Payless
needs to, among other things, safeguard its confidential information. Payless
shall be entitled to injunctive relief in addition to any other remedy it may
have, and Executive expressly consents to injunctive and such other equitable
relief as Payless in good faith believes it may need. Without limiting the
generality of the foregoing, if Executive breaches or threatens to breach
Executive's obligations under Paragraphs 3 or 6 hereof, Executive consents to
entry of an order enjoining Executive from rendering personal services to or in
connection with a Competing Business and from using or disclosing any
confidential information.
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<PAGE> 8
(d) If Executive's employment is terminated by Executive voluntarily or by
Payless for Cause, Executive shall be liable for all attorneys' fees and costs
incurred by Payless in seeking to enforce its rights under this Agreement.
9. Payless Work-Product, The Executive agrees to disclose fully to Payless, and
hereby assigns and transfers to Payless, and agrees to execute any additional
documentation Payless may reasonably request to evidence the assignment and
transfer, immediately upon the conception, development, making or acquisition
thereof, the right, title, and interest in and to any and all inventions,
discoveries, improvements, innovations, and/or designs (the "Work Product")
conceived, discovered, developed, acquired or secured by the Executive, solely
or jointly with others or otherwise, together with all associated U.S. and
foreign intellectual property rights (i.e. patents, copyrights, trademarks or
trade secrets) either:
(a) during the period of Executive's employment, if such Work Product is
related directly or indirectly, to the business of, or to the research or
development work of Payless;
(b) with the use of the time, materials, or facilities of Payless; or
(c) within one year after termination of such employment if conceived as a
result of and is attributable to work done during such employment and relates to
Work Product within the scope of the business of Payless, together with rights
to all intellectual property rights which may be granted thereon.
Upon discovery, development or acquisitions or any such Work Product, Executive
shall notify Payless and shall execute and deliver to Payless, without further
compensation, such documents prepared by Payless as may be reasonable or
necessary to prepare or prosecute applications for such Work Product and to
assign and transfer to Payless Executive's right, title and interest in and to
such Work Product and intellectual property rights thereof. Executive
acknowledges that Executive has carefully read and considered the provisions of
this paragraph and, having done so, agrees that the restrictions set forth
herein are fair and reasonable and are reasonably required for the protection of
the interests of Payless, its officers, directors, and other Executives.
10. The entire understanding and agreement between the parties has been
incorporated into this Agreement, and this Agreement supersedes all other
agreements and understandings between the parties with respect to the employment
of Executive by Payless. This Agreement shall inure to the benefit of, and shall
be binding upon, Payless, its successors and assigns and upon Executive and
Executive's heirs, successors and assigns; provided, however, that, since this
is an agreement for the rendering of personal services, Executive cannot assign
any of Executive's obligations under this Agreement to anyone else. This
Agreement may be executed in counterparts, in which case each of the two
counterparts shall be deemed to be an original and the final counterpart shall
be deemed to have been executed in Topeka, Kansas. Executive agrees that this
Agreement may be assigned by Payless to a subsidiary of Payless; such
assignment, however, shall not relieve Payless of any of its obligations
hereunder except to the extent that such obligations are actually discharged by
such subsidiary.
11. This Agreement has been executed by Payless at Payless' corporate
headquarters and principal executive offices in Topeka, Kansas. Any questions or
other matter arising under this Agreement, whether of validity, interpretation,
performance or otherwise, shall be governed by and construed in accordance with
the laws of the State of Kansas applicable to agreements made and to be
performed in such state without regard to such state's conflicts of law
provision. All actions and proceedings arising out of or relating directly or
indirectly to this Agreement shall be filed and litigated exclusively in any
state court or federal court located in the City of Topeka, Kansas or in Shawnee
County, Kansas. The parties hereto expressly consent to the jurisdiction of any
such court and to venue therein and consent to service of process if made upon
Payless' registered agent or if made at Executive's last known address on the
records of Payless.
BY SIGNING THIS AGREEMENT, EXECUTIVE HEREBY CERTIFIES THAT EXECUTIVE (A) HAS
RECEIVED A COPY OF THIS AGREEMENT FOR REVIEW AND STUDY BEFORE SIGNING IT; (B)
HAS READ THIS AGREEMENT CAREFULLY BEFORE SIGNING IT; (C) HAS HAD SUFFICIENT
OPPORTUNITY TO REVIEW THE AGREEMENT WITH ANY ADVISOR WHICH EXECUTIVE MAY DESIRE
TO CONSULT, INCLUDING LEGAL COUNSEL; (D) HAS HAD SUFFICIENT OPPORTUNITY
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BEFORE SIGNING IT TO ASK ANY QUESTIONS EXECUTIVE HAS ABOUT THIS AGREEMENT AND
HAS RECEIVED SATISFACTORY ANSWERS TO ALL SUCH QUESTIONS; AND (E) UNDERSTANDS
EXECUTIVE'S RIGHTS AND OBLIGATIONS UNDER THIS AGREEMENT.
IN WITNESS WHEREOF, this Agreement has been executed by Executive, and then
by Payless in Topeka, Kansas on the dates shown below, but effective as of the
Hire Date defined in Paragraph 1 hereof.
Date: 28 Jan 99 By: /s/ Ken C. Hicks Executive
--------------- ----------------------
Ken C. Hicks
Date: 2/15/99 By: /s/ Steven J. Douglass PAYLESS SHOESOURCE, INC.
--------------- -----------------------
9
<PAGE> 1
EXHIBIT 11.1
PAYLESS SHOESOURCE, INC.
COMPUTATION OF NET EARNINGS PER SHARE
FOR THE LAST THREE FISCAL YEARS
<TABLE>
<CAPTION>
Jan. 30, Jan. 31, Feb. 1,
(Thousands, except per share) 1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Basic Computation:
Net earnings $134,959 $128,869 $107,702
Common shares outstanding 35,412 38,443 40,220
-------- -------- --------
Net earnings per share $ 3.81 $ 3.35 $ 2.68
======== ======== ========
Diluted Computation:
Net earnings $134,959 $128,869 $107,702
Common shares outstanding 35,412 38,443 40,220
Net effect of dilutive stock
options based on the treasury
stock method 320 487 87
-------- -------- --------
Outstanding shares for diluted
earnings per share 35,732 38,930 40,307
======== ======== ========
Diluted earnings per share $ 3.78 $ 3.31 $ 2.67
======== ======== ========
</TABLE>
<PAGE> 1
EXHIBIT 12.1
PAYLESS SHOESOURCE, INC.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
FOR THE LAST THREE FISCAL YEARS
<TABLE>
<CAPTION>
Jan. 30, Jan. 31, Feb. 1,
(Thousands) 1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Earnings Available for Fixed Charges:
Pretax earnings $224,467 $214,348 $179,159
Fixed Charges (Interest expense plus
interest component of rent) 72,234 85,345 81,576
-------- -------- --------
$296,701 $299,693 $260,735
Fixed Charges:
Gross interest expense $ 1,876 $ 1,246 $ 1,166
Interest factor attributable
to rent expense 70,358 84,099 80,410
-------- -------- --------
72,234 85,345 81,576
======== ======== ========
Ratio of Earnings to Fixed Charges 4.1 3.5 3.2
======== ======== ========
</TABLE>
<PAGE> 1
EXHIBIT 13.1
MANAGEMENT'S DISCUSSION AND ANALYSIS
Payless ShoeSource, Inc., a Delaware corporation (the "Company"), achieved its
third consecutive year of increased sales, net earnings and earnings per share
since operating as an independent public company. The three year diluted
earnings per share compounded growth rate is 19.0 percent.
Sales for the Company increased to $2.62 billion in fiscal 1998, from $2.57
billion in 1997, an increase of 1.9 percent. Same-store sales for 1998 decreased
0.8 percent. The Company's diluted earnings per share for 1998 increased 14.2
percent to $3.78 from $3.31 last year. Net earnings totaled $135.0 million
compared with $128.9 million in 1997, an increase of 4.7 percent. Return on
sales was 5.2 percent in 1998, up from 5.0 percent in 1997. Return on equity
improved to 16.1 percent in 1998 from 15.1 percent in 1997. Return on net assets
declined to 17.2 percent in 1998 from 17.3 percent in 1997.
During 1998 the Company had a net increase of 101 Payless ShoeSource stores (228
openings and 127 closings) and 38 Parade of Shoes stores (55 openings and 17
closings). Year-end 1998 store count was 4,357 Payless ShoeSource stores and 213
Parade of Shoes stores.
The Company's expansion plans for 1999 include a net increase of 120 stores,
which includes Payless ShoeSource domestic and Canadian stores. Over the next
five year period, the Company plans to invest $277 million for new stores and to
spend an additional $134 million to remodel existing stores. These are the major
components of a projected $648 million capital improvement plan.
During 1998 the Company repurchased $272.9 million of common stock, which
represented the entire $150 million stock repurchase program (2.2 million
shares) announced in September 1997 and $122.9 million (2.7 million shares) of
the $150 million stock repurchase program announced in August 1998 that was
increased to $500 million in October. The Company continues to repurchase shares
of its common stock as market conditions allow and intends to complete the $500
million stock repurchase program before the end of fiscal year 2001. During 1997
the Company completed the $150 million stock repurchase program (2.8 million
shares) announced in January 1997.
This discussion summarizes the significant factors affecting operating results
for the fiscal years ended January 30, 1999 (1998), January 30, 1998 (1997), and
February 1, 1997 (1996). The Management's Discussion and Analysis should be read
in conjunction with the consolidated financial statements and notes to the
consolidated financial statements included in this annual report. References to
years relate to fiscal years rather than calendar years unless otherwise
designated.
REVIEW OF OPERATIONS
Diluted earnings per share reached $3.78 in 1998, compared with $3.31 in 1997
and $2.67 in 1996. Net earnings totaled $135.0 million in 1998 compared with
$128.9 million in 1997 and $107.7 million in 1996. The 1998 and 1997 diluted
earnings per share growth rates were 14.2 percent and 24.0 percent,
respectively. Return on sales was 5.2 percent, 5.0 percent and 4.6 percent for
1998, 1997 and 1996, respectively.
Results for the past three years were as follows:
<TABLE>
<CAPTION>
(dollars in 1998 1997 1996
millions, except % of % of % of
per share) $ Sales $ Sales $ Sales
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net retail sales $ 2,615.5 100.0% $ 2,566.9 100.0% $ 2,333.7 100.0%
Cost of sales(1) 1,798.9 68.8 1,799.4 70.1 1,663.5 71.2
Selling,
general and
administrative
expenses(1) 599.2 22.9 562.1 21.9 497.3 21.3
Interest (income)
expense, net (7.1) (0.3) (8.9) (0.3) (6.2) (0.2)
- --------------------------------------------------------------------------------------------------------
Earnings before
income taxes 224.5 8.6 214.3 8.3 179.1 7.7
- --------------------------------------------------------------------------------------------------------
Provision for
income taxes(2) 89.5 39.9 85.4 39.9 71.4 39.9
Net earnings $ 135.0 5.2% $ 128.9 5.0% $ 107.7 4.6%
========================================================================================================
Diluted earnings
per share $ 3.78 $ 3.31 $ 2.67
- --------------------------------------------------------------------------------------------------------
Basic earnings
per share $ 3.81 $ 3.35 $ 2.68
- --------------------------------------------------------------------------------------------------------
</TABLE>
(1) Certain expenses related to occupancy costs have been reclassified from
selling, general and administrative expense to cost of sales.
(2) Percent of sales columns represent effective income tax rates.
NET RETAIL SALES Net retail sales represent the sales of stores operated during
the period. Same-store sales represent sales of those stores open during both
comparable periods. In 1998 total sales increased 1.9 percent from 1997,
consisting of a 1.8 percent decrease in unit volume and a 3.7 percent increase
in average selling prices. Same-store sales decreased 0.8 percent in 1998. In
1997 total sales increased 10.0 percent from 1996, consisting of a 9.5 percent
increase in unit volume and a 0.5 percent increase in average selling prices.
Same-store sales increased 5.6 percent in 1997.
In 1996 sales increased 1.4 percent from 1995, consisting of a 1.0 percent
reduction in unit volume and a 2.4 percent increase in average selling prices.
Same-store sales increased 3.6 percent in 1996.
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<PAGE> 2
The sales increase in 1998 over 1997 was driven principally by growth in store
count and the Company's successful entry into the Canadian market. The
same-store sales decrease in 1998 compared with 1997 reflected general softness
in the footwear market, particularly in the second half of the year; weakness in
certain geographic areas, especially the West Coast and Northwest; declines in
sales of certain categories, such as men's and children's athletic shoes,
women's dress shoes, boots and sandals, due to changes in consumer preferences
and weather conditions; and pressure from close-out sales and inventory
liquidation programs by competitors with excess inventories.
The sales and same-store sales increases in 1997 over 1996 were the result of
achieving positive sales increases in all of the Company's geographic regions;
delivery of validated fashion styles and balanced merchandise assortments to the
Company's market segment faster than competitors; generally stronger responses
to sales promotions based on more effective advertising strategies; and
improvements in store operations due to a stronger base of experienced store
managers.
COST OF SALES Cost of sales includes cost of merchandise sold, and the Company's
buying and occupancy costs. Cost of sales was $1.80 billion in 1998 which was
essentially flat compared with $1.80 billion in 1997. As a percent of net retail
sales, cost of sales was 68.8 percent in 1998 compared with 70.1 percent in
1997. Higher gross margins in 1998 reflect improvements in the merchandising
mix, control of freight costs and improvements in product costs.
Cost of sales was $1.80 billion in 1997 compared with $1.66 billion in 1996, an
8.2 percent increase. The overall increase primarily resulted from a 10.0
percent increase in sales. As a percent of net retail sales, cost of sales was
70.1 percent in 1997 compared with 71.2 percent in 1996. Higher gross margins in
1997 reflect improved merchandise margins and leverage of occupancy costs gained
through positive same-store sales.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative
expenses were $599.2 million in 1998 compared with $562.1 million in 1997, a 6.6
percent increase. As a percent of net retail sales, selling, general and
administrative expenses were 22.9 percent for 1998 compared with 21.9 percent in
1997. The increase was primarily due to an increase in advertising expense;
negative leverage due to below planned sales results; and investments in systems
to support future growth, enhance distribution capabilities and implement the
Company's Year 2000 program, as discussed under "Year 2000 Readiness
Disclosure."
Selling, general and administrative expenses were $562.1 million in 1997
compared with $497.3 million in 1996, a 13.0 percent increase. As a percent of
net retail sales, selling, general and administrative expenses were 21.9 percent
for 1997 compared with 21.3 percent in 1996. An increase in advertising,
start-up and operational costs associated with the Parade of Shoes division;
increased stores payroll; and investments in infrastructure and systems to
support future growth accounted for the majority of the increase.
INTEREST (INCOME) EXPENSE Interest income and expense components were:
(dollars in millions) 1998 1997 1996
- -------------------------------------------------------------
Interest income $(9.0) $(10.1) $(7.4)
Interest expense 1.9 1.2 1.2
- -------------------------------------------------------------
Interest (income) expense, net $(7.1) $ (8.9) $(6.2)
=============================================================
The increase in 1998 interest expense was due to the issuance of $67.0 million
of unsecured notes in November 1998. Interest expense also relates to
capitalized lease obligations. Interest income is from the short-term investment
of available cash balances.
INCOME TAXES The effective income tax rates were 39.9 percent for 1998, 1997 and
1996.
IMPACT OF INFLATION Inflation did not have a material impact on the Company's
1998 sales growth or earnings.
REVIEW OF FINANCIAL CONDITION
CASH FLOW Cash flow from operations (net earnings plus depreciation and
amortization) was $228.8 million, 8.8 percent of net sales in 1998 compared with
8.6 percent in 1997 and 8.5 percent in 1996. Internally generated funds will
continue to provide the Company with significant capital resources to enhance
shareowners' value.
Sources and (uses) of cash flows are summarized below:
(dollars in millions) 1998 1997 1996
- -----------------------------------------------------------------------
Net earnings and depreciation
and amortization $ 228.8 $ 219.5 $ 198.0
Working capital (increases) decreases (5.4) 24.0 25.8
Other operating activities (2.7) (0.7) 16.7
Capital expenditures and
other investing activities (99.9) (74.8) (32.9)
Net purchases of common stock (272.9) (150.0) (16.5)
Net long-term debt issuances (repayments) 65.6 (1.6) (2.1)
- -----------------------------------------------------------------------
Increase (Decrease) in cash
and cash equivalents $ (86.5) $ 16.4 $ 189.0
=======================================================================
13
<PAGE> 3
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
CAPITAL EXPENDITURES In 1998 the Company's capital expenditures totaled $108.6
million, including $50.1 million for new stores, $26.8 million to remodel
existing stores and $31.7 million for other necessary improvements. The Company
expects that 1999 capital expenditures will be approximately $128 million.
Capital expenditures for the period 1999 through 2003 are planned at $648
million. The Company intends to use internal cash flow to finance substantially
all of these expenditures.
FINANCING ACTIVITIES During 1998 the Company issued $67 million of unsecured
notes. Maturities range from 2003 to 2008, with interest rates ranging from
6.55% to 7.35%. The proceeds were added to the Company's general funds and are
available for stock repurchases and other general corporate purposes.
AVAILABLE CREDIT The Company has a $200 million revolving credit agreement.
While no amounts had been drawn against the agreement at January 30, 1999, the
balance available to the Company was reduced by $6.4 million outstanding under a
letter of credit.
FINANCIAL CONDITION RATIOS Return on equity and return on net assets are as
follows:
1998 1997 1996
- -----------------------------------------------------------
Return on equity(1) 16.1% 15.1% 14.3%
Return on net assets(2) 17.2% 17.3% 15.5%
- -----------------------------------------------------------
(1) Return on equity is computed as net earnings divided by beginning
shareowners' equity and measures the Company's ability to invest
shareowners' funds profitably. The 1998 increase results from the 1997 share
repurchases.
(2) Return on net assets is computed as pretax earnings before net interest
expense and the interest component of operating leases, divided by beginning
of year net assets, including present value of future minimum rental
payments under operating leases and represents performance independent of
capital structure.
The debt-to-capitalization ratio was 9.5 percent, 1.0 percent and 1.0 percent
for 1998, 1997 and 1996, respectively. The 1998 debt-to-capitalization ratio
increase results from the issuance of $67 million of unsecured debt in November
1998. For purposes of the debt-to-capitalization ratio, total debt is long-term
debt. Capitalization is defined as total debt, noncurrent deferred income taxes
and shareowners' equity. The debt-to-capitalization ratio, including the present
value of future minimum rental payments under operating leases as debt and as
capitalization, would be 56.8 percent, 50.1 percent and 49.1 percent in 1998,
1997 and 1996, respectively.
The fixed charge coverage was 4.1x, 3.5x and 3.2x in 1998, 1997 and 1996,
respectively. Fixed charges are defined as gross interest expense and the
interest component of rent expense. Fixed charge coverage measures the Company's
ability to meet debt obligations from earnings.
COMMON STOCK AND MARKET PRICES The Company's common stock is listed on the New
York Stock Exchange under the trading symbol PSS. The Company has not paid a
dividend on its shares of common stock and has no present intention to commence
dividend payments. The quarterly intraday price ranges of the common stock in
1998 and 1997 were:
1998 1997
MARKET PRICE Market Price
Quarter HIGH LOW High Low
- ---------------------------------------------------------------
First $77 $65 1/8 $44 1/8 $35 3/4
Second 74 3/8 56 3/8 63 3/4 43
Third 57 11/16 37 65 55 1/2
Fourth 53 41 5/8 70 1/4 55 1/2
- ---------------------------------------------------------------
Year $77 $37 $70 1/4 $35 3/4
- ---------------------------------------------------------------
As of January 30, 1999, there were approximately 45,000 owners of the Company's
common stock.
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.
14
<PAGE> 4
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 second 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.
The Company currently is not dependent on a single source for any products or
services. In the event a significant supplier, bank or other business partner or
vendor is unable to provide products or services to the Company due to a Year
2000 failure, the Company believes it has adequate alternate sources for such
products or services. There can be no guarantee, however, that similar or
identical products or services would be available on the same terms and
conditions or that the Company would not experience some adverse effects as a
result of switching to such alternate sources.
EMBEDDED SYSTEMS. The Company 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 plans to have
fully tested such non-computer equipment by the end of the second quarter of
1999.
COSTS TO ADDRESS THE YEAR 2000 Spending for modifications is being expensed as
incurred and is not expected to have a material impact on the Company's results
of operations or cash flows.
The cost of the Company's Year 2000 program is being funded with cash flows from
operations. The Company's total Year 2000 expenditures (including external and
internal expenditures) are estimated to be in the range of $8-10 million. While
the foregoing estimate does include internal costs, the Company does not
separately track all of the internal costs incurred by it for the Year 2000
program. Such costs are principally the related payroll costs for the Company's
Year 2000 Program Management Office and other internal resources who are also
contributing their efforts to the Year 2000 program. The largest single Year
2000 expenditure to date has been consulting fees incurred in the context of the
remediation of the Company's internally engineered computer systems as discussed
above.
To date, the Company has expended approximately 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.
15
<PAGE> 5
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
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.
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 and appropriate terms; the ability to hire and train associates; and
general economic, business and social conditions.
All subsequent written and oral forward-looking statements attributable to the
Company or persons acting on its behalf are expressly qualified in their
entirety by these cautionary statements. The Company does not undertake any
obligation to release publicly any revisions to such forward-looking statements
to reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events.
16
<PAGE> 6
SUMMARY OF SELECTED HISTORICAL FINANCIAL INFORMATION
The following table presents selected historical financial information of the
Company. The information presented below reflects periods during which the
Company did not operate as an independent public company, and, accordingly,
certain assumptions were made in preparing this financial information.
Therefore, this information may not necessarily reflect the consolidated results
of operations or financial position that would have existed if the Company had
been an independent public company during the periods shown or the future
performance of the Company as an independent public company. The financial
information below should be read in conjunction with the consolidated financial
statements and the notes in this annual report.
<TABLE>
<CAPTION>
(dollars in millions, except per Fiscal Year(1)
share; shares in thousands) 1998 1997 1996 1995 1994 1993 1992
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF EARNINGS DATA:
Net retail sales $2,615.5 $2,566.9 $2,333.7 $2,330.3 $2,116.4 $1,966.5 $1,787.8
Cost of sales(2) 1,798.9 1,799.4 1,663.5 1,696.2 1,494.9 1,369.9 1,228.0
Selling, general and
administrative expenses(2) 598.4 557.4 484.7 472.4 403.3 374.9 347.5
Special and nonrecurring items(3) 0.8 4.7 12.6 71.8 - - -
Interest (income) expense, net (7.1) (8.9) (6.2) 1.0 1.1 0.9 0.8
- -----------------------------------------------------------------------------------------------------------------------
Total cost of sales and expenses 2,391.0 2,352.6 2,154.6 2,241.4 1,899.3 1,745.7 1,576.3
- -----------------------------------------------------------------------------------------------------------------------
Earnings before income taxes 224.5 214.3 179.1 88.9 217.1 220.8 211.5
Provision for income taxes 89.5 85.4 71.4 34.9 85.6 88.0 80.4
- -----------------------------------------------------------------------------------------------------------------------
Net earnings $ 135.0 $ 128.9 $ 107.7 $ 54.0 $ 131.5 $ 132.8 $ 131.1
=======================================================================================================================
Diluted earnings per share(4) $ 3.78 $ 3.31 $ 2.67 - - - -
Average shares outstanding
- diluted(4) 35,732 38,930 40,307 - - - -
BALANCE SHEET DATA:
Working capital $ 300.9 $ 384.8 $ 392.2 $ 232.0 $ 242.8 $ 253.5 $ 206.1
Property and equipment, net 492.8 486.7 502.5 560.0 590.6 433.9 383.9
Total assets 1,017.9 1,073.0 1,091.8 1,014.3 1,019.8 840.8 732.7
Total debt 73.5 7.9 9.5 11.5 13.1 14.5 16.1
Total equity 702.8 836.4 853.0 752.9(5) 793.9(5) 661.0(5) 571.1(5)
=======================================================================================================================
OTHER FINANCIAL DATA:
Capital expenditures $ 108.6 $ 85.4 $ 73.4 $ 95.4 $ 255.2 $ 139.8 $ 119.3
Present value of operating leases 851.4 832.5 817.9 885.5 952.1 779.9 688.1
Earnings before interest,
income taxes, depreciation
and amortization (EBITDA)(6) 315.5 300.5 272.1 185.2 295.2 288.7 245.2
Net retail sales growth 1.9% 10.0% 1.4%(7) 10.1% 7.6% 10.0% 15.5%
Same-store sales growth (0.8)% 5.6% 3.6% (3.7)% (0.2)% 1.7% 2.8%
Return on equity 16.1% 15.1% 14.3% 6.8% 19.8% 23.3% 24.7%
Return on net assets 17.2% 17.3% 15.5% 13.9% 20.9% 22.7% 24.7%
Number of stores (at year-end) 4,570 4,431 4,236 4,549 4,435 3,779 3,570
=======================================================================================================================
</TABLE>
(1) All years include 52 weeks, except 1995, which includes 53 weeks.
(2) Certain expenses related to occupancy costs and asset disposals have been
reclassified from selling, general and administrative expense to cost of
sales.
(3) Special and nonrecurring items are included in selling, general, and
administrative expenses in the accompanying Consolidated Statement of
Earnings. During the fourth quarter of 1995, the Company committed to close
or relocate underperforming stores and restructure its central office. The
Company also incurred executive retention costs associated with the spin-off
that established the Company as an independent public company.
(4) Calculations only shown since being an independent public company.
(5) Prior to 1996, total equity was the equity investment by The May Department
Stores Company.
(6) EBITDA should not be considered in isolation or as a substitute for measures
of performance or cash generation prepared in accordance with generally
accepted accounting principles.
(7) Growth percentage based on a 52-week comparison with 1995.
17
<PAGE> 7
CONSOLIDATED STATEMENT OF EARNINGS
(dollars in millions, except per share data)
<TABLE>
<CAPTION>
1998 1997 1996
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET RETAIL SALES $2,615.5 $2,566.9 $2,333.7
- --------------------------------------------------------------------------------------------
Cost of sales 1,798.9 1,799.4 1,663.5
Selling, general and administrative expenses 599.2 562.1 497.3
Interest (income) expense, net (7.1) (8.9) (6.2)
- --------------------------------------------------------------------------------------------
Total cost of sales and expenses 2,391.0 2,352.6 2,154.6
- --------------------------------------------------------------------------------------------
Earnings before income taxes 224.5 214.3 179.1
Provision for income taxes 89.5 85.4 71.4
- --------------------------------------------------------------------------------------------
NET EARNINGS $ 135.0 $ 128.9 $ 107.7
============================================================================================
Diluted earnings per share $ 3.78 $ 3.31 $ 2.67
- --------------------------------------------------------------------------------------------
Basic earnings per share $ 3.81 $ 3.35 $ 2.68
- --------------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
18
<PAGE> 8
CONSOLIDATED BALANCE SHEET
(dollars in millions, except shares and per share data)
<TABLE>
<CAPTION>
JANUARY 30, January 31,
1999 1998
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 123.5 $ 210.0
Merchandise inventories 342.1 324.6
Current deferred income taxes 14.2 16.9
Other current assets 16.0 11.4
- ---------------------------------------------------------------------------------------------------------------------
Total current assets 495.8 562.9
Property and equipment:
Land 6.3 4.3
Buildings and leasehold improvements 594.8 559.3
Furniture, fixtures and equipment 284.2 279.7
Property under capital leases 7.6 7.5
- ---------------------------------------------------------------------------------------------------------------------
Total property and equipment 892.9 850.8
Accumulated depreciation and amortization (400.1) (364.1)
- ---------------------------------------------------------------------------------------------------------------------
Property and equipment, net 492.8 486.7
Deferred income taxes 25.8 19.9
Other assets 3.5 3.5
- ---------------------------------------------------------------------------------------------------------------------
Total assets $ 1,017.9 $1,073.0
=====================================================================================================================
LIABILITIES AND SHAREOWNERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 1.5 $ 1.4
Accounts payable 75.5 63.8
Accrued expenses 117.9 112.9
- ---------------------------------------------------------------------------------------------------------------------
Total current liabilities 194.9 178.1
Long-term debt 72.0 6.5
Other liabilities 48.2 52.0
Shareowners' Equity:
Preferred stock, $.01 par value; 25,000,000 shares authorized; none issued
Common stock, $.01 par value; 240,000,000 shares authorized;
36,924,127 and 41,000,000 issued in 1998 and 1997, respectively;
32,453,406 and 37,332,068 shares outstanding in 1998 and 1997, respectively 0.3 0.4
Additional paid-in capital 35.0 21.0
Unearned restricted stock (3.3) (7.6)
Retained earnings 670.8 822.6
- ---------------------------------------------------------------------------------------------------------------------
Total shareowners' equity 702.8 836.4
- ---------------------------------------------------------------------------------------------------------------------
Total liabilities and shareowners' equity $ 1,017.9 $1,073.0
=====================================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
19
<PAGE> 9
CONSOLIDATED STATEMENT OF SHAREOWNERS' EQUITY
(dollars in millions, shares in thousands)
<TABLE>
<CAPTION>
Outstanding
Common Stock Additional Unearned Total
------------------------ Paid-in Restricted Retained Shareowners'
Shares Dollars Capital Stock Earnings Equity
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at February 3, 1996 -- $ -- $ -- $ -- $ 752.9 $ 752.9
Net earnings -- -- -- -- 107.7 107.7
Shares issued at spin-off 39,971 0.4 -- -- (0.4) --
Issuances of common stock 409 -- 12.0 (12.0) -- --
Purchases of common stock (460) -- -- -- (16.5) (16.5)
Amortization of unearned
restricted stock -- -- -- 8.9 -- 8.9
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at February 1, 1997 39,920 0.4 12.0 (3.1) 843.7 853.0
Net earnings -- -- -- -- 128.9 128.9
Issuances of common stock 197 -- 9.0 (9.0) -- --
Purchases of common stock (2,785) -- -- -- (150.0) (150.0)
Amortization of unearned
restricted stock -- -- -- 4.5 -- 4.5
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at January 31, 1998 37,332 0.4 21.0 (7.6) 822.6 836.4
Net earnings -- -- -- -- 135.0 135.0
Issuances of common stock 227 -- 14.0 -- -- 14.0
Purchases of common stock (5,106) (0.1) -- -- (286.8) (286.9)
Amortization of unearned
restricted stock -- -- -- 4.3 -- 4.3
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at January 30, 1999 32,453 $ 0.3 $35.0 $ (3.3) $ 670.8 $ 702.8
==================================================================================================================================
</TABLE>
Outstanding common stock excludes shares held in treasury. Treasury share
activity for the last three years is summarized below:
<TABLE>
<CAPTION>
1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, Beginning of Year 3,668 1,080 1,029
Issuances of common stock
Exercise of stock options (214) (38) --
Deferred compensation plan (1) -- --
Restricted stock grants, net of forfeitures (12) (159) (409)
- ----------------------------------------------------------------------------------------------------------------------------------
Total issuances of common stock (227) (197) (409)
Purchases of common stock 5,106 2,785 460
Retirement of common stock (4,076) -- --
- ----------------------------------------------------------------------------------------------------------------------------------
Balance, End of Year 4,471 3,668 1,080
==================================================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
20
<PAGE> 10
CONSOLIDATED STATEMENT OF CASH FLOWS
(dollars in millions)
<TABLE>
<CAPTION>
1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net earnings $ 135.0 $ 128.9 $107.7
Adjustments for noncash items included in net earnings:
Depreciation and amortization 93.8 90.6 90.3
Amortization of unearned restricted stock 4.3 4.5 8.9
Deferred income taxes (3.2) (8.9) 2.9
Changes in working capital -
Merchandise inventories (17.5) 30.2 43.2
Other current assets (4.6) (1.6) (1.1)
Accounts payable 11.7 (19.1) 17.9
Accrued expenses 5.0 14.5 (34.2)
Other assets and liabilities, net (3.8) 3.7 4.9
- ------------------------------------------------------------------------------------------------------------------------
Total operating activities 220.7 242.8 240.5
- ------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Capital expenditures (108.6) (85.4) (73.4)
Dispositions of property and equipment 8.7 10.6 40.5
- ------------------------------------------------------------------------------------------------------------------------
Total investing activities (99.9) (74.8) (32.9)
- ------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Issuance of long-term debt 67.0 - -
Repayments of long-term debt (1.4) (1.6) (2.1)
Purchases of common stock -
Stock repurchase program (272.9) (150.0) (16.5)
Compensation plans (14.0) - -
Issuances of common stock 14.0 - -
- ------------------------------------------------------------------------------------------------------------------------
Total financing activities (207.3) (151.6) (18.6)
- ------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (86.5) 16.4 189.0
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 210.0 193.6 4.6
- ------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 123.5 $ 210.0 $193.6
=========================================================================================================================
Cash paid during the year:
Interest $ 1.9 $ 2.0 $ 1.4
Income taxes 79.6 85.8 67.5
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
21
<PAGE> 11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION Payless ShoeSource, Inc., a
Delaware corporation, together with its subsidiaries, (the "Company"), is the
largest family footwear retailer in North America.
As of January 30, 1999, the Company operated 4,357 self-service Payless
ShoeSource family shoe stores in all 50 states, the District of Columbia, Puerto
Rico, Guam, Saipan, the U.S. Virgin Islands and Canada. The Company also
operates Parade of Shoes, a 213-store division offering fashionable women's
footwear at moderate prices.
The Company utilizes a network of agents with factories in 10 foreign countries
and the United States to source its products, which are manufactured to meet the
Company's specifications and standards. Factories in the People's Republic of
China are a source of approximately 84 percent of the Company's merchandise.
Payless ShoeSource, Inc., a Missouri corporation, and its subsidiaries ("Payless
Missouri") was a subsidiary of The May Department Stores Company ("May Company")
until its spin-off in May 1996. Effective June 1, 1998, Payless Missouri and its
subsidiaries were reorganized into a Delaware holding company structure. The
consolidated financial statements include results for the entire fiscal year for
all years presented and the accounts of the Company, all wholly owned
subsidiaries and one subsidiary, of which less than 0.1 percent of its shares
are minority owned.
FISCAL YEAR The Company's fiscal year ends on the Saturday closest to January
31. Fiscal years 1998, 1997 and 1996 ended on January 30, 1999, January 31,
1998, and February 1, 1997, respectively. Each of these fiscal years included 52
weeks. References to years in these financial statements and notes relate to
fiscal years rather than calendar years.
USE OF ESTIMATES Management makes estimates and assumptions that affect the
amounts reported within the consolidated statement of earnings, shareowners'
equity and cash flows, the consolidated balance sheet and notes to consolidated
financial statements. Actual results could differ from these estimates.
NET RETAIL SALES Net retail sales ("sales") represent the sales, net of returns
and excluding sales tax, of all stores operated during the period. Same-store
sales represent sales of those stores open during both comparable periods.
COST OF SALES Cost of sales includes the cost of merchandise sold and the
Company's buying and occupancy costs.
PRE-OPENING EXPENSES Costs associated with the opening of new stores are
expensed as incurred.
ADVERTISING COSTS Advertising costs and sales promotion costs are expensed at
the time the advertising takes place. Selling, general and administrative
expenses include advertising and sales promotion costs of $84.8 million, $76.0
million and $66.4 million in 1998, 1997 and 1996, respectively.
INCOME TAXES The Company was included in the consolidated tax return filed by
May Company for federal, state and local income tax purposes through May 4,
1996. The provision for income taxes for this period is calculated on a separate
return basis.
Income taxes are accounted for using a balance sheet approach known as the
liability method. The liability method accounts for deferred income taxes by
applying the statutory tax rates in effect at the date of the balance sheet to
differences between the book basis and the tax basis of assets and liabilities.
STOCK-BASED COMPENSATION The Company accounts for stock-based compensation by
applying APB Opinion No. 25, as allowed under Statement of Financial Accounting
Standards (SFAS) No. 123, "Accounting for Stock-based Compensation."
CASH AND CASH EQUIVALENTS Cash equivalents consist of liquid investments with an
original maturity of three months or less. Cash equivalents are stated at cost,
which approximates fair value.
MERCHANDISE INVENTORIES Merchandise inventories are valued by the retail method
and are stated at the lower of cost, determined using the first-in, first-out
(FIFO) basis, or market.
PROPERTY AND EQUIPMENT Property and equipment are recorded at cost and are
depreciated on a straight-line basis over their estimated useful lives.
Investments in properties under capital leases and leasehold improvements are
amortized over the shorter of their useful lives or their related lease terms.
Property and equipment are reviewed regularly to determine whether the carrying
amount of the assets is recoverable.
22
<PAGE> 12
INSURANCE PROGRAMS The Company retains its normal expected losses related
primarily to workers' compensation, physical loss to property and business
interruption resulting from such loss and comprehensive general, product, and
vehicle liability. The Company purchases third party coverage for losses in
excess of the normal expected level. Provisions for losses expected under these
programs are recorded based upon the Company's estimates of the aggregate
liability for claims incurred utilizing independent actuarial assumptions.
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.
Foreign currency translation gains or losses were immaterial for 1998, 1997 and
1996.
FINANCIAL DERIVATIVES Financial derivatives are used to reduce foreign exchange
and interest rate risk. Gains and losses related to forward foreign exchange
contracts used to hedge firm commitments are deferred and recognized in
operating results or included in balance sheet amounts when the transactions are
settled. The amounts of derivative financial instruments in place during 1998,
1997 and 1996 were immaterial. As of January 30, 1999 and January 31, 1998,
there were no derivative financial instruments in place.
The Company intends to adopt SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes accounting and reporting
standards for derivative instruments and hedging activities in fiscal 2000. The
Company believes that SFAS No. 133 will not have a material impact on its
results of operations or financial position.
SEGMENTS In 1998 the Company adopted SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information." Segments have been identified based
upon management responsibility. The Company's two segments, Payless ShoeSource
stores and Parade of Shoes stores, have been aggregated for reporting purposes
based upon the similarity of their operations and economic characteristics.
RECLASSIFICATION Certain prior-year amounts have been reclassified to conform
with the current-year presentation.
QUARTERLY RESULTS (UNAUDITED)
Quarterly results are determined in accordance with annual accounting policies.
They include certain items based upon estimates for the entire year.
Summarized quarterly results for the last two years were:
(dollars in millions,
except per share data) 1998
- --------------------------------------------------------------
Quarter FIRST SECOND THIRD FOURTH YEAR
- --------------------------------------------------------------
Net retail sales $681.0 $723.1 $643.1 $568.4 $2,615.5
Cost of sales(1) 465.4 489.4 441.0 403.2 1,798.9
Net earnings $ 37.8 $ 49.3 $ 33.7 $ 14.2 $ 135.0
- --------------------------------------------------------------
Diluted earnings
per share(2) $ 1.00 $ 1.33 $ 0.98 $ 0.42 $ 3.78
- --------------------------------------------------------------
Basic earnings
per share(2) $ 1.01 $ 1.35 $ 0.98 $ 0.43 $ 3.81
- --------------------------------------------------------------
(dollars in millions,
except per share data) 1997
- --------------------------------------------------------------
Quarter First Second Third Fourth Year
- --------------------------------------------------------------
Net retail sales $645.1 $716.7 $635.7 $569.5 $2,566.9
Cost of sales(1) 448.5 497.8 444.1 409.0 1,799.4
Net earnings $ 32.4 $ 45.6 $ 33.5 $ 17.4 $ 128.9
- --------------------------------------------------------------
Diluted earnings
per share(2) $ 0.81 $ 1.15 $ 0.88 $ 0.46 $ 3.31
- --------------------------------------------------------------
Basic earnings
per share(2) $ 0.81 $ 1.17 $ 0.89 $ 0.47 $ 3.35
- --------------------------------------------------------------
(1)Certain expenses related to occupancy costs have been reclassified from
selling, general and administrative expense to cost of sales.
(2)Earnings per share were computed independently for each of the quarters
presented. The sum of the quarters may not equal the total year amount due to
the impact of changes in average quarterly shares outstanding.
PROFIT SHARING PLAN
In April 1996 associates of the Company began to participate in the Payless
ShoeSource, Inc. Profit Sharing Plan ("Payless Profit Sharing Plan").
Substantially all of the associates' balances in The May Department Stores
Company Profit Sharing Plan, including amounts invested in May Company common
stock, were transferred to the Payless Profit Sharing Plan.
On January 1, 1997, the Payless ShoeSource Profit Sharing Plan for Puerto Rico
Associates ("Puerto Rico Profit Sharing Plan") was established by the Company.
All associates of the Company, as of January 1, 1997, which were previously
participating in the Payless Profit Sharing Plan and employed in Puerto Rico,
had their account balances transferred to the Puerto Rico Profit Sharing Plan.
Contributions to the Company's profit sharing plans are related to the Company's
annual performance and are at the discretion of the Board of Directors. The
Company expects to contribute 2.5 percent of its pretax earnings to the
Company`s profit sharing plans. Associates may voluntarily contribute to the
Company`s profit sharing plans on both a before-tax and after-tax basis. Total
profit sharing contributions made by the Company were $5.6 million, $5.5 million
and $4.6 million in 1998, 1997 and 1996, respectively.
23
<PAGE> 13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
INCOME TAXES
The provision (benefit) for income taxes consisted of the following:
(dollars in millions) 1998 1997 1996
- ------------------------------------------------------------
Federal $75.7 $76.6 $49.2
State and local 17.0 17.7 11.4
- ------------------------------------------------------------
Taxes currently payable 92.7 94.3 60.6
- ------------------------------------------------------------
Federal (3.0) (7.3) 8.7
State and local (0.2) (1.6) 2.1
- ------------------------------------------------------------
Deferred taxes (3.2) (8.9) 10.8
- ------------------------------------------------------------
Total provision $89.5 $85.4 $71.4
============================================================
The reconciliation between the statutory federal income tax rate and the
effective income tax rate was as follows:
1998 1997 1996
- --------------------------------------------------------------
Statutory federal income tax rate 35.0% 35.0% 35.0%
State and local income taxes
(net of federal tax benefit) 4.9 4.9 4.9
- --------------------------------------------------------------
Effective income tax rate 39.9% 39.9% 39.9%
- ------------------------------------------------------------
Major components of deferred income tax assets and (liabilities) were as
follows:
Jan. 30, Jan. 31,
(dollars in millions) 1999 1998
- ----------------------------------------------------------------
Accrued expenses and reserves $26.5 $38.8
Depreciation/amortization and basis differences 14.0 (2.2)
Other deferred income taxes, net (0.5) 0.2
- ----------------------------------------------------------------
Net deferred income taxes 40.0 36.8
Less: Net current deferred income taxes 14.2 16.9
- ----------------------------------------------------------------
Noncurrent deferred income taxes $25.8 $19.9
================================================================
EARNINGS PER SHARE
Basic earnings per share were $3.81, $3.35 and $2.68 in 1998, 1997 and 1996,
respectively. The per share amounts have been computed on the basis of the
weighted average number of shares outstanding.
The calculation of diluted earnings per share for 1998 excludes the impact of
188,583 stock options because to include them would have been antidilutive.
Diluted earnings per share have been computed as follows:
(dollars in millions, except per
share data; shares in thousands) 1998 1997 1996
- ---------------------------------------------------------------------------
Net earnings $ 135.0 $ 128.9 $ 107.7
Weighted average shares outstanding
- basic 35,412 38,443 40,220
Stock options 320 487 87
- ---------------------------------------------------------------------------
Weighted average shares outstanding
- diluted 35,732 38,930 40,307
- ---------------------------------------------------------------------------
Diluted earnings per share $ 3.78 $ 3.31 $ 2.67
===========================================================================
ACCRUED EXPENSES
Major components of accrued expenses included:
Jan. 30, Jan. 31,
(dollars in millions) 1999 1998
- ---------------------------------------------------------------------------
Construction costs $ 24.0 $ 16.9
Profit sharing, bonus and retention 19.3 24.1
Store closings and real estate related 14.9 19.8
Sales, use and other taxes 14.0 14.7
Insurance costs 7.8 10.9
===========================================================================
LINE OF CREDIT
The Company has a $200 million revolving credit agreement. While no amounts had
been drawn against the agreement at January 30, 1999, the balance available to
the Company was reduced by $6.4 million outstanding under a letter of credit.
LONG-TERM DEBT
During 1998 the Company issued $67 million of unsecured notes. The fair value of
long-term debt (excluding capital lease obligations) was approximately $66.8
million at January 30, 1999. The fair value was determined using borrowing rates
for debt instruments with similar terms and maturities.
Long-term debt and capital lease obligations were:
Jan. 30, Jan. 31,
(dollars in millions) 1999 1998
- ---------------------------------------------------------------------------
6.55% unsecured notes due 2003 $ 15.0 $ -
6.88% unsecured notes due 2005 22.0 -
7.35% unsecured notes due 2008 30.0 -
- ---------------------------------------------------------------------------
Total unsecured notes $ 67.0 $ -
Capital lease obligations 6.5 7.9
- ---------------------------------------------------------------------------
Total debt 73.5 7.9
Less current maturities (1.5) (1.4)
- ---------------------------------------------------------------------------
Total long-term debt $ 72.0 $ 6.5
===========================================================================
LEASE OBLIGATIONS
The Company leases substantially all of its stores. Rental expense for the
Company's operating leases consisted of:
(dollars in millions) 1998 1997 1996
- ---------------------------------------------------------------------------
Minimum rentals $ 235.5 $ 227.1 $ 217.8
Contingent rentals based on sales 3.3 3.3 2.7
- ---------------------------------------------------------------------------
Real property rentals 238.8 230.4 220.5
Equipment rentals 0.9 0.8 0.8
- ---------------------------------------------------------------------------
Total $ 239.7 $ 231.2 $ 221.3
===========================================================================
Certain lease agreements include escalating rents over the lease terms.
Cumulative expense recognized on the straight-line basis in excess of cumulative
payments is included in accrued expenses ($4.3 million) and other liabilities
($22.1 million) in the accompanying balance sheet.
24
<PAGE> 14
Future minimum lease payments at January 30, 1999, were as follows:
Capital Operating
(dollars in millions) Leases Leases Total
- ---------------------------------------------------------------
1999 $2.2 $ 226.0 $ 228.2
2000 1.3 202.2 203.5
2001 1.3 173.8 175.1
2002 1.2 142.2 143.4
2003 0.8 106.3 107.1
After 2003 2.5 215.9 218.4
- ---------------------------------------------------------------
Minimum lease payments $9.3 $1,066.4 $1,075.7
===============================================================
Less imputed interest component 2.8
- -----------------------------------------
Present value of net minimum
lease payments of which
$1.5 million is included in
current liabilities $6.5
- -----------------------------------------
At January 30, 1999, the present value of operating leases was $851.4 million.
OTHER LIABILITIES
Major components of other liabilities included:
Jan. 30, Jan. 31,
(dollars in millions) 1999 1998
- ---------------------------------------------------------------
Rent expense $ 22.1 $ 24.2
Insurance costs 18.2 20.2
===============================================================
COMMON STOCK REPURCHASE PROGRAMS
During 1998 the Company repurchased $272.9 million of common stock which
represented the entire $150 million stock repurchase program (2.2 million
shares) announced in September 1997 and $122.9 million (2.7 million shares) of
the $150 million stock repurchase program announced in August 1998 that was
increased to $500 million in October. The Company continues to repurchase shares
of its common stock as market conditions allow and intends to complete the $500
million stock repurchase program before the end of fiscal year 2001. During 1997
the Company completed the $150 million stock repurchase program (2.8 million
shares) announced in January 1997.
STOCK OPTION AND
STOCK-RELATED COMPENSATION PLANS
Under the Company's common stock option plans, options are granted at the
average of the high and low trading price on the date of grant. Options to
purchase may extend for up to ten years, may be exercised in installments only
after stated intervals of time, and are conditional upon continued employment
with the Company. The options may be exercised during certain periods following
retirement, disability or death.
A summary of the status of the various stock option plans at the end of 1998 and
1997, and the changes within years are presented below:
1998
- ------------------------------------------------------------------------
Range of Average
Exercise Exercise
(shares in thousands) Shares Prices Price
- ------------------------------------------------------------------------
Outstanding at beginning of year 2,164 $27-59 $ 39
Granted 233 48-72 64
Exercised 214 27-59 42
Forfeited or expired 52 27-72 46
- ------------------------------------------------------------------------
Outstanding at end of year 2,131 $27-72 $ 45
- ------------------------------------------------------------------------
Exercisable at end of year 925 $27-59 $ 41
Shares available for additional grants 2,873
Fair value of options granted $ 40
- ------------------------------------------------------------------------
1997
- ------------------------------------------------------------------------
Range of Average
Exercise Exercise
(shares in thousands) Shares Prices Price
- ------------------------------------------------------------------------
Outstanding beginning of year 499 $27-38 $ 28
Granted 1,751 45-59 46
Exercised 38 27-46 30
Forfeited or expired 48 27-46 42
- ------------------------------------------------------------------------
Outstanding at end of year 2,164 $27-59 $ 39
- ------------------------------------------------------------------------
Exercisable at end of year 986 $27-59 $ 44
Shares available for additional grants 2,830
Fair value of options granted $ 24
- ------------------------------------------------------------------------
The following table summarizes information about stock options outstanding at
January 30, 1999:
(shares in thousands)
- -------------------------------------------------------------------------------
Options Outstanding Options Exercisable
- -------------------------------------------------------------------------------
Average
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Exercisable Life
- -------------------------------------------------------------------------------
$27-38 401 7 years $28 249 7 years
45-59 1,498 8 years 46 676 8 years
48-72 232 9 years - 0 9 years
- -------------------------------------------------------------------------------
Under the 1996 Stock Incentive Plan, the Company is authorized to grant a
maximum of 400,000 shares of restricted stock to management associates. No
monetary consideration is paid by associates who receive restricted stock.
Restricted stock can be granted with or without performance restrictions.
Restrictions, including performance restrictions, lapse over periods of up to
four years, as determined at the date of grant. In 1998 and 1997 the Company
granted 19,917 and 205,480 shares of restricted stock, respectively, under the
1996 Stock Incentive Plan.
25
<PAGE> 15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company's plans are accounted for as provided by APB Opinion No. 25. For
stock options, no compensation cost has been recognized because the option
exercise price is fixed at the average market price on the date of grant. For
restricted stock grants, compensation expense is based upon the grant date
average market price; it is recorded over the lapsing period. For
performance-based restricted stock, compensation expense is recorded over the
performance period based on estimates of performance levels.
SFAS No. 123, "Accounting for Stock-based Compensation," provides an alternative
method of accounting for stock-based compensation, which establishes a fair
value method of accounting for employee stock options or similar equity
instruments. The Company used the Black-Scholes option pricing model to estimate
the grant date fair value of its 1996 and later option grants. The fair value is
recognized over the option vesting period. As the fair value represents only
1996 and later option grants, the pro forma impact shown below may not be
representative of future years. Had compensation cost for these plans been
determined in accordance with SFAS No. 123, the Company's net earnings and
earnings per share would have been as follows:
- -------------------------------------------------------------------------------
(dollars in millions, except per share data) 1998 1997 1996
- -------------------------------------------------------------------------------
NET EARNINGS:
As reported $ 135.0 $ 128.9 $ 107.7
Pro forma $ 128.7 $ 110.8 $ 105.6
DILUTED EARNINGS PER SHARE:
As reported $ 3.78 $ 3.31 $ 2.67
Pro forma $ 3.60 $ 2.84 $ 2.62
BASIC EARNINGS PER SHARE:
As reported $ 3.81 $ 3.35 $ 2.68
Pro forma $ 3.63 $ 2.88 $ 2.63
- -------------------------------------------------------------------------------
The following assumptions were used in the Black-Scholes calculations above:
1998 1997 1996
- -------------------------------------------------------------------------------
Risk-free interest rate 5.70% 6.66% 6.47%
Expected dividend yield 0% 0% 0%
Option life 10 yrs. 10 yrs. 10 yrs.
Expected volatility 38% 30% 30%
- -------------------------------------------------------------------------------
SHAREOWNER RIGHTS PLAN
The Company has a shareowner rights plan under which one right is attached to
each share of the Company's common stock. The rights become exercisable only
under certain circumstances involving actual or potential acquisitions of the
Company's common stock by a person or persons affiliated with such persons.
Depending on the circumstances, if the rights become exercisable, the holder may
be entitled to purchase units of the Company's preferred stock, shares of the
Company's common stock or shares of the common stock of the acquiring person.
The rights will remain in existence until April 30, 2006, unless they are
terminated, extended, exercised or redeemed.
ACQUISITION
In March 1997 the Company purchased inventory, property and trademarks, and
assumed leases on 186 stores of the Parade of Shoes division from J. Baker, Inc.
The purchase price was approximately $28 million in cash. The acquisition of the
Parade of Shoes division has been accounted for as a purchase, and accordingly,
the operating results of the acquired stores have been included in the Company's
consolidated results since the acquisition date.
<PAGE> 16
REPORT OF MANAGEMENT AND INDEPENDENT PUBLIC ACCOUNTANTS
REPORT OF MANAGEMENT
Management is responsible for the preparation, integrity and objectivity of the
financial information included in this annual report. The financial statements
have been prepared in conformity with generally accepted accounting principles
applied on a consistent basis.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts. Although the financial statements reflect all
available information and management's judgment and estimates of current
conditions and circumstances, and are prepared with the assistance of
specialists within and outside the Company, actual results could differ from
those estimates.
Management has established and maintains an internal control structure to
provide reasonable assurance that assets are safeguarded against loss from
unauthorized use or disposition, that the accounting records provide a reliable
basis for the preparation of financial statements, and that such financial
statements are not misstated due to material fraud or error. Internal controls
include the careful selection of associates, the proper segregation of duties
and the communication and application of formal policies and procedures that are
consistent with high standards of accounting and administrative practices. An
important element of this system is a comprehensive internal audit program.
Management continually reviews, modifies and improves its systems of accounting
and controls in response to changes in business conditions and operations and in
response to recommendations in the reports prepared by the independent public
accountants and internal auditors.
Management believes that it is essential for the Company to conduct its business
affairs in accordance with the highest ethical standards and in conformity with
the law. This standard is described in the company's policies on business
conduct, which are publicized throughout the Company.
AUDIT AND FINANCE COMMITTEE
OF THE BOARD OF DIRECTORS
The Board of Directors, through the activities of its Audit and Finance
Committee, participates in the reporting of financial information by the
Company. The committee meets regularly with management, the internal auditors
and the independent public accountants. The committee reviewed the scope, timing
and fees for the annual audit and the results of the audit examinations
completed by the internal auditors and independent public accountants, including
the recommendations to improve certain internal controls and the follow-up
reports prepared by management. The independent public accountants and internal
auditors have free access to the committee and the Board of Directors and attend
each Audit and Finance Committee meeting.
The members of the Audit and Finance Committee are Howard R. Fricke, Thomas A.
Hays, Mylle B. Mangum, Michael E. Murphy and Robert L. Stark. The Audit and
Finance Committee reports the results of its activities to the full Board of
Directors.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareowners of Payless ShoeSource, Inc.:
We have audited the accompanying consolidated balance sheet of Payless
ShoeSource, Inc. (a Delaware corporation) and subsidiaries as of January 30,
1999, and January 31, 1998, and the related consolidated statements of earnings,
shareowners' equity and cash flows for each of the three fiscal years in the
period ended January 30, 1999. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Payless ShoeSource, Inc. and
subsidiaries as of January 30, 1999, and January 31, 1998, and the results of
their operations and their cash flows for each of the three fiscal years in the
period ended January 30, 1999, in conformity with generally accepted accounting
principles.
Arthur Andersen LLP
St. Louis, Missouri
February 19, 1999
27
<PAGE> 17
BOARD OF DIRECTORS
STEVEN J. DOUGLASS
Chairman of the Board
and Chief Executive Officer
RICHARD A. JOLOSKY
Vice Chairman
KEN C. HICKS
President
DANIEL BOGGAN JR.(2)
Senior Vice President,
National Collegiate
Athletic Association (NCAA)
HOWARD R. FRICKE(1)
Chairman of the Board
and Chief Executive Officer,
The Security Benefit
Group of Companies
THOMAS A. HAYS(1)(2)
Retired Deputy Chairman,
The May Department
Stores Company
MYLLE B. MANGUM(1)
Senior Vice President,
CWT Holdings, Inc.
MICHAEL E. MURPHY(1)(2)
Retired Vice President and
Chief Administrative Officer,
Sara Lee Corporation
ROBERT L. STARK(1)
Retired Executive Vice President
of Hallmark Cards, Inc. and
Retired Dean of the Regents Center, University of Kansas
(1) Audit and Finance Committee (2) Compensation and Nominating Committee
SENIOR MANAGEMENT
STEVEN J. DOUGLASS
Chairman of the Board and Chief Executive Officer
RICHARD A. JOLOSKY
Vice Chairman
KEN C. HICKS
President
DUANE L. CANTRELL
Executive Vice President - Retail Operations
BRYAN P. COLLINS
Senior Vice President - Division Director for Parade of Shoes
STEPHEN FARLEY
Senior Vice President - Marketing
GERALD F. KELLY, JR.
Senior Vice President - Logistics, Information Services and Technology
HARRIS MUSTAFA
Senior Vice President - Merchandise Distribution
JED L. NORDEN
Senior Vice President - Human Resources
JOANN OGEE
Senior Vice President - General Merchandise Manager - Women's
ULLRICH E. PORZIG
Senior Vice President - Chief Financial Officer and Treasurer
WILLIAM J. RAINEY
Senior Vice President - General Counsel and Secretary
THOMAS L. RINEHART
Senior Vice President - General Merchandise Manager - Men's
GARY M. STONE
Senior Vice President - Store Developement
LARRY M. STRECKER
Senior Vice President - Managing Director of Payless ShoeSource
International Limited
MICHAEL S. WILKES
Senior Vice President - General Merchandise Manager - Children's
<PAGE> 18
Shareowner Information
CORPORATE HEADQUARTERS
Payless Shoesource, Inc.
3231 S.E. Sixth Street
Topeka, KS 66607-2207
(785)233-5171
1999 ANNUAL MEETING
The Annual Meeting of Shareowners will be held at
10:00 a.m., Central Daylight Saving Time, on Friday,
May 28, 1999 at:
Bradbury Thompson Center
Washburn University
1700 S.W. College
Topeka, KS
COMMON STOCK
Shares of Payless Shoesource, Inc. are listed and traded on the New York
Stock Exchange. the trading symbol is PSS.
INFORMATION REQUESTS
Copies of the company's annual report to shareowners, the Form 10-K annual
report to the Securities and Exchange Commission (SEC), the Form 10-Q quarterly
reports to the SEC, monthly sales releases and quarterly earnings releases are
available free of charge to shareowners by writing to Corporate
Communications/Investor Relations at the corporate headquarters or by calling
the Investor Relations phone line at (800) 626-3204.
PAYLESS SHOESOURCE ON THE INTERNET
Recent press releases issued by the company and other information are available
on our World Wide Web home page. Visit us at http://www.payless.com.
SHAREOWNER INQUIRIES
Shareowner inquiries regarding stock transfer, lost certificates or address
changes should be directed to the stock transfer agent and registrar, UMB Bank,
as shown below.
PLEASE ADDRESS SHAREOWNER INQUIRIES TO:
Securities Transfer Division
UMB Bank
P.O. Box 410064
Kansas City, MO 64141
(816)860-7786
The bank requests certificates be sent by registered mail.
The fax number for the bank is (816) 221-0438.
The e-mail address for the bank is: [email protected].
Securities analysts, shareowners and investment professionals should direct
inquiries regarding Payless Shoesource, Inc. and its business to Timothy J.
Reid, Director of Corporate Communications, at the corporate headquarters by
calling (785) 295-6695.
THANK YOU
We would like to thank all of the Payless Shoesource and Parade of Shoes
associates who participated in the creation of the 1998 annual report. We
appreciate their hard work and dedication throughout the year.
Creative:Muller+Company, Kansas City, Missouri
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES OF REGISTRANT
The corporations listed below are subsidiaries of Registrant, and all are
included in the consolidated financial statements of Registrant as subsidiaries
(unnamed subsidiaries, considered in the aggregate as a single subsidiary, would
not constitute a significant subsidiary):
Jurisdiction
in which
Name organized
----- ------------
Payless ShoeSource Finance, Inc. Nevada
Payless ShoeSource, Inc. Missouri
Payless ShoeSource Distribution, Inc. Kansas
Payless ShoeSource Merchandising, Inc. Kansas
Payless ShoeSource Worldwide, Inc. Kansas
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
reports incorporated by reference in this Form 10-K, into the Company's
previously filed Registration Statements on Form S-8 (No. 333-25877, 333-28483,
333-30371 and 333-50671).
ARTHUR ANDERSEN LLP
St. Louis, Missouri,
April 9, 1999
<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 52 WEEKS ENDED JANUARY 30, 1999, AND CONDENSED CONSOLIDATED
BALANCE SHEET AS OF JANUARY 30, 1999, AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-30-1999
<PERIOD-START> FEB-01-1998
<PERIOD-END> JAN-30-1999
<CASH> 123,500<F1>
<SECURITIES> 0<F2>
<RECEIVABLES> 9,300<F3>
<ALLOWANCES> 0<F3>
<INVENTORY> 342,100
<CURRENT-ASSETS> 495,800
<PP&E> 892,900
<DEPRECIATION> 400,100
<TOTAL-ASSETS> 1,017,900
<CURRENT-LIABILITIES> 194,900
<BONDS> 72,000<F4>
0
0
<COMMON> 300
<OTHER-SE> 702,500<F5>
<TOTAL-LIABILITY-AND-EQUITY> 1,017,900
<SALES> 2,615,500<F6>
<TOTAL-REVENUES> 2,615,500
<CGS> 1,798,900
<TOTAL-COSTS> 1,798,900
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (7,100)
<INCOME-PRETAX> 224,500
<INCOME-TAX> 89,500
<INCOME-CONTINUING> 135,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 135,000
<EPS-PRIMARY> 3.81<F7>
<EPS-DILUTED> 3.78<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 LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS.
<F5>REFLECTS RETAINED EARNINGS AND ADDITIONAL PAID IN CAPITAL.
<F6>REFLECTS NET SALES.
<F7>EXPRESSED IN DOLLARS.
</FN>
</TABLE>
