<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For The Quarterly Period Ended October 28, 2000
Commission File Number 1-14770
PAYLESS SHOESOURCE, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 43-1813160
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
3231 SOUTHEAST SIXTH AVENUE, TOPEKA, KANSAS 66607-2207
(Address of principal executive offices) (Zip Code)
(785) 233-5171
(Registrant's telephone number,
including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days. YES X NO
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock, $.01 par value
21,915,522 shares as of November 24, 2000
<PAGE> 2
PART 1 - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
PAYLESS SHOESOURCE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
(Dollars in millions)
Oct. 28, Oct. 30, Jan. 29,
ASSETS 2000 1999 2000
------ --------------- --------------- ---------------
<S> <C> <C> <C>
Current Assets:
Cash and cash equivalents $ 18.2 $ 188.8 $ 164.2
Merchandise inventories 356.5 359.4 349.7
Current deferred income taxes 12.1 14.7 12.1
Other current assets 57.8 43.1 40.9
--------------- --------------- ---------------
Total current assets 444.6 606.0 566.9
Property and Equipment:
Land 7.4 7.5 7.5
Buildings and leasehold
improvements 766.3 705.4 713.9
Furniture, fixtures and
equipment 325.5 303.8 309.1
Property under capital leases 7.3 7.3 7.3
--------------- --------------- ---------------
Total property and equipment 1,106.5 1,024.0 1,037.8
Accumulated depreciation
and amortization (604.2) (536.3) (554.9)
--------------- --------------- ---------------
Property and equipment, net 502.3 487.7 482.9
Deferred income taxes 22.4 20.5 21.3
Other assets 9.0 4.5 4.4
--------------- --------------- ---------------
Total Assets $ 978.3 $ 1,118.7 $ 1,075.5
=============== =============== ===============
LIABILITIES AND SHAREOWNERS' EQUITY
Current Liabilities:
Current maturities of
long-term debt $ 5.3 $ 0.7 $ 0.7
Accounts payable and
accrued expenses 215.3 217.4 197.1
--------------- --------------- ---------------
Total current liabilities 220.6 218.1 197.8
Long-term debt 319.0 126.3 126.1
Other liabilities 48.3 49.0 47.8
Minority Interest 1.0 -- --
Shareowners' Equity 389.4 725.3 703.8
--------------- --------------- ---------------
Total Liabilities and
Shareowners' Equity $ 978.3 $ 1,118.7 $ 1,075.5
=============== =============== ===============
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
2
<PAGE> 3
PAYLESS SHOESOURCE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF EARNINGS
(UNAUDITED)
<TABLE>
<CAPTION>
(Millions, except per share)
13 Weeks Ended 39 Weeks Ended
----------------------------------- -----------------------------------
Oct. 28, Oct. 30, Oct. 28, Oct. 30,
2000 1999 2000 1999
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Net Retail Sales $ 723.0 $ 669.4 $ 2,248.4 $ 2,126.2
Cost of sales 489.8 455.4 1,517.0 1,438.3
Selling, general and
administrative
expenses 172.5 156.8 525.7 486.5
Non-recurring item -- -- 8.0 --
Interest (income)
expense, net 7.7 (0.4) 17.3 (0.2)
--------------- --------------- --------------- ---------------
Earnings before income taxes
and extraordinary loss 53.0 57.6 180.4 201.6
Provision for income
taxes 20.6 23.0 70.2 80.4
--------------- --------------- --------------- ---------------
Net Earnings before
extraordinary loss 32.4 34.6 110.2 121.2
Extraordinary loss related to early
extinguishment of debt
net of income tax -- -- 3.6 --
Net Earnings $ 32.4 $ 34.6 $ 106.6 $ 121.2
=============== =============== =============== ===============
Diluted Earnings per Share:
Net earnings before
extraordinary loss 1.44 1.11 4.49 3.82
Extraordinary loss -- -- 0.15 --
Diluted Earnings $ 1.44 $ 1.11 $ 4.34 $ 3.82
per Share =============== =============== =============== ===============
Basic Earnings per Share:
Net earnings before
extraordinary loss 1.46 1.12 4.54 3.84
Extraordinary loss -- -- 0.15 --
Basic Earnings $ 1.46 $ 1.12 $ 4.39 $ 3.84
per Share =============== =============== =============== ===============
Diluted Weighted Average
Shares Outstanding 22.5 31.1 24.6 31.8
=============== =============== =============== ===============
Basic Weighted Average
Shares Outstanding 22.1 30.9 24.3 31.6
=============== =============== =============== ===============
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
3
<PAGE> 4
PAYLESS SHOESOURCE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
(Dollars in millions) 39 Weeks Ended
-----------------------------------
Oct. 28, Oct. 30,
2000 1999
--------------- ---------------
<S> <C> <C>
Operating Activities:
Net earnings $ 106.6 $ 121.2
Adjustments for noncash items
included in net earnings:
Extraordinary loss related to early
extinguishment of debt 3.6 --
Depreciation and amortization 75.4 72.8
Amortization of unearned
restricted stock 2.2 1.4
Deferred income taxes (1.1) 4.8
Merchandise inventories (6.8) (17.3)
Other current assets (14.2) (8.3)
Accounts payable and accrued expenses 20.4 5.2
Other assets and liabilities, net (0.9) 1.9
--------------- ----------------
Total Operating Activities 185.2 181.7
--------------- ----------------
Investing Activities:
Capital expenditures (99.6) (71.7)
Disposition of property and equipment 4.8 4.0
--------------- ----------------
Total Investing Activities (94.8) (67.7)
--------------- ----------------
Financing Activities:
Issuance of long-term debt 400.0 55.0
Repayment of long-term debt (207.2) (1.5)
Payment of debt issuance costs (8.9) --
Net purchases of common stock (421.3) (102.2)
Other financing activities 1.0 --
--------------- ----------------
Total Financing Activities (236.4) (48.7)
--------------- ----------------
Increase (Decrease) in Cash
and Cash Equivalents (146.0) 65.3
Cash and Cash Equivalents,
Beginning of Year 164.2 123.5
--------------- ----------------
Cash and Cash Equivalents,
End of Period $ 18.2 $ 188.8
=============== ================
Cash paid during the period:
Interest $ 21.6 $ 3.1
Income Taxes 56.2 60.9
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
4
<PAGE> 5
PAYLESS SHOESOURCE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
Payless ShoeSource, Inc., a Missouri corporation ("Payless") and its
subsidiaries were reorganized into a Delaware holding company structure
effective June 1, 1998 through a merger ("Merger") with Payless Merger Corp., a
Missouri corporation, which was an indirect wholly owned subsidiary of Payless
and a wholly owned subsidiary of Payless ShoeSource, Inc., a Delaware
corporation ("Company"). The Company formerly was a wholly owned subsidiary of
Payless immediately prior to the merger. Each of the Company and Payless Merger
Corp. were organized in connection with the Merger. Pursuant to the Merger,
Payless became an indirect wholly owned subsidiary of the Company and is the
principal operating subsidiary of the Company. The transaction was accounted for
as a reorganization of entities under common control (similar to a pooling of
interest). As a result, immediately following the effective time the Company and
its subsidiaries had the same consolidated net worth as Payless and its
subsidiaries had immediately prior to the Merger.
For purposes of these Notes to Condensed Consolidated Financial Statements, the
"Registrant", or the "Company" refers to Payless ShoeSource, Inc., a Delaware
corporation, and its subsidiaries, unless the context otherwise requires.
NOTE 2. INTERIM RESULTS. The unaudited Condensed Consolidated Financial
Statements of the Company have been prepared in accordance with the instructions
to Form 10-Q of the Securities and Exchange Commission and should be read in
conjunction with the Notes to the Consolidated Financial Statements (pages
22-26) in the Company's 1999 Annual Report. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. In the opinion of management, the
unaudited Condensed Consolidated Financial Statements are fairly presented and
all adjustments (consisting only of normal recurring adjustments) necessary for
a fair statement of the results for the interim periods have been included;
however, certain items are included in these statements based upon estimates for
the entire year. The results for the quarter and nine month period ended October
28, 2000 are not necessarily indicative of the results that may be expected for
the fiscal year ending February 3, 2001.
NOTE 3. INVENTORIES. Merchandise inventories are valued at the retail method and
are stated at the lower of cost, determined using the first-in, first-out (FIFO)
basis, or market.
5
<PAGE> 6
NOTE 4. LONG-TERM DEBT. In April 2000, the Company repaid its $122 million of
unsecured notes and entered into a new $600 million senior secured credit
facility ("Credit Facility"). The excess of the amount paid over the carrying
value of the Company's unsecured notes was recorded as an extraordinary loss
related to early extinguishment of debt, net of income tax.
The Credit Facility consisted of a $400 million term loan and a $200 million
revolving loan, both of which mature in 2005, subject to prepayment without
penalty by the Company at any time. During the second quarter of 2000, the
Company made an $80 million prepayment on the long-term debt. The Company had
not drawn on its $200 million revolving loan as of October 28, 2000, however,
the balance available to the Company was reduced by $11.4 million outstanding
under a letter of credit. The term loan and revolving loan bear interest at the
LIBOR rate, plus a variable margin of 1.25% to 2.0%. The variable interest rate
at October 28, 2000 was 8.3%. A quarterly commitment fee of between 0.25% and
0.50% per annum is payable on the unborrowed balance of the revolving loan. The
margin on the term loan and the commitment fee varies based upon performance
criteria specified in the credit agreement.
In order to mitigate the Company's exposure to fluctuations in interest rates,
the Company has entered into a series of interest rate swap agreements whereby
the Company will receive interest at the three month LIBOR rate on a $320
million notional amount and pay a weighted average rate of 6.9%. Including the
effect of the interest rate swap agreements, the Company's effective interest
rate on the term loan was 8.8% during the quarter ended October 28, 2000.
As the long-term debt under the Credit Facility bears interest at current market
rates, its carrying value approximates market value at October 28, 2000. The
fair value of the interest rate swap agreements approximates $(1.8) million at
October 28, 2000. The estimated fair value of the interest rate swap agreements
approximates the proceeds to settle the outstanding contracts. Dealer quotations
are available for the Company's interest rate swap agreements.
In order to minimize its foreign exchange risk, the Company entered into two
currency swaps during the third quarter. These swaps effectively convert $30
million of the U.S. dollar-denominated term loan into Canadian
dollar-denominated obligations. This swap has been designated as a foreign
currency hedge on the Company's net investment in Canadian dollar-denominated
subsidiaries. Gains and losses are recorded as a cumulative translation
adjustment in stockholders' equity. The fair value of these currency swaps is
$0.9 million at October 28, 2000.
The Company has also entered into an interest rate swap that becomes effective
upon maturity of the $20 million currency swap in 2002. Under the terms of the
swap, the Company will pay a fixed rate of 6.28% and receive a floating rate
equal to the Canadian Bankers' Acceptance Rate on a notional amount of 29.8
million Canadian dollars. It is the Company's intention to enter into a debt
agreement denominated in Canadian dollars with terms matching those of the
interest rate swap agreement in 2002.
6
<PAGE> 7
NOTE 5. COMMON STOCK REPURCHASE. In April 2000, the Company completed a
self-tender through which it repurchased 7,547,169 shares of its common stock at
$53 per share. The aggregate purchase price was approximately $400 million. In
conjunction with the share repurchase, the Company recorded an $8.0 million
non-recurring pre-tax charge consisting principally of the analysis and
consideration of various strategic alternatives and costs associated with the
self-tender.
In the third quarter of 2000, the Company repurchased 298,659 shares of its
common stock for an aggregate price of $17.2 million. For the first nine months
of the year, the Company has repurchased 8.0 million shares for an aggregate
price of $425.0 million.
NOTE 6. EARNINGS PER SHARE. Basic earnings per share are computed by dividing
net earnings by the weighted average number of shares of common stock
outstanding during the period. Diluted earnings per share include the effect of
conversions of stock options.
NOTE 7. RECLASSIFICATIONS. Certain reclassifications have been made to prior
year balances to conform with the current year presentation.
NOTE 8. FOREIGN CURRENCY TRANSLATION. Local currencies are the functional
currencies for all subsidiaries. Accordingly, assets and liabilities of foreign
subsidiaries are translated at the rate of exchange at the balance sheet date.
Income and expense items of these subsidiaries are translated at average rates
of exchange. The foreign currency translation was immaterial for the third
quarter of 2000 and 1999.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion summarizes the significant factors affecting operating
results for the quarters ended October 28, 2000 (2000) and October 30, 1999
(1999). This discussion and analysis should be read in conjunction with the
unaudited Condensed Consolidated Financial Statements and Notes to the Condensed
Consolidated Financial Statements included in this Form 10-Q.
REVIEW OF OPERATIONS
NET EARNINGS
Net earnings totaled $32.4 million in the third quarter of 2000, down 6.5% from
$34.6 million in the third quarter of 1999. For the first nine months of 2000,
net earnings were $106.6 million compared with $121.2 million in the 1999
period. Excluding the non-recurring item and extraordinary loss, net earnings
for the first nine months of 2000 would have been $115.1 million. The reduction
in earnings compared to last year is due to higher interest costs related to the
self-tender.
7
<PAGE> 8
The following table presents the components of costs and expenses, as a percent
of net retail sales, for the third quarter and first nine months of 2000 and
1999.
<TABLE>
<CAPTION>
First
Third Quarter Nine Months
------------- -------------
2000 1999 2000 1999
------ ------ ------ ------
<S> <C> <C> <C> <C>
Cost of sales 67.8% 68.0% 67.5% 67.6%
Selling, general and
administrative expenses 23.9 23.4 23.4 22.9
Non-recurring item -- -- 0.4 --
Interest (income)/expense, net 1.0 (.0) 0.7 (.0)
------ ------ ------ ------
Earnings before income taxes
and extraordinary loss 7.3% 8.6% 8.0% 9.5%
====== ====== ====== ======
Effective income tax rate 38.9% 39.9% 38.9% 39.9%
====== ====== ====== ======
Net earnings before
extraordinary loss 4.5% 5.2% 4.9% 5.7%
Extraordinary loss,
net of income tax -- -- 0.2% --
Net Earnings 4.5% 5.2% 4.7% 5.7%
====== ====== ====== ======
</TABLE>
NET RETAIL SALES
Net retail sales represent the sales of stores operating during the period.
Same-store sales represent sales of stores open during comparable periods.
During the third quarter of 2000 net retail sales increased 8.0 percent from the
third quarter of 1999, consisting of a 5.3 percent increase in unit volume and a
2.5 percent increase in average selling prices. For the first nine months of
2000 net retail sales increased 5.7 percent from the same period of 1999,
consisting of a 5.6 percent increase in unit volume and a 0.1 percent increase
in average selling prices. Sales percent increases (decreases) are as follows:
<TABLE>
<CAPTION>
Third Quarter First Nine Months
------------------ ------------------
2000 1999 2000 1999
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Net Retail Sales 8.0% 4.1% 5.7% 3.9%
Same-Store Sales 4.1% 0.8% 2.6% 0.4%
</TABLE>
8
<PAGE> 9
COST OF SALES
Cost of sales includes cost of merchandise sold, buying and occupancy costs.
Cost of sales was $489.8 million in the 2000 third quarter, up 7.5% from $455.4
million in the 1999 third quarter. For the first nine months of 2000, cost of
sales was $1.517 billion, a 5.4% increase from $1.438 billion in the 1999
period.
For the third quarter and first nine months, cost of sales, as a percent of net
retail sales, declined 0.2 percent to 67.8 percent and 0.1 percent to 67.5
percent, respectively. Our merchandise margins continue to be favorable, helped
by slightly higher unit retail prices and lower cost of goods sold.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses were $172.5 million in the 2000
third quarter, up 10.0 percent from $156.8 million in the 1999 third quarter.
For the first nine months of 2000, selling, general and administrative expenses
were $525.7 million compared with $486.5 million in the 1999 period, an 8.1
percent increase.
As a percent of net retail sales, selling, general and administrative expenses
were 23.9 percent during the third quarter of 2000 compared with 23.4 percent in
the third quarter of 1999. For the first nine months of 2000, selling, general
and administrative expenses as a percent of net retail sales were 23.4 percent
in 2000 compared with 22.9 percent in 1999.
Our third quarter selling, general and administrative expenses were higher than
last year as a percent of sales, primarily reflecting increased advertising to
drive sales, while the increase for the first nine months of 2000 was primarily
due to increased advertising costs and higher wage rates in the stores.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOW
Cash flow from operations during the nine months ended October 28, 2000, was
$185.2 million. This figure represented 8.2 percent of net retail sales during
the first nine months of 2000 compared with 8.5 percent during the first nine
months of 1999. Internally generated funds are expected to continue to be the
most important component of the Company's capital resources.
CAPITAL EXPENDITURES
Capital expenditures during the first nine months of 2000 totaled $99.6 million,
with an additional $50.4 million estimated to be incurred during the remainder
of fiscal year 2000. The Company anticipates that cash flow from operations and
the Company's existing credit facility should be sufficient to finance projected
capital expenditures.
9
<PAGE> 10
FINANCING ACTIVITIES
In April 2000, the Company completed a self-tender through which it repurchased
7,547,169 shares of its common stock at $53 per share. This represented
approximately 25.5 percent of the Company's 29.6 million shares outstanding on
April 10, 2000. The aggregate purchase price was approximately $400 million.
In conjunction with the self-tender, the Company entered into a new $600 million
senior secured credit facility. The credit facility consisted of a $400 million
term loan and a $200 million revolving loan, both of which mature in 2005
subject to prepayment without penalty by the Company at any time. During the
first quarter, the Company took a $13.9 million pre-tax, $8.5 million after-tax,
charge for non-recurring and extraordinary items principally for costs
associated with the analysis and consideration of various strategic
alternatives, refinancing costs and costs associated with the self-tender.
During the second quarter of 2000, the Company made an $80 million pre-payment
on the long-term debt, paying off 20 percent of the term loan amount.
In the third quarter of 2000, the Company repurchased 298,659 shares of its
common stock for an aggregate price of $17.2 million. For the first nine months
of the year, the Company has repurchased 8 million shares for an aggregate price
of $425 million.
AVAILABLE CREDIT
While no amounts had been drawn against the Company's $200 million revolving
loan at October 28, 2000, the balance available to the Company was reduced by
$11.4 million outstanding under a letter of credit.
10
<PAGE> 11
FINANCIAL CONDITION RATIOS
A summary of key financial information for the periods indicated is as follows:
<TABLE>
<CAPTION>
Oct. 28, Oct. 30, Jan. 29,
2000 1999 2000
---------------- ---------------- ----------------
<S> <C> <C> <C>
Current Ratio 2.0 2.8 2.9
Debt-to-Capitalization Ratio* 45.4% 14.9% 15.3%
Fixed Charge Coverage** 1.9x 3.8x 3.8x
</TABLE>
* Debt-to-capitalization has been computed by dividing total debt, which
includes current and long-term capital lease obligations, by
capitalization, which includes current and long-term capital lease
obligations, non-current deferred income taxes and equity. The
debt-to-capitalization ratio, including the present value of future
minimum rental payments under operating leases as debt and
capitalization, would be 75.1%, 57.3% and 58.1% respectively, for the
periods referred to above. The increase in debt to capitalization
ratio at October 28, 2000 is primarily the result of the $400 million
self-tender and the additional debt issued in April 2000.
** Fixed charge coverage, which is presented for the trailing 52 weeks in
each period ended above, is defined as earnings before income taxes,
gross interest expense, and the interest component of rent expense,
divided by gross interest expense and the interest component of rent
expense. The decrease in the fixed charge coverage ratio at October
28, 2000 is primarily the result of the increase in interest expense
resulting from the additional debt issued in April 2000 and the charge
for the non-recurring and extraordinary item in the first quarter of
2000.
STORE ACTIVITY
At the end of the third quarter of 2000, the Company operated 4,623 Payless
ShoeSource stores in 50 states, Canada, the District of Columbia, Guam, Saipan,
Puerto Rico and the U.S. Virgin Islands and 267 Parade stores. The following
table presents the change in store count for the third quarter and first nine
months of 2000 and 1999.
<TABLE>
<CAPTION>
PAYLESS SHOESOURCE First
Third Quarter Nine Months
------------- ------------
2000 1999 2000 1999
----- ----- ----- -----
<S> <C> <C> <C> <C>
Beginning of quarter/year 4,629 4,413 4,492 4,357
Stores opened 64 69 353 196
Stores closed (70) (33) (222) (104)
----- ----- ----- -----
Ending store count 4,623 4,449 4,623 4,449
===== ===== ===== =====
<CAPTION>
PARADE First
Third Quarter Nine Months
------------- ------------
2000 1999 2000 1999
----- ----- ----- -----
<S> <C> <C> <C> <C>
Beginning of quarter/year 239 215 220 213
Stores opened 33 7 65 11
Stores closed (5) (2) (18) (4)
----- ----- ----- -----
Ending store count 267 220 267 220
===== ===== ===== =====
</TABLE>
11
<PAGE> 12
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 forward-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; 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 Canada
or the United States and foreign countries, economic and political instability
in foreign countries or restrictive actions by the governments of foreign
countries in which suppliers and manufacturers from whom the Company sources are
located; changes in trade and foreign tax laws; fluctuations in currency
exchange rates; availability of suitable store locations on acceptable terms;
the ability to achieve expected advantages of operating shoe departments in
specialty discount stores, the ability to hire and train associates; and general
economic, business and social conditions.
All subsequent written and oral forward-looking statements attributable to the
Company or persons acting on its behalf are expressly qualified in their
entirety by these cautionary statements. The Company does not undertake any
obligation to release publicly any revisions to such forward-looking statements
to reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events.
12
<PAGE> 13
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK
Interest on the Company's Credit Facility is based on the London Interbank
Offered Rate ("LIBOR") plus a variable margin as defined in the credit
agreement. Therefore, the Company's future borrowing costs may fluctuate
depending upon the volatility of LIBOR. The Company currently mitigates a
portion of its interest rate risk through the use of interest rate swap
agreements, whereby the Company has agreed to exchange, at specific intervals,
the difference between fixed and variable interest amounts calculated by
reference to an agreed-upon notional amount.
The table set forth below summarizes the fair values and contract terms of
financial instruments subject to interest rate risk maintained by the Company as
of October 28, 2000 (dollars in thousands):
<TABLE>
<CAPTION>
Maturity Date
------------------------------------------------------------------------ Fair Value at
2000 2001 2002 2003 2004 Thereafter Total October 28, 2000
---- ---- ---- ---- ---- ---------- ----- ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Variable Rate Debt - 15,600 64,400 91,100 117,800 31,100 320,000 320,000
Average Interest Rate 7.9% 7.9% 8.1% 8.3% 8.5% 8.1%
Variable to Fixed Swaps - 80,000 120,000 120,000 320,000 (1,813)
Average Pay Rate 6.9% 6.9% 6.9% 6.9%
Average Receive Rate 6.5% 6.3% 6.5% 6.4%
</TABLE>
The notional amounts of interest rate swap agreements, as presented in the table
above, are used to measure interest to be paid or received and do not represent
the amount of exposure to credit loss. The estimated fair value approximates the
proceeds to settle the outstanding contracts. Interest rates on the variable
debt and the receive rate on the interest rate swaps are estimated using the
average implied LIBOR for the year of maturity based on the yield curve in
effect at October 28, 2000.
CURRENCY RISK
In order to minimize its foreign exchange risk, the Company entered into two
currency swaps during the third quarter. These swaps effectively convert $30
million of the U.S. dollar-denominated term loan into Canadian
dollar-denominated obligations. This swap has been designated as a foreign
currency hedge on the Company's net investment in Canadian dollar-denominated
subsidiaries. One of the currency swaps for $20 million expires in 2002. The
swap for the remaining $10 million expires in 2005. Gains and losses are
recorded as a cumulative translation adjustment in stockholders' equity. As of
October 28, 2000, the Company is obligated to pay on a notional amount of 44.6
million Canadian dollars at an interest rate of 6.28% and will receive interest
on a notional amount of 30 million U.S. dollars at an interest rate of 6.89%.
The fair value of these currency swaps is $0.9 million at October 28, 2000.
The Company has also entered into an interest rate swap that becomes effective
upon maturity of the $20 million currency swap in 2002. Under the terms of the
swap, the Company will pay a fixed rate of 6.28% and receive a floating rate
equal to the Canadian Bankers' Acceptance Rate on a notional amount of 29.8
million Canadian dollars. It is the Company's intention to enter into a debt
agreement denominated in Canadian dollars with terms matching those of the
interest rate swap agreement in 2002.
13
<PAGE> 14
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
The Company and its subsidiaries are parties to ordinary private litigation
incidental to their business.
ITEM 5 - OTHER INFORMATION
In September 2000, the Company announced a joint venture agreement with PLP
S.A., a holding company formed by Central American and Caribbean local partners,
to open and operate Payless ShoeSource family footwear stores in Central America
and the Caribbean. These stores will offer a selection of the same footwear and
accessories available at all Payless ShoeSource locations.
The Company intends to open four stores in Costa Rica this fall, and will
carefully assess the results. If the stores are successful, the Company plans to
open additional new stores in Costa Rica and other Central American markets. On
November 3, 2000, the first store opened in Costa Rica.
In November 2000, the City of Topeka approved the issuance of $110 million in
industrial revenue bonds for the Company. The Company will use the funds over a
four-year period from 2000 through 2003. The Company intends to be the sole
investor in the bonds.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Number Description
------- ------------
11.1 Computation of Net Earnings Per Share*
27 Financial Data Schedule*
* Filed herewith
(b) Reports on Form 8-K
NONE
14
<PAGE> 15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PAYLESS SHOESOURCE, INC.
Date: 12/11/00 /s/ Steven J. Douglass
---------------- -------------------------------
Steven J. Douglass
Chairman and
Chief Executive Officer
Date: 12/11/00 /s/ Ullrich E. Porzig
---------------- -------------------------------
Ullrich E. Porzig
Senior Vice President and
Chief Financial Officer
15
<PAGE> 16
Exhibit Index
Number Description
------ -----------
11.1 Computation of Net Earnings Per Share
27 Financial Data Schedule
