-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, D41tk8oZ7+maN4u9NfOu72Aa54ixYDPESGiG63ai9ksyS9JgfHjxSGxE7tq4x7ZW FkRJ3FETCldCzWi8B85Ysw== 0000950124-99-006368.txt : 19991210 0000950124-99-006368.hdr.sgml : 19991210 ACCESSION NUMBER: 0000950124-99-006368 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19991030 FILED AS OF DATE: 19991209 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PAYLESS SHOESOURCE INC /DE/ CENTRAL INDEX KEY: 0001060232 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-SHOE STORES [5661] IRS NUMBER: 431813160 STATE OF INCORPORATION: DE FISCAL YEAR END: 0130 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-14770 FILM NUMBER: 99771050 BUSINESS ADDRESS: STREET 1: 3231 SOUTH EAST SIXTH STREET CITY: TOPEKA STATE: KS ZIP: 66607-2207 BUSINESS PHONE: 9132335171 MAIL ADDRESS: STREET 1: 3231 S E 6TH ST CITY: TOPEKA STATE: KS ZIP: 66607-2207 FORMER COMPANY: FORMER CONFORMED NAME: PAYLESS SHOESOURCE HOLDINGS INC DATE OF NAME CHANGE: 19980421 10-Q 1 FORM 10-Q 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 30, 1999 Commission File Number 1-14770 PAYLESS SHOESOURCE, INC. (Exact name of registrant as specified in its charter) DELAWARE 43-1813160 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 3231 SOUTHEAST SIXTH AVENUE, TOPEKA, KANSAS 66607-2207 (Address of principal executive offices) (Zip Code) (785) 233-5171 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. YES X NO ------ ------- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Common Stock, $.01 par value 30,296,374 shares as of November 26, 1999 2 PART 1 - FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS PAYLESS SHOESOURCE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEET
(Dollars in millions) (Unaudited) (Unaudited) Oct. 30, Oct. 31, Jan. 30, ASSETS 1999 1998 1999 - ------ --------------- --------------- --------------- Current Assets: Cash and cash equivalents $ 210.7 $ 102.4 $ 123.5 Merchandise inventories 359.4 353.3 342.1 Current deferred income taxes 14.7 7.7 14.2 Other current assets 21.2 17.5 16.0 --------------- --------------- --------------- Total current assets 606.0 480.9 495.8 Property and Equipment: Land 7.4 6.0 6.3 Buildings and leasehold improvements 647.8 603.9 594.8 Furniture, fixtures and equipment 294.4 306.5 284.2 Property under capital leases 7.3 7.5 7.6 --------------- --------------- --------------- Total property and equipment 956.9 923.9 892.9 Accumulated depreciation and amortization (469.2) (429.0) (400.1) --------------- --------------- --------------- Property and equipment 487.7 494.9 492.8 Deferred income taxes 20.5 24.2 25.8 Other assets 4.5 3.5 3.5 --------------- --------------- --------------- Total Assets $ 1,118.7 $ 1,003.5 $ 1,017.9 =============== =============== =============== LIABILITIES AND SHAREOWNERS' EQUITY - ----------------------------------- Current Liabilities: Current maturities of long-term debt $ 0.7 $ 1.5 $ 1.5 Accounts payable 78.9 84.1 75.5 Accrued expenses 138.5 125.7 117.9 --------------- --------------- --------------- Total current liabilities 218.1 211.3 194.9 Long-term debt 126.3 5.2 72.0 Other liabilities 49.0 48.8 48.2 Shareowners' Equity 725.3 738.2 702.8 Total Liabilities and Shareowners' Equity $ 1,118.7 $ 1,003.5 $ 1,017.9 =============== =============== ===============
See Notes to Condensed Consolidated Financial Statements. 2 3 PAYLESS SHOESOURCE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF EARNINGS (UNAUDITED)
(Millions, except per share) 13 Weeks Ended 39 Weeks Ended ----------------------------------- ----------------------------------- Oct. 30, Oct. 31, Oct. 30, Oct. 31, 1999 1998 1999 1998 --------------- --------------- --------------- --------------- Net Retail Sales $ 669.4 $ 643.1 $ 2,126.2 $ 2,047.1 Cost of sales 455.4 441.0 1,438.3 1,394.6 Selling, general and administrative expenses 156.8 147.4 486.5 457.7 Interest (income) expense, net (0.4) (1.3) (0.2) (6.0) --------------- --------------- --------------- --------------- Earnings before income taxes 57.6 56.0 201.6 200.8 Provision for income taxes 23.0 22.3 80.4 80.1 --------------- --------------- --------------- --------------- Net Earnings $ 34.6 $ 33.7 $ 121.2 $ 120.7 =============== =============== =============== =============== Diluted Earnings per Share $ 1.11 $ 0.98 $ 3.82 $ 3.31 =============== =============== =============== =============== Basic Earnings per Share $ 1.12 $ 0.98 $ 3.84 $ 3.35 =============== =============== =============== =============== Diluted Weighted Average Shares Outstanding 31.1 34.5 31.8 36.4 =============== =============== =============== =============== Basic Weighted Average Shares Outstanding 30.9 34.4 31.6 36.1 =============== =============== =============== ===============
See Notes to Condensed Consolidated Financial Statements. 3 4 PAYLESS SHOESOURCE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
(Dollars in millions) 39 Weeks Ended ---------------------------------- Oct. 30, Oct. 31, 1999 1998 --------------- ------------- Operating Activities: Net earnings $ 121.2 $ 120.7 Adjustments for noncash items included in net earnings: Depreciation and amortization 72.8 69.9 Amortization of unearned restricted stock 1.4 2.1 Deferred income taxes 4.8 4.9 Merchandise inventories (17.3) (28.7) Other current assets (5.2) (6.1) Accounts payable 3.4 20.3 Accrued expenses 20.6 12.8 Other assets and liabilities, net 1.9 (3.4) --------------- ---------------- Total Operating Activities 203.6 192.5 --------------- ---------------- Investing Activities: Capital expenditures (71.7) (84.9) Disposition of property and equipment 4.0 6.7 --------------- ---------------- Total Investing Activities (67.7) (78.2) --------------- ---------------- Financing Activities: Issuance of long-term debt 55.0 0.0 Repayment of long-term debt (1.5) (1.2) Net purchases of common stock (102.2) (220.7) --------------- ---------------- Total Financing Activities (48.7) (221.9) --------------- ---------------- Increase (Decrease) in Cash and Cash Equivalents 87.2 (107.6) Cash and Cash Equivalents, Beginning of Year 123.5 210.0 --------------- ---------------- Cash and Cash Equivalents, End of Period $ 210.7 $ 102.4 =============== ================ Cash paid during the period: Interest $ 3.1 $ 0.8 Income Taxes 60.9 62.3
See Notes to Condensed Consolidated Financial Statements. 4 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 1998 Annual Report. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, the unaudited Condensed Consolidated Financial Statements are fairly presented and all adjustments (consisting only of normal recurring adjustments) necessary for a fair statement of the results for the interim periods have been included; however, certain items are included in these statements based upon estimates for the entire year. The results for the quarter and nine month period ended October 30, 1999, are not necessarily indicative of the results that may be expected for the year ending January 29, 2000. NOTE 3. INVENTORIES. Merchandise inventories are valued at the retail method and are stated at the lower of cost, determined using the first- in, first-out (FIFO) basis, or market. NOTE 4. LONG-TERM DEBT. In June 1999, the Company completed a $55 million financing through a private placement of unsecured notes issued by a wholly owned subsidiary in five and ten year maturities. The financing consists of an aggregate of $20 million of senior notes maturing in June 2004 at 7.34%, $15 million of senior notes maturing in June 2009 at 7.67%, with payments of principal beginning in June 2003, and $20 million of senior notes maturing in June 2009 at 7.78%. 5 6 NOTE 5. 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 6. RECLASSIFICATIONS. Certain reclassifications have been made to prior year balances to conform with the current year presentation. NOTE 7. FOREIGN CURRENCY TRANSLATION. Local currencies are the functional currencies for all subsidiaries. Accordingly, assets and liabilities of foreign subsidiaries are translated at the rate of exchange at the balance sheet date. Income and expense items of these subsidiaries are translated at average rates of exchange. The foreign currency translation was immaterial for the third quarter of 1999 and 1998. ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion summarizes the significant factors affecting operating results for the quarters ended October 30, 1999 (1999) and October 31, 1998 (1998). This discussion and analysis should be read in conjunction with the unaudited Condensed Consolidated Financial Statements and Notes to the Condensed Consolidated Financial Statements included in this Form 10-Q. REVIEW OF OPERATIONS NET EARNINGS Net earnings totaled $34.6 million in the third quarter of 1999, up 2.7% from $33.7 million in the third quarter of 1998. For the first nine months of 1999, net earnings were $121.2 million compared with $120.7 million in the 1998 period, a 0.4% increase. The following table presents the components of costs and expenses, as a percent of net retail sales, for the third quarter and first nine months of 1999 and 1998.
First Third Quarter Nine Months ------------- ------------- 1999 1998 1999 1998 ------ ------ ------ ------ Cost of sales 68.0% 68.6% 67.6% 68.1% Selling, general and administrative expenses 23.4 22.9 22.9 22.4 Interest (income)/expense, net (.0) (.2) (.0) (.3) ---- ---- ---- ---- Earnings before income taxes 8.6% 8.7% 9.5% 9.8% ==== ==== ==== ==== Effective income tax rate 39.9% 39.9% 39.9% 39.9% ==== ==== ==== ==== Net Earnings 5.2% 5.2% 5.7% 5.9% ==== ==== ==== ====
6 7 NET RETAIL SALES Net retail sales represent the sales of stores operating during the period. Same-store sales represent sales of stores open during comparable periods. During the third quarter of 1999 net retail sales increased 4.1 percent from the third quarter of 1998, consisting of a 7.5 percent increase in unit volume and a 3.1 percent decrease in average selling prices. For the first nine months of 1999 net retail sales increased 3.9 percent from the same period of 1998, consisting of a 5.7 percent increase in unit volume and a 1.7 percent decrease in average selling prices. Sales percent increases (decreases) are as follows:
Third Quarter First Nine Months ----------------- ------------------- 1999 1998 1999 1998 -------- ------- --------- -------- Net Retail Sales 4.1% 1.2% 3.9% 2.5% Same-Store Sales 0.8% (1.9%) 0.4% (0.1%)
COST OF SALES Cost of sales includes cost of merchandise sold, buying and occupancy costs. Cost of sales was $455.4 million in the 1999 third quarter, up 3.3% from $441.0 million in the 1998 third quarter. For the first nine months of 1999, cost of sales was $1.438 billion, a 3.1% increase from $1.395 billion in the 1998 period. For the third quarter and first nine months, cost of sales, as a percent of net retail sales, declined 0.6 percent to 68.0 percent and 0.5 percent to 67.6 percent, respectively. Gross margin improvement in the third quarter and the first nine months of the year was primarily due to lower sourcing costs, control of freight costs, a lower markdown rate, and reduced damages and shrink. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses were $156.8 million in the 1999 third quarter, up 6.4 percent from $147.4 million in the 1998 third quarter. For the first nine months of 1999, selling, general and administrative expenses were $486.5 million compared with $457.7 million in the 1998 period, a 6.3 percent increase. As a percent of net retail sales, selling, general and administrative expenses were 23.4 percent during the third quarter of 1999 compared with 22.9 percent in the third quarter of 1998. For the first nine months of 1999, selling, general and administrative expenses as a percent of net retail sales were 22.9 percent in 1999 compared with 22.4 percent in 1998. The increase during the third quarter and the first nine months of 1999 was due primarily to an increase in stores payroll due to higher hourly wage rates, and higher advertising expenditures. CASH FLOW Cash flow from operations during the nine months ended October 30, 1999, was $203.6 million. This figure represented 9.6 percent of net retail sales during the first nine months of 1999 compared with 9.4 percent during the first nine months of 1998. Internally generated funds are expected to continue to be the most important component of the Company's capital resources and are expected to fund capital expansion. 7 8 CAPITAL EXPENDITURES Capital expenditures during the first nine months of 1999 totaled $71.7 million with an additional $34.3 million estimated to be incurred during the remainder of fiscal year 1999. The Company anticipates that cash flow from operations and the Company's existing credit facility should be sufficient to finance projected capital expenditures. FINANCING ACTIVITIES During the third quarter of 1999, the Company acquired 0.8 million shares of its common stock for an aggregate price of approximately $40 million. For the first nine months of the year, the Company has acquired 2.1 million shares for an aggregate price of approximately $105 million. In June 1999, the Company completed a $55.0 million dollar financing through a private placement of unsecured notes issued by a wholly-owned subsidiary in five and ten year maturities. Principal payments on $15.0 million of the ten year notes begin in June 2003. Proceeds from the financing are intended to be used for general corporate purposes including the funding of a portion of the company's stock repurchase program. AVAILABLE CREDIT The Company has in place a $200.0 million unsecured revolving credit facility with a bank syndication group. While no amounts had been drawn against the agreement at October 30, 1999, the balance available to the Company was reduced by $11.4 million outstanding under a letter of credit. FINANCIAL CONDITION RATIOS A summary of key financial information for the periods indicated is as follows:
Oct. 30, Oct. 31, Jan. 30, 1999 1998 1999 --------- --------- --------- Current Ratio 2.8 2.3 2.5 Debt-to-Capitalization Ratio* 14.9% 0.9% 9.5% Fixed Charge Coverage** 3.8x 4.1x 4.1x
* Debt-to-capitalization has been computed by dividing total debt, which includes current and long-term capital lease obligations, by capitalization, which includes current and long-term capital lease obligations, long-term debt, non-current deferred income taxes and equity. The debt-to-capitalization ratio, including the present value of future minimum rental payments under operating leases as debt and capitalization, would be 57.3%, 53.7% and 56.8% respectively, for the periods referred to above. ** Fixed charge coverage, which is presented for the trailing 52 weeks in each period ended above, is defined as earnings before income taxes, gross interest expense, and the interest component of rent expense, divided by gross interest expense and the interest component of rent expense. 8 9 STORE ACTIVITY At the end of the third quarter of 1999, the Company operated 4,449 Payless ShoeSource stores in 50 states, Canada, the District of Columbia, Guam, Saipan, Puerto Rico and the U.S. Virgin Islands and 220 Parade of Shoes stores. The following table presents the change in store count for the third quarter and first nine months of 1999 and 1998.
PAYLESS SHOESOURCE First Third Quarter Nine Months --------------- ------------- 1999 1998 1999 1998 -------- ------ ------ ------ Beginning of quarter/year 4,413 4,293 4,357 4,256 Stores opened 69 71 196 178 Stores closed (33) (37) (104) (107) ----- ----- ----- ----- Ending store count 4,449 4,327 4,449 4,327 ===== ===== ===== ===== PARADE OF SHOES First Third Quarter Nine Months ------------- ------------- 1999 1998 1999 1998 ------ ------ ----- ------- Beginning of quarter/year 215 211 213 175 Stores opened 7 10 11 51 Stores closed (2) (9) (4) (14) ----- ----- ----- ----- Ending store count 220 212 220 212 ===== ===== ===== =====
E-COMMERCE On May 27, 1999 the Company launched its online store, Payless.com (sm). The store's Internet address is http://www.payless.com. The online store offers customers another way to take advantage of the value, quality, and selection offered through the Company's Payless ShoeSource stores, with the added convenience of online shopping. In late September, Payless announced an E-Commerce agreement with America Online, Inc. to sell footwear through AOL's new Shop@AOL marketplace, making Payless.com (sm) an anchor tenant for this online shopping destination. SHOPKO Effective July 23, 1999, the Company entered into an agreement with ShopKo Stores, Inc. ("ShopKo") under which Payless will operate the shoe departments in the ShopKo stores. In early October the Company opened its first Payless ShoeSource shoe departments in ShopKo stores. The Company is now operating in 9 ShopKo stores and intends to be open in 13 ShopKo stores by the end of the year. Payless expects to be operating in all ShopKo stores by the fall of 2000. There are currently 160 ShopKo locations. These shoe departments will offer the same footwear and accessories available in Payless ShoeSource stores. The Company estimates that these Payless ShoeSource shoe departments will produce approximately 50% of the revenue of a typical Payless ShoeSource store. PARADE OF SHOES UPDATE In light of the performance of Parade of Shoes during the first nine months of 1999, the Company now plans to add approximately ten new Parade of Shoes stores by the end of the fiscal year and anticipates adding another 50 stores in fiscal year 2000. 9 10 YEAR 2000 READINESS DISCLOSURE Many existing computer programs were designed and developed without regard for the implications of Year 2000 and beyond. If not corrected, these computer applications could fail or create erroneous results before or at the Year 2000. For the Company, this could disrupt product purchasing and distribution, store operations, finance and other support areas, and affect the Company's ability to timely deliver product to stores, thereby causing potential lost sales opportunities and additional expenses. THE COMPANY'S STATE OF READINESS. The Company created a Year 2000 Steering Committee comprised of various senior management members and a Year 2000 Project Management Office. This group is responsible for planning and monitoring the Company's overall Year 2000 program and for reporting on a regular basis to the Company's Board of Directors. The Company's Year 2000 program encompasses both information systems and non-information technology within the Company as well as investigation of the readiness of the Company's significant business partners. The Company engaged an international consulting firm to evaluate and assist in the monitoring of its Year 2000 program. The outside consulting firm provided periodic updates on the Company's progress to the Company's Board of Directors. INTERNALLY ENGINEERED SYSTEMS. With assistance from another international consulting firm, the Company has modified 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 has been completed. The consulting firm has completed its work and the Company completed its remediation and testing of its internally engineered computer systems using internal resources. 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 has tested 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 that 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. 10 11 The Company has compiled detailed information regarding all of its significant business partners. The Company has, where appropriate, reviewed such significant partners throughout 1999 to confirm their level of preparedness for the Year 2000 and has made adjustments where necessary to avoid utilization of those partners who present an unacceptable level of risk. The Company currently is not dependent on any single source for any products or services. In the event a significant supplier, bank or other business partner or vendor is unable to provide products or services to the Company due to a Year 2000 failure, the Company believes it has adequate alternate sources for such products or services. There can be no guarantee, however, that similar or identical products or services would be available on the same terms and conditions or that the Company would not experience some adverse effects as a result of switching to such alternate sources. EMBEDDED SYSTEMS. The Company has inventoried non-computing electronic equipment (non-information technology) throughout the enterprise to determine whether it is date sensitive. Where appropriate, the Company has sought and received contractual protections or made contingency plans in an effort to minimize any adverse effect on any such equipment due to the Year 2000. The Company has fully tested critical non-computer equipment. COSTS TO ADDRESS THE YEAR 2000. Spending for modifications is being expensed as incurred and is not expected to have a material impact on the Company's results of operations or cash flows. The cost of the Company's Year 2000 program is being funded with cash flows from operations. The Company's total Year 2000 expenditures (including external and internal expenditures) are estimated to be in the range of $8-10 million. While the foregoing estimate does include internal costs, the Company does not separately track all of the internal costs incurred by it for the Year 2000 program. Such costs are principally the related payroll costs for the Company's Year 2000 Program Management Office and other internal resources who are also contributing their efforts to the Year 2000 program. The largest single Year 2000 expenditure to date has been consulting fees incurred in the context of the remediation of the Company's internally engineered computer systems as discussed above. To date, the Company has expended nearly all of its planned Year 2000 expenditures, although this 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 been ascertained by the Company. 11 12 The Company's Year 2000 program has identified and seeks to minimize this risk and included testing of 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. The Company's Year 2000 program also includes a contingency plan which attempts to minimize any disruption to the Company's operations in the event of a Year 2000 failure. The Company's plans are designed 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 was a function of the risks ascertained through the Company's investigative efforts. The Company's contingency planning has been completed. 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 should effectively minimize disruption to the Company's operations due to the Year 2000. FORWARD-LOOKING STATEMENTS This report contains, and from time to time, the Company may publish, forward-looking statements relating to such matters as anticipated financial performance, business prospects, e-commerce initiatives, technological developments, new products, future store openings, possible strategic alternatives and similar matters. Also, statements including the words "expects," "anticipates," "intends," "plans," "believes," "seeks," or variations of such words and similar expressions are forwarding-looking statements. The Company notes that a variety of factors could cause its actual results and experience to differ materially from the anticipated results or other expectations expressed in its forward-looking statements. The risks and uncertainties that may affect the operations, performance, development and results of the Company's business include, but are not limited to, the following: changes in consumer spending patterns; changes in consumer preferences and overall economic conditions; the impact of competition and pricing; changes in weather patterns; successful implementations of new technologies; Year 2000 matters as discussed herein; the financial condition of the suppliers and manufacturers from whom the Company sources its merchandise; changes in existing or potential duties, tariffs or quotas; changes in relationships between the United States and foreign countries, economic and political instability in foreign countries or restrictive actions by the governments of foreign countries in which suppliers and manufacturers from whom the Company sources are located; changes in trade and foreign tax laws; fluctuations in currency exchange rates; availability of suitable store locations on acceptable terms; the ability to achieve expected advantages of operating shoe departments in specialty discount stores, the ability to hire, train and retain associates; and general economic, business and social conditions. 12 13 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. 13 14 PART II - OTHER INFORMATION ITEM 1 - LEGAL PROCEEDINGS There are no material pending legal proceedings, to which the Company or any of its subsidiaries is a party or of which any of their property is the subject. The Company and its subsidiaries are parties to ordinary private litigation incidental to their business. ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: Number Description ------- ------------ 10.1 Consulting Agreement between the Company and Richard A. Jolosky* 11.1 Computation of Net Earnings Per Share* 27 Financial Data Schedule* * Filed herewith (b) Reports on Form 8-K NONE 14 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: 12/8/99 /s/ Steven J. Douglass ------- ------------------------------ Steven J. Douglass Chairman and Chief Executive Officer Date: 12/8/99 /s/ Ullrich E. Porzig ------- ------------------------------ Ullrich E. Porzig Senior Vice President and Chief Financial Officer 15 16 Exhibit Index Number Description ------ ----------- 10.1 Consulting Agreement between the Company and Richard A. Jolosky 11.1 Computation of Net Earnings Per Share 27 Financial Data Schedule EX-10.1 2 CONSULTING AGMT. BETW. COMPANY & RICHARD JOLOSKY 1 EXHIBIT 10.1 CONSULTING CONTRACT This Consulting Contract made and entered into as of the 30th day of September, 1999 by and between Payless ShoeSource, Inc., ("Payless") a Delaware corporation and Richard A. Jolosky ("Consultant). WHEREAS, Payless and Consultant desire that Consultant serve as a consultant to Payless for the fees and upon and subject to the terms and provisions hereinafter set forth; In consideration of the mutual promises and agreements hereinafter set forth, it is hereby agreed by and between Payless and Consultant as follows: 1.(a)The term of the Consulting Contract shall be from October 1, 1999 to September 30, 2002. Consultant covenants and agrees that he will, when and as requested by Payless (subject to Section 1(c), below), from time to time during the term of this Consulting Contract, and at such place or places as Payless may reasonably request, render and furnish consulting services relating to the conduct and operation of Payless' affairs as shall be requested by the proper officers of Payless. (b) In rendering the consulting services provided for herein, Consultant shall make available to Payless such personal expertise, know-how and assistance as Payless may reasonably request. The parties recognize and agree that Consultant's services are of a special and unique character. Consultant's obligations hereunder are obligations of the Consultant alone, and may not be assigned to or performed by others. (c) Consultant and Payless desire to permit Consultant maximum flexibility in terms of the timing of his work, consistent with Payless' need for his consulting services. In addition, however, Consultant and Payless recognize that, in many instances, Payless must be able to count on receiving such services in a timely fashion. Therefore, Consultant and Payless shall both seek to be as reasonable as possible in exercising their respective rights in carrying out their respective duties hereunder, and shall communicate with each other as far in advance as reasonably practicable concerning the scheduling of consulting services. (d) Consultant shall render consulting services during the term of this Consulting Contract as follows: 1) for up to 120 days during the period commencing October 1, 1999, and ending September 30, 2000; plus 2) for up to 80 days during the period commencing October 1, 2000, and ending September 30, 2001; plus 3) for up to 40 days during the period commencing October 1, 2001, and ending September 30, 2002 For purposes of this Consulting Contract, Consultant shall be deemed to have furnished and rendered consulting services under this Consulting Contract for a "day" for each calendar day or portion thereof on which Consultant provides not less than three hours of consulting services under this Consulting Contract; provided, however, that in no event shall any single calendar day be counted as more than one "day" for purposes of calculating fees payable to Consultant under this Consulting Contract. In the event that Consultant provides less than three hours of services in any calendar day (a 2 "short-hour day") under this Consulting Contract, then Consultant shall be deemed to have furnished and rendered consulting services under this Consulting Contract for a "day" for each group of short-hour days in which the aggregate of hours or consulting services rendered is not less than seven hours; provided, however, that in no event shall any one short-hour day be included in more than one such group of short-hour days. 2.(a) Payless agrees to pay Consultant consulting fees (before taxes) for the performance of its obligations under this Consulting Contract, to be paid on or about the first week after the close of the fiscal quarter as follows: 1) for the period commencing October 1, 1999, and ending September 30, 2000, the amount of $250,000 (before taxes), payable in equal quarterly installments; 2) for the period commencing October 1, 2000, and ending September 30, 2001, the amount of $166,700 (before taxes), payable in equal quarterly installments; 3) for the period commencing October 1, 2001, and ending September 30, 2002, the amount of $83,300 (before taxes), payable in equal quarterly installments. (b) In the event that, during the term of this Consulting Contract, Consultant renders and furnishes consulting services in excess of the number of days described in Section 1(d) of this Consulting Contract, then Payless agrees to pay Consultant supplementary consulting fees, in addition to the consulting fees described in Section 2 (a) of this Consulting Contract, at a rate of $2,100 per day for each day that Consultant so renders and furnishes such excess consulting services. In the event that Payless becomes obligated to pay supplementary consulting fees under this Section 2(b) Payless agrees to pay such supplementary consulting fees accrued on or about the first week after the close of the fiscal quarter. (c) Payless shall reimburse Consultant for all reasonable ordinary and necessary business expenses incurred directly in the rendering of consulting services hereunder, including, but not by way of limitation, expenses for such matters as transportation, travel, entertainment, long distance telephone calls and other necessary and customary expenses on the same terms as were offered while Consultant was employed as Vice Chairman by Payless. Payment of such expenses during the term of this Consulting Contract shall be made promptly upon presentation of supporting documents comparable to those required to be submitted by employees of Payless. If business is conducted by Consultant on any trip for Payless and for a non-Payless client of consultant, then such trip costs will be allocated equally among all of the clients so served. (d) It is agreed and understood that nothing in this Section 2 or elsewhere in this Consulting Contract shall be deemed or construed to create or continue an employer-employee relationship between Consultant and Payless, it being agreed that such employer-employee relationship between Consultant Richard A. Jolosky terminated on or about September 30, 1999. 3.(a) Consultant covenants and agrees that during the term of this Consulting Contract, and for a period of two years from the earlier of September 30, 2002 or the actual termination of this Consulting Contract, he shall not: 3 (i) either alone or in concert with others, directly or indirectly, own, be a partner in, be a member of, operate, be employed by, or act as an advisor, consultant, agent, officer, director, or independent contractor for, or otherwise have an interest in, a Competing Business; (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 in soliciting for employment, hiring or offering employment to, any employee of Payless, or (iii) take any action which is intended to harm Payless or its reputation, which Payless reasonably concludes could lead to unwanted or unfavorable publicity to Payless; unless Consultant (i) shall first have written to the Chairman of Payless and shall have fully disclosed in advance of such activity both (1) the identity of such competing business and (2) the nature of the consulting or similar services to be rendered and (ii) shall first have secured the prior written approval of the Chairman to Consultant's rendering such consulting or other similar services, which prior written approval shall not be unreasonably withheld; but except to the extent limited as aforesaid, and as hereinafter provided, Consultant's activities shall not be otherwise restricted by its Consulting Contract. (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, Bradlee's, Ames, Mervyn's, Pic-N-Pay, Foot Star, Inc., Edison, Aldo, Genesco, 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 4 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) The background of the non-compete restriction is as follows: (i) Payless is one of the leading retail companies in the United States, with self-service shoe stores throughout the United States, Puerto Rico, U.S.Virgin Islands, Guam, Saipan 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 (iii) Consultant desires to contract with Payless, to be given access to confidential and proprietary information of Payless necessary for Consultant to perform the Consulting Contract, but which Payless would not make available to Consultant but for Consultant's signing and agreeing to abide by the terms of this Consulting Contract with Payless; and (iv) Consultant recognizes and acknowledges that the Consulting Contract with Payless provides Consultant with access to Payless' confidential and proprietary trade secret information and other confidential business information; and (v) long-term customer and supplier relationships often can be difficult to develop and require a significant investment of time, effort and expense; and (vi) Consultant recognizes and acknowledges that if Consultant's contract with Payless were to cease, Payless needs certain protections in order to ensure that Consultant does not appropriate and use any confidential information entrusted to Consultant during the course of this Consulting Contract 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 Consultant from having an unfair competitive advantage over Payless. 4. Payless and Consultant 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 Consulting Contract, and enforcement of one or more of such rights and remedies shall in no way preclude Payless or Consultant from pursuing, at the same time or subsequently, any and all other rights and remedies available to each of them. In no event may either party (the "terminating party") terminate this Consulting Contract or Consultant's engagement hereunder on account of the breach of this Consulting Contract by the other party unless the terminating party gives notice to the other party of the grounds for claiming such breach and such grounds continue for ten days after the other party receives such notice. The giving of one such notice on one or more grounds shall not preclude the giving of a subsequent notice or notices. In any legal or other proceeding with respect to any such breach of this Consulting Contract, the only basis on which the terminating party may establish such stated breach 5 will be the grounds stated in any such notice or subsequent notice or notices. 5. Whenever it is provided herein that notice, demand, request or other communication shall or may be given to or served upon either of the parties by the other, and whenever either of the parties shall desire to give or serve upon the other any notice, demand, request or other communication, each such notice, demand, request or other communication shall be in writing and shall not be effective for any purposes unless the same shall be given or served by mailing the same or having the same delivered by an independent courier, addressed as follows: (a) If to Payless: Payless ShoeSource, Inc. 3231 SE 6th Street Topeka, Kansas 66607 Attention: Chairman or at such other address or addresses as Payless may from time to time designate by notice given to Consultant. (b) If to Consultant: With a copy to: Richard A. Jolosky Robert J. Rosepink 1921 Quail Run Rosepink & Estes Lawrence, Kansas 66047 7373 North Scottsdale Road Ste D102 Scottsdale, Arizona 85253 or at such other address or addresses as Payless Consultant may from time to time designate by notice given to Payless Consultant. Every notice, demand, request or other communication under this Consulting Contract shall be given or served by (i) depositing the same in the United States mail, first-class, registered or certified, postage paid, return receipt requested, or (ii) depositing the same with an independent courier, expenses prepaid, return receipt requested, and the postal receipt or courier receipt showing delivery to Payless or to Consultant, as the case may be, of any such notice, demand, request or other communication addressed and delivered in accordance with this Section 5 shall be deemed conclusive evidence that (i) such notice, demand, request or other communication shall have been given or served as of the date so deposited in the United States mail or with such independent courier and (ii) such addressee shall have received the same; such notice, demand, request or other communication shall be effective as of the time of receipt by the addressee. 6. (a) Consultant will not, at any time, directly or indirectly, use or disclose any of Payless' Confidential Information except as authorized and within the scope of the Consulting Contract with Payless. (b) At Payless' request and/or termination of this Consulting Contract with Payless, Consultant 6 will return to Payless all documents, records, notebooks, computer diskettes and tapes and anything else containing Payless' Confidential Information, including all copies thereof, as well as any other Payless property, in Consultant's possession, custody or control. Consultant will also delete from Consultant's own computer or other electronic storage medium, any of Payless' proprietary or Confidential Information. Not later than 20 days after the Consulting Contract is terminated, Consultant will certify in writing to Payless that Consultant has complied with these obligations. (c) During the terms of this Consulting Contract with Payless and thereafter, Consultant will (i) notify and provide Payless immediately with the details of any unauthorized possession, use or knowledge of any of Payless' Confidential Information, (ii) assist in preventing any reoccurrence of this possession, use or knowledge, and (iii) cooperate with Payless in any litigation or other action to protect or retrieve Payless' Confidential information. (d) "Confidential Information" means any non-public information pertaining to Payless' business. Confidential Information includes information disclosed by Payless to Consultant, and information developed or learned by Consultant during the course of or as a result of the Consulting Contract with Payless, which Consultant also agrees is Payless' property. Consultant further agrees that any item of intellectual or artistic property generated or prepared by Consultant, for Consultant or with others, in connection with this Consulting Contract with Payless is Payless' sole property and shall remain so unless Payless otherwise specifically agrees in writing. 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, marketing plans and strategies; profit margins; seasonal plans, goals, objectives and projections, compilations, analysis and projections regarding Payless' divisions, businesses, 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 it business. (e) Consultant agrees that Consultant will not disclose to Payless or use, or induce Payless to use, any proprietary information, trade secret or confidential business information of any other person or entity, including any previous employer of Consultant. Consultant also represents that Consultant has returned all property, proprietary information, trade secret and confidential business information belonging to any prior employer. 7. Consultant acknowledges and agrees that Consultant understands the restrictions in paragraph 3 above, that they are reasonable and that such restrictions are enforceable in view of the background for the non-compete restriction set forth in Section 3(c), and in view of, among other things, (i) the market in which Payless operates it business; (ii) the confidential information to which Consultant has access; (iii) Consultant's training and background, which are such that neither Payless nor Consultant believe that the restraint will pose an undue hardship on the Consultant; 7 (iv) the fact that a Competing Business could benefit greatly if it were to obtain Payless' confidential information; (v) the fact that Payless would not have adequate protection if Consultant was permitted to work for any Competing Business since Payless would be unable to verify whether its confidential information was being disclosed or misused; (vi) The limited duration of, the limited scope of, and the limited activities prohibited by, the restrictions in paragraph 3 above; and (vii) Payless' legitimate interests in protecting its confidential information, goodwill and relationships Furthermore, Payless and Consultant hereby expressly agree that should any court of competent jurisdiction determine that any provision of this Consulting Contract is, but for the provisions of this Section 7, illegal or void as against public policy, for any reason, 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 such court shall determine it not to be illegal or void as against public policy. If any such provision cannot be amended to the extent provided in the preceding sentence, then such provision shall be severed from this Consulting Contract. In either event, all other remaining terms and provisions shall remain in full force and effect. 8. Payless Work-Product. Consultant 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 Consultant, 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 this Consulting Contract, if such Work Product is related directly to 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 six (6) months after termination of this Consulting Contract 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 acquisition of any such Work Product, Consultant 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 rights in such Work Product and to assign and transfer to Payless Consultant's right, title and interest in and to such Work Product and intellectual property rights thereof. Consultant acknowledges that Consultant has carefully read and considered the provisions of this paragraph and, having done so, agrees that the 8 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 associates. 9. This Consulting Contract shall be governed by and construed in accordance with the laws of the State of Kansas. The appropriate state or federal courts of the State of Kansas shall have exclusive jurisdiction over the parties hereto and each party hereby submits to the personal jurisdiction of said courts of the State of Kansas otherwise having jurisdiction over the subject matter. 10. The entire understanding and agreement between the parties with respect to Consultant's consulting services hereunder has been incorporated into this Consulting Contract. This Consulting Contract may not be amended, except in writing, signed by both parties. 11. Consultant's obligations hereunder may not be assigned without the express written consent of Payless. This Consulting Contract shall be binding upon Consultant, its successors and assigns and upon Payless, its successors and assigns. IN WITNESS THEREOF, Payless and Consultant have executed this Consulting Contract in two counterparts, each of which shall be deemed an original, on the dates indicated below, but effective as of the day and year first above written. Payless ShoeSource, Inc. 8/19/99 - ------------------ Date By /s/ Steven J. Douglass ----------------------------- Title: Chairman Richard A. Jolosky 9/16/99 - ------------------- Date By /s/ Richard A. Jolosky ----------------------------- EX-11.1 3 COMPUTATION OF NET EARNINGS PER SHARE 1 EXHIBIT 11 PAYLESS SHOESOURCE, INC. COMPUTATION OF NET EARNINGS PER SHARE
13 Weeks Ended 39 Weeks Ended -------------------- ------------------- Oct. 30, Oct. 31, Oct. 30, Oct. 31, (Thousands, except per share) 1999 1998 1999 1998 --------- --------- --------- --------- Basic Computation: Net earnings $ 34,618 $ 33,688 $121,232 $120,747 Weighted average common shares outstanding 30,926 34,377 31,591 36,060 -------- -------- -------- -------- Basic earnings per share $ 1.12 $ 0.98 $ 3.84 $ 3.35 ======== ======== ======== ======== Diluted Computation: Net earnings $ 34,618 $ 33,688 $121,232 $120,747 Weighted average common shares outstanding 30,926 34,377 31,591 36,060 Net effect of dilutive stock options based on the treasury stock method 161 111 185 372 -------- -------- -------- -------- Outstanding shares for diluted earnings per share 31,087 34,488 31,776 36,432 ======== ======== ======== ======== Diluted earnings per share $ 1.11 $ 0.98 $ 3.82 $ 3.31 ======== ======== ======== ========
Note: Basic earnings per share is computed by dividing net earnings by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share includes the effect of conversions of options. EX-27 4 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM PAYLESS SHOESOURCE, INC. CONDENSED CONSOLIDATED STATEMENT OF EARNINGS FOR THE 39 WEEKS ENDED OCTOBER 30, 1999, AND CONDENSED CONSOLIDATED BALANCE SHEET AS OF OCTOBER 30, 1999, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS JAN-29-2000 JAN-31-1999 OCT-30-1999 210,700 0 8,700 0 359,400 606,000 956,900 469,200 1,118,700 218,100 126,300 0 0 300 725,000 1,118,700 2,126,200 2,126,200 1,438,300 1,438,300 0 0 (200) 201,600 80,400 121,200 0 0 0 121,200 3.84 3.82 Includes cash equivalent securities. Any "securities" are shown under "Cash". Receivables are net after deduction of allowances. Consists of Capital Lease Obligations plus Long-Term Debt. Reflects Retained Earnings and Additional Paid In Capital. Reflects net sales. Expressed in dollars.
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