##### Table of Contents



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
   PAYLESS SHOESOURCE, INC.
  DELAWARE
(State or other jurisdiction of
incorporation or organization)
    
    43-1813160
(I.R.S. Employer
Identification Number)3231 SOUTHEAST SIXTH AVENUE, TOPEKA, KANSAS
(Address of principal executive offices)
    
    66607-2207
(Zip Code)
 
  ü
  ü
  ü




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TABLE OF CONTENTS  PART I  FINANCIAL INFORMATIONITEM 1  FINANCIAL STATEMENTSPAYLESS SHOESOURCE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)PAYLESS SHOESOURCE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED)PAYLESS SHOESOURCE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)Thirteen Weeks Ended July 30, 2005Thirteen Weeks Ended July 31, 2004Twenty-six Weeks Ended July 30, 2005Twenty-Six Weeks Ended July 31, 2004July 30, 2005July 31, 2004CONDENSED CONSOLIDATING BALANCE SHEET (UNAUDITED) As of July 30, 2005CONDENSED CONSOLIDATING BALANCE SHEET (UNAUDITED) As of July 31, 2004CONDENSED CONSOLIDATING BALANCE SHEET (UNAUDITED) As of January 29, 2005CONDENSED CONSOLIDATING STATEMENT OF EARNINGS (UNAUDITED) For the Thirteen Weeks Ended July 30, 2005CONDENSED CONSOLIDATING STATEMENT OF EARNINGS (UNAUDITED) For the Thirteen Weeks Ended July 31, 2004CONDENSED CONSOLIDATING STATEMENT OF EARNINGS (UNAUDITED) For the Twenty-six Weeks Ended July 30, 2005CONDENSED CONSOLIDATING STATEMENT OF EARNINGS (UNAUDITED) For the Twenty-six Weeks Ended July 31, 2004CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS (UNAUDITED) For the Twenty-six Weeks Ended July 30, 2005CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS (UNAUDITED) For the Twenty-six Weeks Ended July 31, 2004ITEM 2  MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSITEM 3  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKITEM 4  CONTROLS AND PROCEDURESPART II  OTHER INFORMATIONITEM 1  LEGAL PROCEEDINGSITEM 2  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDSISSUER PURCHASES OF EQUITY SECURITIESITEM 6  EXHIBITSSIGNATURESCertification Pursuant to Rule 13a-14(a) of the CEO and PresidentCertification Pursuant to Rule 13a-14(a) of the Sr. VP, CFO and TreasurerCertification Pursuant to 18 U.S.C. 1350 of the CEO and PresidentCertification Pursuant to 18 U.S.C. 1350 of the Sr. VP, CFO and Treasurer    Table of Contents  
  
  
 
  July 30,
    
    
    July 31,
    
    
    January 29,ASSETS
    
    2005
    
    
    2004
    
    
    2005Current Assets:Cash and cash equivalents
    
    $
    361.0
    
    
    $
    175.0
    
    
    $
    289.6Marketable securities, available for sale
    
    
    
    
    
    
    9.0
    
    
    
    5.0Restricted cash
    
    
    2.0
    
    
    
    33.5
    
    
    
    3.0Inventories
    
    
    361.9
    
    
    
    398.2
    
    
    
    345.3Current deferred income taxes
    
    
    22.4
    
    
    
    23.1
    
    
    
    21.9Other current assets
    
    
    56.8
    
    
    
    68.2
    
    
    
    56.6Current assets of discontinued operations
    
    
    2.9
    
    
    
    20.6
    
    
    
    8.5Total current assets
    
    
    807.0
    
    
    
    727.6
    
    
    
    729.9Property and Equipment:Land
    
    
    7.7
    
    
    
    8.0
    
    
    
    8.0Buildings and leasehold improvements
    
    
    654.4
    
    
    
    670.5
    
    
    
    673.3Furniture, fixtures and equipment
    
    
    531.1
    
    
    
    523.4
    
    
    
    509.8Property under capital leases
    
    
    3.7
    
    
    
    4.6
    
    
    
    3.8Total property and equipment
    
    
    1,196.9
    
    
    
    1,206.5
    
    
    
    1,194.9Accumulated depreciation and amortization
    
    
    (797.9
    )
    
    
    (793.8
    )
    
    
    (772.6
    )Property and equipment, net
    
    
    399.0
    
    
    
    412.7
    
    
    
    422.3Favorable leases, net
    
    
    19.9
    
    
    
    24.3
    
    
    
    21.7Deferred income taxes
    
    
    35.1
    
    
    
    33.9
    
    
    
    36.4Goodwill, net
    
    
    5.9
    
    
    
    5.9
    
    
    
    5.9Other assets
    
    
    22.5
    
    
    
    26.5
    
    
    
    23.5Noncurrent assets of discontinued operations
    
    
    
    
    
    
    12.0
    
    
    
    0.1Total Assets
    
    $
    1,289.4
    
    
    $
    1,242.9
    
    
    $
    1,239.8LIABILITIES AND SHAREOWNERS EQUITYCurrent Liabilities:Current maturities of debt
    
    $
    1.6
    
    
    $
    0.8
    
    
    $
    0.3Notes payable
    
    
    2.0
    
    
    
    33.5
    
    
    
    3.0Accounts payable
    
    
    147.9
    
    
    
    126.5
    
    
    
    160.3Accrued expenses
    
    
    163.8
    
    
    
    151.9
    
    
    
    159.7Current liabilities of discontinued operations
    
    
    6.2
    
    
    
    4.9
    
    
    
    15.0Total current liabilities
    
    
    321.5
    
    
    
    317.6
    
    
    
    338.3Long-term debt
    
    
    204.3
    
    
    
    204.1
    
    
    
    204.3Other liabilities
    
    
    98.0
    
    
    
    81.4
    
    
    
    93.6Noncurrent liabilities of discontinued operations
    
    
    
    
    
    
    9.9
    
    
    
    Minority interest
    
    
    8.4
    
    
    
    8.0
    
    
    
    8.6Commitments and contingencies
    
    
    
    
    
    
    
    
    
    
    Total shareowners equity
    
    
    657.2
    
    
    
    621.9
    
    
    
    595.0Total Liabilities and Shareowners Equity
    
    $
    1,289.4
    
    
    $
    1,242.9
    
    
    $
    1,239.8
  2




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##### Table of Contents



13 Weeks Ended
    
    
    26 Weeks EndedJuly 30, 2005
    
    
    July 31, 2004
    
    
    July 30, 2005
    
    
    July 31, 2004Net sales
    
    $
    693.9
    
    
    $
    695.6
    
    
    $
    1,389.1
    
    
    $
    1,387.9Cost of sales
    
    
    458.8
    
    
    
    476.1
    
    
    
    909.6
    
    
    
    951.6Gross margin
    
    
    235.1
    
    
    
    219.5
    
    
    
    479.5
    
    
    
    436.3Selling, general and administrative expenses
    
    
    200.9
    
    
    
    181.5
    
    
    
    397.6
    
    
    
    369.9Restructuring charges
    
    
    
    
    
    
    13.7
    
    
    
    0.7
    
    
    
    13.7Operating profit from continuing operations
    
    
    34.2
    
    
    
    24.3
    
    
    
    81.2
    
    
    
    52.7Interest expense
    
    
    5.0
    
    
    
    5.8
    
    
    
    9.9
    
    
    
    11.2Interest income
    
    
    (2.6
    )
    
    
    (1.3
    )
    
    
    (4.3
    )
    
    
    (2.3
    )Earnings from continuing operations before
income taxes and minority interest
    
    
    31.8
    
    
    
    19.8
    
    
    
    75.6
    
    
    
    43.8Provision for income taxes
    
    
    10.1
    
    
    
    2.2
    
    
    
    22.6
    
    
    
    10.2Earnings from continuing operations before
minority interest
    
    
    21.7
    
    
    
    17.6
    
    
    
    53.0
    
    
    
    33.6Minority interest, net of income taxes
    
    
    0.1
    
    
    
    2.2
    
    
    
    0.5
    
    
    
    4.1Net earnings from continuing operations
    
    
    21.8
    
    
    
    19.8
    
    
    
    53.5
    
    
    
    37.7Loss from discontinued operations, net of
income taxes and minority interest
    
    
    (1.9
    )
    
    
    (16.0
    )
    
    
    (3.4
    )
    
    
    (19.8
    )Net earnings
    
    $
    19.9
    
    
    $
    3.8
    
    
    $
    50.1
    
    
    $
    17.9Diluted earnings per share:Earnings from continuing operations
    
    $
    0.32
    
    
    $
    0.29
    
    
    $
    0.79
    
    
    $
    0.55Loss from discontinued operations
    
    
    (0.03
    )
    
    
    (0.24
    )
    
    
    (0.05
    )
    
    
    (0.29
    )Diluted earnings per share
    
    $
    0.29
    
    
    $
    0.05
    
    
    $
    0.74
    
    
    $
    0.26Basic earnings per share:Earnings from continuing operations
    
    $
    0.32
    
    
    $
    0.29
    
    
    $
    0.79
    
    
    $
    0.55Loss from discontinued operations
    
    
    (0.03
    )
    
    
    (0.24
    )
    
    
    (0.05
    )
    
    
    (0.29
    )Basic earnings per share
    
    $
    0.29
    
    
    $
    0.05
    
    
    $
    0.74
    
    
    $
    0.26Diluted Weighted Average Shares Outstanding
    
    
    68.0
    
    
    
    68.1
    
    
    
    67.4
    
    
    
    68.0Basic Weighted Average Shares Outstanding
    
    
    67.5
    
    
    
    68.0
    
    
    
    67.3
    
    
    
    68.0
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##### Table of Contents



26 Weeks EndedJuly 30, 2005
    
    
    July 31, 2004Operating Activities:Net earnings
    
    $
    50.1
    
    
    $
    17.9Loss from discontinued operation, net of
income taxes and minority interest
    
    
    (3.4
    )
    
    
    (19.8
    )Net earnings from continuing operations
    
    
    53.5
    
    
    
    37.7Adjustments for non-cash items included
in net earnings from continuing operations:Restructuring charges
    
    
    
    
    
    
    13.7Loss on impairment and disposal of assets
    
    
    5.2
    
    
    
    4.7Depreciation and amortization
    
    
    46.0
    
    
    
    47.5Amortization of deferred financing costs
    
    
    0.6
    
    
    
    0.5Amortization of unearned restricted stock
    
    
    0.3
    
    
    
    0.4Deferred income taxes
    
    
    0.9
    
    
    
    (7.2
    )Minority interest, net of income taxes
    
    
    (0.5
    )
    
    
    (4.1
    )Income tax benefit of stock option exercises
    
    
    0.8
    
    
    
    Changes in working capital:Inventories
    
    
    (16.6
    )
    
    
    (23.5
    )Other current assets
    
    
    (0.1
    )
    
    
    (7.9
    )Accounts payable
    
    
    (11.4
    )
    
    
    (2.5
    )Accrued expenses
    
    
    10.5
    
    
    
    30.4Other assets and liabilities, net
    
    
    4.7
    
    
    
    0.9Net cash (used in) provided by discontinued
operations
    
    
    (6.5
    )
    
    
    1.1Cash flow provided by operating activities
    
    
    87.4
    
    
    
    91.7Investing Activities:Payments for capital expenditures
    
    
    (35.3
    )
    
    
    (56.2
    )Dispositions of property and equipment
    
    
    0.8
    
    
    
    Restricted cash
    
    
    1.0
    
    
    
    Purchases of marketable securities
    
    
    
    
    
    
    (9.0
    )Sales of marketable securities
    
    
    5.0
    
    
    
    10.0Cash flow used in investing activities
    
    
    (28.5
    )
    
    
    (55.2
    )Financing Activities:Repayment of notes payable
    
    
    (1.0
    )
    
    
    Issuance of debt
    
    
    1.3
    
    
    
    1.6Payment of deferred financing costs
    
    
    
    
    
    
    (0.2
    )Repayment of debt
    
    
    
    
    
    
    (0.5
    )Issuances of common stock
    
    
    12.3
    
    
    
    1.0Purchases of common stock
    
    
    (2.4
    )
    
    
    (1.0
    )Contributions by minority owners
    
    
    0.5
    
    
    
    1.5Cash flow provided by financing activities
    
    
    10.7
    
    
    
    2.4Effect of exchange rate changes on cash
    
    
    1.8
    
    
    
    (0.6
    )Increase in cash and cash equivalents
    
    
    71.4
    
    
    
    38.3Cash and cash equivalents, beginning of year
    
    
    289.6
    
    
    
    136.7Cash and cash equivalents, end of period
    
    $
    361.0
    
    
    $
    175.0Supplemental cash flow information:Interest paid
    
    $
    10.4
    
    
    $
    11.1Income taxes paid
    
    $
    16.9
    
    
    $
    0.3Non-cash investing and operating activities:Accrued capital additions
    
    $
    7.5
    
    
    $
    11.5
  4




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##### Table of Contents



AccrualBalance as of
    
    
    2005 Charges
    
    
    
    
    
    
    AccrualTotal Charges
    
    
    January 29,
    
    
    Costs
    
    
    Accrual
    
    
    Cash
    
    
    Balance as of(dollars in millions)
    
    to Date
    
    
    2005
    
    
    Incurred
    
    
    Adjustments
    
    
    Payments
    
    
    July 30, 2005Asset impairments and net
disposal losses
    
    $
    35.1
    
    
    $
    
    
    
    $
    0.4
    
    
    $
    
    
    
    $
    
    
    
    $
    Employee severance costs
    
    
    9.0
    
    
    
    4.2
    
    
    
    
    
    
    
    (0.3
    )
    
    
    (2.1
    )
    
    
    1.8Contract termination costs
    
    
    26.3
    
    
    
    17.6
    
    
    
    
    
    
    
    5.0
    
    
    
    (14.5
    )
    
    
    8.1Other exit costs
    
    
    3.7
    
    
    
    
    
    
    
    1.1
    
    
    
    
    
    
    
    (1.1
    )
    
    
    Total
    
    $
    74.1
    
    
    $
    21.8
    
    
    $
    1.5
    
    
    $
    4.7
    
    
    $
    (17.7
    )
    
    $
    9.9
 5




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##### Table of Contents



Thirteen Weeks Ended July 30, 2005
 Payless
    
    
    Payless
    
    
    Payless(dollars in millions)
    
    Domestic
    
    
    International
    
    
    ConsolidatedLoss on disposal of discontinued operations before income taxes
    
    $
    (3.0
    )
    
    $
    
    
    
    $
    (3.0
    )Benefit for income taxes
    
    
    (1.1
    )
    
    
    
    
    
    
    (1.1
    )Loss from discontinued operations, net of income taxes
    
    $
    (1.9
    )
    
    $
    
    
    
    $
    (1.9
    )
 
 Thirteen Weeks Ended July 31, 2004
 Payless
    
    
    Payless
    
    
    Payless(dollars in millions)
    
    Domestic
    
    
    International
    
    
    ConsolidatedNet sales
    
    $
    29.8
    
    
    $
    2.4
    
    
    $
    32.2Loss from discontinued operations before
income taxes and minority interest
    
    
    (1.2
    )
    
    
    (2.2
    )
    
    
    (3.4
    )(Benefit) provision for income taxes
    
    
    (0.6
    )
    
    
    0.1
    
    
    
    (0.5
    )Loss from discontinued operations before
minority interest
    
    
    (0.6
    )
    
    
    (2.3
    )
    
    
    (2.9
    )Minority interest, net of income taxes
    
    
    
    
    
    
    0.9
    
    
    
    0.9Loss on disposal of discontinued
operations, net of income taxesof $5.6 and $0.0, respectively,
and minority interestof $0.0 and $3.4, respectively
    
    
    (8.9
    )
    
    
    (5.1
    )
    
    
    (14.0
    )Loss from discontinued operations, net of
income taxes and minority interest
    
    $
    (9.5
    )
    
    $
    (6.5
    )
    
    $
    (16.0
    )
 
 Twenty-six Weeks Ended July 30, 2005
 Payless
    
    
    Payless
    
    
    Payless(dollars in millions)
    
    Domestic
    
    
    International
    
    
    ConsolidatedLoss on disposal of discontinued operations before income taxes
    
    $
    (5.5
    )
    
    
    
    
    
    
    Benefit for income taxes
    
    
    (2.1
    )
    
    
    
    
    
    
    (2.1
    )Loss from discontinued operations, net of income taxes
    
    $
    (3.4
    )
    
    $
    
    
    
    $
    (3.4
    )
 6




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##### Table of Contents



Twenty-Six Weeks Ended July 31, 2004
 Payless
    
    
    Payless
    
    
    Payless(dollars in millions)
    
    Domestic
    
    
    International
    
    
    ConsolidatedNet sales
    
    $
    56.9
    
    
    $
    4.9
    
    
    $
    61.8Loss from discontinued operations before
income taxes and minority interest
    
    
    (5.6
    )
    
    
    (3.9
    )
    
    
    (9.5
    )(Benefit) provision for income taxes
    
    
    (2.4
    )
    
    
    0.3
    
    
    
    (2.1
    )Loss from discontinued operations before
minority interest
    
    
    (3.2
    )
    
    
    (4.2
    )
    
    
    (7.4
    )Minority interest, net of income taxes
    
    
    
    
    
    
    1.6
    
    
    
    1.6Loss on disposal of discontinued operations,
net of income taxesof $5.6 and $0.0, respectively, and
minority interestof $0.0 and $3.4, respectively
    
    
    (8.9
    )
    
    
    (5.1
    )
    
    
    (14.0
    )Loss from discontinued operations, net of
income taxes and minority interest
    
    $
    (12.1
    )
    
    $
    (7.7
    )
    
    $
    (19.8
    )
  
 July 30, 2005
 Payless
    
    
    Payless
    
    
    Payless(dollars in millions)
    
    Domestic
    
    
    International
    
    
    ConsolidatedAssetsCurrent assets:Current deferred income taxes
    
    $
    2.5
    
    
    
    
    
    
    $
    2.5Other current assets
    
    
    0.4
    
    
    
    
    
    
    
    0.4Total current assets of discontinued operations
    
    $
    2.9
    
    
    $
    
    
    
    $
    2.9LiabilitiesCurrent liabilities:Accrued expenses
    
    
    6.2
    
    
    
    
    
    
    
    6.2Total current liabilities of discontinued operations
    
    $
    6.2
    
    
    $
    
    
    
    $
    6.2
 
 July 31, 2004
 Payless
    
    
    Payless
    
    
    Payless(dollars in millions)
    
    Domestic
    
    
    International
    
    
    ConsolidatedAssetsCurrent assets:Cash and cash equivalents
    
    $
    0.1
    
    
    $
    1.6
    
    
    $
    1.7Inventories
    
    
    14.2
    
    
    
    2.0
    
    
    
    16.2Current deferred income taxes
    
    
    0.2
    
    
    
    
    
    
    
    0.2Other current assets
    
    
    2.5
    
    
    
    
    
    
    
    2.5Total current assets of discontinued operations
    
    $
    17.0
    
    
    $
    3.6
    
    
    $
    20.6Property and equipment, net
    
    $
    2.5
    
    
    $
    0.9
    
    
    $
    3.4Deferred income taxes
    
    
    7.7
    
    
    
    
    
    
    
    7.7Other assets
    
    
    0.1
    
    
    
    0.8
    
    
    
    0.9Total non-current assets of discontinued operations
    
    $
    10.3
    
    
    $
    1.7
    
    
    $
    12.0LiabilitiesCurrent liabilities:Accounts payable
    
    $
    3.0
    
    
    $
    0.4
    
    
    $
    3.4Accrued expenses
    
    
    1.1
    
    
    
    0.4
    
    
    
    1.5Total current liabilities of discontinued operations
    
    $
    4.1
    
    
    $
    0.8
    
    
    $
    4.9Other liabilities
    
    $
    9.8
    
    
    $
    0.1
    
    
    $
    9.9Total non-current liabilities of discontinued operations
    
    $
    9.8
    
    
    $
    0.1
    
    
    $
    9.9
 7




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##### Table of Contents



January 29, 2005
 Payless
    
    
    Payless
    
    
    Payless(dollars in millions)
    
    Domestic
    
    
    International
    
    
    ConsolidatedAssetsCurrent assets:Current deferred income taxes
    
    $
    5.6
    
    
    $
    
    
    
    $
    5.6Other current assets
    
    
    2.9
    
    
    
    
    
    
    
    2.9Total current assets of discontinued operations
    
    $
    8.5
    
    
    $
    
    
    
    $
    8.5Other assets
    
    
    0.1
    
    
    
    
    
    
    
    0.1Total non-current assets of discontinued operations
    
    $
    0.1
    
    
    $
    
    
    
    $
    0.1LiabilitiesCurrent liabilities:Accounts payable
    
    $
    0.2
    
    
    $
    
    
    
    $
    0.2Accrued expenses
    
    
    14.8
    
    
    
    
    
    
    
    14.8Total current liabilities of discontinued operations
    
    $
    15.0
    
    
    $
    
    
    
    $
    15.0
    13 Weeks Ended
    
    
    26 Weeks EndedJuly 30, 2005
    
    
    July 31, 2004
    
    
    July 30, 2005
    
    
    July 31, 2004Net earnings:As reported
    
    $
    19.9
    
    
    $
    3.8
    
    
    $
    50.1
    
    
    $
    17.9Add: Total stock-based employee compensation expense included in
net earnings as reported, net of related income taxes
    
    
    2.4
    
    
    
    0.1
    
    
    
    3.2
    
    
    
    0.6Less: Total stock-based employee compensation expense determined
under fair value based method for all awards, net of related
income taxes
    
    
    3.5
    
    
    
    0.9
    
    
    
    4.6
    
    
    
    2.0Pro forma
    
    $
    18.8
    
    
    $
    3.0
    
    
    $
    48.7
    
    
    $
    16.5Diluted earnings per share:As reported
    
    $
    0.29
    
    
    $
    0.05
    
    
    $
    0.74
    
    
    $
    0.26Pro forma
    
    $
    0.27
    
    
    $
    0.04
    
    
    $
    0.72
    
    
    $
    0.24Basic earnings per share:As reported
    
    $
    0.29
    
    
    $
    0.05
    
    
    $
    0.74
    
    
    $
    0.26Pro forma
    
    $
    0.27
    
    
    $
    0.04
    
    
    $
    0.72
    
    
    $
    0.24
   8




---



##### Table of Contents



(dollars in millions)
    
    July 30, 2005
    
    
    July 31, 2004
    
    
    January 29, 2005Gross carrying amount
    
    $
    76.6
    
    
    $
    83.0
    
    
    $
    78.2Less: accumulated amortization
    
    
    (56.7
    )
    
    
    (58.7
    )
    
    
    (56.5
    )Carrying amount, end of period
    
    $
    19.9
    
    
    $
    24.3
    
    
    $
    21.7
  (dollars in millions)
    
    13 Weeks Ended
    
    
    26 Weeks EndedJuly 30, 2005
    
    
    July 31, 2004
    
    
    July 30, 2005
    
    
    July 31, 2004Amortization expense on
favorable leases
    
    $
    0.8
    
    
    $
    1.0
    
    
    $
    1.7
    
    
    $
    2.1
  Year
    
    AmountRemainder of 2005
    
    $
    1.72006
    
    
    3.12007
    
    
    2.72008
    
    
    2.42009
    
    
    2.1
 
  9




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##### Table of Contents



Year
    
    Percentage2008
    
    
    104.125
    %2009
    
    
    102.750
    %2010
    
    
    101.375
    %2011 and thereafter
    
    
    100.000
    %
     13 Weeks Ended
    
    
    26 Weeks EndedJuly 30, 2005
    
    
    July 31, 2004
    
    
    July 30, 2005
    
    
    July 31, 2004Components of pension expense:Service cost
    
    $
    0.2
    
    
    $
    0.2
    
    
    $
    0.4
    
    
    $
    0.4Interest cost
    
    
    0.3
    
    
    
    0.3
    
    
    
    0.6
    
    
    
    0.6Amortization of prior service cost
    
    
    0.1
    
    
    
    0.1
    
    
    
    0.1
    
    
    
    0.2Amortization of actuarial loss
    
    
    
    
    
    
    0.1
    
    
    
    0.1
    
    
    
    0.2Total
    
    $
    0.6
    
    
    $
    0.7
    
    
    $
    1.2
    
    
    $
    1.4
   10




---



##### Table of Contents



13 Weeks Ended
    
    
    26 Weeks EndedJuly 30, 2005
    
    
    July 31, 2004
    
    
    July 30, 2005
    
    
    July 31, 2004Net earnings
    
    $
    19.9
    
    
    $
    3.8
    
    
    $
    50.1
    
    
    $
    17.9Other comprehensive income (loss):Foreign currency translation adjustments
    
    
    1.2
    
    
    
    2.4
    
    
    
    1.1
    
    
    
    (0.9
    )Total other comprehensive income (loss)
    
    
    1.2
    
    
    
    2.4
    
    
    
    1.1
    
    
    
    (0.9
    )Total comprehensive income
    
    $
    21.1
    
    
    $
    6.2
    
    
    $
    51.2
    
    
    $
    17.0
     13 Weeks Ended
    
    
    26 Weeks EndedJuly 30, 2005
    
    
    July 31, 2004
    
    
    July 30, 2005
    
    
    July 31, 2004Diluted Computation:Net earnings from continuing operations
    
    $
    21.8
    
    
    $
    19.8
    
    
    $
    53.5
    
    
    $
    37.7Weighted average common shares outstanding
    
    
    67.5
    
    
    
    68.0
    
    
    
    67.3
    
    
    
    68.0Net effect of dilutive stock options and unearned
restricted stock based on the treasury stock method
    
    
    0.5
    
    
    
    0.1
    
    
    
    0.1
    
    
    
    Outstanding shares for diluted earnings per share
    
    
    68.0
    
    
    
    68.1
    
    
    
    67.4
    
    
    
    68.0Diluted earnings per share from continuing operations
    
    $
    0.32
    
    
    $
    0.29
    
    
    $
    0.79
    
    
    $
    0.55Basic Computation:Net earnings from continuing operations
    
    $
    21.8
    
    
    $
    19.8
    
    
    $
    53.5
    
    
    $
    37.7Weighted average common shares outstanding
    
    
    67.5
    
    
    
    68.0
    
    
    
    67.3
    
    
    
    68.0Basic earnings per share from continuing operations
    
    $
    0.32
    
    
    $
    0.29
    
    
    $
    0.79
    
    
    $
    0.55
  11




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##### Table of Contents



Payless Domestic
    
    
    Payless International
    
    
    Payless ConsolidatedThirteen weeks ended July 30, 2005:Revenues from external customers
    
    $
    602.2
    
    
    $
    91.7
    
    
    $
    693.9Operating profit from continuing
operations
    
    
    25.4
    
    
    
    8.8
    
    
    
    34.2Twenty-six weeks ended July 30, 2005:Revenues from external customers
    
    $
    1,217.2
    
    
    $
    171.9
    
    
    $
    1,389.1Operating profit from continuing
operations
    
    
    69.0
    
    
    
    12.2
    
    
    
    81.2Total assets
    
    
    1,133.1
    
    
    
    156.3
    
    
    
    1,289.4Thirteen weeks ended July 31, 2004:Revenues from external customers
    
    $
    609.8
    
    
    $
    85.8
    
    
    $
    695.6Operating profit from continuing operations
    
    
    19.8
    
    
    
    4.5
    
    
    
    24.3Twenty-six weeks ended July 31, 2004:Revenues from external customers
    
    $
    1,232.0
    
    
    $
    155.9
    
    
    $
    1,387.9Operating profit from continuing
operations
    
    
    45.5
    
    
    
    7.2
    
    
    
    52.7Total assets
    
    
    1,031.0
    
    
    
    211.9
    
    
    
    1,242.9
       12




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##### Table of Contents



13




---



##### Table of Contents



14




---



##### Table of Contents



Parent
    
    
    Guarantor
    
    
    Non-guarantorCompany
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedASSETSCurrent Assets:Cash and cash equivalents
    
    $
    
    
    
    $
    267.7
    
    
    $
    93.3
    
    
    $
    
    
    
    $
    361.0Restricted cash
    
    
    
    
    
    
    
    
    
    
    2.0
    
    
    
    
    
    
    
    2.0Inventories
    
    
    
    
    
    
    291.3
    
    
    
    74.3
    
    
    
    (3.7
    )
    
    
    361.9Current deferred income taxes
    
    
    
    
    
    
    22.3
    
    
    
    0.1
    
    
    
    
    
    
    
    22.4Other current assets
    
    
    23.1
    
    
    
    82.2
    
    
    
    21.7
    
    
    
    (70.2
    )
    
    
    56.8Current assets of discontinued operations
    
    
    
    
    
    
    2.9
    
    
    
    
    
    
    
    
    
    
    
    2.9Total current assets
    
    
    23.1
    
    
    
    666.4
    
    
    
    191.4
    
    
    
    (73.9
    )
    
    
    807.0Property and Equipment:Land
    
    
    
    
    
    
    7.7
    
    
    
    
    
    
    
    
    
    
    
    7.7Buildings and leasehold improvements
    
    
    
    
    
    
    577.6
    
    
    
    76.8
    
    
    
    
    
    
    
    654.4Furniture, fixtures and equipment
    
    
    
    
    
    
    469.6
    
    
    
    61.5
    
    
    
    
    
    
    
    531.1Property under capital leases
    
    
    
    
    
    
    3.7
    
    
    
    
    
    
    
    
    
    
    
    3.7Total property and equipment
    
    
    
    
    
    
    1,058.6
    
    
    
    138.3
    
    
    
    
    
    
    
    1,196.9Accumulated depreciation and amortization
    
    
    
    
    
    
    (724.6
    )
    
    
    (73.3
    )
    
    
    
    
    
    
    (797.9
    )Property and equipment, net
    
    
    
    
    
    
    334.0
    
    
    
    65.0
    
    
    
    
    
    
    
    399.0Favorable leases, net
    
    
    
    
    
    
    19.9
    
    
    
    
    
    
    
    
    
    
    
    19.9Deferred income taxes
    
    
    
    
    
    
    23.7
    
    
    
    11.4
    
    
    
    
    
    
    
    35.1Goodwill, net
    
    
    
    
    
    
    5.9
    
    
    
    
    
    
    
    
    
    
    
    5.9Other assets
    
    
    1,124.6
    
    
    
    465.4
    
    
    
    1.8
    
    
    
    (1,569.3
    )
    
    
    22.5Total assets
    
    $
    1,147.7
    
    
    $
    1,515.3
    
    
    $
    269.6
    
    
    $
    (1,643.2
    )
    
    $
    1,289.4LIABILITIES AND SHAREOWNERS EQUITYCurrent Liabilities:Current maturities of long-term debt
    
    $
    
    
    
    $
    0.4
    
    
    $
    1.2
    
    
    $
    
    
    
    $
    1.6Notes payable
    
    
    
    
    
    
    
    
    
    
    2.0
    
    
    
    
    
    
    
    2.0Accounts payable
    
    
    
    
    
    
    133.2
    
    
    
    60.3
    
    
    
    (45.6
    )
    
    
    147.9Accrued expenses
    
    
    8.3
    
    
    
    164.1
    
    
    
    19.7
    
    
    
    (28.3
    )
    
    
    163.8Current liabilities of discontinued operations
    
    
    
    
    
    
    6.2
    
    
    
    
    
    
    
    
    
    
    
    6.2Total current liabilities
    
    
    8.3
    
    
    
    303.9
    
    
    
    83.2
    
    
    
    (73.9
    )
    
    
    321.5Long-term debt
    
    
    480.3
    
    
    
    0.7
    
    
    
    6.4
    
    
    
    (283.1
    )
    
    
    204.3Other liabilities
    
    
    1.9
    
    
    
    83.9
    
    
    
    12.3
    
    
    
    (0.1
    )
    
    
    98.0Minority interest
    
    
    
    
    
    
    
    
    
    
    8.4
    
    
    
    
    
    
    
    8.4Commitments and contingencies
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total shareowners equity
    
    
    657.2
    
    
    
    1,126.8
    
    
    
    159.3
    
    
    
    (1,286.1
    )
    
    
    657.2Total liabilities and shareowners equity
    
    $
    1,147.7
    
    
    $
    1,515.3
    
    
    $
    269.6
    
    
    $
    (1,643.2
    )
    
    $
    1,289.4
 15




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##### Table of Contents



Parent
    
    
    Guarantor
    
    
    Non-guarantorCompany
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedASSETSCurrent Assets:Cash and cash equivalents
    
    $
    
    
    
    $
    125.1
    
    
    $
    49.9
    
    
    $
    
    
    
    $
    175.0Marketable securities, available for sale
    
    
    
    
    
    
    9.0
    
    
    
    
    
    
    
    
    
    
    
    9.0Restricted cash
    
    
    
    
    
    
    
    
    
    
    33.5
    
    
    
    
    
    
    
    33.5Inventories
    
    
    
    
    
    
    327.7
    
    
    
    73.8
    
    
    
    (3.3
    )
    
    
    398.2Current deferred income taxes
    
    
    
    
    
    
    22.4
    
    
    
    0.7
    
    
    
    
    
    
    
    23.1Other current assets
    
    
    11.6
    
    
    
    68.5
    
    
    
    36.8
    
    
    
    (48.7
    )
    
    
    68.2Current assets of discontinued operations
    
    
    
    
    
    
    16.9
    
    
    
    3.7
    
    
    
    
    
    
    
    20.6Total current assets
    
    
    11.6
    
    
    
    569.6
    
    
    
    198.4
    
    
    
    (52.0
    )
    
    
    727.6Property and Equipment:Land
    
    
    
    
    
    
    8.0
    
    
    
    
    
    
    
    
    
    
    
    8.0Buildings and leasehold improvements
    
    
    
    
    
    
    602.2
    
    
    
    68.3
    
    
    
    
    
    
    
    670.5Furniture, fixtures and equipment
    
    
    
    
    
    
    462.0
    
    
    
    61.4
    
    
    
    
    
    
    
    523.4Property under capital leases
    
    
    
    
    
    
    4.6
    
    
    
    
    
    
    
    
    
    
    
    4.6Total property and equipment
    
    
    
    
    
    
    1,076.8
    
    
    
    129.7
    
    
    
    
    
    
    
    1,206.5Accumulated depreciation and amortization
    
    
    
    
    
    
    (733.3
    )
    
    
    (60.5
    )
    
    
    
    
    
    
    (793.8
    )Property and equipment, net
    
    
    
    
    
    
    343.5
    
    
    
    69.2
    
    
    
    
    
    
    
    412.7Favorable leases, net
    
    
    
    
    
    
    24.3
    
    
    
    
    
    
    
    
    
    
    
    24.3Deferred income taxes
    
    
    
    
    
    
    25.4
    
    
    
    8.5
    
    
    
    
    
    
    
    33.9Goodwill, net
    
    
    
    
    
    
    5.9
    
    
    
    
    
    
    
    
    
    
    
    5.9Other assets
    
    
    1,097.7
    
    
    
    439.6
    
    
    
    0.9
    
    
    
    (1,511.7
    )
    
    
    26.5Non-current assets of discontinued operations
    
    
    
    
    
    
    10.4
    
    
    
    1.6
    
    
    
    
    
    
    
    12.0Total assets
    
    $
    1,109.3
    
    
    $
    1,418.7
    
    
    $
    278.6
    
    
    $
    (1,563.7
    )
    
    $
    1,242.9LIABILITIES AND SHAREOWNERS EQUITYCurrent Liabilities:Current maturities of long-term debt
    
    $
    
    
    
    $
    0.8
    
    
    $
    
    
    
    $
    
    
    
    $
    0.8Notes payable
    
    
    
    
    
    
    
    
    
    
    33.5
    
    
    
    
    
    
    
    33.5Accounts payable
    
    
    
    
    
    
    96.1
    
    
    
    71.4
    
    
    
    (41.0
    )
    
    
    126.5Accrued expenses
    
    
    7.2
    
    
    
    139.0
    
    
    
    16.7
    
    
    
    (11.0
    )
    
    
    151.9Current liabilities of discontinued operations
    
    
    
    
    
    
    4.1
    
    
    
    0.8
    
    
    
    
    
    
    
    4.9Total current liabilities
    
    
    7.2
    
    
    
    240.0
    
    
    
    122.4
    
    
    
    (52.0
    )
    
    
    317.6Long-term debt
    
    
    479.9
    
    
    
    1.6
    
    
    
    5.6
    
    
    
    (283.0
    )
    
    
    204.1Other liabilities
    
    
    0.3
    
    
    
    118.8
    
    
    
    12.9
    
    
    
    (50.6
    )
    
    
    81.4Non-current liabilities of discontinued operations
    
    
    
    
    
    
    9.8
    
    
    
    0.1
    
    
    
    
    
    
    
    9.9Minority interest
    
    
    
    
    
    
    
    
    
    
    8.0
    
    
    
    
    
    
    
    8.0Commitments and contingencies
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total shareowners equity
    
    
    621.9
    
    
    
    1,048.5
    
    
    
    129.6
    
    
    
    (1,178.1
    )
    
    
    621.9Total liabilities and shareowners equity
    
    $
    1,109.3
    
    
    $
    1,418.7
    
    
    $
    278.6
    
    
    $
    (1,563.7
    )
    
    $
    1,242.9
 16




---



##### Table of Contents



Parent
    
    
    Guarantor
    
    
    Non-guarantorCompany
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedASSETSCurrent Assets:Cash and cash equivalents
    
    $
    
    
    
    $
    210.8
    
    
    $
    78.8
    
    
    $
    
    
    
    $
    289.6Marketable securities, available for sale
    
    
    
    
    
    
    5.0
    
    
    
    
    
    
    
    
    
    
    
    5.0Restricted cash
    
    
    
    
    
    
    
    
    
    
    3.0
    
    
    
    
    
    
    
    3.0Inventories
    
    
    
    
    
    
    277.1
    
    
    
    71.0
    
    
    
    (2.8
    )
    
    
    345.3Current deferred income taxes
    
    
    
    
    
    
    21.9
    
    
    
    
    
    
    
    
    
    
    
    21.9Other current assets
    
    
    16.8
    
    
    
    50.6
    
    
    
    50.1
    
    
    
    (60.9
    )
    
    
    56.6Current assets of discontinued operations
    
    
    
    
    
    
    8.5
    
    
    
    
    
    
    
    
    
    
    
    8.5Total current assets
    
    
    16.8
    
    
    
    573.9
    
    
    
    202.9
    
    
    
    (63.7
    )
    
    
    729.9Property and Equipment:Land
    
    
    
    
    
    
    8.0
    
    
    
    
    
    
    
    
    
    
    
    8.0Buildings and leasehold improvements
    
    
    
    
    
    
    597.1
    
    
    
    76.2
    
    
    
    
    
    
    
    673.3Furniture, fixtures and equipment
    
    
    
    
    
    
    450.4
    
    
    
    59.4
    
    
    
    
    
    
    
    509.8Property under capital leases
    
    
    
    
    
    
    3.8
    
    
    
    
    
    
    
    
    
    
    
    3.8Total property and equipment
    
    
    
    
    
    
    1,059.3
    
    
    
    135.6
    
    
    
    
    
    
    
    1,194.9Accumulated depreciation and amortization
    
    
    
    
    
    
    (705.7
    )
    
    
    (66.9
    )
    
    
    
    
    
    
    (772.6
    )Property and equipment, net
    
    
    
    
    
    
    353.6
    
    
    
    68.7
    
    
    
    
    
    
    
    422.3Favorable leases, net
    
    
    
    
    
    
    21.7
    
    
    
    
    
    
    
    
    
    
    
    21.7Deferred income taxes
    
    
    
    
    
    
    25.1
    
    
    
    11.3
    
    
    
    
    
    
    
    36.4Goodwill, net
    
    
    
    
    
    
    5.9
    
    
    
    
    
    
    
    
    
    
    
    5.9Other assets
    
    
    1,067.1
    
    
    
    448.5
    
    
    
    1.9
    
    
    
    (1,494.0
    )
    
    
    23.5Non-current assets of discontinued operations
    
    
    
    
    
    
    0.1
    
    
    
    
    
    
    
    
    
    
    
    0.1Total assets
    
    $
    1,083.9
    
    
    $
    1,428.8
    
    
    $
    284.8
    
    
    $
    (1,557.7
    )
    
    $
    1,239.8LIABILITIES AND SHAREOWNERS EQUITYCurrent Liabilities:Current maturities of long-term debt
    
    $
    
    
    
    $
    0.3
    
    
    $
    
    
    
    $
    
    
    
    $
    0.3Notes payable
    
    
    
    
    
    
    
    
    
    
    3.0
    
    
    
    
    
    
    
    3.0Accounts payable
    
    
    
    
    
    
    130.6
    
    
    
    68.8
    
    
    
    (39.1
    )
    
    
    160.3Accrued expenses
    
    
    7.2
    
    
    
    156.9
    
    
    
    20.2
    
    
    
    (24.6
    )
    
    
    159.7Current liabilities of discontinued operations
    
    
    
    
    
    
    15.0
    
    
    
    
    
    
    
    
    
    
    
    15.0Total current liabilities
    
    
    7.2
    
    
    
    302.8
    
    
    
    92.0
    
    
    
    (63.7
    )
    
    
    338.3Long-term debt
    
    
    480.2
    
    
    
    0.9
    
    
    
    6.4
    
    
    
    (283.2
    )
    
    
    204.3Other liabilities
    
    
    1.5
    
    
    
    82.8
    
    
    
    13.7
    
    
    
    (4.4
    )
    
    
    93.6Minority interest
    
    
    
    
    
    
    
    
    
    
    8.6
    
    
    
    
    
    
    
    8.6Commitments and contingencies
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total shareowners equity
    
    
    595.0
    
    
    
    1,042.3
    
    
    
    164.1
    
    
    
    (1,206.4
    )
    
    
    595.0Total liabilities and shareowners equity
    
    $
    1,083.9
    
    
    $
    1,428.8
    
    
    $
    284.8
    
    
    $
    (1,557.7
    )
    
    $
    1,239.8
 17




---



##### Table of Contents



Parent
    
    
    Guarantor
    
    
    Non-guarantorCompany
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedNet sales
    
    $
    
    
    
    $
    631.7
    
    
    $
    193.3
    
    
    $
    (131.1
    )
    
    $
    693.9Cost of sales
    
    
    
    
    
    
    435.4
    
    
    
    151.5
    
    
    
    (128.1
    )
    
    
    458.8Gross Margin
    
    
    
    
    
    
    196.3
    
    
    
    41.8
    
    
    
    (3.0
    )
    
    
    235.1Selling, general and administrative expense
    
    
    1.7
    
    
    
    174.2
    
    
    
    28.0
    
    
    
    (3.0
    )
    
    
    200.9Restructuring charges
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Operating (loss) profit from continuing operations
    
    
    (1.7
    )
    
    
    22.1
    
    
    
    13.8
    
    
    
    
    
    
    
    34.2Interest expense
    
    
    7.9
    
    
    
    0.4
    
    
    
    0.2
    
    
    
    (3.5
    )
    
    
    5.0Interest income
    
    
    
    
    
    
    (5.8
    )
    
    
    (0.3
    )
    
    
    3.5
    
    
    
    (2.6
    )Equity in (earnings) loss of subsidiaries
    
    
    (26.1
    )
    
    
    (12.5
    )
    
    
    
    
    
    
    38.6
    
    
    
    Earnings from continuing operations before income
taxes and minority interest
    
    
    16.5
    
    
    
    40.0
    
    
    
    13.9
    
    
    
    (38.6
    )
    
    
    31.8(Benefit) provision for income taxes
    
    
    (3.4
    )
    
    
    12.0
    
    
    
    1.5
    
    
    
    
    
    
    
    10.1Earnings from continuing operations before
minority interest
    
    
    19.9
    
    
    
    28.0
    
    
    
    12.4
    
    
    
    (38.6
    )
    
    
    21.7Minority interest, net of income tax
    
    
    
    
    
    
    
    
    
    
    0.1
    
    
    
    
    
    
    
    0.1Net earnings from continuing operations
    
    
    19.9
    
    
    
    28.0
    
    
    
    12.5
    
    
    
    (38.6
    )
    
    
    21.8Loss from discontinued operations, net of income
taxes and minority interest
    
    
    
    
    
    
    (1.9
    )
    
    
    
    
    
    
    
    
    
    
    (1.9
    )Net earnings
    
    $
    19.9
    
    
    $
    26.1
    
    
    $
    12.5
    
    
    $
    (38.6
    )
    
    $
    19.9
 18




---



##### Table of Contents



Parent
    
    
    Guarantor
    
    
    Non-guarantorCompany
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedNet sales
    
    $
    
    
    
    $
    638.5
    
    
    $
    166.6
    
    
    $
    (109.5
    )
    
    $
    695.6Cost of sales
    
    
    
    
    
    
    446.4
    
    
    
    137.1
    
    
    
    (107.4
    )
    
    
    476.1Gross Margin
    
    
    
    
    
    
    192.1
    
    
    
    29.5
    
    
    
    (2.1
    )
    
    
    219.5Selling, general and administrative expense
    
    
    0.5
    
    
    
    151.0
    
    
    
    32.1
    
    
    
    (2.1
    )
    
    
    181.5Restructuring charges
    
    
    
    
    
    
    13.1
    
    
    
    0.6
    
    
    
    
    
    
    
    13.7Operating (loss) profit from continuing operations
    
    
    (0.5
    )
    
    
    28.0
    
    
    
    (3.2
    )
    
    
    
    
    
    
    24.3Interest expense
    
    
    6.5
    
    
    
    
    
    
    
    1.6
    
    
    
    (2.3
    )
    
    
    5.8Interest income
    
    
    
    
    
    
    (2.7
    )
    
    
    (0.9
    )
    
    
    2.3
    
    
    
    (1.3
    )Equity in (loss) earnings of subsidiaries
    
    
    (8.2
    )
    
    
    3.5
    
    
    
    
    
    
    
    4.7
    
    
    
    Earnings (loss) from continuing operations before
income taxes and minority interest
    
    
    1.2
    
    
    
    27.2
    
    
    
    (3.9
    )
    
    
    (4.7
    )
    
    
    19.8(Benefit) provision for income taxes
    
    
    (2.6
    )
    
    
    9.5
    
    
    
    (4.7
    )
    
    
    
    
    
    
    2.2Earnings from continuing operations before
minority interest
    
    
    3.8
    
    
    
    17.7
    
    
    
    0.8
    
    
    
    (4.7
    )
    
    
    17.6Minority interest, net of income tax
    
    
    
    
    
    
    
    
    
    
    2.2

    
    
    
    

    
    
    
    2.2Net earnings from continuing operations
    
    
    3.8
    
    
    
    17.7
    
    
    
    3.0
    
    
    
    (4.7
    )
    
    
    19.8Loss from discontinued operations, net of income
taxes and minority interest
    
    
    
    
    
    
    (9.5
    )
    
    
    (6.5
    )
    
    
    
    
    
    
    (16.0
    )Net earnings (loss)
    
    $
    3.8
    
    
    $
    8.2
    
    
    $
    (3.5
    )
    
    $
    (4.7
    )
    
    $
    3.8
 19




---



##### Table of Contents



Parent
    
    
    Guarantor
    
    
    Non-guarantorCompany
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedNet sales
    
    $
    
    
    
    $
    1,274.7
    
    
    $
    357.9
    
    
    $
    (243.5
    )
    
    $
    1,389.1Cost of sales
    
    
    
    
    
    
    862.7
    
    
    
    284.9
    
    
    
    (238.0
    )
    
    
    909.6Gross Margin
    
    
    
    
    
    
    412.0
    
    
    
    73.0
    
    
    
    (5.5
    )
    
    
    479.5Selling, general and administrative expense
    
    
    2.3
    
    
    
    347.6
    
    
    
    53.2
    
    
    
    (5.5
    )
    
    
    397.6Restructuring charges
    
    
    
    
    
    
    0.7
    
    
    
    
    
    
    
    
    
    
    
    0.7Operating (loss) profit from continuing operations
    
    
    (2.3
    )
    
    
    63.7
    
    
    
    19.8
    
    
    
    
    
    
    
    81.2Interest expense
    
    
    15.2
    
    
    
    0.7
    
    
    
    0.7
    
    
    
    (6.7
    )
    
    
    9.9Interest income
    
    
    
    
    
    
    (10.2
    )
    
    
    (0.8
    )
    
    
    6.7
    
    
    
    (4.3
    )Equity in (earnings) loss of subsidiaries
    
    
    (61.4
    )
    
    
    (18.6
    )
    
    
    
    
    
    
    80.0
    
    
    
    Earnings from continuing operations before income
taxes and minority interest
    
    
    43.9
    
    
    
    91.8
    
    
    
    19.9
    
    
    
    (80.0
    )
    
    
    75.6(Benefit) provision for income taxes
    
    
    (6.2
    )
    
    
    27.0
    
    
    
    1.8
    
    
    
    
    
    
    
    22.6Earnings from continuing operations before
minority interest
    
    
    50.1
    
    
    
    64.8
    
    
    
    18.1
    
    
    
    (80.0
    )
    
    
    53.0Minority interest, net of income tax
    
    
    
    
    
    
    
    
    
    
    0.5
    
    
    
    
    
    
    
    0.5Net earnings from continuing operations
    
    
    50.1
    
    
    
    64.8
    
    
    
    18.6
    
    
    
    (80.0
    )
    
    
    53.5Loss from discontinued operations, net of income
taxes and minority interest
    
    
    
    
    
    
    (3.4
    )
    
    
    
    
    
    
    
    
    
    
    (3.4
    )Net earnings
    
    $
    50.1
    
    
    $
    61.4
    
    
    $
    18.6
    
    
    $
    (80.0
    )
    
    $
    50.1
 20




---



##### Table of Contents



Parent
    
    
    Guarantor
    
    
    Non-guarantorCompany
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedNet sales
    
    $
    
    
    
    $
    1,289.9
    
    
    $
    328.1
    
    
    $
    (230.1
    )
    
    $
    1,387.9Cost of sales
    
    
    
    
    
    
    903.5
    
    
    
    273.9
    
    
    
    (225.8
    )
    
    
    951.6Gross Margin
    
    
    
    
    
    
    386.4
    
    
    
    54.2
    
    
    
    (4.3
    )
    
    
    436.3Selling, general and administrative expense
    
    
    1.0
    
    
    
    318.9
    
    
    
    54.3
    
    
    
    (4.3
    )
    
    
    369.9Restructuring charges
    
    
    
    
    
    
    13.1
    
    
    
    0.6
    
    
    
    
    
    
    
    13.7Operating (loss) profit from continuing operations
    
    
    (1.0
    )
    
    
    54.4
    
    
    
    (0.7
    )
    
    
    
    
    
    
    52.7Interest expense
    
    
    12.7
    
    
    
    0.3
    
    
    
    2.7
    
    
    
    (4.5
    )
    
    
    11.2Interest income
    
    
    
    
    
    
    (5.0
    )
    
    
    (1.8
    )
    
    
    4.5
    
    
    
    (2.3
    )Equity in (loss) earnings of subsidiaries
    
    
    (26.6
    )
    
    
    0.3
    
    
    
    
    
    
    
    26.3
    
    
    
    Earnings (loss) from continuing operations before
income taxes and minority interest
    
    
    12.9
    
    
    
    58.8
    
    
    
    (1.6
    )
    
    
    (26.3
    )
    
    
    43.8(Benefit) provision for income taxes
    
    
    (5.0
    )
    
    
    20.1
    
    
    
    (4.9
    )
    
    
    
    
    
    
    10.2Earnings from continuing operations before
minority interest
    
    
    17.9
    
    
    
    38.7
    
    
    
    3.3
    
    
    
    (26.3
    )
    
    
    33.6Minority interest, net of income tax
    
    
    
    
    
    
    
    
    
    
    4.1
    
    
    
    
    
    
    
    4.1Net earnings from continuing operations
    
    
    17.9
    
    
    
    38.7
    
    
    
    7.4
    
    
    
    (26.3
    )
    
    
    37.7Loss from discontinued operations, net of income
taxes and minority interest
    
    
    
    
    
    
    (12.1
    )
    
    
    (7.7
    )
    
    
    
    
    
    
    (19.8
    )Net earnings (loss)
    
    $
    17.9
    
    
    $
    26.6
    
    
    $
    (0.3
    )
    
    $
    (26.3
    )
    
    $
    17.9
 21




---



##### Table of Contents



Parent
    
    
    Guarantor
    
    
    Non-guarantorCompany
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedOperating Activities:Net earnings
    
    $
    50.1
    
    
    $
    61.4
    
    
    $
    18.6
    
    
    $
    (80.0
    )
    
    $
    50.1Loss from discontinued operations, net of
income taxes and minority interest
    
    
    
    
    
    
    (3.4
    )
    
    
    
    
    
    
    
    
    
    
    (3.4
    )Net earnings from continuing operations
    
    
    50.1
    
    
    
    64.8
    
    
    
    18.6
    
    
    
    (80.0
    )
    
    
    53.5Adjustments for non-cash items included in
earnings from continuing operations:Loss on impairment of and disposal of assets
    
    
    
    
    
    
    5.0
    
    
    
    0.2
    
    
    
    
    
    
    
    5.2Depreciation and amortization
    
    
    
    
    
    
    41.6
    
    
    
    4.4
    
    
    
    
    
    
    
    46.0Amortization of deferred financing costs
    
    
    
    
    
    
    0.6
    
    
    
    
    
    
    
    
    
    
    
    0.6Amortization of unearned restricted stock
    
    
    0.3
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.3Deferred income taxes
    
    
    
    
    
    
    1.0
    
    
    
    (0.1
    )
    
    
    
    
    
    
    0.9Minority interest, net of income taxes
    
    
    
    
    
    
    
    
    
    
    (0.5
    )
    
    
    
    
    
    
    (0.5
    )Income tax benefit of stock option exercises
    
    
    0.8
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.8Changes in working capital:Inventories
    
    
    
    
    
    
    (14.2
    )
    
    
    (3.3
    )
    
    
    0.9
    
    
    
    (16.6
    )Other current assets
    
    
    (6.3
    )
    
    
    (31.6
    )
    
    
    28.5
    
    
    
    9.3
    
    
    
    (0.1
    )Accounts payable
    
    
    
    
    
    
    4.8
    
    
    
    (9.7
    )
    
    
    (6.5
    )
    
    
    (11.4
    )Accrued expenses
    
    
    1.1
    
    
    
    13.8
    
    
    
    (0.7
    )
    
    
    (3.7
    )
    
    
    10.5Other assets and liabilities, net
    
    
    (55.9
    )
    
    
    (18.3
    )
    
    
    (1.1
    )
    
    
    80.0
    
    
    
    4.7Net cash provided by (used in) discontinued
operations
    
    
    
    
    
    
    (6.5
    )
    
    
    
    
    
    
    
    
    
    
    (6.5
    )Cash flow (used in) provided by operating
activities
    
    
    (9.9
    )
    
    
    61.0
    
    
    
    36.3
    
    
    
    
    
    
    
    87.4Investing Activities:Capital expenditures
    
    
    
    
    
    
    (34.2
    )
    
    
    (1.1
    )
    
    
    
    
    
    
    (35.3
    )Dispositions of property and equipment
    
    
    
    
    
    
    0.8
    
    
    
    
    
    
    
    
    
    
    
    0.8Restricted cash
    
    
    
    
    
    
    
    
    
    
    1.0
    
    
    
    
    
    
    
    1.0Sales of marketable securities
    
    
    
    
    
    
    5.0
    
    
    
    
    
    
    
    
    
    
    
    5.0Investment in subsidiaries
    
    
    
    
    
    
    24.2
    
    
    
    
    
    
    
    (24.2
    )
    
    
    Cash flow used in investing activities from
continuing operations
    
    
    
    
    
    
    (4.2
    )
    
    
    (0.1
    )
    
    
    (24.2
    )
    
    
    (28.5
    )Financing Activities:Repayment on notes payable
    
    
    
    
    
    
    
    
    
    
    (1.0
    )
    
    
    
    
    
    
    (1.0
    )Issuance of debt
    
    
    
    
    
    
    0.1
    
    
    
    1.2
    
    
    
    
    
    
    
    1.3Issuances of common stock
    
    
    12.3
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12.3Purchases of common stock
    
    
    (2.4
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2.4
    )Distributions to parents
    
    
    
    
    
    
    
    
    
    
    (24.2
    )
    
    
    24.2
    
    
    
    Contributions by minority owners
    
    
    
    
    
    
    
    
    
    
    0.5
    
    
    
    
    
    
    
    0.5Cash flow provided by (used in) financing
activities from continuing operations
    
    
    9.9
    
    
    
    0.1
    
    
    
    (23.5
    )
    
    
    24.2
    
    
    
    10.7Effect of exchange rate changes on cash
    
    
    
    
    
    
    
    
    
    
    1.8
    
    
    
    
    
    
    
    1.8Increase in cash and cash equivalents
    
    
    
    
    
    
    56.9
    
    
    
    14.5
    
    
    
    
    
    
    
    71.4Cash and cash equivalents, beginning of period
    
    
    
    
    
    
    210.8
    
    
    
    78.8
    
    
    
    
    
    
    
    289.6Cash and cash equivalents, end of period
    
    $
    
    
    
    $
    267.7
    
    
    $
    93.3
    
    
    $
    
    
    
    $
    361.0
 22




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##### Table of Contents



Parent
    
    
    Guarantor
    
    
    Non-guarantorCompany
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedOperating Activities:Net earnings (loss)
    
    $
    17.9
    
    
    $
    26.6
    
    
    $
    (0.3
    )
    
    $
    (26.3
    )
    
    $
    17.9Loss from discontinued operations, net of
income taxes and minority interest
    
    
    
    
    
    
    (12.1
    )
    
    
    (7.7
    )
    
    
    
    
    
    
    (19.8
    )Net earnings from continuing operations
    
    
    17.9
    
    
    
    38.7
    
    
    
    7.4
    
    
    
    (26.3
    )
    
    
    37.7Adjustments for non-cash items included in
earnings from continuing operations:Non-cash component of restructuring charges
    
    
    
    
    
    
    13.7
    
    
    
    
    
    
    
    
    
    
    
    13.7Loss on impairment of and disposal of assets
    
    
    
    
    
    
    4.0
    
    
    
    0.7
    
    
    
    
    
    
    
    4.7Depreciation and amortization
    
    
    
    
    
    
    41.7
    
    
    
    5.8
    
    
    
    
    
    
    
    47.5Amortization of deferred financing costs
    
    
    
    
    
    
    0.5
    
    
    
    
    
    
    
    
    
    
    
    0.5Amortization of unearned restricted stock
    
    
    0.4
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.4Deferred income taxes
    
    
    
    
    
    
    (3.1
    )
    
    
    (4.1
    )
    
    
    
    
    
    
    (7.2
    )Minority interest, net of tax
    
    
    
    
    
    
    
    
    
    
    (4.1
    )
    
    
    
    
    
    
    (4.1
    )Changes in working capital:Inventories
    
    
    
    
    
    
    (19.2
    )
    
    
    (3.4
    )
    
    
    (0.9
    )
    
    
    (23.5
    )Other current assets
    
    
    (5.0
    )
    
    
    3.4
    
    
    
    0.3
    
    
    
    (6.6
    )
    
    
    (7.9
    )Accounts payable
    
    
    
    
    
    
    12.2
    
    
    
    (25.7
    )
    
    
    11.0
    
    
    
    (2.5
    )Accrued expenses
    
    
    (0.3
    )
    
    
    33.1
    
    
    
    1.1
    
    
    
    (3.5
    )
    
    
    30.4Other assets and liabilities, net
    
    
    (13.0
    )
    
    
    (16.3
    )
    
    
    3.9
    
    
    
    26.3
    
    
    
    0.9Cash flow provided by (used in) discontinued
operations
    
    
    
    
    
    
    3.1
    
    
    
    (2.0
    )
    
    
    
    
    
    
    1.1Cash flow provided by (used in) operating
activities
    
    
    
    
    
    
    111.8
    
    
    
    (20.1
    )
    
    
    
    
    
    
    91.7Investing Activities:Capital expenditures
    
    
    
    
    
    
    (52.1
    )
    
    
    (4.1
    )
    
    
    
    
    
    
    (56.2
    )Purchases of marketable securities
    
    
    
    
    
    
    (9.0
    )
    
    
    
    
    
    
    
    
    
    
    (9.0
    )Sale of marketable securities
    
    
    
    
    
    
    10.0
    
    
    
    
    
    
    
    
    
    
    
    10.0Investment in subsidiaries
    
    
    
    
    
    
    (2.3
    )
    
    
    
    
    
    
    2.3
    
    
    
    Cash flow used in investing activities from
continuing operations
    
    
    
    
    
    
    (53.4
    )
    
    
    (4.1
    )
    
    
    2.3
    
    
    
    (55.2
    )Financing Activities:Issuance of debt
    
    
    
    
    
    
    
    
    
    
    1.6
    
    
    
    
    
    
    
    1.6Payment of deferred financing costs
    
    
    
    
    
    
    (0.2
    )
    
    
    
    
    
    
    
    
    
    
    (0.2
    )Repayment of debt
    
    
    
    
    
    
    (0.5
    )
    
    
    
    
    
    
    
    
    
    
    (0.5
    )Issuances of common stock
    
    
    1.0
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1.0Purchases of common stock
    
    
    (1.0
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1.0
    )Contributions by parents
    
    
    
    
    
    
    
    
    
    
    2.3
    
    
    
    (2.3
    )
    
    
    Contributions by minority owners
    
    
    
    
    
    
    
    
    
    
    1.5
    
    
    
    
    
    
    
    1.5Cash flow (used in) provided by financing
activities from continuing operations
    
    
    
    
    
    
    (0.7
    )
    
    
    5.4
    
    
    
    (2.3
    )
    
    
    2.4Effect of exchange rate changes on cash
    
    
    
    
    
    
    
    
    
    
    (0.6
    )
    
    
    
    
    
    
    (0.6
    )Increase (decrease) in cash and cash equivalents
    
    
    
    
    
    
    57.7
    
    
    
    (19.4
    )
    
    
    
    
    
    
    38.3Cash and cash equivalents, beginning of period
    
    
    
    
    
    
    67.4
    
    
    
    69.3
    
    
    
    
    
    
    
    136.7Cash and cash equivalents, end of period
    
    $
    
    
    
    $
    125.1
    
    
    $
    49.9
    
    
    $
    
    
    
    $
    175.0
 23




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24




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##### Table of Contents



Second Quarter
    
    
    First Six Months2005
    
    
    2004
    
    
    2005
    
    
    2004Revenues
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of sales
    
    
    66.1
    
    
    
    68.4
    
    
    
    65.5
    
    
    
    68.6Gross margin
    
    
    33.9
    
    
    
    31.6
    
    
    
    34.5
    
    
    
    31.4Selling, general and administrative expense
    
    
    29.0
    
    
    
    26.1
    
    
    
    28.6
    
    
    
    26.6Restructuring charges
    
    
    0.0
    
    
    
    2.0
    
    
    
    0.1
    
    
    
    1.0Operating profit from continuing operations
    
    
    4.9
    
    
    
    3.5
    
    
    
    5.8
    
    
    
    3.8Interest expense, net
    
    
    0.3
    
    
    
    0.6
    
    
    
    0.4
    
    
    
    0.6Earnings from continuing operations before income
taxes and minority interest
    
    
    4.6
    
    
    
    2.9
    
    
    
    5.4
    
    
    
    3.2Effective income tax rate*
    
    
    31.8
    %
    
    
    11.1
    %
    
    
    29.9
    %
    
    
    23.3
    %Earnings from continuing operations before minority
interest
    
    
    3.1
    
    
    
    2.5
    
    
    
    3.8
    
    
    
    2.4Minority interest
    
    
    0.0
    
    
    
    0.3
    
    
    
    0.0
    
    
    
    0.3Earnings from continuing operations
    
    
    3.1
    
    
    
    2.8
    
    
    
    3.8
    
    
    
    2.7Loss from discontinued operations, net of income taxes
and minority interest
    
    
    (0.2
    )
    
    
    (2.3
    )
    
    
    (0.2
    )
    
    
    (1.4
    )Net Earnings
    
    
    2.9
    %
    
    
    0.5
    %
    
    
    3.6
    %
    
    
    1.3
    %
    25




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Second Quarter
    
    
    First Six Months2005
    
    
    2004
    
    
    2005
    
    
    2004Net Sales
    
    
    (0.2
    )%
    
    
    (0.3
    )%
    
    
    0.1
    %
    
    
    1.7
    %Same-store Sales
    
    
    1.5
    
    
    
    (0.9
    )
    
    
    2.1
    
    
    
    1.0Average selling price per unit
    
    
    6.3
    
    
    
    8.7
    
    
    
    5.9
    
    
    
    8.2Unit volume
    
    
    (6.4
    )
    
    
    (8.1
    )
    
    
    (5.4
    )
    
    
    (6.0
    )Footwear average selling price per unit
    
    
    5.4
    
    
    
    6.5
    
    
    
    4.2
    
    
    
    3.7Footwear unit volume
    
    
    (5.2
    )%
    
    
    (6.1
    )%
    
    
    (3.2
    )%
    
    
    (2.2
    )%
            26




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##### Table of Contents



Cash Flow Provided by Operating Activities
  Cash Flow Used in Investing Activities
  27




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##### Table of Contents



Cash Flow Provided by Financing Activities
    Year
    
    Percentage2008
    
    
    104.125
    %2009
    
    
    102.750
    %2010
    
    
    101.375
    %2011 and thereafter
    
    
    100.000
    %
  Financial Commitments
  Payments Due by PeriodRemainder of
    
    
    
    
    
    
    
    
    
    
    More than(dollars in millions)
    
    Total
    
    
    Year
    
    
    1-3 Years
    
    
    3-5 Years
    
    
    Five YearsEmployment
agreement
obligations
    
    $
    6.9
    
    
    $
    2.8
    
    
    $
    3.8
    
    
    $
    0.3
    
    
    
    Employee severance
    
    
    7.3
    
    
    
    2.0
    
    
    
    5.3
    
    
    
    
    
    
    
    $
    14.2
    
    
    $
    4.8
    
    
    $
    9.1
    
    
    $
    0.3
    
    
    
    
  28




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##### Table of Contents



July 30, 2005
    
    
    July 31, 2004
    
    
    January 29, 2005Current Ratio
    
    
    2.5
    
    
    
    2.3
    
    
    
    2.2Debt-Capitalization Ratio*
    
    
    24.0
    %
    
    
    27.7
    %
    
    
    25.9
    %
 *
    
    Debt-to-capitalization has been computed by dividing total debt by capitalization. Total
debt is defined as long-term debt including current maturities, notes payable and borrowings
under the revolving line of credit. Capitalization is defined as total debt 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, was 64.2%, 68.1% and 67.3%
respectively, for the periods referred to above.
   Second Quarter
    
    
    First Six Months2005
    
    
    2004
    
    
    2005
    
    
    2004Beginning of period
    
    
    4,646
    
    
    
    5,066
    
    
    
    4,640
    
    
    
    5,042Stores opened
    
    
    33
    
    
    
    68
    
    
    
    72
    
    
    
    148Stores closed
    
    
    (54
    )
    
    
    (62
    )
    
    
    (87
    )
    
    
    (118
    )Ending store count
    
    
    4,625
    
    
    
    5,072
    
    
    
    4,625
    
    
    
    5,072
     
      29




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##### Table of Contents



30




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##### Table of Contents



Approximate DollarTotal Number
    
    
    Value ofof Shares
    
    
    Shares that MayPurchased as Part of
    
    
    Yet Be PurchasedTotal Number of
    
    
    
    
    
    
    Publicly Announced
    
    
    Under the Plans orShares Purchased(1)
    
    
    Average Price Paid
    
    
    Plans or Programs(2)
    
    
    Programs(3)Period
    
    (in Thousands)
    
    
    per Share
    
    
    (in Thousands)
    
    
    (in Millions)05/01/05  05/28/05
    
    
    10
    
    
    $
    15.52
    
    
    
    0
    
    
    $
    236.205/29/05  07/02/05
    
    
    9
    
    
    
    17.11
    
    
    
    0
    
    
    
    236.207/03/05  07/30/05
    
    
    2
    
    
    
    19.36
    
    
    
    0
    
    
    
    236.2Total
    
    
    21
    
    
    $
    16.59
    
    
    
    0
    
    
    $
    236.2
    31




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##### Table of Contents



Number
    
    Description31.1
    
    Certification Pursuant to
Rule 13a-14(a)/15d-14(a) of the Chief Executive Officer and
President*31.2
    
    Certification Pursuant to
Rule 13a-14(a)/15d-14(a) of the Senior Vice President, Chief Financial Officer
and Treasurer*32.1
    
    Certification Pursuant to 18
U.S.C. 1350 of the Chief Executive Officer and President*32.2
    
    Certification Pursuant to 18
U.S.C. 1350 of the Senior Vice President, Chief Financial Officer
and Treasurer*
 *
 32




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##### Table of Contents



PAYLESS SHOESOURCE, INC.Date: September 7, 2005
    By:
    /s/ Matthew E. RubelMatthew E. RubelChief Executive Officer and President
(Principal Executive Officer) Date:  September 7, 2005
    By:
    /s/ Ullrich E. PorzigUllrich E. PorzigSenior Vice President
Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer)  33