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SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 10-Q/A1 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D)
OF THE SECURITIES EXCHANGE ACT OF 1934 For The Quarterly Period Ended October 30, 2004 Commission File Number 1-14770 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
    
    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 þ      NO o Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of
the Securities Exchange Act of 1934). YES þ      NO o 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
68,093,770 shares as of December 6, 2004




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TABLE OF CONTENTS  PART I  FINANCIAL INFORMATIONITEM 1  FINANCIAL STATEMENTSITEM 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  CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIESITEM 6  EXHIBITS AND REPORTS ON FORM 8-KSIGNATURESIndex to ExhibitsCertification Pursuant to Section 302Certification Pursuant to Section 302Certification Pursuant to Section 906Certification Pursuant to Section 906    Table of Contents  EXPLANATORY NOTE This Form 10-Q/A amends the Companys quarterly report on Form 10-Q for the fiscal quarter
ended October 30, 2004 (Original Filing), initially filed with the Securities and Exchange
Commission (SEC) on December 9, 2004, to reflect the restatement described in Note 3 to the
condensed consolidated financial statements. As a result of the restatement, the Company also
updated the financial statements for discontinued operations as discussed in Note 12, Discontinued
Operations. This Form 10-Q/A amends and restates Items 1, 2 and 4 of Part I of the Original Filing. Except for
the effects of the restatement and discontinued operations, the foregoing items have not been
updated to reflect other events that occurred after the Original Filing or to modify or update
those disclosures affected by subsequent events. In addition, pursuant to the rules of the SEC,
Item 6 of Part II of the Original Filing has been amended to contain currently-dated certifications
from our Chief Executive Officer and Chief Financial Officer, as required by Sections 302 and 906
of the Sarbanes-Oxley Act of 2002. The certifications of our Chief Executive Officer and Chief
Financial Officer are attached to this Form 10-Q/A as Exhibits 31.1, 31.2, 32.1 and 32.2,
respectively. Except for the foregoing amended information, this Form 10-Q/A continues to describe conditions as
of the date of the Original Filing, and does not update disclosures contained herein to reflect
events that occurred at a later date. 2




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PART I  FINANCIAL INFORMATION 
 ITEM 1  FINANCIAL STATEMENTS PAYLESS SHOESOURCE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED) (dollars in millions) (as restated, see Note 3)October 30,
    
    
    November 1,
    
    
    January 31,2004
    
    
    2003
    
    
    2004ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    216.2
    
    
    $
    129.6
    
    
    $
    136.7Marketable securities, available for sale
    
    
    9.0
    
    
    
    10.0
    
    
    
    10.0Restricted cash
    
    
    18.5
    
    
    
    33.5
    
    
    
    33.5Inventories
    
    
    361.7
    
    
    
    391.8
    
    
    
    375.2Current deferred income taxes
    
    
    26.8
    
    
    
    13.6
    
    
    
    17.1Other current assets
    
    
    66.8
    
    
    
    75.1
    
    
    
    64.9Current assets of discontinued operations
    
    
    17.9
    
    
    
    25.2
    
    
    
    24.2Total current assets
    
    
    716.9
    
    
    
    678.8
    
    
    
    661.6Property and Equipment:Land
    
    
    8.0
    
    
    
    8.0
    
    
    
    8.0Buildings and leasehold improvements
    
    
    683.3
    
    
    
    666.0
    
    
    
    679.8Furniture, fixtures and equipment
    
    
    529.0
    
    
    
    486.7
    
    
    
    494.6Property under capital leases
    
    
    4.6
    
    
    
    4.6
    
    
    
    4.6Total property and equipment
    
    
    1,224.9
    
    
    
    1,165.3
    
    
    
    1,187.0Accumulated depreciation
and amortization
    
    
    (802.4
    )
    
    
    (750.0
    )
    
    
    (763.5
    )Property and equipment, net
    
    
    422.5
    
    
    
    415.3
    
    
    
    423.5Favorable leases, net
    
    
    22.7
    
    
    
    30.1
    
    
    
    28.8Deferred income taxes
    
    
    35.2
    
    
    
    26.3
    
    
    
    34.2Goodwill, net
    
    
    5.9
    
    
    
    5.9
    
    
    
    5.9Other assets
    
    
    25.7
    
    
    
    30.0
    
    
    
    22.7Non-current assets of discontinued operations
    
    
    8.1
    
    
    
    30.2
    
    
    
    27.6Total Assets
    
    $
    1,237.0
    
    
    $
    1,216.6
    
    
    $
    1,204.3LIABILITIES AND SHAREOWNERS EQUITYCurrent Liabilities:Current maturities of long-term debt
    
    $
    3.5
    
    
    $
    0.9
    
    
    $
    0.9Notes payable
    
    
    18.5
    
    
    
    33.5
    
    
    
    33.5Accounts payable
    
    
    106.0
    
    
    
    127.9
    
    
    
    129.6Accrued expenses
    
    
    164.6
    
    
    
    129.1
    
    
    
    123.9Current liabilities of discontinued operations
    
    
    5.9
    
    
    
    5.1
    
    
    
    5.8Total current liabilities
    
    
    298.5
    
    
    
    296.5
    
    
    
    293.7Long-term debt
    
    
    202.1
    
    
    
    202.9
    
    
    
    202.8Other liabilities
    
    
    87.4
    
    
    
    81.2
    
    
    
    85.6Non-current liabilities of discontinued operations
    
    
    8.5
    
    
    
    2.2
    
    
    
    2.1Minority interest
    
    
    7.5
    
    
    
    16.2
    
    
    
    15.7Commitments and contingencies
    
    
    
    
    
    
    
    
    
    
    Total shareowners equity
    
    
    633.0
    
    
    
    617.6
    
    
    
    604.4Total Liabilities and Shareowners Equity
    
    $
    1,237.0
    
    
    $
    1,216.6
    
    
    $
    1,204.3
 See Notes to Condensed Consolidated Financial Statements. 3




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PAYLESS SHOESOURCE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (LOSS)
(UNAUDITED) (dollars and shares in millions, except per share) (as restated, see Note 3)13 Weeks Ended
    
    
    39 Weeks EndedOctober 30, 2004
    
    
    November 1, 2003
    
    
    October 30, 2004
    
    
    November 1, 2003Net sales
    
    $
    661.4
    
    
    $
    679.4
    
    
    $
    2,049.3
    
    
    $
    2,044.7Cost of sales
    
    
    460.3
    
    
    
    492.1
    
    
    
    1,411.9
    
    
    
    1,460.3Selling, general and administrative expenses
    
    
    175.7
    
    
    
    181.0
    
    
    
    545.6
    
    
    
    531.4Restructuring charges
    
    
    3.9
    
    
    
    
    
    
    
    17.6
    
    
    
    Operating profit from continuing operations
    
    
    21.5
    
    
    
    6.3
    
    
    
    74.2
    
    
    
    53.0Interest expense
    
    
    5.5
    
    
    
    6.0
    
    
    
    16.7
    
    
    
    15.3Interest income
    
    
    (1.2
    )
    
    
    (1.1
    )
    
    
    (3.5
    )
    
    
    (3.0
    )Earnings from continuing operations before income
taxes and minority interest
    
    
    17.2
    
    
    
    1.4
    
    
    
    61.0
    
    
    
    40.7Provision for income taxes
    
    
    4.9
    
    
    
    0.3
    
    
    
    15.1
    
    
    
    14.1Earnings from continuing operations before minority
interest
    
    
    12.3
    
    
    
    1.1
    
    
    
    45.9
    
    
    
    26.6Minority interest, net of income tax
    
    
    0.2
    
    
    
    1.1
    
    
    
    4.3
    
    
    
    2.4Net earnings from continuing operations
    
    
    12.5
    
    
    
    2.2
    
    
    
    50.2
    
    
    
    29.0Loss from discontinued operations, net of income taxes
and minority interest
    
    
    (5.9
    )
    
    
    (4.4
    )
    
    
    (25.7
    )
    
    
    (11.9
    )Net earnings (loss)
    
    $
    6.6
    
    
    $
    (2.2
    )
    
    $
    24.5
    
    
    $
    17.1Diluted earnings (loss) per share:Earnings from continuing operations
    
    $
    0.19
    
    
    $
    0.03
    
    
    $
    0.74
    
    
    $
    0.43Loss from discontinued operations
    
    
    (0.09
    )
    
    
    (0.06
    )
    
    
    (0.38
    )
    
    
    (0.18
    )Diluted earnings (loss) per share
    
    $
    0.10
    
    
    $
    (0.03
    )
    
    $
    0.36
    
    
    $
    0.25Basic earnings (loss) per share:Earnings from continuing operations
    
    $
    0.19
    
    
    $
    0.03
    
    
    $
    0.74
    
    
    $
    0.43Loss from discontinued operations
    
    
    (0.09
    )
    
    
    (0.06
    )
    
    
    (0.38
    )
    
    
    (0.18
    )Basic earnings (loss) per share
    
    $
    0.10
    
    
    $
    (0.03
    )
    
    $
    0.36
    
    
    $
    0.25Diluted Weighted Average Shares Outstanding
    
    
    68.0
    
    
    
    68.1
    
    
    
    68.0
    
    
    
    68.1Basic Weighted Average Shares Outstanding
    
    
    68.0
    
    
    
    68.1
    
    
    
    68.0
    
    
    
    68.0
 See Notes to Condensed Consolidated Financial Statements. 4




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PAYLESS SHOESOURCE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED) (dollars in millions) (as restated, see Note 3)39 Weeks Ended
    
    
    39 Weeks EndedOctober 30, 2004
    
    
    November 1, 2003Operating Activities:Net earnings
    
    $
    24.5
    
    
    $
    17.1Loss from discontinued operations, net of income
taxes and minority interest
    
    
    (25.7
    )
    
    
    (11.9
    )Net earnings from continuing operations
    
    
    50.2
    
    
    
    29.0Adjustments for non-cash items included
in net earnings:Non-cash component of restructuring charges
    
    
    12.0
    
    
    
    Loss on impairment of and disposal of assets
    
    
    6.6
    
    
    
    7.5Depreciation and amortization
    
    
    71.2
    
    
    
    72.3Amortization of deferred financing costs
    
    
    0.9
    
    
    
    3.8Amortization of unearned restricted stock
    
    
    0.5
    
    
    
    0.5Deferred income taxes
    
    
    (12.9
    )
    
    
    13.0Minority interest, net of tax
    
    
    (4.3
    )
    
    
    (2.4
    )Income tax charge of stock option exercises
    
    
    (0.1
    )
    
    
    Changes in working capital:Inventories
    
    
    15.7
    
    
    
    44.7Other current assets
    
    
    (5.1
    )
    
    
    (18.9
    )Accounts payable
    
    
    (23.7
    )
    
    
    26.1Accrued expenses
    
    
    41.0
    
    
    
    9.6Other assets and liabilities, net
    
    
    5.7
    
    
    
    3.7Cash flow provided by (used in) discontinued
operations
    
    
    0.5
    
    
    
    (12.1
    )Cash flow provided by operating activities
    
    
    158.2
    
    
    
    176.8Investing Activities:Capital expenditures
    
    
    (82.0
    )
    
    
    (83.5
    )Disposition of property and equipment
    
    
    
    
    
    
    1.0Purchase of marketable securities
    
    
    (13.0
    )
    
    
    (10.0
    )Sale of marketable securities
    
    
    14.0
    
    
    
    Cash flow used in investing activities
    
    
    (81.0
    )
    
    
    (92.5
    )Financing Activities:(Repayment) Issuance of notes payable
    
    
    (15.0
    )
    
    
    5.0Restricted cash
    
    
    15.0
    
    
    
    (5.0
    )Issuance of debt
    
    
    2.4
    
    
    
    196.7Payment of deferred financing costs
    
    
    (0.2
    )
    
    
    (9.3
    )Repayment of debt
    
    
    (0.7
    )
    
    
    (216.8
    )Net purchases of common stock
    
    
    (0.8
    )
    
    
    (0.3
    )Contributions by minority owners
    
    
    1.9
    
    
    
    3.6Cash flow provided by (used in) financing
activities
    
    
    2.6
    
    
    
    (26.1
    )Effect of exchange rate changes on cash
    
    
    (0.3
    )
    
    
    (0.3
    )Increase in cash and cash equivalents
    
    
    79.5
    
    
    
    57.9Cash and cash equivalents, beginning of year
    
    
    136.7
    
    
    
    71.7Cash and cash equivalents, end of period
    
    $
    216.2
    
    
    $
    129.6Cash paid during the period for:Interest
    
    $
    20.8
    
    
    $
    11.6Income Taxes
    
    $
    1.6
    
    
    $
    17.1
 See Notes to Condensed Consolidated Financial Statements 5




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PAYLESS SHOESOURCE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) NOTE 1. INTERIM RESULTS. These unaudited Condensed Consolidated Financial Statements of Payless
ShoeSource, Inc., a Delaware corporation, and subsidiaries (the Company) have been prepared in
accordance with the instructions to Form 10-Q of the United States Securities and Exchange
Commission. 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. During 2003, the Company changed the reporting period for its operations in
the Central American and South American Regions to use a December 31 year-end. The Central American
Region is composed of operations in Costa Rica, the Dominican Republic, El Salvador, Guatemala,
Honduras, Nicaragua, Panama and Trinidad & Tobago. The South American Region is composed of
operations in Chile, Ecuador and Peru. The Company also has a 60-percent ownership interest in a
Japanese joint venture. Japanese operations are reported on a one-month lag using a December 31
year-end. The effect of this one-month lag on the Companys financial position and results of
operations is not significant. The results for the three-month period and nine-month period ended
October 30, 2004, are not necessarily indicative of the results that may be expected for the entire
fiscal year ending January 29, 2005. NOTE 2  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Use of Estimates Management makes estimates and assumptions that affect the amounts reported within the condensed
consolidated balance sheets and the statements of earnings, cash flows, and the notes to condensed
consolidated financial statements. Actual results could differ from these estimates. Net Sales Net sales (sales) are recognized at the time the sale is made to the customer, are net of
estimated returns and current promotional discounts and exclude sales tax. Third-party liquidation
sales related to restructuring are recognized at the time the sale is made to the customer, are
calculated based upon contractually guaranteed amounts pursuant to our agreements with liquidators
and are net of associated fees. Gift Cards The Company records a liability in the period in which a gift card is issued and proceeds are
received. As gift cards are redeemed, this liability is reduced and revenue is recognized as a
sale. Cost of Sales Cost of sales includes the cost of merchandise sold and the Companys buying and occupancy costs. Rent Expense Certain of the Companys lease agreements provide for scheduled rent increases during the lease
term, as well as provisions for renewal options. Rent expense is recognized on a straight-line
basis over the term of the lease from the time at which the Company takes possession of the
property. In instances where failure to exercise renewal options would result in an economic
penalty, the calculation of straight-line rent expense includes renewal option periods. Also,
landlord-provided tenant improvement allowances are recorded in other liabilities and amortized as
a credit to rent expense over the term of the lease. Pre-Opening Expenses Costs associated with the opening of new stores are expensed as incurred. 6




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Advertising Costs Advertising costs and sales promotion costs are expensed at the time the advertising takes place. Income Taxes Income taxes are accounted for using a balance sheet approach known as the liability method. The
liability method accounts for deferred income taxes by applying enacted statutory tax rates to
differences between the book basis and the tax basis of assets and liabilities. Cash and Cash Equivalents Cash equivalents consist of liquid investments with an original maturity of three months or less.
Receivables in the amount of $19.2 million, $15.3 million and $11.0 million from banks and credit
card companies for the settlement of credit card transactions are included in cash and cash
equivalents as of October 30, 2004, November 1, 2003 and January 31, 2004, respectively, as they
are generally collected within three business days. Cash equivalents are stated at cost, which
approximates fair value. Marketable Securities As of October 30, 2004, November 1, 2003 and January 31, 2004 marketable securities include $9.0
million, $10.0 million and $10.0 million, respectively, of auction rate securities, which are
available to support the Companys current operations. These investments are classified as
available-for-sale securities and are recorded at fair value with unrealized gains or losses
reported in other comprehensive income (loss). Due to the short time period between the reset
dates of the interest rates, there are no unrealized gains or losses associated with these
securities. All of the auction rate securities have contractual maturities of more than ten years. Inventories Merchandise inventories in our stores are valued by the retail method and are stated at the lower
of cost, determined using the first-in, first-out (FIFO) basis, or market. Prior to shipment to a
specific store, inventories are valued at the lower of cost using the FIFO basis, or market. The
retail method is widely used in the retail industry due to its practicality. Under the retail
method, cost is determined by applying a calculated cost-to-retail ratio across groupings of
similar items, known as departments. As a result, the retail method results in an averaging of
inventory costs across similar items within a department. The cost-to-retail ratio is applied to
ending inventory at its current owned retail valuation to determine the cost of ending inventory on
a department basis. Current owned retail represents the retail price for which merchandise is
offered for sale on a regular basis reduced for any permanent or clearance markdowns. As a result,
the retail method normally results in an inventory valuation that is lower than a traditional FIFO
cost basis. Inherent in the retail method calculation are certain significant management judgments and
estimates including initial mark-up, markdowns and shrinkage, which can significantly impact the
owned retail and, therefore, the ending inventory valuation at cost. Specifically, the failure to
take permanent or clearance markdowns on a timely basis can result in an overstatement of carrying
cost under the retail method. Management believes that its application of the retail method
reasonably states inventory at the lower of cost or market. The Company maintains a global sourcing structure to focus on cost reduction initiatives from
procurement of materials through distribution of finished product. As a result, the Company takes
ownership of certain raw materials as the materials enter the production process. These raw
materials of $8.3 million, $15.6 million and $19.5 million are included in inventories in the
condensed consolidated balance sheets at October 30, 2004, November 1, 2003, and January 31, 2004,
respectively, and are accounted for under the FIFO basis. Property and Equipment Property and equipment are recorded at cost and are depreciated on a straight-line basis over their
estimated useful lives. The costs of repairs and maintenance are expensed when incurred, while
expenditures for store remodels, refurbishments and improvements that 7




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significantly add to the productive capacity or extend the useful life of an asset are capitalized.
The estimated useful life for each major class of property and equipment is as follows: Buildings
    
    10 to 30 yearsLeasehold improvements
    
    the lesser of 10 years or the remaining expected lease term that is reasonably assured
(which may exceed the current non-cancelable term)Furniture, fixtures and equipment
    
    3 to 8 yearsProperty under capital lease
    
    10 to 30 years
 Property and equipment are reviewed for recoverability on a store-by-store basis if an indicator of
impairment exists to determine whether the carrying amount of the assets is recoverable. Estimated
future cash flows are used to determine if impairment exists. The Company uses current operating
results and historical performance to estimate future cash flows on a store-by-store basis. Insurance Programs The Company retains its normal expected losses related primarily to workers compensation, physical
loss to property and business interruption resulting from such loss and comprehensive general,
product, and vehicle liability. The Company purchases third-party coverage for losses in excess of
the normal expected levels. Provisions for losses expected under these programs are recorded based
upon estimates of the aggregate liability for claims incurred utilizing independent actuarial
calculations based on historical results. 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. Adjustments from the translation process are accumulated as part of other comprehensive
income and are included within shareowners equity (see Note 9). The changes in foreign currency
translation adjustments were not adjusted for income taxes since they relate to indefinite term
investments in non-United States subsidiaries. Income and expense items of these subsidiaries are
translated at average rates of exchange. Financial Derivatives The Company has used derivative financial instruments to reduce its exposure to fluctuations in
interest rates and foreign currencies and to minimize the risk associated with investments in
foreign operations. Statement of Financial Accounting Standards No. 133 (SFAS 133), Accounting
for Derivative Instruments and Hedging Activities, requires that all derivatives be reflected as
either assets or liabilities on the balance sheet based on their fair value. If the derivative is a
hedge, depending on the nature of the hedge, changes in the fair value of derivatives will either
be offset against the change in the fair value of the hedged asset, liability or firm commitment
through earnings, or recognized in other comprehensive income until the hedged item is recognized
in earnings. The change in a derivatives fair value related to the ineffective portion of a hedge,
if any, will be immediately recognized in earnings. As of October 30, 2004, November 1, 2003 and
January 31, 2004, the Company had no derivative instruments in place. Reclassification Certain reclassifications have been made to prior year balances to conform to the current year
presentation. NOTE 3. RESTATEMENT OF FINANCIAL STATEMENTS. Subsequent to the issuance of the Companys interim
condensed consolidated financial statements of the quarterly period ended October 30, 2004, and
following a comprehensive review of its accounting treatment for leases and lease-related items,
the Companys management determined that the previous accounting policies used were inappropriate.
As a result, the Company has corrected its accounting practices in this area and restated its
condensed consolidated financial statements. Historically, when accounting for leases with renewal options, the Company had recorded rent
expense on a straight-line basis over the initial non-cancelable lease term, with the term
commencing when the store opened for business. The Company amortized leasehold improvements on
those properties over a period of typically 10 years that, in certain cases, would have included a
portion of the renewal option periods. In connection with the restatement, the Company corrected
its accounting to accelerate the recognition of rent expense on leases by recording lease expense
from the time at which it takes possession of the property, rather than at the time the store opens
for business. In addition, the Company corrected its calculation of rent expense on a straight line
basis to include certain option periods that are reasonably assured of renewal, because failure to
exercise such options would result in an economic penalty. When the renewal option periods are not
reasonably assured, the leasehold improvements are amortized over a period not to exceed the
existing non-cancelable lease term. 8




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Also, the Company had followed the practice of netting landlord-provided tenant improvement
allowances against property and equipment. The restatement corrects the manner in which the Company
accounts for tenant improvement allowances to record the allowances as a deferred credit. There was
no impact to earnings for this correction. Further, the amount of tenant improvement allowances
received each year are shown within the operating activities on the condensed consolidated
statement of cash flows rather than a reduction of capital expenditures. In addition, the Company discovered an error relating to its accounting for deferred income taxes.
Beginning in a period prior to 1998, deferred income tax assets were understated by approximately
$4.5 million. In connection with the restatement mentioned above, the Company recorded a correction
to increase deferred tax assets by approximately $4.5 million. The correction has no impact on
earnings in fiscal years 2004 or 2003. Following is a summary of the effects of the corrections to the Companys condensed consolidated
balance sheets as of October 30, 2004, November 1, 2003 and January 31, 2004 and the Companys
condensed consolidated statements of earnings and cash flows for the thirteen and thirty-nine weeks
ended October 30, 2004 and November 1, 2003. The As previously reported amounts have been
adjusted for the reclassifications discussed in Notes 2 and 12 of the Notes to Condensed
Consolidated Financial Statements. Condensed Consolidated Statements of EarningsAs previously(in millions, except per share data)
    
    Reported
    
    
    Adjustments
    
    
    As restatedThirteen weeks ended October 30, 2004Cost of sales
    
    $
    460.4
    
    
    $
    (0.1
    )
    
    $
    460.3Operating profit from continuing operations
    
    
    21.4
    
    
    
    0.1
    
    
    
    21.5Earnings from continuing operations before income
taxes and minority interest
    
    
    17.1
    
    
    
    0.1
    
    
    
    17.2Provision for income taxes
    
    
    4.9
    
    
    
    
    
    
    
    4.9Earnings from continuing operations before minority interest
    
    
    12.2
    
    
    
    0.1
    
    
    
    12.3Minority interest, net of income taxes
    
    
    0.2
    
    
    
    
    
    
    
    0.2Earnings from continuing operations
    
    
    12.4
    
    
    
    0.1
    
    
    
    12.5Loss from discontinued operations, net of income taxes
and minority interest
    
    
    (5.9
    )
    
    
    
    
    
    
    (5.9
    )Net earnings
    
    $
    6.5
    
    
    $
    0.1
    
    
    $
    6.6Diluted earnings (loss) per share:Earnings from continuing operations
    
    $
    0.19
    
    
    $
    
    
    
    $
    0.19Loss from discontinued operations
    
    
    (0.09
    )
    
    
    
    
    
    
    (0.09
    )Diluted earnings per share
    
    $
    0.10
    
    
    $
    
    
    
    $
    0.10Basic earnings (loss) per share:Earnings from continuing operations
    
    $
    0.19
    
    
    $
    
    
    
    $
    0.19Loss from discontinued operations
    
    
    (0.09
    )
    
    
    
    
    
    
    (0.09
    )Basic earnings per share
    
    $
    0.10
    
    
    $
    
    
    
    $
    0.10
 Condensed Consolidated Statements of LossAs previously(in millions, except per share data)
    
    Reported
    
    
    Adjustments
    
    
    As restatedThirteen weeks ended November 1, 2003Cost of sales
    
    $
    492.1
    
    
    $
    
    
    
    $
    492.1Operating profit from continuing operations
    
    
    6.3
    
    
    
    
    
    
    
    6.3Earnings from continuing operations before income
taxes and minority interest
    
    
    1.4
    
    
    
    
    
    
    
    1.4Provision for income taxes
    
    
    0.3
    
    
    
    
    
    
    
    0.3Earnings from continuing operations before minority interest
    
    
    1.1
    
    
    
    
    
    
    
    1.1Minority interest, net of income taxes
    
    
    1.1
    
    
    
    
    
    
    
    1.1Earnings from continuing operations
    
    
    2.2
    
    
    
    
    
    
    
    2.2Loss from discontinued operations, net of income taxes and
minority interest
    
    
    (4.4
    )
    
    
    
    
    
    
    (4.4
    )Net loss
    
    $
    (2.2
    )
    
    $
    
    
    
    $
    (2.2
    )Diluted earnings (loss) per share:Earnings from continuing operations
    
    $
    0.03
    
    
    $
    
    
    
    $
    0.03Loss from discontinued operations
    
    
    (0.06
    )
    
    
    
    
    
    
    (0.06
    )Diluted earnings per share
    
    $
    (0.03
    )
    
    $
    
    
    
    $
    (0.03
    )Basic earnings (loss) per share:Earnings from continuing operations
    
    $
    0.03
    
    
    $
    
    
    
    $
    0.03Loss from discontinued operations
    
    
    (0.06
    )
    
    
    
    
    
    
    (0.06
    )Basic earnings per share
    
    $
    (0.03
    )
    
    $
    
    
    
    $
    (0.03
    )
 9




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##### Table of Contents



Condensed Consolidated Statements of EarningsAs previously(in millions, except per share data)
    
    Reported
    
    
    Adjustments
    
    
    As restatedThirty-nine weeks ended October 30, 2004Cost of sales
    
    $
    1,411.9
    
    
    $
    
    
    
    $
    1,411.9Operating profit from continuing operations
    
    
    74.2
    
    
    
    
    
    
    
    74.2Earnings from continuing operations before income
taxes and minority interest
    
    
    61.0
    
    
    
    
    
    
    
    61.0Provision for income taxes
    
    
    15.0
    
    
    
    0.1
    
    
    
    15.1Earnings from continuing operations before minority interest
    
    
    46.0
    
    
    
    (0.1
    )
    
    
    45.9Minority interest, net of income taxes
    
    
    4.2
    
    
    
    0.1
    
    
    
    4.3Earnings from continuing operations
    
    
    50.2
    
    
    
    
    
    
    
    50.2Loss from discontinued operations, net of income taxes and
minority interest
    
    
    (26.2
    )
    
    
    0.5
    
    
    
    (25.7
    )Net earnings
    
    $
    24.0
    
    
    $
    0.5
    
    
    $
    24.5Diluted earnings (loss) per share:Earnings from continuing operations
    
    $
    0.74
    
    
    $
    
    
    
    $
    0.74Loss from discontinued operations
    
    
    (0.39
    )
    
    
    0.01
    
    
    
    (0.38
    )Diluted earnings per share
    
    $
    0.35
    
    
    $
    0.01
    
    
    $
    0.36Basic earnings (loss) per share:Earnings from continuing operations
    
    $
    0.74
    
    
    $
    
    
    
    $
    0.74Loss from discontinued operations
    
    
    (0.39
    )
    
    
    0.01
    
    
    
    (0.38
    )Basic earnings per share
    
    $
    0.35
    
    
    $
    0.01
    
    
    $
    0.36
 Condensed Consolidated Statements of EarningsAs previously(in millions, except per share data)
    
    Reported
    
    
    Adjustments
    
    
    As restatedThirty- nine weeks ended November 1, 2003Cost of sales
    
    $
    1,460.3
    
    
    $
    
    
    
    $
    1,460.3Operating profit from continuing operations
    
    
    53.0
    
    
    
    
    
    
    
    53.0Earnings from continuing operations before income
taxes and minority interest
    
    
    40.7
    
    
    
    
    
    
    
    40.7Provision for income taxes
    
    
    14.1
    
    
    
    
    
    
    
    14.1Earnings from continuing operations before minority interest
    
    
    26.6
    
    
    
    
    
    
    
    26.6Minority interest, net of income taxes
    
    
    2.4
    
    
    
    
    
    
    
    2.4Earnings from continuing operations
    
    
    29.0
    
    
    
    
    
    
    
    29.0Loss from discontinued operations, net of income taxes and
minority interest
    
    
    (11.9
    )
    
    
    
    
    
    
    (11.9
    )Net earnings
    
    $
    17.1
    
    
    $
    
    
    
    $
    17.1Diluted earnings (loss) per share:Earnings from continuing operations
    
    $
    0.43
    
    
    $
    
    
    
    $
    0.43Loss from discontinued operations
    
    
    (0.18
    )
    
    
    
    
    
    
    (0.18
    )Diluted earnings per share
    
    $
    0.25
    
    
    $
    
    
    
    $
    0.25Basic earnings (loss) per share:Earnings from continuing operations
    
    $
    0.43
    
    
    $
    
    
    
    $
    0.43Loss from discontinued operations
    
    
    (0.18
    )
    
    
    
    
    
    
    (0.18
    )Basic earnings per share
    
    $
    0.25
    
    
    $
    
    
    
    $
    0.25
 10




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##### Table of Contents



Condensed Consolidated Balance SheetsAs previouslyOctober 30, 2004 (1)
    
    Reported
    
    
    Adjustments
    
    
    As restatedProperty and equipment, net
    
    $
    404.1
    
    
    $
    18.4
    
    
    $
    422.5Deferred income taxes (asset)
    
    
    26.4
    
    
    
    8.8
    
    
    
    35.2Total assets
    
    $
    1,209.8
    
    
    $
    27.2
    
    
    $
    1,237.0Other liabilities
    
    $
    57.3
    
    
    $
    30.1
    
    
    $
    87.4Non-current liabilities of discontinued operations
    
    
    8.4
    
    
    
    0.1
    
    
    
    8.5Minority interest
    
    
    7.8
    
    
    
    (0.3
    )
    
    
    7.5Total shareowners equity
    
    
    635.7
    
    
    
    (2.7
    )
    
    
    633.0Total liabilities and shareowners equity
    
    $
    1,209.8
    
    
    $
    27.2
    
    
    $
    1,237.0November 1, 2003 (2)Property and equipment, net
    
    $
    401.3
    
    
    $
    14.0
    
    
    $
    415.3Deferred income taxes (asset)
    
    
    17.5
    
    
    
    8.8
    
    
    
    26.3Non-current assets of discontinued operations
    
    
    30.5
    
    
    
    (0.3
    )
    
    
    30.2Total assets
    
    $
    1,194.1
    
    
    $
    22.5
    
    
    $
    1,216.6Other liabilities
    
    $
    55.7
    
    
    $
    25.5
    
    
    $
    81.2Non-current liabilities of discontinued operations
    
    
    1.9
    
    
    
    0.3
    
    
    
    2.2Minority interest
    
    
    16.4
    
    
    
    (0.2
    )
    
    
    16.2Total shareowners equity
    
    
    620.7
    
    
    
    (3.1
    )
    
    
    617.6Total liabilities and shareowners equity
    
    $
    1,194.1
    
    
    $
    22.5
    
    
    $
    1,216.6January 31, 2004 (3)Property and equipment, net
    
    $
    409.0
    
    
    $
    14.5
    
    
    $
    423.5Deferred income taxes (asset)
    
    
    25.4
    
    
    
    8.8
    
    
    
    34.2Non-current assets of discontinued operations
    
    
    27.9
    
    
    
    (0.3
    )
    
    
    27.6Total assets
    
    $
    1,181.3
    
    
    $
    23.0
    
    
    $
    1,204.3Other liabilities
    
    $
    59.5
    
    
    $
    26.1
    
    
    $
    85.6Non-current liabilities of discontinued operations
    
    
    1.8
    
    
    
    0.3
    
    
    
    2.1Minority interest
    
    
    16.0
    
    
    
    (0.3
    )
    
    
    15.7Total shareowners equity
    
    
    607.5
    
    
    
    (3.1
    )
    
    
    604.4Total liabilities and shareowners equity
    
    $
    1,181.3
    
    
    $
    23.0
    
    
    $
    1,204.3
 Condensed Consolidated Statements of Cash FlowsAs previouslyThirty-nine weeks ended October 30, 2004
    
    Reported
    
    
    Adjustments
    
    
    As restatedCash flow provided by operating activities
    
    $
    152.0
    
    
    $
    6.2
    
    
    $
    158.2Cash flow used in investing activities
    
    
    (87.2
    )
    
    
    (6.2
    )
    
    
    (81.0
    )Thirty-nine weeks ended November 1, 2003Cash flow provided by operating activities
    
    $
    172.6
    
    
    $
    4.2
    
    
    $
    176.8Cash flow used in investing activities
    
    
    (88.3
    )
    
    
    (4.2
    )
    
    
    (92.5
    )
   (1)
    
    Previously reported amounts include reclassifications to decrease cash by $9.0 million, and
increase marketable securities, other current assets and accrued expenses by $9.0 million,
$6.8 million and $6.8 million, respectively, as of October 30, 2004.(2)
    
    Previously reported amounts include reclassifications to decrease cash and increase
marketable securities by $10.0 million, respectively, as of November 1, 2003.(3)
    
    Previously reported amounts include reclassifications to decrease cash by $10.0 million, and
increase marketable securities, other current assets, other assets and accrued expenses by
$10.0 million, $2.7 million, $1.7 million and $4.4 million, respectively, as of January 31,
2004. 11




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##### Table of Contents



NOTE 4. STOCK-BASED COMPENSATION. The Company follows the disclosure provisions of
Statement of Financial Accounting Standards (SFAS) No. 148, Accounting for Stock-Based
Compensation  Transition and Disclosure, an amendment of FASB Statement No. 123. The Statement
requires prominent disclosures in both annual and interim financial statements regarding the method
of accounting for stock-based employee compensation and the effect of the method used on reported
results. The Company accounts for stock compensation awards under the intrinsic value method of
Accounting Principles Board (APB) Opinion No. 25. APB Opinion No. 25 requires compensation cost
to be recognized based on the excess, if any, between the quoted market price of the stock at the
date of grant and the amount an employee must pay to acquire the stock. All options awarded under
all of the Companys plans are granted with an exercise price equal to the fair market value on the
date of the grant. SFAS 123, Accounting for Stock-Based Compensation, provides an alternative method of accounting
for stock-based compensation, which establishes a fair value based method of accounting for
employee stock options or similar equity instruments. The Company uses the Black-Scholes option
pricing model to estimate the grant date fair value of its 1996 and later option grants. The fair
value is recognized over the option vesting period. The following table presents the effect on net
earnings (loss) and earnings (loss) per share had the Company adopted the fair value based method
of accounting for stock-based compensation under SFAS No. 123, Accounting for Stock-Based
Compensation. (dollars in millions, except per share amounts) 13 Weeks Ended
    
    
    39 Weeks EndedOctober 30, 2004
    
    
    November 1, 2003
    
    
    October 30, 2004
    
    
    November 1, 2003Net earnings (loss):As reported
    
    $
    6.6
    
    
    $
    (2.2
    )
    
    $
    24.5
    
    
    $
    17.1Add: Total stock-based employee compensation expense included in
net earnings as reported, net of related income taxes
    
    
    0.2
    
    
    
    0.2
    
    
    
    0.8
    
    
    
    0.4Less: Total stock-based employee compensation expense determined
under fair value based method for all awards, net of related
income taxes
    
    
    0.8
    
    
    
    1.3
    
    
    
    2.7
    
    
    
    4.1Pro forma
    
    $
    6.0
    
    
    $
    (3.3
    )
    
    $
    22.6
    
    
    $
    13.4Diluted earnings (loss) per share:As reported
    
    $
    0.10
    
    
    $
    (0.03
    )
    
    $
    0.36
    
    
    $
    0.25Pro forma
    
    $
    0.09
    
    
    $
    (0.05
    )
    
    $
    0.33
    
    
    $
    0.19Basic earnings (loss) per share:As reported
    
    $
    0.10
    
    
    $
    (0.03
    )
    
    $
    0.36
    
    
    $
    0.25Pro forma
    
    $
    0.09
    
    
    $
    (0.05
    )
    
    $
    0.33
    
    
    $
    0.19
 NOTE 5. INTANGIBLES. The Company follows SFAS No. 142, Goodwill and Other Intangible Assets.
SFAS No. 142 requires that an intangible asset that is acquired other than by business combination
shall be initially recognized and measured based on its fair value. This Statement also provides
that goodwill and indefinitely-lived intangible assets should not be amortized, but shall be tested
for impairment annually, or more frequently if circumstances indicate potential impairment, through
a comparison of fair value to its carrying amount. Intangible assets with finite lives will
continue to be amortized over their useful lives. No impairment loss was recorded during the first
nine months of 2004 related to goodwill; however, as part of the $44.0 million restructuring charge
discussed in Footnote 11, the Company reduced the carrying value of the favorable leases associated
with the Payless stores to be closed by $1.9 million during the quarter ended July 31, 2004. Favorable leases subject to amortization pursuant to SFAS 142 are as follows: (dollars in millions)
    
    October 30, 2004
    
    
    November 1, 2003
    
    
    January 31, 2004Gross carrying amount
    
    $
    80.4
    
    
    $
    87.5
    
    
    $
    87.0Less: accumulated amortization
    
    
    57.6
    
    
    
    57.4
    
    
    
    58.2Carrying amount, end of period
    
    $
    22.7
    
    
    $
    30.1
    
    
    $
    28.8
 Amortization expense on favorable leases was as follows: (dollars in millions) 13 Weeks Ended
    
    
    39 Weeks EndedOctober 30, 2004
    
    
    November 1, 2003
    
    
    October 30, 2004
    
    
    November 1, 2003Amortization
expense on
favorable leases
    
    $
    1.0
    
    
    $
    1.2
    
    
    $
    3.1
    
    
    $
    3.6
 12




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##### Table of Contents



The Company expects annual amortization expense for favorable leases for the next five years
to be as follows (dollars in millions): Year
    
    AmountRemainder of 2004
    
    $1.02005
    
    3.82006
    
    3.42007
    
    2.92008
    
    2.6
 NOTE 6. LONG-TERM DEBT AND LINE OF CREDIT. In January 2004, the Company replaced its $150
million senior secured revolving credit facility (the Old Facility) with a new $200 million
senior secured revolving credit facility (the New Facility). Funds borrowed under the New
Facility are secured by domestic merchandise inventory and receivables. The Company may borrow up
to $200 million through the New Facility, subject to a sufficient borrowing base. The New Facility
bears interest at the London Inter-bank Offered Rate (LIBOR), plus a variable margin of 1.25
percent to 2.0 percent, or the base rate as defined in the agreement governing the New Facility.
The margin on the New Facility varies based upon certain borrowing levels specified in the
agreement governing the New Facility. The variable interest rate including the applicable variable
margin at October 30, 2004, was 3.4 percent. A monthly commitment fee of 0.30 percent per annum is
payable on the unborrowed balance. The New Facility is scheduled to expire in January 2008, with a
one-year extension to January 2009 at the Companys option. No amounts were drawn on the New
Facility as of October 30, 2004. Based on its borrowing base, the Company may borrow up to $200.0
million under its New Facility, less $17.4 million in outstanding letters of credit as of October 30, 2004. In July 2003, the Company sold $200.0 million of 8.25% Senior Subordinated Notes (the Notes) for
$196.7 million, due 2013. The discount of $3.3 million is being amortized to interest expense over
the life of the Notes. The Notes are guaranteed by all of the Companys domestic subsidiaries.
Interest on the Notes is payable semi-annually, beginning February 1, 2004. The Notes contain
various covenants including those that may limit the Companys ability to pay dividends, repurchase
stock, accelerate the retirement of other subordinated debt or make certain investments. As of
October 30, 2004, the Company was in compliance with all covenants. The proceeds of the Notes and
additional general funds were used to repay the entire $200.0 million term loan portion of the
Companys Old Facility. As of October 30, 2004, the fair value of the Notes was $195.0 million
based on recent trading activity of the Notes. On or after August 1, 2008, the Company may, on any
one or more occasions, redeem all or a part of the Notes at the redemption prices set forth below,
plus accrued and unpaid interest, if any, on the Notes redeemed, to the applicable redemption date: Year
    
    Percentage2008
    
    
    104.125
    %2009
    
    
    102.750
    %2010
    
    
    101.375
    %2011 and thereafter
    
    
    100.000
    %
 NOTE 7. PENSION PLAN. The Company has a nonqualified, supplementary defined benefit plan for
certain management employees. The plan is an unfunded, noncontributory plan and provides for
benefits based upon years of service and cash compensation during employment. Pension expense is based on information provided to an outside actuarial firm that uses assumptions
to estimate the total benefits ultimately payable to management employees and allocates this cost
to service periods. The actuarial assumptions used to calculate pension expense are reviewed
annually for reasonableness. 13




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##### Table of Contents



The components of net periodic benefit costs for the plan were: (dollars in millions) 13 Weeks Ended
    
    
    39 Weeks EndedOctober 30, 2004
    
    
    November 1, 2003
    
    
    October 30, 2004
    
    
    November 1, 2003Components of pension expense:Service cost
    
    $
    0.3
    
    
    $
    0.3
    
    
    $
    0.7
    
    
    $
    0.7Interest cost
    
    
    0.4
    
    
    
    0.3
    
    
    
    1.0
    
    
    
    0.9Amortization of prior service cost
    
    
    
    
    
    
    0.1
    
    
    
    0.2
    
    
    
    0.1Amortization of actuarial loss
    
    
    
    
    
    
    
    
    
    
    0.2
    
    
    
    0.2Total
    
    $
    0.7
    
    
    $
    0.7
    
    
    $
    2.1
    
    
    $
    1.9
 NOTE 8. INCOME TAXES. The Companys effective income tax rate was 28.5 percent in the third
quarter and 24.8 percent for the first nine months of 2004. In order to reflect the estimated
effective tax rate for the year, a 28.5 percent effective tax rate for the third quarter and a 24.8
percent effective tax rate for the first nine months of the year were utilized to record income
taxes. The Company anticipates a tax benefit at the rate of 24.8 percent for the full fiscal year
2004. The Companys effective income tax rate was 21.4 percent in the third quarter and 34.6 for
the first nine months of 2003. NOTE 9. COMPREHENSIVE INCOME (LOSS). The following table shows the computation of comprehensive
income (loss): (dollars in millions) 13 Weeks Ended
    
    
    39 Weeks EndedOctober 30, 2004
    
    
    November 1, 2003
    
    
    October 30, 2004
    
    
    November 1, 2003Net Earnings (Loss)
    
    $
    6.6
    
    
    $
    (2.2
    )
    
    $
    24.5
    
    
    $
    17.1Other Comprehensive Gain (Loss):Change in fair value of derivatives
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.1Derivative losses translated into
interest expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1.7Foreign currency translation adjustments
    
    
    5.2
    
    
    
    (0.8
    )
    
    
    4.4
    
    
    
    3.4Total other comprehensive gain (loss)
    
    
    5.2
    
    
    
    (0.8
    )
    
    
    4.4
    
    
    
    5.2Total Comprehensive Income (Loss)
    
    $
    11.8
    
    
    $
    (3.0
    )
    
    $
    28.9
    
    
    $
    22.3
 The changes in the Companys cumulative foreign currency translation adjustment were
not adjusted for income taxes, as they relate to specific indefinite investments in foreign
subsidiaries. NOTE 10. 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 and unearned restricted stock. The
calculation of diluted earnings (loss) per share for the thirteen week and thirty-nine-week periods
ended October 30, 2004, and November 1, 2003, excludes the impact of 7,898,570 and 7,895,231 stock
options and 8,048,796 and 8,047,453 stock options, respectively, because to include them would be
anti-dilutive. 14




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##### Table of Contents



The following table presents a reconciliation of the numerators and denominators of basic and
diluted earnings per share from continuing operations: (dollars and shares in millions, except per share ) 13 Weeks Ended
    
    
    39 Weeks EndedOctober 30, 2004
    
    
    November 1, 2003
    
    
    October 30, 2004
    
    
    November 1, 2003Diluted Computation:Net earnings from continuing operations
    
    $
    12.5
    
    
    $
    2.2
    
    
    $
    50.2
    
    
    $
    29.0Weighted average common shares outstanding
    
    
    68.0
    
    
    
    68.1
    
    
    
    68.0
    
    
    
    68.0Net effect of dilutive stock options and unearned
restricted stock based on the treasury stock method
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.1Outstanding shares for diluted earnings per share
    
    
    68.0
    
    
    
    68.1
    
    
    
    68.0
    
    
    
    68.1Diluted earnings per share from continuing operations
    
    $
    0.19
    
    
    $
    0.03
    
    
    $
    0.74
    
    
    $
    0.43Basic Computation:Net earnings from continuing operations
    
    $
    12.5
    
    
    $
    2.2
    
    
    $
    50.2
    
    
    $
    29.0Weighted average common shares outstanding
    
    
    68.0
    
    
    
    68.1
    
    
    
    68.0
    
    
    
    68.0Basic earnings per share from continuing operations
    
    $
    0.19
    
    
    $
    0.03
    
    
    $
    0.74
    
    
    $
    0.43
 NOTE 11. RESTRUCTURING CHARGES. During the second quarter of 2004, the Company initiated a
restructuring plan to build long-term shareowner value. Components of the restructuring plan
include:  
    Exiting all 181 Parade stores, and related operations;
    Exiting all 32 Payless ShoeSource stores in Chile and Peru;
    The closing of approximately 260 Payless ShoeSource stores. These store closings differ
from closings in the normal course of business in that they have longer remaining lease
terms;
    The reduction of wholesale businesses that provide no significant growth opportunity, and;
    A comprehensive review of the Companys expense structure and appropriate reductions to improve profitability. As part of the restructuring, during the second quarter of 2004 the Company recorded a non-cash
impairment charge of $36.7 million ($13.7 million relating to continuing operations and $23.0
million relating to discontinued operations) in connection with a reassessment of the carrying
value of the long-lived assets associated with the 32 stores in Chile and Peru, the 181 Parade
stores and the approximately 260 Payless stores to be closed. The impairment charge includes a $1.9
million reduction in the carrying value of favorable leases. During the third quarter of 2004, the Company recorded $7.3 million in restructuring charges
primarily related to severance costs, contract termination costs and the reduction in carrying
value of assets. The $7.3 million charge was comprised of $3.9 million related to continuing
operations and $3.4 million related to discontinued operations. The Company eliminated
approximately 200 management and administrative positions, closed 65 stores and began to liquidate
inventory in its Payless and Parade stores identified for closing. In conjunction with the
liquidation, the Company recorded $0.4 million in inventory markdowns to reflect inventory at lower
of cost or market. Such markdowns are reflected in cost of sales in the condensed consolidated
statement of earnings (loss). 15




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##### Table of Contents



Third-party liquidation sales are recognized at the time the sale is made to the customer, are
calculated based upon contractually guaranteed amounts pursuant to our agreements with liquidators
and are net of associated fees. On October 27, 2004, the Company entered into an agreement to
transfer ownership of its Peruvian entity and related operations and liabilities to Orion
Investment Capital Inc. (Orion), an entity comprised of some owners of the Companys South
American joint venture partner, effective November 15, 2004. In conjunction with this transaction,
the Company recorded approximately $1 million of reductions in the carrying value of assets during
the third quarter. The Company estimates that the total charge related to the restructuring will be in the range of
$77 to $90 million, consisting of contract termination costs of $31 to $44 million, asset
impairments and net disposal losses of approximately $36 million, employee severance costs of
approximately $9 million and other costs of approximately $1 million. The cash component of the
total expected charge of $77 to $90 million is expected to be approximately $40 to $53 million. The
Company is in the process of negotiating contract terminations, and the ultimate cost related to
these terminations will depend upon the results of the negotiations. The Company expects to incur
substantially all such charges in 2004. The significant components of the restructuring charge incurred to date are summarized as follows: (dollars in millions) 13 Weeks Ended
    
    
    39 Weeks EndedOctober 30, 2004
    
    
    October 30, 2004Asset impairments and net disposal losses
    
    $
    0.1
    
    
    $
    36.8Employee severance costs
    
    
    5.3
    
    
    
    5.3Contract termination costs
    
    
    1.1
    
    
    
    1.1Other exit costs
    
    
    0.8
    
    
    
    0.8Total
    
    $
    7.3
    
    
    $
    44.0
 The status of the restructuring-related liabilities, which are included in accrued expenses
($3.5 million) and current liabilities of discontinued operations ($0.8 million) in the condensed
consolidated balances sheets, are summarized below: (dollars in millions) 13 Weeks Ended October 30, 2004Accrual Balance as ofCash Charges
    
    
    Cash Payments
    
    
    October 30, 2004Employee severance costs
    
    $
    5.4
    
    
    $
    1.7
    
    
    $
    3.7Contract termination costs
    
    
    1.4
    
    
    
    0.8
    
    
    
    0.6Other exit costs
    
    
    0.8
    
    
    
    0.8
    
    
    
    Total
    
    $
    7.6
    
    
    $
    3.3
    
    
    $
    4.3
 In accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets, the fair value of the long-lived assets evaluated for recoverability was determined using
the present value of estimated future cash flows. In accordance with SFAS No. 146, Accounting for
Costs Associated with Exit or Disposal Activities, employee severance, contract termination and
other exit costs are recorded at their fair value when they are incurred. The Payless and Parade stores located in Chile, Peru, Puerto Rico and Canada are components of the
Payless International segment. The Parade and Payless stores located in the United States are
components of the Payless Domestic segment. The Company estimates the total restructuring charge
related to the Payless Domestic segment to be between $64 and $73 million, and the total
restructuring 16




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##### Table of Contents



charge related to the Payless International segment to be between $13 million and $17 million. A
summary of the restructuring charge by segment is as follows: (dollars in millions) 13 Weeks Ended
    
    
    39 Weeks EndedOctober 30, 2004
    
    
    October 30, 2004Payless Domestic
    
    $
    4.6
    
    
    $
    32.1Payless International
    
    
    2.7
    
    
    
    11.9Total
    
    $
    7.3
    
    
    $
    44.0
 NOTE 12. DISCONTINUED OPERATIONS. Due to the updating of this filing for the restatement
described in Note 3, the condensed consolidated financial statements have been updated to include
discontinued operations presentation in order to conform to the current presentation of the
Companys operations. In accordance with SFAS No. 144, the results for the thirteen and thirty-nine weeks ended October
30, 2004 and November 1, 2003 have been reclassified to show the results of operations for Parade,
Peru, Chile and 26 Payless closed stores as discontinued operations. The following is a summary of
these results by segment: Thirteen Weeks Ended October 30, 2004 Payless
    
    
    Payless
    
    
    Payless(dollars in millions)
    
    Domestic
    
    
    International
    
    
    ConsolidatedNet sales
    
    $
    23.7
    
    
    $
    2.1
    
    
    $
    25.8Loss from discontinued operations before income taxes and minority interest
    
    
    (5.4
    )
    
    
    (1.1
    )
    
    
    (6.5
    )Benefit for income taxes
    
    
    (2.1
    )
    
    
    
    
    
    
    (2.1
    )Loss from discontinued operations before minority interest
    
    
    (3.3
    )
    
    
    (1.1
    )
    
    
    (4.4
    )Minority interest, net of income taxes
    
    
    
    
    
    
    0.5
    
    
    
    0.5Loss on disposal of discontinued operations, net of income taxes
of $0.8 and $0.0, respectively, and minority interest
of $0.0 and $0.6, respectively
    
    
    (1.1
    )
    
    
    (0.9
    )
    
    
    (2.0
    )Loss from discontinued operations, net of income taxes and minority interest
    
    $
    (4.4
    )
    
    $
    (1.5
    )
    
    $
    (5.9
    )
 Thirteen Weeks Ended November 1, 2003 Payless
    
    
    Payless
    
    
    Payless(dollars in millions)
    
    Domestic
    
    
    International
    
    
    ConsolidatedNet sales
    
    $
    27.4
    
    
    $
    2.9
    
    
    $
    30.3Loss from discontinued operations before income taxes and minority interest
    
    
    (5.8
    )
    
    
    (1.2
    )
    
    
    (7.0
    )Benefit for income taxes
    
    
    (2.1
    )
    
    
    (0.2
    )
    
    
    (2.3
    )Loss from discontinued operations before minority interest
    
    
    (3.7
    )
    
    
    (1.0
    )
    
    
    (4.7
    )Minority interest, net of income taxes
    
    
    
    
    
    
    0.3
    
    
    
    0.3Loss from discontinued operations, net of income taxes and minority interest
    
    $
    (3.7
    )
    
    $
    (0.7
    )
    
    $
    (4.4
    )
 17




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##### Table of Contents



Thirty-Nine Weeks Ended October 30, 2004 Payless
    
    
    Payless
    
    
    Payless(dollars in millions)
    
    Domestic
    
    
    International
    
    
    ConsolidatedNet sales
    
    $
    80.6
    
    
    $
    7.0
    
    
    $
    87.6Loss from discontinued operations before income taxes and minority interest
    
    
    (11.0
    )
    
    
    (5.0
    )
    
    
    (16.0
    )(Benefit) provision for income taxes
    
    
    (4.5
    )
    
    
    0.3
    
    
    
    (4.2
    )Loss from discontinued operations before minority interest
    
    
    (6.5
    )
    
    
    (5.3
    )
    
    
    (11.8
    )Minority interest, net of income taxes
    
    
    
    
    
    
    2.1
    
    
    
    2.1Loss on disposal of discontinued operations, net of income taxes
of $6.4 and $0.0, respectively, and minority interest
of $0.0 and $4.0, respectively
    
    
    (10.0
    )
    
    
    (6.0
    )
    
    
    (16.0
    )Loss from discontinued operations, net of income taxes and minority interest
    
    $
    (16.5
    )
    
    $
    (9.2
    )
    
    $
    (25.7
    )
 Thirty-Nine Weeks Ended November 1, 2003 Payless
    
    
    Payless
    
    
    Payless(dollars in millions)
    
    Domestic
    
    
    International
    
    
    ConsolidatedNet sales
    
    $
    85.8
    
    
    $
    8.2
    
    
    $
    94.0Loss from discontinued operations before income taxes and minority interest
    
    
    (14.7
    )
    
    
    (5.1
    )
    
    
    (19.8
    )Benefit for income taxes
    
    
    (5.3
    )
    
    
    (1.0
    )
    
    
    (6.3
    )Loss from discontinued operations before minority interest
    
    
    (9.4
    )
    
    
    (4.1
    )
    
    
    (13.5
    )Minority interest, net of income taxes
    
    
    
    
    
    
    1.6
    
    
    
    1.6Loss from discontinued operations, net of income taxes and minority interest
    
    $
    (9.4
    )
    
    $
    (2.5
    )
    
    $
    (11.9
    )
 Additionally, the Company has made certain reclassifications to its consolidated balance sheets to reflect the assets of Parade, Peru, Chile and the 26
Payless closed stores as discontinued operations. As of October 30, 2004, November 1, 2003 and January 31, 2004, the current and non-current assets and
liabilities of discontinued operations by financial reporting segment were as follows: 18




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##### Table of Contents



October 30, 2004 Payless
    
    
    Payless
    
    
    Payless(dollars in millions)
    
    Domestic
    
    
    International
    
    
    ConsolidatedAssetsCurrent assets:Cash and cash equivalents
    
    $
    0.2
    
    
    $
    0.7
    
    
    $
    0.9Inventories
    
    
    13.0
    
    
    
    1.2
    
    
    
    14.2Current deferred income taxes
    
    $
    0.2
    
    
    $
    
    
    
    $
    0.2Other current assets
    
    
    2.4
    
    
    
    0.2
    
    
    
    2.6Total current assets of discontinued operations
    
    $
    15.8
    
    
    $
    2.1
    
    
    $
    17.9Property and equipment, net
    
    $
    1.1
    
    
    $
    
    
    
    $
    1.1Favorable leases, net
    
    
    
    
    
    
    
    
    
    
    Deferred income taxes
    
    
    6.5
    
    
    
    
    
    
    
    6.5Other assets
    
    $
    0.1
    
    
    $
    0.4
    
    
    $
    0.5Total non-current assets of discontinued operations
    
    $
    7.7
    
    
    $
    0.4
    
    
    $
    8.1LiabilitiesCurrent liabilities:Accounts payable
    
    $
    4.4
    
    
    $
    0.3
    
    
    $
    4.7Accrued expenses
    
    
    0.9
    
    
    
    0.3
    
    
    
    1.2Total current liabilities of discontinued operations
    
    $
    5.3
    
    
    $
    0.6
    
    
    $
    5.9Other liabilities
    
    $
    8.4
    
    
    $
    0.1
    
    
    $
    8.5Total non-current liabilities of discontinued operations
    
    $
    8.4
    
    
    $
    0.1
    
    
    $
    8.5
 November 1, 2003 Payless
    
    
    Payless
    
    
    Payless(dollars in millions)
    
    Domestic
    
    
    International
    
    
    ConsolidatedAssetsCurrent assets:Cash and cash equivalents
    
    $
    0.2
    
    
    $
    1.0
    
    
    $
    1.2Inventories
    
    
    15.8
    
    
    
    3.1
    
    
    
    18.9Current deferred income taxes
    
    
    0.2
    
    
    
    0.1
    
    
    
    0.3Other current assets
    
    
    2.7
    
    
    
    2.1
    
    
    
    4.8Total current assets of discontinued operations
    
    $
    18.9
    
    
    $
    6.3
    
    
    $
    25.2Property and equipment, net
    
    $
    14.9
    
    
    $
    6.9
    
    
    $
    21.8Favorable leases, net
    
    
    0.5
    
    
    
    
    
    
    
    0.5Deferred income taxes
    
    
    2.6
    
    
    
    3.1
    
    
    
    5.7Other assets
    
    
    0.1
    
    
    
    2.1
    
    
    
    2.2Total non-current assets of discontinued operations
    
    $
    18.1
    
    
    $
    12.1
    
    
    $
    30.2LiabilitiesCurrent liabilities:Accounts payable
    
    $
    3.0
    
    
    $
    0.3
    
    
    $
    3.3Accrued expenses
    
    
    1.5
    
    
    
    0.3
    
    
    
    1.8Total current liabilities of discontinued operations
    
    $
    4.5
    
    
    $
    0.6
    
    
    $
    5.1Other liabilities
    
    $
    2.1
    
    
    $
    0.1
    
    
    $
    2.2Total non-current liabilities of discontinued operations
    
    $
    2.1
    
    
    $
    0.1
    
    
    $
    2.2
 19




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##### Table of Contents



January 31, 2004 Payless
    
    
    Payless
    
    
    Payless(dollars in millions)
    
    Domestic
    
    
    International
    
    
    ConsolidatedAssetsCurrent assets:Cash and cash equivalents
    
    $
    0.1
    
    
    $
    2.1
    
    
    $
    2.2Inventories
    
    
    14.4
    
    
    
    2.8
    
    
    
    17.2Current deferred income taxes
    
    
    0.2
    
    
    
    
    
    
    
    0.2Other current assets
    
    
    2.4
    
    
    
    2.2
    
    
    
    4.6Total current assets of discontinued operations
    
    $
    17.1
    
    
    $
    7.1
    
    
    $
    24.2Property and equipment, net
    
    $
    15.3
    
    
    $
    7.1
    
    
    $
    22.4Favorable leases, net
    
    
    0.4
    
    
    
    
    
    
    
    0.4Deferred income taxes
    
    
    2.6
    
    
    
    
    
    
    
    2.6Other assets
    
    
    0.1
    
    
    
    2.1
    
    
    
    2.2Total non-current assets of discontinued operations
    
    $
    18.4
    
    
    $
    9.2
    
    
    $
    27.6LiabilitiesCurrent liabilities:Accounts payable
    
    $
    2.7
    
    
    $
    0.7
    
    
    $
    3.4Accrued expenses
    
    
    2.0
    
    
    
    0.4
    
    
    
    2.4Total current liabilities of discontinued operations
    
    $
    4.7
    
    
    $
    1.1
    
    
    $
    5.8Other liabilities
    
    $
    2.0
    
    
    $
    0.1
    
    
    $
    2.1Total non-current liabilities of discontinued operations
    
    $
    2.0
    
    
    $
    0.1
    
    
    $
    2.1
 NOTE 13. SEGMENT REPORTING. The Company and its subsidiaries are principally engaged in the
operation of retail locations offering family footwear and accessories. The Company operates its
business in two reportable business segments: Payless Domestic and Payless International. These
segments have been determined based on internal management reporting and management
responsibilities. The Payless Domestic segment includes retail operations in the United States,
Guam and Saipan and sourcing operations. The Payless International segment includes retail
operations in Canada, the South American Region, the Central American Region, Puerto Rico, the U.S.
Virgin Islands and operations in Japan. The Companys operations in its Central American Region,
its South American Region and Japan are operated as joint ventures in which the Company maintains a
60-percent ownership interest. Minority interest represents the Companys joint venture partners
share of net earnings or losses on applicable international operations. Certain management costs
for services performed by Payless Domestic and certain royalty fees and sourcing fees charged by
Payless Domestic are allocated to the Payless International segment. These total costs and fees
amounted to $5.9 million during the third quarter of 2004 and $4.2 million during the same period
in 2003. For the first nine months of 2004, these total costs and fees amounted to $15.3 million,
compared with $12.4 million for the first nine months of 2003. The Companys reporting period for
its operations in the South American Region, the Central American Region and Japan is a December 31
year-end. The effect of this one-month lag on the Companys financial position and results of
operations is not significant. Information on the segments is as follows: (dollars in millions) Payless Domestic
    
    
    Payless International
    
    
    Payless ConsolidatedThirteen weeks ended October 30, 2004Revenues from external customers
    
    $
    579.2
    
    
    $
    82.2
    
    
    $
    661.4Operating profit from continuing operations
    
    
    16.5
    
    
    
    5.0
    
    
    
    21.5Thirty-nine weeks ended October 30, 2004Revenues from external customers
    
    $
    1,811.2
    
    
    $
    238.1
    
    
    $
    2,049.3Operating profit from continuing operations
    
    
    62.0
    
    
    
    12.2
    
    
    
    74.2Total assets
    
    
    1,056.0
    
    
    
    181.0
    
    
    
    1,237.0Thirteen weeks ended November 1, 2003Revenues from external customers
    
    $
    604.9
    
    
    $
    74.5
    
    
    $
    679.4Operating profit (loss) from continuing
operations
    
    
    7.0
    
    
    
    (0.7
    )
    
    
    6.3Thirty-nine weeks ended November 1, 2003Revenues from external customers
    
    $
    1,827.6
    
    
    $
    217.1
    
    
    $
    2,044.7Operating profit (loss) from continuing
operations
    
    
    53.9
    
    
    
    (0.9
    )
    
    
    53.0Total assets
    
    
    1,013.1
    
    
    
    203.5
    
    
    
    1,216.6
 Total assets for the Payless Domestic segment include $5.9 million in goodwill as of October
30, 2004, and November 1, 2003. 20




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##### Table of Contents



NOTE 14. CONTINGENCIES. On or about December 20, 2001, a First Amended Complaint was filed against
the Company in the U.S. District Court for the District of Oregon, captioned Adidas America, Inc.
and Adidas-Salomon AG v. Payless ShoeSource, Inc. The First Amended Complaint seeks injunctive
relief and unspecified monetary damages for trademark and trade dress infringement, unfair
competition, deceptive trade practices and breach of contract. The Company believes it has
meritorious defenses to claims asserted in the lawsuit and has filed an answer and a motion for
summary judgment which the court granted in part. An estimate of the possible loss, if any, or the
range of loss cannot be made. On or about January 20, 2000, a complaint was filed against the Company in the U.S. District Court
for the District of New Hampshire, captioned Howard J. Dananberg, D.P.M. v. Payless ShoeSource,
Inc. The Complaint seeks injunctive relief, unspecified treble monetary damages, attorneys fees,
interest and costs for patent infringement. The Company believes it has meritorious defenses to
claims asserted in the lawsuit. An estimate of the possible loss, if any, or the range of loss
cannot be made. NOTE 15. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS. During May 2003, the FASB issued SFAS 150,
Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.
SFAS 150 clarifies the accounting for certain financial instruments with characteristics of both
liabilities and equity and requires that those instruments be classified as liabilities in
statements of financial position. SFAS 150 is effective for financial instruments entered into or
modified after May 31, 2003, and otherwise is effective at the beginning of the first interim
period beginning after June 15, 2003, except that certain provisions have been deferred pursuant to
FASB Staff Position No. FAS 150-3. The application of SFAS 150-3 is not expected to have a material
impact on the Companys consolidated financial statements, and the adoption of SFAS 150 did not
have a material impact on the Companys consolidated financial statements. In December 2003, the FASB issued FASB Interpretation No. 46R, Consolidation of Variable Interest
Entities and Interpretation of ARB No. 51. This interpretation, which replaces FASB Interpretation
No. 46, Consolidation of Variable Interest Entities, clarifies the application of Accounting
Research Bulletin No. 51, Consolidated Financial Statements, to certain entities in which equity
investors do not have the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without additional subordinated
financial support. This interpretation is required in financial statements for periods ending after
March 15, 2004, for those companies that have yet to adopt the provisions of FIN 46. The
application of FASB Interpretation No. 46R did not have a material impact on the Companys
condensed consolidated financial statements. In January 2003, the FASB issued SFAS 132 (revised 2003), Employers Disclosures about Pensions
and Other Postretirement Benefits, which retains all of the disclosures that are required by SFAS
132 and includes several additional disclosures. It also amends APB Opinion 28, Interim Financial
Reporting, to require certain disclosures about pension and other postretirement benefit plans in
interim financial statements. The provisions of SFAS 132 (revised 2003) are effective for fiscal
years ending after June 15, 2004. The interim disclosure provisions are effective for interim
periods beginning after December 15, 2003. The Company adopted the provisions of SFAS 132 (revised
2003) in the first quarter of fiscal year 2004. NOTE 16. SUBSIDIARY GUARANTORS OF SENIOR NOTES  CONDENSED CONSOLIDATING FINANCIAL
INFORMATION. The Company has issued Notes guaranteed by all of its domestic subsidiaries
(the Guarantor Subsidiaries). The Guarantor Subsidiaries are direct or indirect wholly owned
domestic subsidiaries of the Company. The guarantees are full and unconditional, to the extent
allowed by law, and joint and several. The following supplemental financial information sets forth, on a consolidating basis, the
condensed statements of earnings (loss) and cash flows for Payless ShoeSource, Inc., a Delaware
corporation (the Parent Company), for the Guarantor Subsidiaries and for the Companys
non-guarantor subsidiaries (the Non-guarantor Subsidiaries) and the Company for the thirteen-week
and thirty-nine-week periods ended October 30, 2004, and November 1, 2003, and the related
condensed consolidating balanced sheets as of October 30, 2004, November 1, 2003, and January 31,
2004. The intercompany investment for each subsidiary is recorded by its parent in Other Assets. The Non-guarantor Subsidiaries are made up of the Companys retail operations in the Central
American and South American Regions, Canada, Saipan, and Puerto Rico, operations in Japan and the
Companys sourcing organization in Hong Kong, Taiwan, China, Indonesia and Brazil. During 2003,
the Company changed the reporting period for its operations in the Central American and South
American Regions to use a December 31 year-end. Operations in the Central American Region, the
South American Region and Japan are included in our results on a one-month lag relative to results
from other regions. The effect of this one-month lag on our financial position and results of
operations is not significant. 21




---



##### Table of Contents



CONDENSED CONSOLIDATING BALANCE SHEET
(UNAUDITED)
As of October 30, 2004 (Restated) (dollars in millions) Parent
    
    
    Guarantor
    
    
    Non-guarantorCompany
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedASSETSCurrent Assets:Cash and cash equivalents
    
    $
    
    
    
    $
    158.2
    
    
    $
    58.0
    
    
    $
    
    
    
    $
    216.2Marketable securities, available for sale
    
    
    
    
    
    
    9.0
    
    
    
    
    
    
    
    
    
    
    
    9.0Restricted cash
    
    
    
    
    
    
    
    
    
    
    18.5
    
    
    
    
    
    
    
    18.5Inventories
    
    
    
    
    
    
    295.7
    
    
    
    69.2
    
    
    
    (3.2
    )
    
    
    361.7Current deferred income taxes
    
    
    
    
    
    
    26.8
    
    
    
    
    
    
    
    
    
    
    
    26.8Other current assets
    
    
    14.1
    
    
    
    63.4
    
    
    
    40.0
    
    
    
    (50.7
    )
    
    
    66.8Current assets of discontinued operations
    
    
    
    
    
    
    15.6
    
    
    
    2.3
    
    
    
    
    
    
    
    17.9Total current assets
    
    
    14.1
    
    
    
    568.7
    
    
    
    188.0
    
    
    
    (53.9
    )
    
    
    716.9Property and Equipment:Land
    
    
    
    
    
    
    8.0
    
    
    
    
    
    
    
    
    
    
    
    8.0Buildings and leasehold improvements
    
    
    
    
    
    
    607.3
    
    
    
    76.0
    
    
    
    
    
    
    
    683.3Furniture, fixtures and equipment
    
    
    
    
    
    
    469.1
    
    
    
    59.9
    
    
    
    
    
    
    
    529.0Property under capital leases
    
    
    
    
    
    
    4.6
    
    
    
    
    
    
    
    
    
    
    
    4.6Total property and equipment
    
    
    
    
    
    
    1,089.0
    
    
    
    135.9
    
    
    
    
    
    
    
    1,224.9Accumulated depreciation and amortization
    
    
    
    
    
    
    (737.8
    )
    
    
    (64.6
    )
    
    
    
    
    
    
    (802.4
    )Property and equipment, net
    
    
    
    
    
    
    351.2
    
    
    
    71.3
    
    
    
    
    
    
    
    422.5Favorable leases, net
    
    
    
    
    
    
    22.7
    
    
    
    
    
    
    
    
    
    
    
    22.7Deferred income taxes
    
    
    
    
    
    
    24.5
    
    
    
    10.7
    
    
    
    
    
    
    
    35.2Goodwill, net
    
    
    
    
    
    
    5.9
    
    
    
    
    
    
    
    
    
    
    
    5.9Other assets
    
    
    1,106.1
    
    
    
    453.1
    
    
    
    1.6
    
    
    
    (1,535.1
    )
    
    
    25.7Non-current assets of discontinued operations
    
    
    
    
    
    
    7.7
    
    
    
    0.4
    
    
    
    
    
    
    
    8.1Total assets
    
    $
    1,120.2
    
    
    $
    1,433.8
    
    
    $
    272.0
    
    
    $
    (1,589.0
    )
    
    $
    1,237.0LIABILITIES AND SHAREOWNERS EQUITYCurrent Liabilities:Current maturities of long-term debt
    
    $
    
    
    
    $
    1.1
    
    
    $
    2.4
    
    
    $
    
    
    
    $
    3.5Notes payable
    
    
    
    
    
    
    
    
    
    
    18.5
    
    
    
    
    
    
    
    18.5Accounts payable
    
    
    
    
    
    
    89.3
    
    
    
    57.1
    
    
    
    (40.4
    )
    
    
    106.0Accrued expenses
    
    
    3.1
    
    
    
    150.9
    
    
    
    24.1
    
    
    
    (13.5
    )
    
    
    164.6Current liabilities of discontinued operations
    
    
    
    
    
    
    5.3
    
    
    
    0.6
    
    
    
    
    
    
    
    5.9Total current liabilities
    
    
    3.1
    
    
    
    246.6
    
    
    
    102.7
    
    
    
    (53.9
    )
    
    
    298.5Long-term debt
    
    
    480.0
    
    
    
    1.1
    
    
    
    4.0
    
    
    
    (283.0
    )
    
    
    202.1Other liabilities
    
    
    1.5
    
    
    
    103.7
    
    
    
    14.6
    
    
    
    (32.4
    )
    
    
    87.4Non-current liabilities of discontinued operations
    
    
    
    
    
    
    8.4
    
    
    
    0.1
    
    
    
    
    
    
    
    8.5Minority interest
    
    
    
    
    
    
    
    
    
    
    7.5
    
    
    
    
    
    
    
    7.5Commitments and contingencies
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total shareowners equity
    
    
    635.6
    
    
    
    1,074.0
    
    
    
    143.1
    
    
    
    (1,219.7
    )
    
    
    633.0Total liabilities and shareowners equity
    
    $
    1,120.2
    
    
    $
    1,433.8
    
    
    $
    272.0
    
    
    $
    (1,589.0
    )
    
    $
    1,237.0
 22




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##### Table of Contents



CONDENSED CONSOLIDATING BALANCE SHEET
(UNAUDITED)
As of November 1, 2003 (Restated) (dollars in millions) Parent
    
    
    Guarantor
    
    
    Non-guarantorCompany
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedASSETSCurrent Assets:Cash and cash equivalents
    
    $
    
    
    
    $
    96.1
    
    
    $
    33.5
    
    
    $
    
    
    
    $
    129.6Marketable securities, available for sale
    
    
    
    
    
    
    10.0
    
    
    
    
    
    
    
    
    
    
    
    10.0Restricted cash
    
    
    
    
    
    
    
    
    
    
    33.5
    
    
    
    
    
    
    
    33.5Inventories
    
    
    
    
    
    
    296.3
    
    
    
    95.5
    
    
    
    
    
    
    
    391.8Current deferred income taxes
    
    
    
    
    
    
    12.9
    
    
    
    0.7
    
    
    
    
    
    
    
    13.6Other current assets
    
    
    5.7
    
    
    
    88.0
    
    
    
    42.5
    
    
    
    (61.1
    )
    
    
    75.1Current assets of discontinued operations
    
    
    
    
    
    
    18.9
    
    
    
    6.3
    
    
    
    
    
    
    
    25.2Total current assets
    
    
    5.7
    
    
    
    522.2
    
    
    
    212.0
    
    
    
    (61.1
    )
    
    
    678.8Property and Equipment:Land
    
    
    
    
    
    
    8.0
    
    
    
    
    
    
    
    
    
    
    
    8.0Buildings and leasehold improvements
    
    
    
    
    
    
    597.2
    
    
    
    68.8
    
    
    
    
    
    
    
    666.0Furniture, fixtures and equipment
    
    
    
    
    
    
    433.3
    
    
    
    53.4
    
    
    
    
    
    
    
    486.7Property under capital leases
    
    
    
    
    
    
    4.6
    
    
    
    
    
    
    
    
    
    
    
    4.6Total property and equipment
    
    
    
    
    
    
    1,043.1
    
    
    
    122.2
    
    
    
    
    
    
    
    1,165.3Accumulated depreciation and amortization
    
    
    
    
    
    
    (697.7
    )
    
    
    (52.3
    )
    
    
    
    
    
    
    (750.0
    )Property and equipment, net
    
    
    
    
    
    
    345.4
    
    
    
    69.9
    
    
    
    
    
    
    
    415.3Favorable leases, net
    
    
    
    
    
    
    30.1
    
    
    
    
    
    
    
    
    
    
    
    30.1Deferred income taxes
    
    
    
    
    
    
    18.8
    
    
    
    7.5
    
    
    
    
    
    
    
    26.3Goodwill, net
    
    
    
    
    
    
    5.9
    
    
    
    
    
    
    
    
    
    
    
    5.9Other assets
    
    
    1,105.5
    
    
    
    426.1
    
    
    
    12.1
    
    
    
    (1,513.7
    )
    
    
    30.0Non-current assets of discontinued operations
    
    
    
    
    
    
    18.2
    
    
    
    12.0
    
    
    
    
    
    
    
    30.2Total assets
    
    $
    1,111.2
    
    
    $
    1,366.7
    
    
    $
    313.5
    
    
    $
    (1,574.8
    )
    
    $
    1,216.6LIABILITIES AND SHAREOWNERS EQUITYCurrent Liabilities:Current maturities of long-term debt
    
    $
    
    
    
    $
    0.9
    
    
    $
    
    
    
    $
    
    
    
    $
    0.9Notes payable
    
    
    
    
    
    
    
    
    
    
    33.5
    
    
    
    
    
    
    
    33.5Accounts payable
    
    
    
    
    
    
    82.7
    
    
    
    99.9
    
    
    
    (54.7
    )
    
    
    127.9Accrued expenses
    
    
    10.6
    
    
    
    109.8
    
    
    
    15.1
    
    
    
    (6.4
    )
    
    
    129.1Current liabilities of discontinued operations
    
    
    
    
    
    
    4.6
    
    
    
    0.5
    
    
    
    
    
    
    
    5.1Total current liabilities
    
    
    10.6
    
    
    
    198.0
    
    
    
    149.0
    
    
    
    (61.1
    )
    
    
    296.5Long-term debt
    
    
    479.9
    
    
    
    2.1
    
    
    
    4.0
    
    
    
    (283.1
    )
    
    
    202.9Other liabilities
    
    
    
    
    
    
    121.2
    
    
    
    12.6
    
    
    
    (52.6
    )
    
    
    81.2Non-current liabilities of discontinued operations
    
    
    
    
    
    
    2.1
    
    
    
    0.1
    
    
    
    
    
    
    
    2.2Minority interest
    
    
    
    
    
    
    
    
    
    
    16.2
    
    
    
    
    
    
    
    16.2Commitments and contingencies
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total shareowners equity
    
    
    620.7
    
    
    
    1,043.3
    
    
    
    131.6
    
    
    
    (1,178.0
    )
    
    
    617.6Total liabilities and shareowners equity
    
    $
    1,111.2
    
    
    $
    1,366.7
    
    
    $
    313.5
    
    
    $
    (1,574.8
    )
    
    $
    1,216.6
 23




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##### Table of Contents



CONDENSED CONSOLIDATING BALANCE SHEET
(UNAUDITED)
As of January 31, 2004 (Restated) (dollars in millions) Parent
    
    
    Guarantor
    
    
    Non-guarantorCompany
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedASSETSCurrent Assets:Cash and cash equivalents
    
    $
    
    
    
    $
    67.4
    
    
    $
    69.3
    
    
    $
    
    
    
    $
    136.7Marketable securities, available for sale
    
    
    
    
    
    
    10.0
    
    
    
    
    
    
    
    
    
    
    
    10.0Restricted cash
    
    
    
    
    
    
    
    
    
    
    33.5
    
    
    
    
    
    
    
    33.5Inventories
    
    
    
    
    
    
    308.5
    
    
    
    70.9
    
    
    
    (4.2
    )
    
    
    375.2Current deferred income taxes
    
    
    
    
    
    
    17.0
    
    
    
    0.1
    
    
    
    
    
    
    
    17.1Other current assets
    
    
    6.6
    
    
    
    71.9
    
    
    
    41.7
    
    
    
    (55.3
    )
    
    
    64.9Current assets of discontinued operations
    
    
    
    
    
    
    17.0
    
    
    
    7.2
    
    
    
    
    
    
    
    24.2Total current assets
    
    
    6.6
    
    
    
    491.8
    
    
    
    222.7
    
    
    
    (59.5
    )
    
    
    661.6Property and Equipment:Land
    
    
    
    
    
    
    8.0
    
    
    
    
    
    
    
    
    
    
    
    8.0Buildings and leasehold improvements
    
    
    
    
    
    
    610.7
    
    
    
    69.1
    
    
    
    
    
    
    
    679.8Furniture, fixtures and equipment
    
    
    
    
    
    
    439.7
    
    
    
    54.9
    
    
    
    
    
    
    
    494.6Property under capital leases
    
    
    
    
    
    
    4.6
    
    
    
    
    
    
    
    
    
    
    
    4.6Total property and equipment
    
    
    
    
    
    
    1,063.0
    
    
    
    124.0
    
    
    
    
    
    
    
    1,187.0Accumulated depreciation and amortization
    
    
    
    
    
    
    (711.6
    )
    
    
    (51.9
    )
    
    
    
    
    
    
    (763.5
    )Property and equipment, net
    
    
    
    
    
    
    351.4
    
    
    
    72.1
    
    
    
    
    
    
    
    423.5Favorable leases, net
    
    
    
    
    
    
    28.8
    
    
    
    
    
    
    
    
    
    
    
    28.8Deferred income taxes
    
    
    
    
    
    
    27.7
    
    
    
    6.5
    
    
    
    
    
    
    
    34.2Goodwill, net
    
    
    
    
    
    
    5.9
    
    
    
    
    
    
    
    
    
    
    
    5.9Other assets
    
    
    1,085.1
    
    
    
    440.7
    
    
    
    1.4
    
    
    
    (1,504.5
    )
    
    
    22.7Non-current assets of discontinued operations
    
    
    
    
    
    
    18.4
    
    
    
    9.2
    
    
    
    
    
    
    
    27.6Total assets
    
    $
    1,091.7
    
    
    $
    1,364.7
    
    
    $
    311.9
    
    
    $
    (1,564.0
    )
    
    $
    1,204.3LIABILITIES AND SHAREOWNERS EQUITYCurrent Liabilities:Current maturities of long-term debt
    
    $
    
    
    
    $
    0.9
    
    
    $
    
    
    
    $
    
    
    
    $
    0.9Notes payable
    
    
    
    
    
    
    
    
    
    
    33.5
    
    
    
    
    
    
    
    33.5Accounts payable
    
    
    
    
    
    
    84.3
    
    
    
    97.3
    
    
    
    (52.0
    )
    
    
    129.6Accrued expenses
    
    
    7.5
    
    
    
    108.1
    
    
    
    15.8
    
    
    
    (7.5
    )
    
    
    123.9Current liabilities of discontinued operations
    
    
    
    
    
    
    4.8
    
    
    
    1.0
    
    
    
    
    
    
    
    5.8Total current liabilities
    
    
    7.5
    
    
    
    198.1
    
    
    
    147.6
    
    
    
    (59.5
    )
    
    
    293.7Long-term debt
    
    
    479.8
    
    
    
    2.0
    
    
    
    4.0
    
    
    
    (283.0
    )
    
    
    202.8Other liabilities
    
    
    
    
    
    
    137.3
    
    
    
    8.8
    
    
    
    (60.5
    )
    
    
    85.6Non-current liabilities of discontinued operations
    
    
    
    
    
    
    2.0
    
    
    
    0.1
    
    
    
    
    
    
    
    2.1Minority interest
    
    
    
    
    
    
    
    
    
    
    15.7
    
    
    
    
    
    
    
    15.7Commitments and contingencies
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total shareowners equity
    
    
    604.4
    
    
    
    1,025.3
    
    
    
    135.7
    
    
    
    (1,161.0
    )
    
    
    604.4Total liabilities and shareowners equity
    
    $
    1,091.7
    
    
    $
    1,364.7
    
    
    $
    311.9
    
    
    $
    (1,564.0
    )
    
    $
    1,204.3
 24




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##### Table of Contents



CONDENSED CONSOLIDATING STATEMENT OF EARNINGS (LOSS)
(UNAUDITED)
For the Thirteen Weeks Ended October 30, 2004 (Restated) (dollars in millions) Parent
    
    
    Guarantor
    
    
    Non-guarantorCompany
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedNet sales
    
    $
    
    
    
    $
    611.6
    
    
    $
    163.9
    
    
    $
    (114.1
    )
    
    $
    661.4Cost of sales
    
    
    
    
    
    
    442.3
    
    
    
    130.0
    
    
    
    (112.0
    )
    
    
    460.3Selling, general and administrative expense
    
    
    0.8
    
    
    
    145.1
    
    
    
    31.9
    
    
    
    (2.1
    )
    
    
    175.7Restructuring charges
    
    
    
    
    
    
    3.9
    
    
    
    
    
    
    
    
    
    
    
    3.9Operating (loss) profit from continuing operations
    
    
    (0.8
    )
    
    
    20.3
    
    
    
    2.0
    
    
    
    
    
    
    
    21.5Interest expense
    
    
    6.9
    
    
    
    0.1
    
    
    
    0.8
    
    
    
    (2.3
    )
    
    
    5.5Interest income
    
    
    
    
    
    
    (2.9
    )
    
    
    (0.6
    )
    
    
    2.3
    
    
    
    (1.2
    )Equity in (loss) earnings of subsidiaries
    
    
    (11.8
    )
    
    
    3.2
    
    
    
    
    
    
    
    8.6
    
    
    
    Earnings (loss) from continuing operations before
income taxes and minority interest
    
    
    4.1
    
    
    
    19.9
    
    
    
    1.8
    
    
    
    (8.6
    )
    
    
    17.2(Benefit) provision for income taxes
    
    
    (2.5
    )
    
    
    3.7
    
    
    
    3.7
    
    
    
    
    
    
    
    4.9Earnings (loss) from continuing operations before
minority interest
    
    
    6.6
    
    
    
    16.2
    
    
    
    (1.9
    )
    
    
    (8.6
    )
    
    
    12.3Minority interest, net of income tax
    
    
    
    
    
    
    
    
    
    
    0.2
    
    
    
    
    
    
    
    0.2Net earnings (loss) from continuing operations
    
    
    6.6
    
    
    
    16.2
    
    
    
    (1.7
    )
    
    
    (8.6
    )
    
    
    12.5Loss from discontinued operations, net of income
taxes and minority interest
    
    
    
    
    
    
    (4.4
    )
    
    
    (1.5
    )
    
    
    
    
    
    
    (5.9
    )Net earnings (loss)
    
    $
    6.6
    
    
    $
    11.8
    
    
    $
    (3.2
    )
    
    $
    (8.6
    )
    
    $
    6.6
 25




---



##### Table of Contents



CONDENSED CONSOLIDATING STATEMENT OF LOSS
(UNAUDITED)
For the Thirteen Weeks Ended November 1, 2003 (Restated) (dollars in millions) Parent
    
    
    Guarantor
    
    
    Non-guarantorCompany
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedNet sales
    
    $
    
    
    
    $
    639.7
    
    
    $
    159.4
    
    
    $
    (119.7
    )
    
    $
    679.4Cost of sales
    
    
    
    
    
    
    481.2
    
    
    
    129.1
    
    
    
    (118.2
    )
    
    
    492.1Selling, general and administrative expense
    
    
    1.3
    
    
    
    158.7
    
    
    
    22.5
    
    
    
    (1.5
    )
    
    
    181.0Operating (loss) profit from continuing operations
    
    
    (1.3
    )
    
    
    (0.2
    )
    
    
    7.8
    
    
    
    
    
    
    
    6.3Interest expense
    
    
    5.3
    
    
    
    2.0
    
    
    
    1.0
    
    
    
    (2.3
    )
    
    
    6.0Interest income
    
    
    
    
    
    
    (2.5
    )
    
    
    (0.9
    )
    
    
    2.3
    
    
    
    (1.1
    )Equity in (loss) earnings of subsidiaries
    
    
    (2.0
    )
    
    
    (8.1
    )
    
    
    
    
    
    
    10.1
    
    
    
    Earnings (loss) from continuing operations before
income taxes and minority interest
    
    
    (4.6
    )
    
    
    8.4
    
    
    
    7.7
    
    
    
    (10.1
    )
    
    
    1.4(Benefit) provision for income taxes
    
    
    (2.4
    )
    
    
    2.7
    
    
    
    
    
    
    
    
    
    
    
    0.3Earnings (loss) from continuing operations before
minority interest
    
    
    (2.2
    )
    
    
    5.7
    
    
    
    7.7
    
    
    
    (10.1
    )
    
    
    1.1Minority interest, net of income tax
    
    
    
    
    
    
    
    
    
    
    1.1
    
    
    
    
    
    
    
    1.1Net earnings (loss) from continuing operations
    
    
    (2.2
    )
    
    
    5.7
    
    
    
    8.8
    
    
    
    (10.1
    )
    
    
    2.2Loss from discontinued operations, net of income
taxes and minority interest
    
    
    
    
    
    
    (3.7
    )
    
    
    (0.7
    )
    
    
    
    
    
    
    (4.4
    )Net earnings (loss)
    
    $
    (2.2
    )
    
    $
    2.0
    
    
    $
    8.1
    
    
    $
    (10.1
    )
    
    $
    (2.2
    )
 26




---



##### Table of Contents



CONDENSED CONSOLIDATING STATEMENT OF EARNINGS
(UNAUDITED)  (dollars in millions) Parent
    
    
    Guarantor
    
    
    Non-guarantorCompany
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedNet sales
    
    $
    
    
    
    $
    1,901.5
    
    
    $
    492.0
    
    
    $
    (344.2
    )
    
    $
    2,049.3Cost of sales
    
    
    
    
    
    
    1,345.8
    
    
    
    403.9
    
    
    
    (337.8
    )
    
    
    1,411.9Selling, general and administrative expense
    
    
    1.8
    
    
    
    464.0
    
    
    
    86.2
    
    
    
    (6.4
    )
    
    
    545.6Restructuring charges
    
    
    
    
    
    
    17.0
    
    
    
    0.6
    
    
    
    
    
    
    
    17.6Operating (loss) profit from continuing operations
    
    
    (1.8
    )
    
    
    74.7
    
    
    
    1.3
    
    
    
    
    
    
    
    74.2Interest expense
    
    
    19.6
    
    
    
    0.4
    
    
    
    3.5
    
    
    
    (6.8
    )
    
    
    16.7Interest income
    
    
    
    
    
    
    (7.9
    )
    
    
    (2.4
    )
    
    
    6.8
    
    
    
    (3.5
    )Equity in (loss) earnings of subsidiaries
    
    
    (38.4
    )
    
    
    3.5
    
    
    
    
    
    
    
    34.9
    
    
    
    Earnings (loss) from continuing operations before
income taxes and minority interest
    
    
    17.0
    
    
    
    78.7
    
    
    
    0.2
    
    
    
    (34.9
    )
    
    
    61.0(Benefit) provision for income taxes
    
    
    (7.5
    )
    
    
    23.8
    
    
    
    (1.2
    )
    
    
    
    
    
    
    15.1Earnings (loss) from continuing operations before
minority interest
    
    
    24.5
    
    
    
    54.9
    
    
    
    1.4
    
    
    
    (34.9
    )
    
    
    45.9Minority interest, net of income tax
    
    
    
    
    
    
    
    
    
    
    4.3
    
    
    
    
    
    
    
    4.3Net earnings (loss) from continuing operations
    
    
    24.5
    
    
    
    54.9
    
    
    
    5.7
    
    
    
    (34.9
    )
    
    
    50.2Loss from discontinued operations, net of income
taxes and minority interest
    
    
    
    
    
    
    (16.5
    )
    
    
    (9.2
    )
    
    
    
    
    
    
    (25.7
    )Net earnings (loss)
    
    $
    24.5
    
    
    $
    38.4
    
    
    $
    (3.5
    )
    
    $
    (34.9
    )
    
    $
    24.5
 27




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##### Table of Contents



CONDENSED CONSOLIDATING STATEMENT OF EARNINGS
(UNAUDITED)
For the Thirty-nine Weeks Ended November 1, 2003 (Restated) (dollars in millions) Parent
    
    
    Guarantor
    
    
    Non-guarantorCompany
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedNet sales
    
    $
    
    
    
    $
    1,916.7
    
    
    $
    511.5
    
    
    $
    (383.5
    )
    
    $
    2,044.7Cost of sales
    
    
    
    
    
    
    1,417.9
    
    
    
    420.4
    
    
    
    (378.0
    )
    
    
    1,460.3Selling, general and administrative expense
    
    
    1.4
    
    
    
    470.3
    
    
    
    65.2
    
    
    
    (5.5
    )
    
    
    531.4Operating (loss) profit from continuing operations
    
    
    (1.4
    )
    
    
    28.5
    
    
    
    25.9
    
    
    
    
    
    
    
    53.0Interest expense
    
    
    11.8
    
    
    
    9.1
    
    
    
    3.1
    
    
    
    (8.7
    )
    
    
    15.3Interest income
    
    
    
    
    
    
    (9.2
    )
    
    
    (2.5
    )
    
    
    8.7
    
    
    
    (3.0
    )Equity in (loss) earnings of subsidiaries
    
    
    (25.5
    )
    
    
    (25.4
    )
    
    
    
    
    
    
    50.9
    
    
    
    Earnings (loss) from continuing operations before
income taxes and minority interest
    
    
    12.3
    
    
    
    54.0
    
    
    
    25.3
    
    
    
    (50.9
    )
    
    
    40.7(Benefit) provision for income taxes
    
    
    (4.8
    )
    
    
    19.1
    
    
    
    (0.2
    )
    
    
    
    
    
    
    14.1Earnings (loss) from continuing operations before
minority interest
    
    
    17.1
    
    
    
    34.9
    
    
    
    25.5
    
    
    
    (50.9
    )
    
    
    26.6Minority interest, net of income tax
    
    
    
    
    
    
    
    
    
    
    2.4
    
    
    
    
    
    
    
    2.4Net earnings (loss) from continuing operations
    
    
    17.1
    
    
    
    34.9
    
    
    
    27.9
    
    
    
    (50.9
    )
    
    
    29.0Loss from discontinued operations, net of income
taxes and minority interest
    
    
    
    
    
    
    (9.4
    )
    
    
    (2.5
    )
    
    
    
    
    
    
    (11.9
    )Net earnings (loss)
    
    $
    17.1
    
    
    $
    25.5
    
    
    $
    25.4
    
    
    $
    (50.9
    )
    
    $
    17.1
 28




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##### Table of Contents



CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
(UNAUDITED)
For the Thirty-nine Weeks Ended October 30, 2004 (Restated) (dollars in millions) Parent
    
    
    Guarantor
    
    
    Non-guarantorCompany
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedOperating Activities:Net earnings
    
    $
    24.5
    
    
    $
    38.4
    
    
    $
    (3.5
    )
    
    $
    (34.9
    )
    
    $
    24.5Loss from discontinued operations, net of
income taxes and minority interest
    
    
    
    
    
    
    (16.5
    )
    
    
    (9.2
    )
    
    
    
    
    
    
    (25.7
    )Net earnings from continuing operations
    
    
    24.5
    
    
    
    54.9
    
    
    
    5.7
    
    
    
    (34.9
    )
    
    
    50.2Adjustments for non-cash items included in
earnings from continuing operations:Non-cash component of restructuring charges
    
    
    
    
    
    
    12.0
    
    
    
    
    
    
    
    
    
    
    
    12.0Loss on impairment of and disposal of assets
    
    
    
    
    
    
    5.5
    
    
    
    1.1
    
    
    
    
    
    
    
    6.6Depreciation and amortization
    
    
    
    
    
    
    62.6
    
    
    
    8.6
    
    
    
    
    
    
    
    71.2Amortization of deferred financing costs
    
    
    
    
    
    
    0.9
    
    
    
    
    
    
    
    
    
    
    
    0.9Amortization of unearned restricted stock
    
    
    0.5
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.5Deferred income taxes
    
    
    
    
    
    
    (6.6
    )
    
    
    (6.3
    )
    
    
    
    
    
    
    (12.9
    )Minority interest, net of tax
    
    
    
    
    
    
    
    
    
    
    (4.3
    )
    
    
    
    
    
    
    (4.3
    )Income tax charge of stock option exercises
    
    
    (0.1
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (0.1
    )Changes in working capital:Inventories
    
    
    
    
    
    
    12.8
    
    
    
    3.9
    
    
    
    (1.0
    )
    
    
    15.7Other current assets
    
    
    (7.5
    )
    
    
    8.5
    
    
    
    (1.5
    )
    
    
    (4.6
    )
    
    
    (5.1
    )Accounts payable
    
    
    
    
    
    
    5.0
    
    
    
    (40.3
    )
    
    
    11.6
    
    
    
    (23.7
    )Accrued expenses
    
    
    (4.4
    )
    
    
    42.8
    
    
    
    8.6
    
    
    
    (6.0
    )
    
    
    41.0Other assets and liabilities, net
    
    
    (12.2
    )
    
    
    (32.2
    )
    
    
    15.2
    
    
    
    34.9
    
    
    
    5.7Cash flow provided by (used in) discontinued
operations
    
    
    
    
    
    
    2.5
    
    
    
    (2.0
    )
    
    
    
    
    
    
    0.5Cash flow provided by (used in) operating
activities from continuing operations
    
    
    0.8
    
    
    
    168.7
    
    
    
    (11.3
    )
    
    
    
    
    
    
    158.2Investing Activities:Capital expenditures
    
    
    
    
    
    
    (75.1
    )
    
    
    (6.9
    )
    
    
    
    
    
    
    (82.0
    )Purchase of marketable securities
    
    
    
    
    
    
    (13.0
    )
    
    
    
    
    
    
    
    
    
    
    (13.0
    )Sale of marketable securities
    
    
    
    
    
    
    14.0
    
    
    
    
    
    
    
    
    
    
    
    14.0Investment in subsidiaries
    
    
    
    
    
    
    (2.9
    )
    
    
    
    
    
    
    2.9
    
    
    
    Cash flow used in investing activities from
continuing operations
    
    
    
    
    
    
    (77.0
    )
    
    
    (6.9
    )
    
    
    2.9
    
    
    
    (81.0
    )Financing Activities:Repayment on notes payable
    
    
    
    
    
    
    
    
    
    
    (15.0
    )
    
    
    
    
    
    
    (15.0
    )Restricted cash
    
    
    
    
    
    
    
    
    
    
    15.0
    
    
    
    
    
    
    
    15.0Issuance of debt
    
    
    
    
    
    
    
    
    
    
    2.4
    
    
    
    
    
    
    
    2.4Payment of deferred financing costs
    
    
    
    
    
    
    (0.2
    )
    
    
    
    
    
    
    
    
    
    
    (0.2
    )Repayment of debt
    
    
    
    
    
    
    (0.7
    )
    
    
    
    
    
    
    
    
    
    
    (0.7
    )Net purchases of common stock
    
    
    (0.8
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (0.8
    )Contributions by parents
    
    
    
    
    
    
    
    
    
    
    2.9
    
    
    
    (2.9
    )
    
    
    Contributions by minority owners
    
    
    
    
    
    
    
    
    
    
    1.9
    
    
    
    
    
    
    
    1.9Cash flow (used in) provided by financing
activities from continuing operations
    
    
    (0.8
    )
    
    
    (0.9
    )
    
    
    7.2
    
    
    
    (2.9
    )
    
    
    2.6Effect of exchange rate changes on cash
    
    
    
    
    
    
    
    
    
    
    (0.3
    )
    
    
    
    
    
    
    (0.3
    )Increase (decrease) in cash and cash equivalents
    
    
    
    
    
    
    90.8
    
    
    
    (11.3
    )
    
    
    
    
    
    
    79.5Cash and cash equivalents, beginning of period
    
    
    
    
    
    
    67.4
    
    
    
    69.3
    
    
    
    
    
    
    
    136.7Cash and cash equivalents, end of period
    
    $
    
    
    
    $
    158.2
    
    
    $
    58.0
    
    
    $
    
    
    
    $
    216.2
 29




---



##### Table of Contents



CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
(UNAUDITED)
For the Thirty-nine Weeks Ended November 1, 2003 (Restated) (dollars in millions) Parent
    
    
    Guarantor
    
    
    Non-guarantorCompany
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedOperating Activities:Net earnings
    
    $
    17.1
    
    
    $
    25.5
    
    
    $
    25.4
    
    
    $
    (50.9
    )
    
    $
    17.1Loss from discontinued operations, net of
income taxes and minority interest
    
    
    
    
    
    
    (9.4
    )
    
    
    (2.5
    )
    
    
    
    
    
    
    (11.9
    )Net earnings from continuing operations
    
    
    17.1
    
    
    
    34.9
    
    
    
    27.9
    
    
    
    (50.9
    )
    
    
    29.0Adjustments for non-cash items included in
earnings from continuing operations:Loss on impairment of and disposal of assets
    
    
    
    
    
    
    7.4
    
    
    
    0.1
    
    
    
    
    
    
    
    7.5Depreciation and amortization
    
    
    
    
    
    
    62.9
    
    
    
    9.4
    
    
    
    
    
    
    
    72.3Amortization of deferred financing costs
    
    
    
    
    
    
    3.8
    
    
    
    
    
    
    
    
    
    
    
    3.8Amortization of unearned restricted stock
    
    
    0.5
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.5Deferred income taxes
    
    
    
    
    
    
    13.4
    
    
    
    (0.4
    )
    
    
    
    
    
    
    13.0Minority interest, net of tax
    
    
    
    
    
    
    
    
    
    
    (2.4
    )
    
    
    
    
    
    
    (2.4
    )Changes in working capital:Inventories
    
    
    
    
    
    
    56.2
    
    
    
    (5.8
    )
    
    
    (5.7
    )
    
    
    44.7Other current assets
    
    
    (0.1
    )
    
    
    78.1
    
    
    
    (24.2
    )
    
    
    (72.7
    )
    
    
    (18.9
    )Accounts payable
    
    
    
    
    
    
    17.9
    
    
    
    29.0
    
    
    
    (20.8
    )
    
    
    26.1Accrued expenses
    
    
    (59.4
    )
    
    
    3.7
    
    
    
    (3.9
    )
    
    
    69.2
    
    
    
    9.6Other assets and liabilities, net
    
    
    (28.3
    )
    
    
    (57.6
    )
    
    
    8.7
    
    
    
    80.9
    
    
    
    3.7Cash flow used in discontinued operations
    
    
    
    
    
    
    (3.0
    )
    
    
    (9.1
    )
    
    
    
    
    
    
    (12.1
    )Cash flow (used in) provided by operating
activities from continuing operations
    
    
    (70.2
    )
    
    
    217.7
    
    
    
    29.3
    
    
    
    
    
    
    
    176.8Investing Activities:Capital expenditures
    
    
    
    
    
    
    (69.9
    )
    
    
    (13.6
    )
    
    
    
    
    
    
    (83.5
    )Disposition of property and equipment
    
    
    
    
    
    
    1.0
    
    
    
    
    
    
    
    
    
    
    
    1.0Purchase of marketable securities
    
    
    
    
    
    
    (10.0
    )
    
    
    
    
    
    
    
    
    
    
    (10.0
    )Repayment of loan from parent/subsidiary
    
    
    
    
    
    
    146.9
    
    
    
    
    
    
    
    (146.9
    )
    
    
    Investment in subsidiaries
    
    
    
    
    
    
    (5.4
    )
    
    
    
    
    
    
    5.4
    
    
    
    Cash flow provided by (used in) investing
activities from continuing operations
    
    
    
    
    
    
    62.6
    
    
    
    (13.6
    )
    
    
    (141.5
    )
    
    
    (92.5
    )Financing Activities:Issuance on notes payable
    
    
    
    
    
    
    
    
    
    
    5.0
    
    
    
    
    
    
    
    5.0Restricted cash
    
    
    
    
    
    
    
    
    
    
    (5.0
    )
    
    
    
    
    
    
    (5.0
    )Issuance of debt
    
    
    196.7
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    196.7Payment of deferred financing costs
    
    
    (9.3
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (9.3
    )Repayment of debt
    
    
    
    
    
    
    (216.8
    )
    
    
    
    
    
    
    
    
    
    
    (216.8
    )Loan from parent/subsidiary
    
    
    (116.9
    )
    
    
    
    
    
    
    (30.0
    )
    
    
    146.9
    
    
    
    Net purchases of common stock
    
    
    (0.3
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (0.3
    )Contributions by parents
    
    
    
    
    
    
    
    
    
    
    5.4
    
    
    
    (5.4
    )
    
    
    Contributions by minority owners
    
    
    
    
    
    
    
    
    
    
    3.6
    
    
    
    
    
    
    
    3.6Cash flow provided by (used in) financing
activities from continuing operations
    
    
    70.2
    
    
    
    (216.8
    )
    
    
    (21.0
    )
    
    
    141.5
    
    
    
    (26.1
    )Effect of exchange rate changes on cash
    
    
    
    
    
    
    
    
    
    
    (0.3
    )
    
    
    
    
    
    
    (0.3
    )Increase (decrease) in cash and cash equivalents
    
    
    
    
    
    
    63.5
    
    
    
    (5.6
    )
    
    
    
    
    
    
    57.9Cash and cash equivalents, beginning of period
    
    
    
    
    
    
    32.6
    
    
    
    39.1
    
    
    
    
    
    
    
    71.7Cash and cash equivalents, end of period
    
    $
    
    
    
    $
    96.1
    
    
    $
    33.5
    
    
    $
    
    
    
    $
    129.6
 30




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##### Table of Contents



ITEM 2  MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This discussion and analysis should be read in conjunction with the Condensed Consolidated
Financial Statements and Notes to the Condensed Consolidated Financial Statements included in this
Form 10-Q/A. FORWARD-LOOKING STATEMENTS This report contains forward-looking statements relating to such matters as anticipated financial
performance, international expansion opportunities, consumer spending patterns, capital expenditure
plans, business prospects, products, future store openings and closings, possible strategic
initiatives and similar matters. Forward looking statements are identified by words such as
expects, anticipates, intends, plans, believes, seeks, or variations of such words. A
variety of known and unknown risks and uncertainties and other factors could cause actual results
and expectations to differ materially from the anticipated results or expectations which include,
but are not limited to: changes in consumer spending patterns; changes in consumer preferences and
overall economic conditions; the impact of competition and pricing; changes in weather patterns;
the financial condition of the Companys suppliers and manufacturers; changes in existing or
potential duties, tariffs or quotas; changes in relationships between the United States and foreign
countries, changes in relationships between Canada 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 or in which the Company
has retail locations or otherwise does business; changes in trade, customs and/or tax laws;
fluctuations in currency exchange rates; availability of suitable store locations on acceptable
terms; the ability to terminate leases on acceptable terms; the ability to hire and retain
associates; performance of other parties in strategic alliances; general economic, business and
social conditions in the countries from which we source products, supplies or have or intend to
open stores; performance of partners in joint ventures; the ability to comply with local laws in
foreign countries; threats or acts of terrorism; strikes, work stoppages and/or slowdowns by unions
that play a significant role in the manufacture; distribution or sale of product; congestion at
major ocean ports; changes in the value of the dollar relative to the Chinese yuan and other
currencies. Please refer to the Companys 2003 Annual Report and its Form 10-K for the fiscal year
ended January 31, 2004 for more information on these and other risk factors that could cause actual
results to differ. 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. RESTATEMENT The accompanying Managements Discussion and Analysis of Financial Condition and Results of
Operations gives effect to the restatement described in Note 3 to the Condensed Consolidated
Financial Statements. OVERVIEW We are the largest specialty family footwear retailer in the Western Hemisphere with retail stores
in the United States, Canada, the Caribbean, and the Central American and South American Regions.
The Central American Region is composed of operations in Costa Rica, the Dominican Republic, El
Salvador, Guatemala, Honduras, Nicaragua, Panama and Trinidad & Tobago. The South American Region
is composed of operations in Chile, Ecuador and Peru; however, we intend to dispose of all store
operations in Chile during 2004 and we have transferred ownership of our Peruvian entity and
related operations and liabilities to an entity comprised of some owners of our South American
joint venture partner effective November 15, 2004. Our stores offer fashionable, quality, private
and branded label footwear and accessories for women, men and children at affordable prices in a
self-selection shopping format. During the third quarter of 2004, we announced a series of strategic initiatives as part of a
restructuring plan designed to sharpen our focus on our core business strategy, reduce expenses,
accelerate decision-making, increase profitability, improve our operating margin and build value
for shareowners over the long-term. The strategic initiatives include:  
    Exiting all 181 Parade stores, and related operations;
    Exiting all 32 Payless ShoeSource stores in Chile and Peru;
    The closing of approximately 260 Payless ShoeSource stores. These store closings differ
from closings in the normal course of business in that they have longer remaining lease
terms;
    The reduction of wholesale businesses that provide no significant growth opportunity, and;
    A comprehensive review of the Companys expense structure and appropriate reductions to improve profitability. 31




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##### Table of Contents



Due to the restatement described in Note 3 to the Condensed Consolidated Financial Statements, we
have reflected the financial information of the Parade, Peru and Chile stores and 26 of the Payless
ShoeSource stores as discontinued operations in order to conform to the current presentation.
Unless otherwise noted, the amounts and discussions included in this Managements Discussion and
Analysis relate to continuing operations. As part of the strategic initiatives, during the third quarter we eliminated approximately 200
management and administrative positions, closed 65 stores and began to liquidate inventory in our
Payless and Parade stores identified for closing. During the third quarter, we recorded $7.3
million in restructuring charges ($3.9 million relating to continuing operations and $3.4 million
relating to discontinued operations) primarily related to employee severance costs, contract
termination costs and a reduction of the carrying value of our assets in Peru. This is in addition
to a non-cash restructuring charge of $36.7 million recorded in the second quarter related to the
impairment of the assets associated with Chile, Peru, Parade and the approximately 260 Payless
stores to be closed. If the $36.7 million second quarter charge, $13.7 million related to
continuing operations and $23.0 million related to discontinued operations. We expect that the total restructuring costs will be in the range of $77 million to $90 million,
with estimated remaining expenses of $33 million to $46 million expected in the fourth quarter.
However, we are in the process of negotiating contract terminations, and the ultimate restructuring
charge will depend upon the results of these negotiations. We intend to complete the strategic
initiatives by the end of fiscal 2004. For the third quarter of 2004, total sales decreased 2.6 percent, or $18.0 million, to $661.4
million as compared to the third quarter of the prior year. Same-store sales, one of the key
indicators we consider as a measure of performance, decreased 2.8 percent. Gross margin was 30.4
percent of sales in the current years third quarter, versus 27.6 percent in the prior years third
quarter. For the first nine months of 2004, total sales increased 0.2 percent, or $4.6 million, to
$2,049.3 as compared to the first nine months of 2003. Same-store sales decreased 0.3 percent.
Gross margin was 31.1 percent of sales in the first nine months of 2004, versus 28.6 percent in the
same period in 2003. The competitive environment in the third quarter remained highly promotional,
a continuation of the environment that developed in the second quarter. During August and September
we continued to be less promotional than the prior year in order to protect our gross margins.
Sales during the month of October benefited from an increase in markdowns and a higher level of
advertising than the prior two months. Our cash and cash equivalents balance at the end of the 2004 third quarter was $216.2 million, an
increase of $79.5 million from the end of 2003 and $86.6 million over the 2003 third quarter. Total
inventories at the end of the 2004 third quarter were $361.7 million, a reduction of $30.1 million
from the 2003 third quarter. Inventory per store declined by 7 percent on a cost basis and 9
percent on a footwear unit basis over the same period. We are committed to serving the interest of our shareowners by building long-term value through
consistent execution of our core business strategy: to be the Merchandise Authority in value-priced
footwear and accessories. To improve the near-term execution of our strategy, we have adjusted
certain key tactics including:  
    Simplifying our process for planning and executing merchandise assortments;
    Refocusing and intensifying our messaging, increasing the frequency of communication
with customers through print and broadcast media; and
    Adjusting our store-level execution to achieve better balance between the tasks
necessary to run a best-of-kind retail store and customer service through the use of our
key service behaviors that have been identified to impact conversion. Looking to the balance of the year, our strategy is to position the Company for improved
performance in 2005 and beyond. To do so, we intend to complete all of our strategic initiatives by
the end of fiscal 2004. We will continue to carefully manage our inventory receipts to assure that
we end the year with our inventory appropriately positioned for the 2005 spring season. Consistent
with this objective, our promotional level is likely to increase during the fourth quarter compared
with the third quarter. We also intend to increase advertising during the fourth quarter as
compared with the same period last year. REVIEW OF OPERATIONS The following discussion summarizes the significant factors affecting operating results for the
third quarter and nine months ended October 30, 2004 (2004) and November 1, 2003 (2003). 32




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##### Table of Contents



NET EARNINGS We posted net earnings of $6.6 million in the third quarter of 2004 compared with a net loss of
$2.2 million in the third quarter of 2003. For the first nine months of 2004 net earnings were
$24.5 million compared with $17.1 million in the 2003 period. The following table presents the components of costs and expenses, as a percent of revenues, for
the third quarter and first nine months of 2004 and 2003. Third Quarter
    
    
    First Nine Months2004
    
    
    2003
    
    
    2004
    
    
    2003Cost of sales
    
    
    69.6
    %
    
    
    72.4
    %
    
    
    68.9
    %
    
    
    71.4
    %Selling, general and administrative expense
    
    
    26.6
    
    
    
    26.6
    
    
    
    26.6
    
    
    
    26.0Restructuring charges
    
    
    0.6
    
    
    
    
    
    
    
    0.9
    
    
    
    Operating profit from continuing operations
    
    
    3.3
    
    
    
    0.9
    
    
    
    3.6
    
    
    
    2.6Interest expense, net
    
    
    0.7
    
    
    
    0.7
    
    
    
    0.6
    
    
    
    0.6Earnings from continuing operations before
income taxes and minority interest
    
    
    2.6
    
    
    
    0.2
    
    
    
    3.0
    
    
    
    2.0Effective income tax rate*
    
    
    28.5
    %
    
    
    21.4
    %
    
    
    24.8
    %
    
    
    34.6
    %Earnings from continuing operations before
minority interest
    
    
    1.9
    
    
    
    0.2
    
    
    
    2.2
    
    
    
    1.3Minority interest
    
    
    
    
    
    
    0.1
    
    
    
    0.2
    
    
    
    0.1Net earnings from continuing operations
    
    
    1.9
    %
    
    
    0.3
    %
    
    
    2.4
    %
    
    
    1.4
    %
   *
    
    Percent of pre-tax earnings (loss) NET SALES Net sales are recognized at the time the sale is made to the customer, are net of estimated returns
and current promotional discounts and exclude sales tax. Third-party liquidation sales are
recognized at the time the sale is made to the customer, are calculated based upon contractually
guaranteed amounts pursuant to our agreements with liquidators and are net of associated fees.
Same-store sales are calculated on a weekly basis. If a store is open the entire week in each of
the two years being compared, its sales are included in the same-store sales calculation for that
week. Relocated and remodeled stores are also included in the same-store sales calculation if they
were open during the entire week in each of the two years being compared. Same-store sales for the
third quarter and first nine months of 2004 and 2003 exclude all stores in the South American and
Central American Regions. In addition, beginning in October, all Parade stores and the North
American Payless ShoeSource stores that are part of our previously announced strategic initiatives
are excluded from same-store sales results. Sales percent increases (decreases) are as follows: Third Quarter
    
    
    First Nine Months2004
    
    
    2003
    
    
    2004
    
    
    2003Net Sales
    
    
    (2.6
    )%
    
    
    (0.3
    )%
    
    
    0.2
    %
    
    
    (3.3
    )%Same-store Sales
    
    
    (2.8
    )
    
    
    (1.1
    )
    
    
    (0.3
    )
    
    
    (4.0
    )Average selling price per unit
    
    
    9.0
    
    
    
    (0.2
    )
    
    
    8.4
    
    
    
    2.4Unit volume
    
    
    (11.5
    )
    
    
    0.3
    
    
    
    (7.8
    )
    
    
    (5.1
    )Footwear average selling price per unit
    
    
    9.9
    
    
    
    (5.2
    )
    
    
    5.4
    
    
    
    1.0Footwear unit volume
    
    
    (12.4
    )%
    
    
    4.3
    %
    
    
    (5.4
    )%
    
    
    (5.2
    )%
 Net sales for the 2004 third quarter totaled $661.4 million compared with $679.4 million in
the 2003 third quarter. Net sales and same-store sales decreased in the third quarter of 2004 from
2003 primarily due to a difficult competitive environment combined with our strategy to be less
promotional than last year in order to protect our gross margins, particularly in the first two
months of the quarter. 33




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##### Table of Contents



Net sales for the first nine months of 2004 were up slightly compared with the 2003 period. In the
first nine months of 2004, net sales totaled $2,049.3 million compared with $2,044.7 million in the
first nine months of 2003. COST OF SALES Cost of sales includes cost of merchandise sold, buying and occupancy costs and markdowns incurred
to liquidate inventory in stores associated with the restructuring. Cost of sales was $460.3
million in the 2004 third quarter, down 6.5 percent from $492.1 million in the 2003 third quarter.
For the first nine months of 2004, cost of sales was $1,411.9 million, down 3.3 percent from
$1,460.3 million in 2003. As a percentage of net sales, cost of sales was 69.6 percent in the third quarter of 2004, compared
with 72.4 percent in the third quarter of 2003. As a percentage of net sales, cost of sales was
68.9 percent in the first nine months of 2004, compared with 71.4 percent in the first nine months
of 2003. The decrease in cost of sales as a percentage of net sales was due primarily to more
favorable initial markups and fewer markdowns relative to the same period last year. During the third quarter, we began to liquidate inventory in our Payless ShoeSource and Parade
stores identified for closing. In conjunction with the liquidation, we recorded $0.4 million in
inventory markdowns to reflect inventory at lower of cost or market. Such markdowns are reflected
in cost of sales in the condensed consolidated statement of earnings (loss). SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses were $175.7 million in the third quarter of 2004, a
decrease of 2.9 percent from $181.0 million in the third quarter of 2003. For the first nine months
of 2004, selling, general and administrative expenses were $545.6 million, an increase of 2.7
percent from $531.4 million in the 2003 period. As a percentage of net sales, selling, general and administrative expenses were 26.6 percent during
the third quarter of 2004 compared with 26.6 percent in the third quarter of 2003. For the first
nine months of 2004, selling, general and administrative expenses as a percentage of net sales were
26.6 percent compared with 26.0 percent in the 2003 period. The decrease in the third quarter of 2004 was primarily the result of a $4.1 million decrease in
advertising expense, as well as lower expenses for payroll and supplies, offset by increased bonus
and professional service costs and negative leverage due to lower same-store sales. The increase in
the first nine months of 2004 was primarily the result of $13.0 million of additional payroll and
payroll-related costs, $4.5 million in increased workers compensation insurance costs, and $6.6
million in increased professional services related to the proxy contest and Sarbanes-Oxley
compliance, partially offset by $2.2 million in decreased medical insurance costs and the write-off
of $3.1 million in debt costs in conjunction with our debt restructuring during the 2003 period. RESTRUCTURING CHARGES The $7.3 million restructuring charge ($3.9 million relating to continuing operations and $3.4
million relating to discontinued operations) primarily relates to employee severance costs,
contract termination costs and a reduction in the carrying value of assets for our Peruvian
operations. The third quarter charges are in addition to the $36.7 million non-cash restructuring
charge recorded in the second quarter related to the impairment of long-lived assets associated
with Chile, Peru, Parade and the approximately 260 Payless stores to be closed. Of the $36.7
million charge, $13.7 million related to continuing operations and $23.0 million related to
discontinued operations. INTEREST EXPENSE, NET Net interest expense decreased from $4.9 million in the third quarter of 2003 to $4.3 million in
the third quarter of 2004 due to increased interest income as a result of higher average invested
cash balances compared to last year. Interest expense for the first nine months of 2004 was $13.2
million, an increase of $0.9 million over the same period last year. The increase in net interest
expense reflects the higher interest rate associated with the Senior Subordinated Notes compared
with the $200 million term loan portion of the credit facility that was in place during the first
half of 2003. EFFECTIVE INCOME TAX RATE Our effective income tax rate was 28.5 percent in the third quarter and 24.8 percent for the first
nine months of 2004. The effective income tax rate of 28.5 percent for the third quarter includes
an adjustment to reflect an effective tax rate of 24.8 percent for the first nine months of the
year. We anticipate a tax benefit at the rate of 24.8 percent for the full fiscal year 2004. Our
effective income tax rate was 21.4 percent in the third quarter and 34.6 percent for the first nine
months of 2003. 34




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##### Table of Contents



MINORITY INTEREST, NET OF TAX Minority interest represents our joint venture partners share of net earnings or losses on
applicable international operations. LIQUIDITY AND CAPITAL RESOURCES We ended the third quarter of 2004 with a cash balance of $216.2 million, an increase of $86.6
million over the 2003 third quarter. Internally generated cash flow from operations is expected to
continue to be the most important component of our capital resources. Cash Flow Provided by Operating Activities Cash flow provided by operations was $158.2 million in the first nine months of 2004, compared with
$176.8 million in the 2003 period. As a percentage of net sales, cash flow from operations was 7.7
percent in the first nine months of 2004, compared with 8.6 percent in the same period in 2003. The
significant changes in cash flow during the first nine months of 2004 as compared with the 2003
period are as follows: higher net earnings (excluding $12.0 million in non-cash restructuring
charges for continuing operations); inventory decreased by $15.7 million in 2004 compared to $44.7
million in 2003 for a net cash outflow of $29.0 million due primarily to lower inventory levels at
the beginning of 2004 compared to 2003; accounts payable decreased $23.7 million in 2004 compared
to a $26.1 million increase in 2003 for a net cash outflow of $49.8 million; and accrued expenses
increased $41.0 million in 2004 compared to $9.6 million in 2003 for a net cash inflow of $31.4
million due primarily to accrued income taxes, accrued payroll-related costs, accrued insurance
costs and accrued restructuring charges. Cash Flow Used in Investing Activities In the first nine months of 2004, our capital expenditures totaled $82.0 million, compared with
$83.5 million for the same period in 2003. We estimate that capital expenditures for the remainder
of the year will be approximately $32 million, including $0.6 million to be contributed by our
joint venture partners in the Central American and South American Regions. We anticipate that
internal cash flow and available financing from our $200 million revolving credit agreement will be
sufficient to finance all of these expenditures. Cash Flow Provided by Financing Activities In January 2004, we replaced our $150 million senior secured revolving credit facility (the Old
Facility) with a new $200 million senior secured revolving credit facility (the New Facility).
Funds borrowed under the New Facility are secured by domestic merchandise inventory and
receivables. We may borrow up to $200 million through the New Facility, subject to a sufficient
borrowing base. The New Facility bears interest at the LIBOR rate, plus a variable margin of 1.25
percent to 2.0 percent, or the base rate defined in the agreement governing the New Facility. The
margin on the New Facility varies based upon certain borrowing levels specified in the agreement
governing the New Facility. The variable interest rate at October 30, 2004, was 3.4 percent. A
monthly commitment fee of 0.30 percent per annum is payable on the unborrowed balance. The New
Facility is scheduled to expire in January 2008, with a one-year extension to January 2009 at our
option. No amounts were drawn on the New Facility as of October 30, 2004. Based on our borrowing
base, we may borrow up to $200.0 million under the New Facility, less $17.4 million in outstanding
letters of credit as of October 30, 2004. In July 2003, we sold $200.0 million of 8.25% Senior Subordinated Notes (the Notes) for $196.7
million, due 2013. The discount of $3.3 million is being amortized to interest expense over the
life of the Notes. The Notes are guaranteed by all of our domestic subsidiaries. Interest on the
Notes is payable semi-annually, beginning February 1, 2004. The Notes contain various covenants
including those that may limit our ability to pay dividends, repurchase stock, accelerate the
retirement of other subordinated debt or make certain investments. As of October 30, 2004, we were
in compliance with all covenants. The proceeds of the Notes and additional general funds were used
to repay the entire $200.0 million term loan portion of our Old Facility. As of October 30, 2004,
the fair value of the Notes was $195.0 million based on recent trading activity of the Notes. On or
after August 1, 2008, we may, on any one or more occasions, redeem all or a part of the Notes at
the redemption prices set forth below, plus accrued and unpaid interest, if any, on the Notes
redeemed, to the applicable redemption date: Year
    
    Percentage2008
    
    
    104.125
    %2009
    
    
    102.750
    %2010
    
    
    101.375
    %2011 and thereafter
    
    
    100.000
    %
 35




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##### Table of Contents



We have entered into $18.5 million of demand notes payable to efficiently finance our
subsidiaries in the Central American Region. We maintain cash balances of $18.5 million in
certificates of deposit as compensating balances to collateralize these notes payable. The notes
payable accrue interest at a weighted average 8.52 percent. The certificates of deposit earn
interest at a weighted average of 8.11 percent and are reflected as restricted cash in the
accompanying condensed consolidated balance sheet. Financial Commitments As a result of the restructuring, we estimate that cash commitments for contract terminations,
severance and other exit activities will be in the range of $40 million to $53 million. However,
the final financial impact of the restructuring is dependent upon the ultimate exit transactions.
We expect to incur substantially all such charges in 2004. As of October 30, 2004, no amounts were drawn against our $200 million revolving credit facility.
The availability under the New Facility has been reduced, however, by $17.4 million in outstanding
letters of credit. As a result of the restatement discussed in Note 3 to the condensed consolidated
financial statements, our operating lease obligations as of October 30, 2004, are as follows: (dollars in millions)Payments Due by Period
    
    Operating lease obligationsRemainder of Year
    
    $
    69.41-3 Years
    
    
    467.73-5 Years
    
    
    353.9More than Five Years
    
    
    338.4Total
    
    $
    1,229.4
 For a discussion of our other contractual obligations, see a discussion of future commitments
under Item 7, Managements Discussion and Analysis of Financial Condition and Results of
Operations, in our Form 10-K for the fiscal year ended January 31, 2004. With the exception of
restructuring and restatement related obligations previously discussed, there have been no
significant developments with respect to our contractual obligations since January 31, 2004. FINANCIAL CONDITION RATIOS A summary of key financial information for the periods indicated is as follows: October 30, 2004
    
    
    November 1, 2003
    
    
    January 31, 2004Current Ratio
    
    
    2.4
    
    
    
    2.3
    
    
    
    2.3Debt-Capitalization Ratio*
    
    
    26.1
    %
    
    
    27.8
    %
    
    
    28.2
    %
   *
    
    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 67.0%, 67.1% and 66.8%
respectively, for the periods referred to above. STORE ACTIVITY As of October 30, 2004, we operated 5,022 retail shoe stores offering quality footwear and
accessories in all 50 of the United States, the District of Columbia, Puerto Rico, Guam, Saipan,
the U.S. Virgin Islands, Canada, and the Central and South American Regions. The following table
presents the change in store count for the entire company for the third quarter and first nine
months of 2004 and 2003. We consider a store relocation to be both a store opening and a store
closing. Third Quarter
    
    
    First Nine Months2004
    
    
    2003
    
    
    2004
    
    
    2003Beginning of period
    
    
    5,072
    
    
    
    5,020
    
    
    
    5,042
    
    
    
    4,992Stores opened
    
    
    78
    
    
    
    84
    
    
    
    226
    
    
    
    202Stores closed
    
    
    (128
    )
    
    
    (54
    )
    
    
    (246
    )
    
    
    (144
    )Ending store count
    
    
    5,022
    
    
    
    5,050
    
    
    
    5,022
    
    
    
    5,050
 36




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##### Table of Contents



As of October 30, 2004, we operated 148 stores in the Central America Region, 63 stores in the
South America Region and 304 stores in Canada. We have entered into a joint venture agreement to
operate Payless ShoeSource stores in Japan. We own 60 percent of the Japanese joint venture and,
therefore, have consolidated the results of such operations in our financial statements. We opened
the first test store in Japan during November 2004. We have curtailed any other expansion into new
international markets to focus on our core business. We intend to exit from all 32 stores in Chile and Peru, all Parade stores and approximately 260
Payless stores pursuant to the restructuring plan strategic initiatives. We began the year with
5,042 stores and expect to end the year with approximately 4,640 stores. CRITICAL ACCOUNTING POLICIES In preparing the condensed consolidated financial statements included in this Form 10-Q/A,
management makes estimates and assumptions that affect the amounts reported within the financial
statements. Actual results could differ from these estimates, and such differences may be material
to the condensed consolidated financial statements. We believe that the following critical
accounting policies involve a higher degree of judgment or complexity (see the notes to our
condensed consolidated financial statements for a complete discussion of our significant accounting
policies). Inventories Merchandise inventories in our stores are valued by the retail method and are stated at the lower
of cost, determined using the first-in, first-out (FIFO) basis, or market. Prior to shipment to a
specific store, inventories are valued at the lower of cost using the FIFO basis, or market. The
retail method is widely used in the retail industry due to its practicality. Under the retail
method, cost is determined by applying a calculated cost-to-retail ratio across groupings of
similar items, known as departments. As a result, the retail method results in an averaging of
inventory costs across similar items within a department. The cost-to-retail ratio is applied to
ending inventory at its current owned retail valuation to determine the cost of ending inventory on
a department basis. Current owned retail represents the retail price for which merchandise is
offered for sale on a regular basis reduced for any permanent or clearance markdowns. As a result,
the retail method normally results in an inventory valuation that is lower than a traditional FIFO
cost basis. Inherent in the retail method calculation are certain significant management judgments and
estimates including initial mark-up, markdowns and shrinkage, which can significantly impact the
owned retail and, therefore, the ending inventory valuation at cost. Specifically, the failure to
take permanent or clearance markdowns on a timely basis can result in an overstatement of cost
under the retail method. We believe that our application of the retail method reasonably states
inventory at the lower of cost or market. Property and Equipment Property and equipment are recorded at cost and depreciated on a straight-line basis over their
estimated useful lives. The useful lives of assets are based upon our expectations. Investments in
properties under capital leases and leasehold improvements are amortized over the shorter of their
useful lives or their related lease terms. Property and equipment are reviewed on a store-by-store basis if an indicator of impairment exists
to determine whether the carrying amount of the asset is recoverable. Estimated future cash flows
are used to determine if impairment exists. We use current operating results and historical
performance to estimate future cash flows on a store-by-store basis. Rent Expense Certain of the Companys lease agreements provide for scheduled rent increases during the lease
term, as well as provisions for renewal options. Rent expense is recognized on a straight-line
basis over the term of the lease from the time at which the Company takes possession of the
property. In instances where failure to exercise renewal options would result in an economic
penalty, the calculation of straight-line rent expense includes renewal option periods. Also,
landlord-provided tenant improvement allowances are recorded in other liabilities and amortized as
a credit to rent expense over the term of the lease. Insurance Programs We retain our normal expected losses related primarily to workers compensation, physical loss to
property and business interruption resulting from such loss and comprehensive general, product, and
vehicle liability. We purchase third party coverage for losses in excess of the normal expected
levels. Provisions for losses expected under these programs are recorded based upon estimates of
aggregate liability for claims incurred utilizing independent actuarial calculations. These
actuarial calculations utilize assumptions to 37




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estimate the frequency and severity of losses as well as the patterns surrounding the emergence,
development and settlement of claims based on historical results. Accounting for Taxes We are routinely under audit by the United States federal, state, local or international tax
authorities in the areas of income taxes and sales and use taxes. In evaluating the potential
exposures associated with our various tax filings, we accrue charges for possible exposures. Based
on the annual evaluations of tax positions, we believe we have appropriately filed our tax returns
and accrued for possible exposures. To the extent we were to prevail in income tax matters for
which accruals have been established or be required to pay amounts in excess of reserves, our
effective income tax rate in a given financial period might be impacted. We have various state,
local and international tax examinations currently in process. The fiscal years ending February 2,
2002 and after could still be subject to a U.S. federal income tax audit but currently there is
none in process. We record valuation allowances against our deferred tax assets, when necessary, in accordance with
Statement of Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes.
Realization of deferred tax assets (such as net operating loss carryforwards) is dependent on
future taxable earnings and is therefore uncertain. We assess the likelihood that our deferred tax
assets in each of the jurisdictions in which we operate will be recovered from future taxable
income. Deferred tax assets are reduced by a valuation allowance to recognize the extent to which,
more likely than not, the future tax benefits will not be realized. 
 ITEM 3  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK INTEREST RATE RISK Interest on our senior secured revolving credit facility, which is entirely comprised of a
revolving line of credit, is based on the London Inter-Bank Offered Rate (LIBOR) plus a variable
margin of 1.25 percent to 2.0 percent, or the base rate, as defined in the credit agreement. There
are no outstanding borrowings on the revolving line of credit; however, if we were to borrow
against our revolving line of credit, borrowing costs may fluctuate depending upon the volatility
of LIBOR and amounts borrowed. FOREIGN CURRENCY RISK We have retail operations in foreign countries; therefore, our cash flows in U.S. dollars are
impacted by fluctuations in foreign currency exchange rates. We adjust our retail prices, when
possible, to reflect changes in exchange rates to mitigate this risk. To further mitigate this
risk, we may, from time to time, enter into forward contracts to purchase or sell foreign
currencies. For the quarters and nine-month periods ended October 30, 2004, and November 1, 2003,
fluctuations in foreign currency exchange rates did not have a material impact on our operations or
cash flows and we did not enter into any forward contracts to purchase or sell foreign
currencies . In 2003, approximately 84 percent of our products, based on cost, were sourced from the
Peoples Republic of China (the PRC). The national currency of the PRC, the yuan, is currently
not a freely convertible currency. The yuan may be made freely convertible or be revalued by the
PRC government. If this occurs, the products we source from the PRC could become more expensive. 
 ITEM 4  CONTROLS AND PROCEDURES As of October 30, 2004, we carried out an evaluation, under the supervision and with the
participation of our principal executive officer and principal financial officer, of the
effectiveness of the design and operation of our disclosure controls and procedures. Based on this
evaluation, our principal executive officer and principal financial officer concluded that our
disclosure controls and procedures are effective in alerting them in a timely manner to material
information required to be disclosed in our periodic reports filed with the Securities Exchange
Commission . The Company does not consider the impact of correcting its previously issued
financial statements for the restatement discussed in Note 3 to the condensed consolidated
financial statements to be material to any individual reporting period. In addition, there was no change in our internal control over financial reporting that occurred
during the fiscal quarter to which this report relates that has materially affected, or is
reasonably likely to materially affect, our internal control over financial reporting. 38




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PART II  OTHER INFORMATION 
 ITEM 1  LEGAL PROCEEDINGS Other than as described below, there are no material pending legal proceedings other than ordinary,
routine litigation incidental to the business to which the Company is a party or of which any of
its property is subject. On or about December 20, 2001, a First Amended Complaint was filed against the Company in the U.S.
District Court for the District of Oregon, captioned Adidas America, Inc. and Adidas-Salomon AG v.
Payless ShoeSource, Inc. The First Amended Complaint seeks injunctive relief and unspecified
monetary damages for trademark and trade dress infringement, unfair competition, deceptive trade
practices and breach of contract. The Company believes it has meritorious defenses to claims
asserted in the lawsuit and has filed an answer and a motion for summary judgment which the court
granted in part. An estimate of the possible loss, if any, or the range of loss cannot be made. On or about January 20, 2000, a complaint was filed against the Company in the U.S. District Court
for the District of New Hampshire, captioned Howard J. Dananberg, D.P.M. v. Payless ShoeSource,
Inc. The Complaint seeks injunctive relief, unspecified treble monetary damages, attorneys fees,
interest and costs for patent infringement. The Company believes it has meritorious defenses to
claims asserted in the lawsuit. An estimate of the possible loss, if any, or the range of loss
cannot be made. 
 ITEM 2  CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIES The following table provides information about purchases by the Company (and its affiliated
purchasers) during the quarter ended October 30, 2004, of equity securities that are registered by
the Company pursuant to Section 12 of the Exchange Act: ISSUER PURCHASES OF EQUITY SECURITIES Total Number of Shares
    
    
    
    Approximate Dollar Value ofTotal Number of
    
    
    
    
    
    
    
    
    Purchased as Part of
    
    
    
    Shares that May Yet BeShares Purchased (1)
    
    
    
    Average Price Paid
    
    
    
    Publicly Announced
    
    
    
    Purchased Under the Plans orPeriod
    
    
    (in Thousands)
    
    
    
    per Share
    
    
    
    Plans or Programs (2)
    
    
    
    Programs (in Millions) (3)08/01/04  08/28/04
    
    
    
    7
    
    
    
    $
    10.75
    
    
    
    
    0
    
    
    
    $
    248.208/29/04  10/01/04
    
    
    
    5
    
    
    
    
    10.96
    
    
    
    
    0
    
    
    
    
    248.210/02/04  10/30/04
    
    
    
    5
    
    
    
    
    10.17
    
    
    
    
    0
    
    
    
    
    248.2Total
    
    
    
    17
    
    
    
    $
    10.64
    
    
    
    
    0
    
    
    
    $
    248.2
    (2) In 2001, our Board of Directors approved the repurchase of our common stock having a value of
up to $250 million in the aggregate pursuant to the Program. (3) The timing and amount of share repurchases, if any, are limited by the terms of the Companys
Credit Agreement and Senior Subordinated Notes. 39




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ITEM 6  EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: Number
    
    Description31.1
    
    Certification Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 of the Chairman of the Board and Chief Executive
Officer*31.2
    
    Certification Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 of the Senior Vice President, Chief Financial
Officer and Treasurer*32.1
    
    Certification Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 of the Chairman of the Board and Chief Executive
Officer*32.2
    
    Certification Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 of the Senior Vice President, Chief Financial
Officer and Treasurer*
   *
    
    Filed herewith (b) Reports on Form 8-K On December 2, 2004, the Company filed a Current Report on Form 8-K furnishing under item 7.01 the
Companys press release announcing its sales for the fiscal month of November, which ended November
27, 2004. On November 12, 2004, the Company filed a Current Report on Form 8-K furnishing under Items 5.02
and 7.01 the Companys press release announcing its results for the third fiscal quarter of 2004,
which ended October 30, 2004. On November 4, 2004, the Company filed a Current Report on Form 8-K furnishing under Item 7.01 the
Companys press release announcing its sales for the fiscal month of October, which ended October
30, 2004. On October 7, 2004, the Company filed a Current Report on Form 8-K furnishing under Items 7.01 and
8.01 the Companys press release announcing its sales for the fiscal month of September, which
ended October 2, 2004. On September 2, 2004, the Company filed a Current Report on Form 8-K furnishing under Items 5.02,
7.01 and 8.01 the Companys press release announcing its sales for the fiscal month of August,
which ended August 28, 2004 and certain management restructuring actions. On August 12, 2004, the Company filed a Current Report on Form 8-K furnishing under Items 9 and 12
the Companys press release announcing its results for the second fiscal quarter of 2004, which
ended July 31, 2004, and certain strategic initiatives. On August 5, 2004, the Company filed a Current Report on Form 8-K furnishing under Items 5 and 9
the Companys press release announcing its sales for the fiscal month of July, which ended July 31,
2004. 40




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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: June 7, 2005
    
    By:
    
    /s/ Steven J. DouglassSteven J. DouglassChairman of the Board andChief Executive Officer(Principal Executive Officer)Date: June 7, 2005
    
    By:
    
    /s/ Ullrich E. PorzigUllrich E. PorzigSenior Vice PresidentChief Financial Officer and Treasurer(Principal Financial and Accounting Officer)
 41




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Index to Exhibits Number
    
    Description31.1
    
    Certification Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 of the Chairman of the Board and Chief Executive
Officer*31.2
    
    Certification Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 of the Senior Vice President, Chief Financial
Officer and Treasurer*32.1
    
    Certification Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 of the Chairman of the Board and Chief Executive
Officer*32.2
    
    Certification Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 of the Senior Vice President, Chief Financial
Officer and Treasurer*
   *
    
    Filed herewith