##### Table of Contents



SECURITIES AND EXCHANGE COMMISSION  FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D)
OF THE SECURITIES EXCHANGE ACT OF 1934 For The Quarterly Period Ended October 30, 2004 Commission File Number 1-14770 PAYLESS SHOESOURCE, INC.  DELAWARE
    
    43-1813160(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification Number)3231 SOUTHEAST SIXTH AVENUE, TOPEKA, KANSAS
    
    66607-2207(Address of principal executive offices)
    
    (Zip Code)
 (785) 233-5171
(Registrants telephone number,
including area code) Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [  ]
 Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934). YES [X] NO [  ]
 Indicate the number of shares outstanding of each of the issuers classes of
common stock, as of the latest practicable date. Common Stock, $.01 par value
68,093,770 shares as of December 6, 2004




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TABLE OF CONTENTS  PART I  FINANCIAL INFORMATIONITEM 1  FINANCIAL STATEMENTSCONDENSED CONSOLIDATED BALANCE SHEETSCONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (LOSS)CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWSNOTES TO CONDENSED CONSOLIDATED 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-KSIGNATURESComputation of Net Earnings (Loss) Per Share302 Certification of Chairman of the Board & CEO302 Certification of Sr. VP, CFO and Treasurer906 Certification of Chairman of the Board & CEO906 Certification of Sr. VP, CFO and Treasurer    Table of Contents  
 PART I  FINANCIAL INFORMATION 
 ITEM 1  FINANCIAL STATEMENTS PAYLESS SHOESOURCE, INC. AND SUBSIDIARIES 
 
 October 30,
    
    November 1,
    
    January 31,(dollars in millions)

    
    2004
    
    2003
    
    2004ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    226.1
    
    
    $
    140.8
    
    
    $
    148.9Restricted cash
    
    
    18.5
    
    
    
    33.5
    
    
    
    33.5Inventories
    
    
    375.9
    
    
    
    410.7
    
    
    
    392.4Current deferred income taxes
    
    
    27.0
    
    
    
    13.8
    
    
    
    17.3Other current assets
    
    
    62.5
    
    
    
    80.0
    
    
    
    61.0Total current assets
    
    
    710.0
    
    
    
    678.8
    
    
    
    653.1Property and Equipment:Land
    
    
    8.0
    
    
    
    8.0
    
    
    
    8.0Buildings and leasehold improvements
    
    
    649.1
    
    
    
    652.5
    
    
    
    666.5Furniture, fixtures and equipment
    
    
    548.3
    
    
    
    509.4
    
    
    
    517.6Property under capital leases
    
    
    4.6
    
    
    
    4.6
    
    
    
    4.6Total property and equipment
    
    
    1,210.0
    
    
    
    1,174.5
    
    
    
    1,196.7Accumulated depreciation and amortization
    
    
    (804.8
    )
    
    
    (750.6
    )
    
    
    (764.7
    )Property and equipment, net
    
    
    405.2
    
    
    
    423.9
    
    
    
    432.0Favorable leases, net
    
    
    22.7
    
    
    
    30.6
    
    
    
    29.2Deferred income taxes
    
    
    32.9
    
    
    
    22.8
    
    
    
    27.7Goodwill
    
    
    5.9
    
    
    
    5.9
    
    
    
    5.9Other assets
    
    
    26.2
    
    
    
    32.0
    
    
    
    24.9Total Assets
    
    $
    1,202.9
    
    
    $
    1,194.0
    
    
    $
    1,172.8LIABILITIES AND SHAREOWNERS EQUITYCurrent Liabilities:Current maturities of debt
    
    $
    3.5
    
    
    $
    0.9
    
    
    $
    0.9Notes payable
    
    
    18.5
    
    
    
    33.5
    
    
    
    33.5Accounts payable
    
    
    110.7
    
    
    
    131.2
    
    
    
    133.0Accrued expenses
    
    
    158.9
    
    
    
    130.9
    
    
    
    117.8Total current liabilities
    
    
    291.6
    
    
    
    296.5
    
    
    
    285.2Long-term debt
    
    
    202.1
    
    
    
    202.9
    
    
    
    202.8Other liabilities
    
    
    65.9
    
    
    
    57.5
    
    
    
    61.3Minority interest
    
    
    7.7
    
    
    
    16.4
    
    
    
    16.0Total shareowners equity
    
    
    635.6
    
    
    
    620.7
    
    
    
    607.5Total Liabilities and Shareowners Equity
    
    $
    1,202.9
    
    
    $
    1,194.0
    
    
    $
    1,172.8
 See Notes to Condensed Consolidated Financial Statements. 2




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##### Table of Contents



PAYLESS SHOESOURCE, INC. AND SUBSIDIARIES 
 
 13 Weeks Ended
    
    39 Weeks Ended(dollars and shares in millions, except per share)
    
    October 30, 2004
    
    November 1, 2003
    
    October 30, 2004
    
    November 1, 2003Net sales
    
    $
    687.3
    
    
    $
    709.7
    
    
    $
    2,137.2
    
    
    $
    2,138.9Cost of sales
    
    
    485.2
    
    
    
    520.5
    
    
    
    1,488.7
    
    
    
    1,546.9Selling, general and administrative expenses
    
    
    183.1
    
    
    
    190.1
    
    
    
    573.1
    
    
    
    558.9Restructuring charges
    
    
    7.3
    
    
    
    
    
    
    
    44.0
    
    
    
    Operating profit (loss)
    
    
    11.7
    
    
    
    (0.9
    )
    
    
    31.4
    
    
    
    33.1Interest expense
    
    
    5.5
    
    
    
    6.0
    
    
    
    16.7
    
    
    
    15.4Interest income
    
    
    (1.2
    )
    
    
    (1.1
    )
    
    
    (3.5
    )
    
    
    (3.1
    )Earnings (Loss) before income taxes and
minority interest
    
    
    7.4
    
    
    
    (5.8
    )
    
    
    18.2
    
    
    
    20.8Provision (Benefit) for income taxes
    
    
    2.1
    
    
    
    (2.1
    )
    
    
    4.6
    
    
    
    7.6Earnings (Loss) before minority interest
    
    
    5.3
    
    
    
    (3.7
    )
    
    
    13.6
    
    
    
    13.2Minority interest, net of income tax
    
    
    1.3
    
    
    
    1.5
    
    
    
    10.4
    
    
    
    3.9Net Earnings (Loss)
    
    $
    6.6
    
    
    $
    (2.2
    )
    
    $
    24.0
    
    
    $
    17.1Diluted Earnings (Loss) per Share
    
    $
    0.10
    
    
    $
    (0.03
    )
    
    $
    0.35
    
    
    $
    0.25Basic Earnings (Loss) per Share
    
    $
    0.10
    
    
    $
    (0.03
    )
    
    $
    0.35
    
    
    $
    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. 3




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##### Table of Contents



PAYLESS SHOESOURCE, INC. AND SUBSIDIARIES 
 
 39 Weeks Ended(dollars in millions)
    
    October 30, 2004
    
    November 1, 2003Operating Activities:Net earnings
    
    $
    24.0
    
    
    $
    17.1Adjustments for non-cash items included
in net earnings:Non-cash component of restructuring charges
    
    
    36.8
    
    
    
    Loss on impairment of and disposal of assets
    
    
    6.7
    
    
    
    13.1Depreciation and amortization
    
    
    73.9
    
    
    
    74.8Amortization of deferred financing costs
    
    
    0.9
    
    
    
    3.8Amortization of unearned restricted stock
    
    
    0.5
    
    
    
    0.5Deferred income taxes
    
    
    (14.9
    )
    
    
    8.8Minority interest, net of tax
    
    
    (10.4
    )
    
    
    (3.9
    )Income tax charge of stock option exercises
    
    
    (0.1
    )
    
    
    Changes in working capital:Inventories
    
    
    15.5
    
    
    
    41.8Other current assets
    
    
    (1.5
    )
    
    
    (21.2
    )Accounts payable
    
    
    (22.3
    )
    
    
    24.8Accrued expenses
    
    
    41.1
    
    
    
    6.3Other assets and liabilities, net
    
    
    2.1
    
    
    
    5.7Cash flow provided by operating activities
    
    
    152.3
    
    
    
    171.6Investing Activities:Capital expenditures
    
    
    (77.9
    )
    
    
    (81.9
    )Disposition of property and equipment
    
    
    
    
    
    
    1.0Cash flow used in investing activities
    
    
    (77.9
    )
    
    
    (80.9
    )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
    )
    
    
    (5.5
    )Repayment of debt
    
    
    (0.7
    )
    
    
    (216.8
    )Net purchases of common stock
    
    
    (0.8
    )
    
    
    (0.3
    )Contributions by minority owners
    
    
    1.9
    
    
    
    3.6Other financing activities
    
    
    0.2
    
    
    
    (1.1
    )Cash flow provided by (used in) financing
activities
    
    
    2.8
    
    
    
    (23.4
    )Increase in cash and cash equivalents
    
    
    77.2
    
    
    
    67.3Cash and cash equivalents, beginning of year
    
    
    148.9
    
    
    
    73.5Cash and cash equivalents, end of period
    
    $
    226.1
    
    
    $
    140.8Cash paid during the period for:Interest
    
    $
    20.8
    
    
    $
    11.6Income Taxes
    
    $
    1.6
    
    
    $
    17.1
 See Notes to Condensed Consolidated Financial Statements. 4




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##### Table of Contents



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 and should be read in conjunction with the Notes to the Consolidated
Financial Statements (pages 30-52) in the Companys 2003 Annual Report on Form
10-K. 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. 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. 13 Weeks Ended
    
    39 Weeks Ended(dollars in millions, except per share amounts)
    
    October 30, 2004
    
    November 1, 2003
    
    October 30, 2004
    
    November 1, 2003Net earnings (loss):As reported
    
    $
    6.6
    
    
    $
    (2.2
    )
    
    $
    24.0
    
    
    $
    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
    )
    
    $
    22.1
    
    
    $
    13.4Diluted earnings (loss) per share:As reported
    
    $
    0.10
    
    
    $
    (0.03
    )
    
    $
    0.35
    
    
    $
    0.25Pro forma
    
    $
    0.09
    
    
    $
    (0.05
    )
    
    $
    0.32
    
    
    $
    0.19Basic earnings (loss) per share:As reported
    
    $
    0.10
    
    
    $
    (0.03
    )
    
    $
    0.35
    
    
    $
    0.25Pro forma
    
    $
    0.09
    
    
    $
    (0.05
    )
    
    $
    0.32
    
    
    $
    0.19
 5




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##### Table of Contents



NOTE 3. 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. Raw materials of $8.3 million, $15.6 million and $19.5 million are
included in inventories in the condensed consolidated balance sheet at October
30, 2004, November 1, 2003, and January 31, 2004, respectively. NOTE 4. 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 $36.8 million
restructuring charges discussed in Footnote 10, 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
    
    $
    80.8
    
    
    $
    88.4
    
    
    $
    87.9Less: accumulated amortization
    
    
    58.1
    
    
    
    57.8
    
    
    
    58.7Carrying amount, end of period
    
    $
    22.7
    
    
    $
    30.6
    
    
    $
    29.2
 Amortization expense on favorable leases was as follows: 13 Weeks Ended
    
    39 Weeks Ended(dollars in millions)
    
    October 30, 2004
    
    November 1, 2003
    
    October 30, 2004
    
    November 1, 2003Amortization
expense on
favorable leases
    
    $
    1.0
    
    
    $
    1.2
    
    
    $
    3.2
    
    
    $
    3.8
 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 5. 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. 6




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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 6. 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. The components of net periodic benefit costs for the plan were: 13 Weeks Ended
    
    39 Weeks Ended(dollars in millions)
    
    October 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 7. INCOME TAXES. The Companys effective income tax rate was 28.4 percent
in the third quarter and 25.3 percent for the first nine months of 2004. The
effective income tax rate of 28.4 percent for the third quarter includes an
adjustment to reflect an effective tax rate of 25.3 percent for the first nine
months of the year. The Company anticipates a tax benefit at the rate of 25.3
percent for the full fiscal year 2004. The Companys effective income tax rate
was 36.5 percent in the third quarter and first nine months of 2003. 7




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NOTE 8. COMPREHENSIVE INCOME (LOSS). The following table shows the computation
of comprehensive income (loss): 13 Weeks Ended
    
    39 Weeks Ended(dollars in millions)
    
    October 30, 2004
    
    November 1, 2003
    
    October 30, 2004
    
    November 1, 2003Net Earnings (Loss)
    
    $
    6.6
    
    
    $
    (2.2
    )
    
    $
    24.0
    
    
    $
    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
    )
    
    $
    28.4
    
    
    $
    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 9. 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
exercise of stock options. NOTE 10. 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 related to 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 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). 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 consideration of Orion
assuming the liabilities of the entity. In conjunction with this transaction,
the Company recorded approximately $1 million of reductions in the carrying
value of assets during the third quarter. 8




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##### Table of Contents



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, not including the related tax benefit. 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: 13 Weeks Ended
    
    39 Weeks Ended(dollars in millions)
    
    October 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 in the condensed consolidated balances sheets, are summarized
below: 13 Weeks Ended October 30, 2004Accrual Balance as of(dollars in millions)
    
    Cash 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 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: 13 Weeks Ended
    
    39 Weeks Ended(dollars in millions)
    
    October 30, 2004
    
    October 30, 2004Payless Domestic
    
    $
    4.6
    
    
    $
    32.1Payless International
    
    
    2.7
    
    
    
    11.9Total
    
    $
    7.3
    
    
    $
    44.0
 9




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NOTE 11. 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 $4.3 million during the same period in 2003. For the first nine months
of 2004, these total costs and fees amounted to $15.4 million, compared with
$13.3 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
    
    $
    603.7
    
    
    $
    83.6
    
    
    $
    687.3Operating profit (loss)
    
    
    17.1
    
    
    
    (5.4
    )
    
    
    11.7Thirty-nine weeks ended October 30, 2004Revenues from external customers
    
    $
    1,893.9
    
    
    $
    243.3
    
    
    $
    2,137.2Operating profit (loss)
    
    
    40.0
    
    
    
    (8.6
    )
    
    
    31.4Total assets
    
    
    1,027.5
    
    
    
    175.4
    
    
    
    1,202.9Thirteen weeks ended November 1, 2003Revenues from external customers
    
    $
    631.2
    
    
    $
    78.5
    
    
    $
    709.7Operating profit (loss)
    
    
    0.8
    
    
    
    (1.7
    )
    
    
    (0.9
    )Thirty-nine weeks ended November 1, 2003Revenues from external customers
    
    $
    1,909.1
    
    
    $
    229.8
    
    
    $
    2,138.9Operating profit (loss)
    
    
    38.5
    
    
    
    (5.4
    )
    
    
    33.1Total assets
    
    
    994.1
    
    
    
    199.9
    
    
    
    1,194.0
 Total assets for the Payless Domestic segment include $5.9 million in goodwill
as of October 30, 2004, and November 1, 2003. NOTE 12. RECLASSIFICATIONS. Certain reclassifications have been made to prior
years balances to conform to the current year presentation. NOTE 13. 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 (loss) and are included as a separate component of
shareowners equity. 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. 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. 10




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##### Table of Contents



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. 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. 11




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##### Table of Contents



CONDENSED CONSOLIDATING BALANCE SHEET
(UNAUDITED)
As of October 30, 2004 Parent
    
    Guarantor
    
    Non-guarantor(dollars in millions)
    
    Company
    
    Subsidiaries
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedASSETSCurrent Assets:Cash and cash equivalents
    
    $
    
    
    
    $
    167.4
    
    
    $
    58.7
    
    
    $
    
    
    
    $
    226.1Restricted cash
    
    
    
    
    
    
    
    
    
    
    18.5
    
    
    
    
    
    
    
    18.5Inventories
    
    
    
    
    
    
    308.6
    
    
    
    70.5
    
    
    
    (3.2
    )
    
    
    375.9Current deferred income taxes
    
    
    
    
    
    
    27.0
    
    
    
    
    
    
    
    
    
    
    
    27.0Other current assets
    
    
    14.1
    
    
    
    58.8
    
    
    
    40.3
    
    
    
    (50.7
    )
    
    
    62.5Total current assets
    
    
    14.1
    
    
    
    561.8
    
    
    
    188.0
    
    
    
    (53.9
    )
    
    
    710.0Property and Equipment:Land
    
    
    
    
    
    
    8.0
    
    
    
    
    
    
    
    
    
    
    
    8.0Buildings and leasehold improvements
    
    
    
    
    
    
    576.7
    
    
    
    72.4
    
    
    
    
    
    
    
    649.1Furniture, fixtures and equipment
    
    
    
    
    
    
    486.9
    
    
    
    61.4
    
    
    
    
    
    
    
    548.3Property under capital leases
    
    
    
    
    
    
    4.6
    
    
    
    
    
    
    
    
    
    
    
    4.6Total property and equipment
    
    
    
    
    
    
    1,076.2
    
    
    
    133.8
    
    
    
    
    
    
    
    1,210.0Accumulated depreciation and amortization
    
    
    
    
    
    
    (740.4
    )
    
    
    (64.4
    )
    
    
    
    
    
    
    (804.8
    )Property and equipment, net
    
    
    
    
    
    
    335.8
    
    
    
    69.4
    
    
    
    
    
    
    
    405.2Favorable leases, net
    
    
    
    
    
    
    22.7
    
    
    
    
    
    
    
    
    
    
    
    22.7Deferred income taxes
    
    
    
    
    
    
    22.9
    
    
    
    10.0
    
    
    
    
    
    
    
    32.9Goodwill
    
    
    
    
    
    
    5.9
    
    
    
    
    
    
    
    
    
    
    
    5.9Other assets
    
    
    1,106.1
    
    
    
    453.2
    
    
    
    2.0
    
    
    
    (1,535.1
    )
    
    
    26.2Total Assets
    
    $
    1,120.2
    
    
    $
    1,402.3
    
    
    $
    269.4
    
    
    $
    (1,589.0
    )
    
    $
    1,202.9LIABILITIES AND SHAREOWNERS EQUITYCurrent Liabilities:Current maturities of long-term debt
    
    $
    
    
    
    $
    1.1
    
    
    $
    2.4
    
    
    $
    
    
    
    $
    3.5Notes payable
    
    
    
    
    
    
    
    
    
    
    18.5
    
    
    
    
    
    
    
    18.5Accounts payable
    
    
    
    
    
    
    93.7
    
    
    
    57.4
    
    
    
    (40.4
    )
    
    
    110.7Accrued expenses
    
    
    3.1
    
    
    
    144.9
    
    
    
    24.4
    
    
    
    (13.5
    )
    
    
    158.9Total current liabilities
    
    
    3.1
    
    
    
    239.7
    
    
    
    102.7
    
    
    
    (53.9
    )
    
    
    291.6Long-term debt
    
    
    480.0
    
    
    
    1.1
    
    
    
    4.0
    
    
    
    (283.0
    )
    
    
    202.1Other liabilities
    
    
    1.5
    
    
    
    86.7
    
    
    
    10.1
    
    
    
    (32.4
    )
    
    
    65.9Minority interest
    
    
    
    
    
    
    
    
    
    
    7.7
    
    
    
    
    
    
    
    7.7Total shareowners equity
    
    
    635.6
    
    
    
    1,074.8
    
    
    
    144.9
    
    
    
    (1,219.7
    )
    
    
    635.6Total Liabilities and Shareowners Equity
    
    $
    1,120.2
    
    
    $
    1,402.3
    
    
    $
    269.4
    
    
    $
    (1,589.0
    )
    
    $
    1,202.9
 12




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##### Table of Contents



CONDENSED CONSOLIDATING BALANCE SHEET
(UNAUDITED)
As of November 1, 2003 Parent
    
    Guarantor
    
    Non-guarantor(dollars in millions)
    
    Company
    
    Subsidiaries
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedASSETSCurrent Assets:Cash and cash equivalents
    
    $
    
    
    
    $
    106.3
    
    
    $
    34.5
    
    
    $
    
    
    
    $
    140.8Restricted cash
    
    
    
    
    
    
    
    
    
    
    33.5
    
    
    
    
    
    
    
    33.5Inventories
    
    
    
    
    
    
    312.2
    
    
    
    98.5
    
    
    
    
    
    
    
    410.7Current deferred income taxes
    
    
    
    
    
    
    13.1
    
    
    
    0.7
    
    
    
    
    
    
    
    13.8Other current assets
    
    
    5.7
    
    
    
    90.6
    
    
    
    44.8
    
    
    
    (61.1
    )
    
    
    80.0Total current assets
    
    
    5.7
    
    
    
    522.2
    
    
    
    212.0
    
    
    
    (61.1
    )
    
    
    678.8Property and Equipment:Land
    
    
    
    
    
    
    8.0
    
    
    
    
    
    
    
    
    
    
    
    8.0Buildings and leasehold improvements
    
    
    
    
    
    
    584.3
    
    
    
    68.2
    
    
    
    
    
    
    
    652.5Furniture, fixtures and equipment
    
    
    
    
    
    
    451.1
    
    
    
    58.3
    
    
    
    
    
    
    
    509.4Property under capital leases
    
    
    
    
    
    
    4.6
    
    
    
    
    
    
    
    
    
    
    
    4.6Total property and equipment
    
    
    
    
    
    
    1,048.0
    
    
    
    126.5
    
    
    
    
    
    
    
    1,174.5Accumulated depreciation and amortization
    
    
    
    
    
    
    (699.0
    )
    
    
    (51.6
    )
    
    
    
    
    
    
    (750.6
    )Property and equipment, net
    
    
    
    
    
    
    349.0
    
    
    
    74.9
    
    
    
    
    
    
    
    423.9Favorable leases, net
    
    
    
    
    
    
    30.6
    
    
    
    
    
    
    
    
    
    
    
    30.6Deferred income taxes
    
    
    
    
    
    
    13.0
    
    
    
    9.8
    
    
    
    
    
    
    
    22.8Goodwill
    
    
    
    
    
    
    5.9
    
    
    
    
    
    
    
    
    
    
    
    5.9Other assets
    
    
    1,105.5
    
    
    
    426.0
    
    
    
    14.2
    
    
    
    (1,513.7
    )
    
    
    32.0Total Assets
    
    $
    1,111.2
    
    
    $
    1,346.7
    
    
    $
    310.9
    
    
    $
    (1,574.8
    )
    
    $
    1,194.0LIABILITIES AND SHAREOWNERS EQUITYCurrent Liabilities:Current maturities of long-term debt
    
    $
    
    
    
    $
    0.9
    
    
    $
    
    
    
    $
    
    
    
    $
    0.9Notes payable
    
    
    
    
    
    
    
    
    
    
    33.5
    
    
    
    
    
    
    
    33.5Accounts payable
    
    
    
    
    
    
    85.8
    
    
    
    100.1
    
    
    
    (54.7
    )
    
    
    131.2Accrued expenses
    
    
    10.6
    
    
    
    111.3
    
    
    
    15.4
    
    
    
    (6.4
    )
    
    
    130.9Total 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
    
    
    
    
    
    
    101.6
    
    
    
    8.5
    
    
    
    (52.6
    )
    
    
    57.5Minority interest
    
    
    
    
    
    
    
    
    
    
    16.4
    
    
    
    
    
    
    
    16.4Total shareowners equity
    
    
    620.7
    
    
    
    1,045.0
    
    
    
    133.0
    
    
    
    (1,178.0
    )
    
    
    620.7Total Liabilities and Shareowners Equity
    
    $
    1,111.2
    
    
    $
    1,346.7
    
    
    $
    310.9
    
    
    $
    (1,574.8
    )
    
    $
    1,194.0
 13




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##### Table of Contents



CONDENSED CONSOLIDATING BALANCE SHEET
(UNAUDITED)
As of January 31, 2004 Parent
    
    Guarantor
    
    Non-guarantor(dollars in millions)
    
    Company
    
    Subsidiaries
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedASSETSCurrent Assets:Cash and cash equivalents
    
    $
    
    
    
    $
    77.5
    
    
    $
    71.4
    
    
    $
    
    
    
    $
    148.9Restricted cash
    
    
    
    
    
    
    
    
    
    
    33.5
    
    
    
    
    
    
    
    33.5Inventories
    
    
    
    
    
    
    322.9
    
    
    
    73.7
    
    
    
    (4.2
    )
    
    
    392.4Current deferred income taxes
    
    
    
    
    
    
    17.2
    
    
    
    0.1
    
    
    
    
    
    
    
    17.3Other current assets
    
    
    6.6
    
    
    
    65.9
    
    
    
    43.8
    
    
    
    (55.3
    )
    
    
    61.0Total current assets
    
    
    6.6
    
    
    
    483.5
    
    
    
    222.5
    
    
    
    (59.5
    )
    
    
    653.1Property and Equipment:Land
    
    
    
    
    
    
    8.0
    
    
    
    
    
    
    
    
    
    
    
    8.0Buildings and leasehold improvements
    
    
    
    
    
    
    593.9
    
    
    
    72.6
    
    
    
    
    
    
    
    666.5Furniture, fixtures and equipment
    
    
    
    
    
    
    457.4
    
    
    
    60.2
    
    
    
    
    
    
    
    517.6Property under capital leases
    
    
    
    
    
    
    4.6
    
    
    
    
    
    
    
    
    
    
    
    4.6Total property and equipment
    
    
    
    
    
    
    1,063.9
    
    
    
    132.8
    
    
    
    
    
    
    
    1,196.7Accumulated depreciation and amortization
    
    
    
    
    
    
    (711.2
    )
    
    
    (53.5
    )
    
    
    
    
    
    
    (764.7
    )Property and equipment, net
    
    
    
    
    
    
    352.7
    
    
    
    79.3
    
    
    
    
    
    
    
    432.0Favorable leases, net
    
    
    
    
    
    
    29.2
    
    
    
    
    
    
    
    
    
    
    
    29.2Deferred income taxes
    
    
    
    
    
    
    21.2
    
    
    
    6.5
    
    
    
    
    
    
    
    27.7Goodwill
    
    
    
    
    
    
    5.9
    
    
    
    
    
    
    
    
    
    
    
    5.9Other assets
    
    
    1,088.2
    
    
    
    440.7
    
    
    
    3.5
    
    
    
    (1,507.5
    )
    
    
    24.9Total Assets
    
    $
    1,094.8
    
    
    $
    1,333.2
    
    
    $
    311.8
    
    
    $
    (1,567.0
    )
    
    $
    1,172.8LIABILITIES AND SHAREOWNERS EQUITYCurrent Liabilities:Current maturities of long-term debt
    
    $
    
    
    
    $
    0.9
    
    
    $
    
    
    
    $
    
    
    
    $
    0.9Notes payable
    
    
    
    
    
    
    
    
    
    
    33.5
    
    
    
    
    
    
    
    33.5Accounts payable
    
    
    
    
    
    
    86.9
    
    
    
    98.1
    
    
    
    (52.0
    )
    
    
    133.0Accrued expenses
    
    
    7.5
    
    
    
    101.9
    
    
    
    15.9
    
    
    
    (7.5
    )
    
    
    117.8Total current liabilities
    
    
    7.5
    
    
    
    189.7
    
    
    
    147.5
    
    
    
    (59.5
    )
    
    
    285.2Long-term debt
    
    
    479.8
    
    
    
    2.0
    
    
    
    4.0
    
    
    
    (283.0
    )
    
    
    202.8Other liabilities
    
    
    
    
    
    
    113.0
    
    
    
    8.8
    
    
    
    (60.5
    )
    
    
    61.3Minority interest
    
    
    
    
    
    
    
    
    
    
    16.0
    
    
    
    
    
    
    
    16.0Total shareowners equity
    
    
    607.5
    
    
    
    1,028.5
    
    
    
    135.5
    
    
    
    (1,164.0
    )
    
    
    607.5Total Liabilities and Shareowners Equity
    
    $
    1,094.8
    
    
    $
    1,333.2
    
    
    $
    311.8
    
    
    $
    (1,567.0
    )
    
    $
    1,172.8
 14




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##### Table of Contents



CONDENSED CONSOLIDATING STATEMENT OF EARNINGS (LOSS)
(UNAUDITED)
For the Thirteen Weeks Ended October 30, 2004 Parent
    
    Guarantor
    
    Non-guarantor(dollars in millions)
    
    Company
    
    Subsidiaries
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedNet sales
    
    $
    
    
    
    $
    636.7
    
    
    $
    166.0
    
    
    $
    (115.4
    )
    
    $
    687.3Cost of sales
    
    
    
    
    
    
    466.4
    
    
    
    132.1
    
    
    
    (113.3
    )
    
    
    485.2Selling, general and administrative expense
    
    
    0.8
    
    
    
    151.5
    
    
    
    32.9
    
    
    
    (2.1
    )
    
    
    183.1Restructuring charges
    
    
    
    
    
    
    5.8
    
    
    
    1.5
    
    
    
    
    
    
    
    7.3Operating (loss) profit
    
    
    (0.8
    )
    
    
    13.0
    
    
    
    (0.5
    )
    
    
    
    
    
    
    11.7Interest 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
    )
    
    
    3.1
    
    
    
    
    
    
    
    8.7
    
    
    
    Earnings (Loss) before income taxes and minority
interest
    
    
    4.1
    
    
    
    12.7
    
    
    
    (0.7
    )
    
    
    (8.7
    )
    
    
    7.4(Benefit) Provision for income taxes
    
    
    (2.5
    )
    
    
    0.9
    
    
    
    3.7
    
    
    
    
    
    
    
    2.1Earnings (Loss) before minority interest
    
    
    6.6
    
    
    
    11.8
    
    
    
    (4.4
    )
    
    
    (8.7
    )
    
    
    5.3Minority interest, net of income tax
    
    
    
    
    
    
    
    
    
    
    1.3
    
    
    
    
    
    
    
    1.3Net earnings (loss)
    
    $
    6.6
    
    
    $
    11.8
    
    
    $
    (3.1
    )
    
    $
    (8.7
    )
    
    $
    6.6
 CONDENSED CONSOLIDATING STATEMENT OF EARNINGS (LOSS)
(UNAUDITED)
For the Thirteen Weeks Ended November 1, 2003 Parent
    
    Guarantor
    
    Non-guarantor(dollars in millions)
    
    Company
    
    Subsidiaries
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedNet sales
    
    $
    
    
    
    $
    669.5
    
    
    $
    162.3
    
    
    $
    (122.1
    )
    
    $
    709.7Cost of sales
    
    
    
    
    
    
    508.9
    
    
    
    132.2
    
    
    
    (120.6
    )
    
    
    520.5Selling, general and administrative expense
    
    
    1.3
    
    
    
    166.8
    
    
    
    23.5
    
    
    
    (1.5
    )
    
    
    190.1Operating (loss) profit
    
    
    (1.3
    )
    
    
    (6.2
    )
    
    
    6.6
    
    
    
    
    
    
    
    (0.9
    )Interest 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
    )
    
    
    (8.2
    )
    
    
    
    
    
    
    10.2
    
    
    
    (Loss) Earnings before income taxes and minority
interest
    
    
    (4.6
    )
    
    
    2.5
    
    
    
    6.5
    
    
    
    (10.2
    )
    
    
    (5.8
    )(Benefit) Provision for income taxes
    
    
    (2.4
    )
    
    
    0.5
    
    
    
    (0.2
    )
    
    
    
    
    
    
    (2.1
    )(Loss) Earnings before minority interest
    
    
    (2.2
    )
    
    
    2.0
    
    
    
    6.7
    
    
    
    (10.2
    )
    
    
    (3.7
    )Minority interest, net of tax
    
    
    
    
    
    
    
    
    
    
    1.5
    
    
    
    
    
    
    
    1.5Net (loss) earnings
    
    $
    (2.2
    )
    
    $
    2.0
    
    
    $
    8.2
    
    
    $
    (10.2
    )
    
    $
    (2.2
    )
 15




---



##### Table of Contents



CONDENSED CONSOLIDATING STATEMENT OF EARNINGS (LOSS)
(UNAUDITED)
For the Thirty-nine Weeks Ended October 30, 2004 Parent
    
    Guarantor
    
    Non-guarantor(dollars in millions)
    
    Company
    
    Subsidiaries
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedNet sales
    
    $
    
    
    
    $
    1,990.7
    
    
    $
    495.9
    
    
    $
    (349.4
    )
    
    $
    2,137.2Cost of sales
    
    
    
    
    
    
    1,422.6
    
    
    
    409.0
    
    
    
    (342.9
    )
    
    
    1,488.7Selling, general and administrative expense
    
    
    1.8
    
    
    
    501.4
    
    
    
    76.4
    
    
    
    (6.5
    )
    
    
    573.1Restructuring charges
    
    
    
    
    
    
    33.3
    
    
    
    10.7
    
    
    
    
    
    
    
    44.0Operating (loss) profit
    
    
    (1.8
    )
    
    
    33.4
    
    
    
    (0.2
    )
    
    
    
    
    
    
    31.4Interest expense
    
    
    19.6
    
    
    
    0.3
    
    
    
    3.5
    
    
    
    (6.7
    )
    
    
    16.7Interest income
    
    
    
    
    
    
    (7.7
    )
    
    
    (2.5
    )
    
    
    6.7
    
    
    
    (3.5
    )Equity in (loss) earnings of subsidiaries
    
    
    (37.9
    )
    
    
    (7.1
    )
    
    
    
    
    
    
    45.0
    
    
    
    Earnings (Loss) before income taxes and minority
interest
    
    
    16.5
    
    
    
    47.9
    
    
    
    (1.2
    )
    
    
    (45.0
    )
    
    
    18.2Provision (Benefit) for income taxes
    
    
    (7.5
    )
    
    
    10.0
    
    
    
    2.1
    
    
    
    
    
    
    
    4.6Earnings (Loss) before minority interest
    
    
    24.0
    
    
    
    37.9
    
    
    
    (3.3
    )
    
    
    (45.0
    )
    
    
    13.6Minority interest, net of income tax
    
    
    
    
    
    
    
    
    
    
    10.4
    
    
    
    
    
    
    
    10.4Net earnings (loss)
    
    $
    24.0
    
    
    $
    37.9
    
    
    $
    7.1
    
    
    $
    (45.0
    )
    
    $
    24.0
 CONDENSED CONSOLIDATING STATEMENT OF EARNINGS (LOSS)
(UNAUDITED)
For the Thirty-nine Weeks Ended November 1, 2003 Parent
    
    Guarantor
    
    Non-guarantor(dollars in millions)
    
    Company
    
    Subsidiaries
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedNet sales
    
    $
    
    
    
    $
    2,009.6
    
    
    $
    519.7
    
    
    $
    (390.4
    )
    
    $
    2,138.9Cost of sales
    
    
    
    
    
    
    1,502.7
    
    
    
    429.7
    
    
    
    (385.5
    )
    
    
    1,546.9Selling, general and administrative expense
    
    
    1.4
    
    
    
    492.9
    
    
    
    69.4
    
    
    
    (4.8
    )
    
    
    558.9Operating (loss) profit
    
    
    (1.4
    )
    
    
    14.0
    
    
    
    20.6
    
    
    
    (0.1
    )
    
    
    33.1Interest expense
    
    
    11.8
    
    
    
    9.1
    
    
    
    3.1
    
    
    
    (8.6
    )
    
    
    15.4Interest income
    
    
    
    
    
    
    (9.1
    )
    
    
    (2.5
    )
    
    
    8.5
    
    
    
    (3.1
    )Equity in (loss) earnings of subsidiaries
    
    
    (25.5
    )
    
    
    (25.1
    )
    
    
    
    
    
    
    50.6
    
    
    
    Earnings before income taxes and minority
interest
    
    
    12.3
    
    
    
    39.1
    
    
    
    20.0
    
    
    
    (50.6
    )
    
    
    20.8(Benefit) Provision for income taxes
    
    
    (4.8
    )
    
    
    13.6
    
    
    
    (1.2
    )
    
    
    
    
    
    
    7.6Earnings before minority interest
    
    
    17.1
    
    
    
    25.5
    
    
    
    21.2
    
    
    
    (50.6
    )
    
    
    13.2Minority interest, net of income tax
    
    
    
    
    
    
    
    
    
    
    3.9
    
    
    
    
    
    
    
    3.9Net earnings
    
    $
    17.1
    
    
    $
    25.5
    
    
    $
    25.1
    
    
    $
    (50.6
    )
    
    $
    17.1
 16




---



##### Table of Contents



CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
(UNAUDITED)
For the Thirty-nine Weeks Ended October 30, 2004 Parent
    
    Guarantor
    
    Non-guarantor(dollars in millions)
    
    Company
    
    Subsidiaries
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedOperating Activities:Net Earnings
    
    $
    24.0
    
    
    $
    37.9
    
    
    $
    7.1
    
    
    $
    (45.0
    )
    
    $
    24.0Adjustments for non-cash items included in
earnings:Non-cash component of restructuring charges
    
    
    
    
    
    
    26.8
    
    
    
    10.0
    
    
    
    
    
    
    
    36.8Loss on impairment of and disposal of assets
    
    
    
    
    
    
    5.6
    
    
    
    1.1
    
    
    
    
    
    
    
    6.7Depreciation and amortization
    
    
    
    
    
    
    64.5
    
    
    
    9.4
    
    
    
    
    
    
    
    73.9Amortization of deferred financing costs
    
    
    0.2
    
    
    
    0.7
    
    
    
    
    
    
    
    
    
    
    
    0.9Amortization of unearned restricted stock
    
    
    
    
    
    
    0.5
    
    
    
    
    
    
    
    
    
    
    
    0.5Deferred income taxes
    
    
    
    
    
    
    (11.5
    )
    
    
    (3.4
    )
    
    
    
    
    
    
    (14.9
    )Minority interest, net of tax
    
    
    
    
    
    
    
    
    
    
    (10.4
    )
    
    
    
    
    
    
    (10.4
    )Income tax charge of stock option exercises
    
    
    (0.1
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (0.1
    )Changes in working capital:Inventories
    
    
    
    
    
    
    14.3
    
    
    
    2.2
    
    
    
    (1.0
    )
    
    
    15.5Other current assets
    
    
    (7.5
    )
    
    
    7.1
    
    
    
    3.5
    
    
    
    (4.6
    )
    
    
    (1.5
    )Accounts payable
    
    
    
    
    
    
    6.8
    
    
    
    (40.7
    )
    
    
    11.6
    
    
    
    (22.3
    )Accrued expenses
    
    
    (4.4
    )
    
    
    43.0
    
    
    
    8.5
    
    
    
    (6.0
    )
    
    
    41.1Other assets and liabilities, net
    
    
    (11.4
    )
    
    
    (31.2
    )
    
    
    (0.3
    )
    
    
    45.0
    
    
    
    2.1Cash flow provided by (used in) operating
activities
    
    
    0.8
    
    
    
    164.5
    
    
    
    (13.0
    )
    
    
    
    
    
    
    152.3Investing Activities:Capital expenditures
    
    
    
    
    
    
    (70.8
    )
    
    
    (7.1
    )
    
    
    
    
    
    
    (77.9
    )Investment in subsidiaries
    
    
    
    
    
    
    (2.9
    )
    
    
    
    
    
    
    2.9
    
    
    
    Cash flow used in investing activities
    
    
    
    
    
    
    (73.7
    )
    
    
    (7.1
    )
    
    
    2.9
    
    
    
    (77.9
    )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
    
    
    
    
    
    
    
    1.9Other financing activities
    
    
    
    
    
    
    
    
    
    
    0.2
    
    
    
    
    
    
    
    0.2Cash flow (used in) provided by financing
activities
    
    
    (0.8
    )
    
    
    (0.9
    )
    
    
    7.4
    
    
    
    (2.9
    )
    
    
    2.8Increase (decrease) in cash
    
    
    
    
    
    
    89.9
    
    
    
    (12.7
    )
    
    
    
    
    
    
    77.2Cash and cash equivalents, beginning of period
    
    
    
    
    
    
    77.5
    
    
    
    71.4
    
    
    
    
    
    
    
    148.9Cash and cash equivalents, end of period
    
    $
    
    
    
    $
    167.4
    
    
    $
    58.7
    
    
    $
    
    
    
    $
    226.1
 17




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##### Table of Contents



CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
(UNAUDITED)
For the Thirty-nine Weeks Ended November 1, 2003 Parent
    
    Guarantor
    
    Non-guarantor(dollars in millions)
    
    Company
    
    Subsidiaries
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedOperating Activities:Net Earnings
    
    $
    17.1
    
    
    $
    25.5
    
    
    $
    25.1
    
    
    $
    (50.6
    )
    
    $
    17.1Adjustments for non-cash items included in
earnings:Loss on impairment of and disposal of assets
    
    
    
    
    
    
    13.0
    
    
    
    0.1
    
    
    
    
    
    
    
    13.1Depreciation and amortization
    
    
    
    
    
    
    64.7
    
    
    
    10.1
    
    
    
    
    
    
    
    74.8Amortization of deferred financing costs
    
    
    
    
    
    
    3.8
    
    
    
    
    
    
    
    
    
    
    
    3.8Amortization of unearned restricted stock
    
    
    
    
    
    
    0.5
    
    
    
    
    
    
    
    
    
    
    
    0.5Deferred income taxes
    
    
    
    
    
    
    10.6
    
    
    
    (1.8
    )
    
    
    
    
    
    
    8.8Minority interest, net of tax
    
    
    
    
    
    
    
    
    
    
    (3.9
    )
    
    
    
    
    
    
    (3.9
    )Changes in working capital:Inventories
    
    
    
    
    
    
    57.0
    
    
    
    (9.5
    )
    
    
    (5.7
    )
    
    
    41.8Other current assets
    
    
    (0.1
    )
    
    
    76.1
    
    
    
    (24.6
    )
    
    
    (72.6
    )
    
    
    (21.2
    )Accounts payable
    
    
    
    
    
    
    16.8
    
    
    
    28.9
    
    
    
    (20.9
    )
    
    
    24.8Accrued expenses
    
    
    (59.4
    )
    
    
    2.1
    
    
    
    (5.6
    )
    
    
    69.2
    
    
    
    6.3Other assets and liabilities, net
    
    
    (31.6
    )
    
    
    (54.6
    )
    
    
    11.3
    
    
    
    80.6
    
    
    
    5.7Cash flow provided by (used in) operating
activities
    
    
    (74.0
    )
    
    
    215.5
    
    
    
    30.1
    
    
    
    
    
    
    
    171.6Investing Activities:Capital expenditures
    
    
    
    
    
    
    (66.8
    )
    
    
    (15.1
    )
    
    
    
    
    
    
    (81.9
    )Investment in subsidiaries
    
    
    
    
    
    
    (5.4
    )
    
    
    
    
    
    
    5.4
    
    
    
    Repayment of loan from parent/subsidiary
    
    
    
    
    
    
    146.9
    
    
    
    
    
    
    
    (146.9
    )
    
    
    Disposition of property and equipment
    
    
    
    
    
    
    1.0
    
    
    
    
    
    
    
    
    
    
    
    1.0Cash flow provided by (used in) investing
activities
    
    
    
    
    
    
    75.7
    
    
    
    (15.1
    )
    
    
    (141.5
    )
    
    
    (80.9
    )Financing Activities:Issuance of notes payable
    
    
    
    
    
    
    
    
    
    
    5.0
    
    
    
    
    
    
    
    5.0Restricted cash
    
    
    
    
    
    
    
    
    
    
    (5.0
    )
    
    
    
    
    
    
    (5.0
    )Issuance of debt
    
    
    196.7
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    196.7Payment of deferred financing costs
    
    
    (5.5
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5.5
    )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
    
    
    
    
    
    
    
    3.6Other financing activities
    
    
    
    
    
    
    
    
    
    
    (1.1
    )
    
    
    
    
    
    
    (1.1
    )Cash flow used in financing activities
    
    
    74.0
    
    
    
    (216.8
    )
    
    
    (22.1
    )
    
    
    141.5
    
    
    
    (23.4
    )Increase in cash
    
    
    
    
    
    
    74.4
    
    
    
    (7.1
    )
    
    
    
    
    
    
    67.3Cash and cash equivalents, beginning of period
    
    
    
    
    
    
    31.9
    
    
    
    41.6
    
    
    
    
    
    
    
    73.5Cash and cash equivalents, end of period
    
    $
    
    
    
    $
    106.3
    
    
    $
    34.5
    
    
    $
    
    
    
    $
    140.8
 18




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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. 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. 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 Payless ShoeSource 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, and our
Parade stores offer fashionable, quality, private label womens shoes at
moderate prices in a self-selection shopping format; however, we intend to
dispose of our Parade operations during 2004. For the third quarter of 2004, total sales decreased 3.1 percent, or $22.4
million, to $687.3 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 3.1 percent. Gross margin was 29.4 percent of sales in
the current years third quarter, versus 26.7 percent in the prior years third
quarter. For the first nine months of 2004, total sales decreased 0.1 percent,
or $1.7 million, to $2,137.2 as compared to the first nine months of 2003.
Same-store sales decreased 0.4 percent. Gross margin was 30.3 percent of sales
in the first nine months of 2004, versus 27.7 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. 19




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##### Table of Contents



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. 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 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. 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. Our cash and cash equivalents balance at the end of the 2004 third quarter was
$226.1 million, an increase of $77.2 million from the end of 2003 and $85.3
million over the 2003 third quarter. Total inventories at the end of the 2004
third quarter were $375.9 million, a reduction of $34.8 million from the 2003
third quarter. Inventory per store declined by 8 percent on a cost basis and 10
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). 20




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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 $24.0 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
    
    
    70.6
    %
    
    
    73.3
    %
    
    
    69.7
    %
    
    
    72.3
    %Selling, general and administrative expense
    
    
    26.6
    
    
    
    26.8
    
    
    
    26.8
    
    
    
    26.1Restructuring charges
    
    
    1.1
    
    
    
    
    
    
    
    2.0
    
    
    
    Operating profit (loss)
    
    
    1.7
    
    
    
    (0.1
    )
    
    
    1.5
    
    
    
    1.6Interest expense, net
    
    
    0.6
    
    
    
    0.7
    
    
    
    0.6
    
    
    
    0.6Earnings (Loss) before income taxes and
minority interest
    
    
    1.1
    
    
    
    (0.8
    )
    
    
    0.9
    
    
    
    1.0Effective income tax rate*
    
    
    28.4
    %
    
    
    36.5
    %
    
    
    25.3
    %
    
    
    36.5
    %Earnings (Loss) before minority interest
    
    
    0.8
    
    
    
    (0.5
    )
    
    
    0.6
    
    
    
    0.6Minority interest
    
    
    0.2
    
    
    
    0.2
    
    
    
    0.5
    
    
    
    0.2Net Earnings (Loss)
    
    
    1.0
    %
    
    
    (0.3
    )%
    
    
    1.1
    %
    
    
    0.8
    %
 * 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 GAAP 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
    
    
    (3.1
    )%
    
    
    (0.5
    )%
    
    
    (0.1
    )%
    
    
    (4.0
    )%Same-store Sales
    
    
    (3.1
    )
    
    
    (1.4
    )
    
    
    (0.4
    )
    
    
    (4.7
    )Average selling price per unit
    
    
    8.2
    
    
    
    (0.6
    )
    
    
    7.6
    
    
    
    1.8Unit volume
    
    
    (10.4
    )
    
    
    0.1
    
    
    
    (6.9
    )
    
    
    (5.7
    )Footwear average selling price per unit
    
    
    10.0
    
    
    
    (5.5
    )
    
    
    5.4
    
    
    
    0.6Footwear unit volume
    
    
    (12.4
    )%
    
    
    4.0
    %
    
    
    (5.5
    )%
    
    
    (5.9
    )%
 Net sales for the 2004 third quarter totaled $687.3 million compared with
$709.7 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. 21




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##### Table of Contents



Net sales for the first nine months of 2004 were down slightly compared with
the 2003 period. In the first nine months of 2004, net sales totaled $2,137.2
million compared with $2,138.9 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 $485.2 million in the 2004 third quarter, down
6.8 percent from $520.5 million in the 2003 third quarter. For the first nine
months of 2004, cost of sales was $1,488.7 million, down 3.8 percent from
$1,546.9 million in 2003. As a percentage of net sales, cost of sales was 70.6 percent in the third
quarter of 2004, compared with 73.3 percent in the third quarter of 2003. As a
percentage of net sales, cost of sales was 69.7 percent in the first nine
months of 2004, compared with 72.3 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 $183.1 million in the third
quarter of 2004, a decrease of 3.7 percent from $190.1 million in the third
quarter of 2003. For the first nine months of 2004, selling, general and
administrative expenses were $573.1 million, an increase of 2.5 percent from
$558.9 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 26.8 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 26.8 percent compared
with 26.1 percent in the 2003 period. The decrease in the third quarter of 2004 was primarily the result of a $4.2
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 $12.3 million of additional payroll
and payroll-related costs, $4.4 million in increased workers compensation
insurance costs, and $4.1 million in increased professional services related to
the proxy contest and Sarbanes-Oxley compliance, partially offset by $2.1
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 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. 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 28.4 percent in the third quarter and 25.3
percent for the first nine months of 2004. The effective income tax rate of
28.4 percent for the third quarter includes an adjustment to reflect an
effective tax rate of 25.3 percent for the first nine months of the year. We
anticipate a tax benefit at the rate of 25.3 percent for the full fiscal year
2004. Our effective income tax rate was 36.5 percent in the third quarter and
first nine months of 2003. 22




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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. The increase in minority
interest for first nine months of 2004 is due primarily to restructuring
charges related to operations in Peru and Chile. LIQUIDITY AND CAPITAL RESOURCES We ended the third quarter of 2004 with a cash balance of $226.1 million, an
increase of $85.3 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 $152.3 million in the first nine months of
2004, compared with $171.6 million in the 2003 period. As a percentage of net
sales, cash flow from operations was 7.1 percent in the first nine months of
2004, compared with 8.0 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 $36.8 million in
non-cash restructuring charges); inventory decreased by $15.5 million in 2004
compared to $41.8 million in 2003 for a net cash outflow of $26.3 million due
primarily to lower inventory levels at the beginning of 2004 compared to 2003;
accounts payable decreased $22.3 million in 2004 compared to a $24.8 million
increase in 2003 for a net cash outflow of $47.1 million; and accrued expenses
increased $41.1 million in 2004 compared to $6.3 million in 2003 for a net cash
inflow of $34.8 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 $77.9
million, compared with $80.9 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: 23




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##### Table of Contents



Year
    
    Percentage2008
    
    
    104.125
    %2009
    
    
    102.750
    %2010
    
    
    101.375
    %2011 and thereafter
    
    
    100.000
    %
 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. For a
discussion of our 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 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
    
    
    2.3
    
    
    
    2.3
    
    
    
    2.3Debt-Capitalization Ratio*
    
    
    27.6
    %
    
    
    27.7
    %
    
    
    28.1
    %
  *
    
    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 65.4%, 65.3% and 66.0% 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
 24




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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, management makes estimates and assumptions that affect the amounts
reported within the financial statements. Actual results could differ from
these estimates. For more information regarding our critical accounting
policies, estimates and judgments, see the discussion under Managements
Discussion and Analysis of Financial Condition and Results of Operations in our
Form 10-K for the year ended January 31, 2004. 
 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. In addition, there was no significant change in our internal control over
financial reporting that occurred during our most recently completed fiscal
quarter that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting. 25




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##### Table of Contents



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
 (1) We repurchased an aggregate of 17,238 shares of our common stock in
connection with our employee stock purchase and stock incentive plans. (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.   26




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##### Table of Contents



ITEM 6  EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: Number
    
    Description11.1
    
    Computation of Net Earnings (Loss) Per Share*31.1
    
    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. 27




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##### Table of Contents



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: December 9, 2004
    
    By: /s/ Steven J. DouglassSteven J. DouglassChairman of the Board andChief Executive Officer(Principal Executive Officer)Date: December 9, 2004
    
    By: /s/ Ullrich E. PorzigUllrich E. PorzigSenior Vice PresidentChief Financial Officer and Treasurer(Principal Financial and Accounting Officer)
 28