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SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 10-Q/A1 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D)
OF THE SECURITIES EXCHANGE ACT OF 1934 For The Quarterly Period Ended July 31, 2004 Commission File Number 1-14770 PAYLESS SHOESOURCE, INC.  DELAWARE
(State or other jurisdiction of
incorporation or organization)
    
    43-1813160
(I.R.S. Employer
Identification Number)3231 SOUTHEAST SIXTH AVENUE, TOPEKA, KANSAS
(Address of principal executive offices)
    
    66607-2207
(Zip Code)
 (785) 233-5171
(Registrants telephone number,
including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2)
has been subject to such filing requirements for the past 90 days. YES þ   NO o Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of
the Securities Exchange Act of 1934). YES þ   NO o Indicate the number of shares outstanding of each of the issuers classes of common stock, as of
the latest practicable date. Common Stock, $.01 par value
68,120,068 shares as September 2, 2004




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TABLE OF CONTENTS  PART I  FINANCIAL INFORMATIONITEM 1  FINANCIAL STATEMENTSITEM 2  MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSITEM 3  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKITEM 4  CONTROLS AND PROCEDURESPART II  OTHER INFORMATIONITEM 1  LEGAL PROCEEDINGSITEM 2  CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIESITEM 6  EXHIBITS AND REPORTS ON FORM 8-KSIGNATURESINDEX OF EXHIBITSCertification Pursuant to Section 302Certification Pursuant to Section 302Certification Pursuant to Section 906Certification Pursuant to Section 906    Table of Contents  EXPLANATORY NOTE This Form 10-Q/A amends the Companys quarterly report on Form 10-Q for the fiscal quarter ended
July 31, 2004 (Original Filing), initially filed with the Securities and Exchange Commission
(SEC) on September 7, 2004, to reflect the restatement described in Note 3 to the condensed
consolidated financial statements. As a result of the restatement, the Company also updated the
financial statements for discontinued operations as discussed in Note 12, Discontinued
Operations. This Form 10-Q/A amends and restates Items 1, 2 and 4 of Part I of the Original Filing. Except for
the effects of the restatement and discontinued operations, the foregoing items have not been
updated to reflect other events that occurred after the Original Filing or to modify or update
those disclosures affected by subsequent events. In addition, pursuant to the rules of the SEC,
Item 6 of Part II of the Original Filing has been amended to contain currently-dated certifications
from our Chief Executive Officer and Chief Financial Officer, as required by Sections 302 and 906
of the Sarbanes-Oxley Act of 2002. The certifications of our Chief Executive Officer and Chief
Financial Officer are attached to this Form 10-Q/A as Exhibits 31.1, 31.2, 32.1 and 32.2,
respectively. Except for the foregoing amended information, this Form 10-Q/A continues to describe conditions as
of the date of the Original Filing, and does not update disclosures contained herein to reflect
events that occurred at a later date. 2




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##### Table of Contents



PART I - FINANCIAL INFORMATION 
 ITEM 1 - FINANCIAL STATEMENTS PAYLESS SHOESOURCE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED) (as restated, see Note 3)July 31,
    
    
    August 2,
    
    
    January 31,(dollars in millions)
    
    2004
    
    
    2003
    
    
    2004ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    175.0
    
    
    $
    113.2
    
    
    $
    136.7Marketable securities, available for sale
    
    
    9.0
    
    
    
    
    
    
    
    10.0Restricted cash
    
    
    33.5
    
    
    
    33.0
    
    
    
    33.5Inventories
    
    
    398.2
    
    
    
    399.2
    
    
    
    375.2Current deferred income taxes
    
    
    23.1
    
    
    
    15.9
    
    
    
    17.1Other current assets
    
    
    68.2
    
    
    
    63.8
    
    
    
    64.9Current assets of discontinued operations
    
    
    20.6
    
    
    
    24.8
    
    
    
    24.2Total current assets
    
    
    727.6
    
    
    
    649.9
    
    
    
    661.6Property and Equipment:Land
    
    
    8.0
    
    
    
    8.4
    
    
    
    8.0Buildings and leasehold improvements
    
    
    670.5
    
    
    
    649.6
    
    
    
    679.8Furniture, fixtures and equipment
    
    
    523.4
    
    
    
    484.6
    
    
    
    494.6Property under capital leases
    
    
    4.6
    
    
    
    4.6
    
    
    
    4.6Total property and equipment
    
    
    1,206.5
    
    
    
    1,147.2
    
    
    
    1,187.0Accumulated depreciation
and amortization
    
    
    (793.8
    )
    
    
    (737.2
    )
    
    
    (763.5
    )Property and equipment, net
    
    
    412.7
    
    
    
    410.0
    
    
    
    423.5Favorable leases, net
    
    
    24.3
    
    
    
    31.3
    
    
    
    28.8Deferred income taxes
    
    
    33.9
    
    
    
    33.0
    
    
    
    34.2Goodwill, net
    
    
    5.9
    
    
    
    5.9
    
    
    
    5.9Other assets
    
    
    26.5
    
    
    
    29.6
    
    
    
    22.7Non-current assets of discontinued operations
    
    
    12.0
    
    
    
    31.0
    
    
    
    27.6Total Assets
    
    $
    1,242.9
    
    
    $
    1,190.7
    
    
    $
    1,204.3LIABILITIES AND SHAREOWNERS EQUITYCurrent Liabilities:Current maturities of long-term debt
    
    $
    0.8
    
    
    $
    0.9
    
    
    $
    0.9Notes payable
    
    
    33.5
    
    
    
    33.0
    
    
    
    33.5Accounts payable
    
    
    126.5
    
    
    
    111.8
    
    
    
    129.6Accrued expenses
    
    
    151.9
    
    
    
    118.6
    
    
    
    123.9Current liabilities of discontinued operations
    
    
    4.9
    
    
    
    4.5
    
    
    
    5.8Total current liabilities
    
    
    317.6
    
    
    
    268.8
    
    
    
    293.7Long-term debt
    
    
    204.1
    
    
    
    203.1
    
    
    
    202.8Other liabilities
    
    
    81.4
    
    
    
    78.0
    
    
    
    85.6Non-current liabilities of discontinued operations
    
    
    9.9
    
    
    
    2.1
    
    
    
    2.1Minority interest
    
    
    8.0
    
    
    
    18.1
    
    
    
    15.7Commitments and contingencies
    
    
    
    
    
    
    
    
    
    
    Total shareowners equity
    
    
    621.9
    
    
    
    620.6
    
    
    
    604.4Total Liabilities and Shareowners Equity
    
    $
    1,242.9
    
    
    $
    1,190.7
    
    
    $
    1,204.3
 See Notes to Condensed Consolidated Financial Statements. 3




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PAYLESS SHOESOURCE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED) (as restated, see Note 3)13 Weeks Ended
    
    
    26 Weeks Ended(dollars and shares in millions, except per share)
    
    July 31, 2004
    
    
    August 2, 2003
    
    
    July 31, 2004
    
    
    August 2, 2003Net sales
    
    $
    695.6
    
    
    $
    698.0
    
    
    $
    1,387.9
    
    
    $
    1,365.3Cost of sales
    
    
    476.1
    
    
    
    501.1
    
    
    
    951.6
    
    
    
    968.2Selling, general and administrative expenses
    
    
    181.5
    
    
    
    179.3
    
    
    
    369.9
    
    
    
    350.4Restructuring charges
    
    
    13.7
    
    
    
    
    
    
    
    13.7
    
    
    
    Operating profit from continuing operations
    
    
    24.3
    
    
    
    17.6
    
    
    
    52.7
    
    
    
    46.7Interest expense
    
    
    5.8
    
    
    
    4.3
    
    
    
    11.2
    
    
    
    9.3Interest income
    
    
    (1.3
    )
    
    
    (1.0
    )
    
    
    (2.3
    )
    
    
    (1.9
    )Earnings from continuing operations before income
taxes and minority interest
    
    
    19.8
    
    
    
    14.3
    
    
    
    43.8
    
    
    
    39.3Provision for income taxes
    
    
    2.2
    
    
    
    5.0
    
    
    
    10.2
    
    
    
    13.8Earnings from continuing operations before minority
interest
    
    
    17.6
    
    
    
    9.3
    
    
    
    33.6
    
    
    
    25.5Minority interest, net of income tax
    
    
    2.2
    
    
    
    0.7
    
    
    
    4.1
    
    
    
    1.3Net earnings from continuing operations
    
    
    19.8
    
    
    
    10.0
    
    
    
    37.7
    
    
    
    26.8Loss from discontinued operations, net of income taxes
and minority interest
    
    
    (16.0
    )
    
    
    (4.8
    )
    
    
    (19.8
    )
    
    
    (7.5
    )Net earnings
    
    $
    3.8
    
    
    $
    5.2
    
    
    $
    17.9
    
    
    $
    19.3Diluted earnings per share:Earnings from continuing operations
    
    $
    0.29
    
    
    $
    0.15
    
    
    $
    0.55
    
    
    $
    0.39Loss from discontinued operations
    
    
    (0.24
    )
    
    
    (0.07
    )
    
    
    (0.29
    )
    
    
    (0.11
    )Diluted earnings per share
    
    $
    0.05
    
    
    $
    0.08
    
    
    $
    0.26
    
    
    $
    0.28Basic earnings per share:Earnings from continuing operations
    
    $
    0.29
    
    
    $
    0.15
    
    
    $
    0.55
    
    
    $
    0.39Loss from discontinued operations
    
    
    (0.24
    )
    
    
    (0.07
    )
    
    
    (0.29
    )
    
    
    (0.11
    )Basic earnings per share
    
    $
    0.05
    
    
    $
    0.08
    
    
    $
    0.26
    
    
    $
    0.28Diluted Weighted Average Shares Outstanding
    
    
    68.1
    
    
    
    68.1
    
    
    
    68.0
    
    
    
    68.1Basic Weighted Average Shares Outstanding
    
    
    68.0
    
    
    
    68.0
    
    
    
    68.0
    
    
    
    68.0
 See Notes to Condensed Consolidated Financial Statements. 4




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PAYLESS SHOESOURCE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED) (as restated, see Note 3)26 Weeks Ended
    
    
    26 Weeks Ended(dollars in millions)
    
    July 31, 2004
    
    
    August 2, 2003Operating Activities:Net earnings
    
    $
    17.9
    
    
    $
    19.3Loss for discontinued operations, net of income
    
    
    (19.8
    )
    
    
    (7.5
    )Net earnings from continuing operations
    
    
    37.7
    
    
    
    26.8Adjustments for non-cash items included
in net earnings:Restructuring charges
    
    
    13.7
    
    
    
    Loss on impairment of and disposal of assets
    
    
    4.7
    
    
    
    5.5Depreciation and amortization
    
    
    47.5
    
    
    
    48.5Amortization of deferred financing costs
    
    
    0.5
    
    
    
    3.6Amortization of unearned restricted stock
    
    
    0.4
    
    
    
    0.3Deferred income taxes
    
    
    (7.2
    )
    
    
    2.7Minority interest, net of tax
    
    
    (4.1
    )
    
    
    (1.3
    )Changes in working capital:Inventories
    
    
    (23.5
    )
    
    
    38.0Other current assets
    
    
    (7.9
    )
    
    
    (7.8
    )Accounts payable
    
    
    (3.1
    )
    
    
    9.6Accrued expenses
    
    
    28.0
    
    
    
    0.6Other assets and liabilities, net
    
    
    0.9
    
    
    
    6.2Cash flow provided by (used in) discontinued
operations
    
    
    1.1
    
    
    
    (8.5
    )Cash flow provided by operating activities
    
    
    88.7
    
    
    
    124.2Investing Activities:Capital expenditures
    
    
    (53.2
    )
    
    
    (56.3
    )Purchases of marketable securities
    
    
    (9.0
    )
    
    
    Sales of marketable securities
    
    
    10.0
    
    
    
    Cash flow used in investing activities
    
    
    (52.2
    )
    
    
    (56.3
    )Financing Activities:Issuance of notes payable
    
    
    
    
    
    
    4.5Restricted cash
    
    
    
    
    
    
    (4.5
    )Issuance of long-term debt
    
    
    1.6
    
    
    
    196.7Payment of deferred financing costs
    
    
    (0.2
    )
    
    
    (8.6
    )Repayment of long-term debt
    
    
    (0.5
    )
    
    
    (216.6
    )Net purchases of common stock
    
    
    
    
    
    
    (0.2
    )Contributions by minority owners
    
    
    1.5
    
    
    
    3.6Cash flow provided by (used in) financing
activities
    
    
    2.4
    
    
    
    (25.1
    )Effect of exchange rate changes on cash
    
    
    (0.6
    )
    
    
    (1.3
    )Increase in cash and cash equivalents
    
    
    38.3
    
    
    
    41.5Cash and cash equivalents, beginning of year
    
    
    136.7
    
    
    
    71.7Cash and cash equivalents, end of period
    
    $
    175.0
    
    
    $
    113.2Cash paid during the period for:Interest
    
    $
    11.1
    
    
    $
    9.0Income Taxes
    
    $
    0.3
    
    
    $
    13.7
 See Notes to Condensed Consolidated Financial Statements. 5




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PAYLESS SHOESOURCE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) NOTE 1. INTERIM RESULTS. These unaudited Condensed Consolidated Financial Statements of Payless
ShoeSource, Inc. and subsidiaries (the Company) have been prepared in accordance with the
instructions to Form 10-Q of the United States Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or omitted pursuant to
such rules and regulations. In the opinion of management, the unaudited Condensed Consolidated
Financial Statements are fairly presented and all adjustments (consisting only of normal recurring
adjustments, except for the restructuring charges) 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 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 six-month period ended July 31, 2004, are not necessarily indicative of the
results that may be expected for the entire fiscal year ending January 29, 2005. NOTE 2  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Use of Estimates Management makes estimates and assumptions that affect the amounts reported within the condensed
consolidated balance sheets and the statements of earnings, cash flows, and the notes to condensed
consolidated financial statements. Actual results could differ from these estimates. Net Sales Net sales (sales) are recognized at the time the sale is made to the customer, are net of
estimated returns and current promotional discounts and exclude sales tax. Third-party liquidation
sales related to restructuring are recognized at the time the sale is made to the customer, are
calculated based upon contractually guaranteed amounts pursuant to our agreements with liquidators
and are net of associated fees. Gift Cards The Company records a liability in the period in which a gift card is issued and proceeds are
received. As gift cards are redeemed, this liability is reduced and revenue is recognized as a
sale. Cost of Sales Cost of sales includes the cost of merchandise sold and the Companys buying and occupancy costs. Rent Expense Certain of the Companys lease agreements provide for scheduled rent increases during the lease
term, as well as provisions for renewal options. Rent expense is recognized on a straight-line
basis over the term of the lease from the time at which the Company takes possession of the
property. In instances where failure to exercise renewal options would result in an economic
penalty, the calculation of straight-line rent expense includes renewal option periods. Also,
landlord-provided tenant improvement allowances are recorded in other liabilities and amortized as
a credit to rent expense over the term of the lease. Pre-Opening Expenses Costs associated with the opening of new stores are expensed as incurred. 6




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Advertising Costs Advertising costs and sales promotion costs are expensed at the time the advertising takes place. Income Taxes Income taxes are accounted for using a balance sheet approach known as the liability method. The
liability method accounts for deferred income taxes by applying enacted statutory tax rates to
differences between the book basis and the tax basis of assets and liabilities. Cash and Cash Equivalents Cash equivalents consist of liquid investments with an original maturity of three months or less.
Receivables in the amount of $16.5 million, $17.3 million and $11.0 million from banks and credit
card companies for the settlement of credit card transactions are included in cash and cash
equivalents as of July 31, 2004, August 2, 2003 and January 31, 2004, respectively, as they are
generally collected within three business days. Cash equivalents are stated at cost, which
approximates fair value. Marketable Securities As of July 31, 2004 and January 31, 2004 marketable securities include $9.0 million and $10.0
million, respectively, of auction rate securities, which are available to support the Companys
current operations. These investments are classified as available-for-sale securities and are
recorded at fair value with unrealized gains or losses reported in other comprehensive income
(loss). Due to the short time period between the reset dates of the interest rates, there are no
unrealized gains or losses associated with these securities. All of the auction rate securities
have contractual maturities of more than ten years. Inventories Merchandise inventories in our stores are valued by the retail method and are stated at the lower
of cost, determined using the first-in, first-out (FIFO) basis, or market. Prior to shipment to a
specific store, inventories are valued at the lower of cost using the FIFO basis, or market. The
retail method is widely used in the retail industry due to its practicality. Under the retail
method, cost is determined by applying a calculated cost-to-retail ratio across groupings of
similar items, known as departments. As a result, the retail method results in an averaging of
inventory costs across similar items within a department. The cost-to-retail ratio is applied to
ending inventory at its current owned retail valuation to determine the cost of ending inventory on
a department basis. Current owned retail represents the retail price for which merchandise is
offered for sale on a regular basis reduced for any permanent or clearance markdowns. As a result,
the retail method normally results in an inventory valuation that is lower than a traditional FIFO
cost basis. Inherent in the retail method calculation are certain significant management judgments and
estimates including initial mark-up, markdowns and shrinkage, which can significantly impact the
owned retail and, therefore, the ending inventory valuation at cost. Specifically, the failure to
take permanent or clearance markdowns on a timely basis can result in an overstatement of carrying
cost under the retail method. Management believes that its application of the retail method
reasonably states inventory at the lower of cost or market. The Company maintains a global sourcing structure to focus on cost reduction initiatives from
procurement of materials through distribution of finished product. As a result, the Company takes
ownership of certain raw materials as the materials enter the production process. These raw
materials of $16.8 million, $13.5 million and $19.5 million are held by third parties and included
in inventories in the consolidated balance sheet at July 31, 2004, August 2, 2003 and January 31,
2004, respectively, and are accounted for under the FIFO basis. Property and Equipment Property and equipment are recorded at cost and are depreciated on a straight-line basis over their
estimated useful lives. The costs of repairs and maintenance are expensed when incurred, while
expenditures for store remodels, refurbishments and improvements that significantly add to the
productive capacity or extend the useful life of an asset are capitalized. The estimated useful
life for each major class of property and equipment is as follows: 7




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Buildings
    
    10 to 30 yearsLeasehold improvements
    
    the lesser of 10 years or the
remaining expected lease term that is reasonably assured
(which may exceed the current non-cancelable term)Furniture, fixtures and equipment
    
    3 to 8 yearsProperty under capital lease
    
    10 to 30 years
 Property and equipment are reviewed for recoverability on a store-by-store basis if an indicator of
impairment exists to determine whether the carrying amount of the assets is recoverable. Estimated
future cash flows are used to determine if impairment exists. The Company uses current operating
results and historical performance to estimate future cash flows on a store-by-store basis. Insurance Programs The Company retains its normal expected losses related primarily to workers compensation, physical
loss to property and business interruption resulting from such loss and comprehensive general,
product, and vehicle liability. The Company purchases third-party coverage for losses in excess of
the normal expected levels. Provisions for losses expected under these programs are recorded based
upon estimates of the aggregate liability for claims incurred utilizing independent actuarial
calculations based on historical results. Foreign Currency Translation Local currencies are the functional currencies for all subsidiaries. Accordingly, assets and
liabilities of foreign subsidiaries are translated at the rate of exchange at the balance sheet
date. Adjustments from the translation process are accumulated as part of other comprehensive
income and are included within shareowners equity (see Note 9). The changes in foreign currency
translation adjustments were not adjusted for income taxes since they relate to indefinite term
investments in non-United States subsidiaries. Income and expense items of these subsidiaries are
translated at average rates of exchange. Financial Derivatives The Company has used derivative financial instruments to reduce its exposure to fluctuations in
interest rates and foreign currencies and to minimize the risk associated with investments in
foreign operations. Statement of Financial Accounting Standards No. 133 (SFAS 133), Accounting
for Derivative Instruments and Hedging Activities, requires that all derivatives be reflected as
either assets or liabilities on the balance sheet based on their fair value. If the derivative is a
hedge, depending on the nature of the hedge, changes in the fair value of derivatives will either
be offset against the change in the fair value of the hedged asset, liability or firm commitment
through earnings, or recognized in other comprehensive income until the hedged item is recognized
in earnings. The change in a derivatives fair value related to the ineffective portion of a hedge,
if any, will be immediately recognized in earnings. In order to mitigate the Companys exposure to fluctuations in interest rates, the Company had
entered into a series of interest rate swap agreements whereby the Company received interest at the
three-month London Inter-Bank Offered Rate (LIBOR) and paid a weighted average rate of 6.9%. The
interest rate swaps expired in the second quarter of 2003. During the three months ended August 2,
2003, $0.7 million of after-tax losses ($1.1 million pre-tax) included in accumulated other
comprehensive income related to interest rate swap agreements was reclassified to interest expense.
As of July 31, 2004, August 2, 2003 and January 31, 2004, the Company had no derivative instruments
in place. Reclassification Certain reclassifications have been made to prior year balances to conform to the current year
presentation. NOTE 3. RESTATEMENT OF FINANCIAL STATEMENTS. Subsequent to the issuance of the Companys interim
condensed consolidated financial statements of the quarterly period ended July 31, 2004, and
following a comprehensive review of its accounting treatment for leases and lease-related items,
the Companys management determined that the previous accounting policies used were inappropriate.
As a result, the Company has corrected its accounting practices in this area and restated its
condensed consolidated financial statements. Historically, when accounting for leases with renewal options, the Company had recorded rent
expense on a straight-line basis over the initial non-cancelable lease term, with the term
commencing when the store opened for business. The Company amortized leasehold improvements on
those properties over a period of typically 10 years that, in certain cases, would have included a
portion of the renewal option periods. In connection with the restatement, the Company corrected
its accounting to accelerate the recognition of rent expense on leases by recording lease expense
from the time at which it takes possession of the property, rather than at the time the store opens
for business. In addition, the Company corrected its calculation of rent expense on a straight line
basis to include certain option periods that are reasonably assured of renewal, because failure to
exercise such options would result in an economic penalty. 8




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When the renewal option periods are not reasonably assured, the leasehold improvements are
amortized over a period not to exceed the existing non-cancelable lease term. Also, the Company had followed the practice of netting landlord-provided tenant improvement
allowances against property and equipment. The restatement corrects the manner in which the Company
accounts for tenant improvement allowances to record the allowances as a deferred credit. There was
no impact to earnings for this correction. Further, the amount of tenant improvement allowances
received each year are shown within the operating activities on the condensed consolidated
statement of cash flows rather than a reduction of capital expenditures. In addition, the Company discovered an error relating to its accounting for deferred income taxes.
Beginning in a period prior to 1998, deferred income tax assets were understated by approximately
$4.5 million. In connection with the restatement mentioned above, the Company recorded a correction
to increase deferred tax assets by approximately $4.5 million. The correction has no impact on
earnings in fiscal years 2004 or 2003. Following is a summary of the effects of the corrections to the Companys condensed consolidated
balance sheets as of July 31, 2004, August 2, 2003 and January 31, 2004 and the Companys condensed
consolidated statements of earnings and cash flows for the thirteen and twenty-six weeks ended July
31, 2004 and August 2, 2003. The As previously reported amounts have been adjusted for the
reclassifications discussed in Notes 2 and 12 of the Notes to Condensed Consolidated Financial
Statements. 9




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##### Table of Contents



Condensed Consolidated Statements of EarningsAs previously(in millions, except per share data)
    
    Reported
    
    
    Adjustments
    
    
    As restatedThirteen weeks ended July 31, 2004Cost of sales
    
    $
    476.0
    
    
    $
    0.1
    
    
    $
    476.1Operating profit from continuing operations
    
    
    24.4
    
    
    
    (0.1
    )
    
    
    24.3Earnings from continuing operations before income
taxes and minority interest
    
    
    19.9
    
    
    
    (0.1
    )
    
    
    19.8Provision for income taxes
    
    
    2.1
    
    
    
    0.1
    
    
    
    2.2Earnings from continuing operations before minority interest
    
    
    17.8
    
    
    
    (0.2
    )
    
    
    17.6Minority interest, net of income taxes
    
    
    2.1
    
    
    
    0.1
    
    
    
    2.2Earnings from continuing operations
    
    
    19.9
    
    
    
    (0.1
    )
    
    
    19.8Loss from discontinued operations, net of income taxes
and minority interest
    
    
    (16.2
    )
    
    
    0.2
    
    
    
    (16.0
    )Net earnings
    
    $
    3.7
    
    
    $
    0.1
    
    
    $
    3.8Diluted earnings (loss) per share:Earnings from continuing operations
    
    $
    0.29
    
    
    $
    
    
    
    $
    0.29Loss from discontinued operations
    
    
    (0.24
    )
    
    
    
    
    
    
    (0.24
    )Diluted earnings per share
    
    $
    0.05
    
    
    $
    
    
    
    $
    0.05Basic earnings (loss) per share:Earnings from continuing operations
    
    $
    0.29
    
    
    $
    
    
    
    $
    0.29Loss from discontinued operations
    
    
    (0.24
    )
    
    
    
    
    
    
    (0.24
    )Basic earnings per share
    
    $
    0.05
    
    
    $
    
    
    
    $
    0.05
 Condensed Consolidated Statements of EarningsAs previously(in millions, except per share data)
    
    Reported
    
    
    Adjustments
    
    
    As restatedThirteen weeks ended August 2, 2003Cost of sales
    
    $
    501.1
    
    
    $
    
    
    
    $
    501.1Operating profit from continuing operations
    
    
    17.6
    
    
    
    
    
    
    
    17.6Earnings from continuing operations before income
taxes and minority interest
    
    
    14.3
    
    
    
    
    
    
    
    14.3Provision for income taxes
    
    
    5.0
    
    
    
    
    
    
    
    5.0Earnings from continuing operations before minority interest
    
    
    9.3
    
    
    
    
    
    
    
    9.3Minority interest, net of income taxes
    
    
    0.7
    
    
    
    
    
    
    
    0.7Earnings from continuing operations
    
    
    10.0
    
    
    
    
    
    
    
    10.0Loss from discontinued operations, net of income taxes and
minority interest
    
    
    (4.8
    )
    
    
    
    
    
    
    (4.8
    )Net earnings
    
    $
    5.2
    
    
    $
    
    
    
    $
    5.2Diluted earnings (loss) per share:Earnings from continuing operations
    
    $
    0.15
    
    
    $
    
    
    
    $
    0.15Loss from discontinued operations
    
    
    (0.07
    )
    
    
    
    
    
    
    (0.07
    )Diluted earnings per share
    
    $
    0.08
    
    
    $
    
    
    
    $
    0.08Basic earnings (loss) per share:Earnings from continuing operations
    
    $
    0.15
    
    
    $
    
    
    
    $
    0.15Loss from discontinued operations
    
    
    (0.07
    )
    
    
    
    
    
    
    (0.07
    )Basic earnings per share
    
    $
    0.08
    
    
    $
    
    
    
    $
    0.08
 10




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##### Table of Contents



Condensed Consolidated Statements of EarningsAs previously(in millions, except per share data)
    
    Reported
    
    
    Adjustments
    
    
    As restatedTwenty-six weeks ended July 31, 2004Cost of sales
    
    $
    951.5
    
    
    $
    0.1
    
    
    $
    951.6Operating profit from continuing operations
    
    
    52.8
    
    
    
    (0.1
    )
    
    
    52.7Earnings from continuing operations before income
taxes and minority interest
    
    
    43.9
    
    
    
    (0.1
    )
    
    
    43.8Provision for income taxes
    
    
    10.1
    
    
    
    0.1
    
    
    
    10.2Earnings from continuing operations before minority interest
    
    
    33.8
    
    
    
    (0.2
    )
    
    
    33.6Minority interest, net of income taxes
    
    
    4.0
    
    
    
    0.1
    
    
    
    4.1Earnings from continuing operations
    
    
    37.8
    
    
    
    (0.1
    )
    
    
    37.7Loss from discontinued operations, net of income taxes and
minority interest
    
    
    (20.3
    )
    
    
    0.5
    
    
    
    (19.8
    )Net earnings
    
    $
    17.5
    
    
    $
    0.4
    
    
    $
    17.9Diluted earnings (loss) per share:Earnings from continuing operations
    
    $
    0.56
    
    
    $
    (0.01
    )
    
    $
    0.55Loss from discontinued operations
    
    
    (0.30
    )
    
    
    0.01
    
    
    
    (0.29
    )Diluted earnings per share
    
    $
    0.26
    
    
    $
    
    
    
    $
    0.26Basic earnings (loss) per share:Earnings from continuing operations
    
    $
    0.56
    
    
    $
    (0.01
    )
    
    $
    0.55Loss from discontinued operations
    
    
    (0.30
    )
    
    
    0.01
    
    
    
    (0.29
    )Basic earnings per share
    
    $
    0.26
    
    
    $
    
    
    
    $
    0.26
 Condensed Consolidated Statements of EarningsAs previously(in millions, except per share data)
    
    Reported
    
    
    Adjustments
    
    
    As restatedTwenty-six weeks ended August 2, 2003Cost of sales
    
    $
    968.2
    
    
    $
    
    
    
    $
    968.2Operating profit from continuing operations
    
    
    46.7
    
    
    
    
    
    
    
    46.7Earnings from continuing operations before income
taxes and minority interest
    
    
    39.3
    
    
    
    
    
    
    
    39.3Provision for income taxes
    
    
    13.8
    
    
    
    
    
    
    
    13.8Earnings from continuing operations before minority interest
    
    
    25.5
    
    
    
    
    
    
    
    25.5Minority interest, net of income taxes
    
    
    1.3
    
    
    
    
    
    
    
    1.3Earnings from continuing operations
    
    
    26.8
    
    
    
    
    
    
    
    26.8Loss from discontinued operations, net of income taxes and
minority interest
    
    
    (7.5
    )
    
    
    
    
    
    
    (7.5
    )Net earnings
    
    $
    19.3
    
    
    $
    
    
    
    $
    19.3Diluted earnings (loss) per share:Earnings from continuing operations
    
    $
    0.39
    
    
    $
    
    
    
    $
    0.39Loss from discontinued operations
    
    
    (0.11
    )
    
    
    
    
    
    
    (0.11
    )Diluted earnings per share
    
    $
    0.28
    
    
    $
    
    
    
    $
    0.28Basic earnings (loss) per share:Earnings from continuing operations
    
    $
    0.39
    
    
    $
    
    
    
    $
    0.39Loss from discontinued operations

    
    
    (0.11
    )
    
    
    
    
    
    
    (0.11
    )Basic earnings per share
    
    $
    0.28
    
    
    $
    
    
    
    $
    0.28
 11




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##### Table of Contents



Condensed Consolidated Balance SheetsAs previouslyReported
    
    
    Adjustments
    
    
    As restatedJuly 31, 2004(1)Property and equipment, net
    
    $
    395.7
    
    
    $
    17.0
    
    
    $
    412.7Deferred income taxes (asset)
    
    
    25.1
    
    
    
    8.8
    
    
    
    33.9Total assets
    
    $
    1,217.1
    
    
    $
    25.8
    
    
    $
    1,242.9Other liabilities
    
    $
    52.8
    
    
    $
    28.6
    
    
    $
    81.4Non-current liabilities of discontinued operations
    
    
    9.8
    
    
    
    0.1
    
    
    
    9.9Minority interest
    
    
    8.3
    
    
    
    (0.3
    )
    
    
    8.0Total shareowners equity
    
    
    624.5
    
    
    
    (2.6
    )
    
    
    621.9Total liabilities and shareowners equity
    
    $
    1,217.1
    
    
    $
    25.8
    
    
    $
    1,242.9August 2, 2003Property and equipment, net
    
    $
    396.6
    
    
    $
    13.4
    
    
    $
    410.0Deferred income taxes (asset)
    
    
    24.2
    
    
    
    8.8
    
    
    
    33.0Non-current assets of discontinued operations
    
    
    31.3
    
    
    
    (0.3
    )
    
    
    31.0Total assets
    
    $
    1,168.8
    
    
    $
    21.9
    
    
    $
    1,190.7Other liabilities
    
    $
    53.1
    
    
    $
    24.9
    
    
    $
    78.0Non-current liabilities of discontinued operations
    
    
    1.8
    
    
    
    0.3
    
    
    
    2.1Minority interest
    
    
    18.3
    
    
    
    (0.2
    )
    
    
    18.1Total shareowners equity
    
    
    623.7
    
    
    
    (3.1
    )
    
    
    620.6Total liabilities and shareowners equity
    
    $
    1,168.8
    
    
    $
    21.9
    
    
    $
    1,190.7January 31, 2004(2)Property and equipment, net
    
    $
    409.0
    
    
    $
    14.5
    
    
    $
    423.5Deferred income taxes (asset)
    
    
    25.4
    
    
    
    8.8
    
    
    
    34.2Non-current assets of discontinued operations
    
    
    27.9
    
    
    
    (0.3
    )
    
    
    27.6Total assets
    
    $
    1,181.3
    
    
    $
    23.0
    
    
    $
    1,204.3Other liabilities
    
    $
    59.5
    
    
    $
    26.1
    
    
    $
    85.6Non-current liabilities of discontinued operations
    
    
    1.8
    
    
    
    0.3
    
    
    
    2.1Minority interest
    
    
    16.0
    
    
    
    (0.3
    )
    
    
    15.7Total shareowners equity
    
    
    607.5
    
    
    
    (3.1
    )
    
    
    604.4Total liabilities and shareowners equity
    
    $
    1,181.3
    
    
    $
    23.0
    
    
    $
    1,204.3
 Condensed Consolidated Statements of Cash FlowsAs previouslyReported
    
    
    Adjustments
    
    
    As restatedTwenty Six weeks ended July 31, 2004Cash flow provided by operating activities
    
    $
    84.6
    
    
    $
    4.1
    
    
    $
    88.7Cash flow used in investing activities
    
    
    (48.1
    )
    
    
    (4.1
    )
    
    
    (52.2
    )Twenty Six weeks ended August 2, 2003Cash flow provided by operating activities
    
    $
    121.4
    
    
    $
    2.8
    
    
    $
    124.2Cash flow used in investing activities
    
    
    (53.5
    )
    
    
    (2.8
    )
    
    
    (56.3
    )
   (1)
    Previously reported amounts include reclassifications to decrease cash by $9.0 million,
and increase marketable securities, other current assets and accrued expenses by $9.0
million, $6.8 million and $6.8 million, respectively, as of July 31, 2004.(2)
    Previously reported amounts include reclassifications to decrease cash by $10.0
million, and increase marketable securities, other current assets, other assets and accrued
expenses by $10.0 million, $2.7 million, $1.7 million and $4.4 million, respectively, as of
January 31, 2004.
 NOTE 4. STOCK-BASED COMPENSATION. The Company follows the disclosure provisions of
Statement of Financial Accounting Standards (SFAS) No. 148, Accounting for Stock-Based
Compensation  Transition and Disclosure, an amendment of FASB Statement No. 123. The Statement
requires prominent disclosures in both annual and interim financial statements regarding the method
of accounting for stock-based employee compensation and the effect of the method used on reported
results. The Company accounts for stock compensation awards under the intrinsic value method of
Accounting Principles Board (APB) Opinion No. 25. APB Opinion No. 25 requires compensation cost
to be recognized based on the excess, if any, between the quoted market price of the 12




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##### Table of Contents



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 and earnings 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
    
    
    26 Weeks Ended(dollars in millions, except per share amounts)
    
    July 31, 2004
    
    
    August 2, 2003
    
    
    July 31, 2004
    
    
    August 2, 2003Net earnings:As reported
    
    $
    3.8
    
    
    $
    5.2
    
    
    $
    17.9
    
    
    $
    19.3Add: Total stock-based employee compensation expense included in
net earnings as reported, net of related income taxes
    
    
    0.1
    
    
    
    0.1
    
    
    
    0.6
    
    
    
    0.3Less: Total stock-based employee compensation expense determined
under fair value based method for all awards, net of related
income taxes
    
    
    0.9
    
    
    
    1.2
    
    
    
    2.0
    
    
    
    2.8Pro forma
    
    $
    3.0
    
    
    $
    4.1
    
    
    $
    16.5
    
    
    $
    16.8Diluted earnings per share:As reported
    
    $
    0.05
    
    
    $
    0.08
    
    
    $
    0.26
    
    
    $
    0.28Pro forma
    
    $
    0.04
    
    
    $
    0.06
    
    
    $
    0.24
    
    
    $
    0.24Basic earnings per share:As reported
    
    $
    0.05
    
    
    $
    0.08
    
    
    $
    0.26
    
    
    $
    0.28Pro forma
    
    $
    0.04
    
    
    $
    0.06
    
    
    $
    0.24
    
    
    $
    0.24
 NOTE 5. INTANGIBLES. The Company follows SFAS No. 142, Goodwill and Other Intangible Assets.
SFAS No. 142 requires that an intangible asset that is acquired other than by business combination
shall be initially recognized and measured based on its fair value. This Statement also provides
that goodwill and indefinitely-lived intangible assets should not be amortized, but shall be tested
for impairment annually, or more frequently if circumstances indicate potential impairment, through
a comparison of fair value to its carrying amount. Intangible assets with finite lives will
continue to be amortized over their useful lives. The Company assesses the fair value of its
relevant reporting units annually. No impairment loss was recorded during the first six months of
2004 related to goodwill; however, as part of the $36.7 million restructuring charges discussed in
Footnote 1, 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)
    July 31, 2004
    
    August 2, 2003
    
    
    January 31, 2004Gross carrying amount
    
    $
    83.0
    
    
    $
    87.8
    
    
    $
    87.0Less: accumulated amortization
    
    
    58.7
    
    
    
    56.5
    
    
    
    58.2Carrying amount, end of period
    
    $
    24.3
    
    
    $
    31.3
    
    
    $
    28.8
 13




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##### Table of Contents



Amortization expense on favorable leases was as follows: 13 Weeks Ended
    
    
    26 Weeks Ended(dollars in millions)
    
    July 31, 2004
    
    
    August 2, 2003
    
    
    July 31, 2004
    
    
    August 2, 2003Amortization
expense on
favorable leases
    
    $
    1.0
    
    
    $
    1.2
    
    
    $
    2.1
    
    
    $
    2.4
 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
    
    $
    2.22005
    
    
    3.92006
    
    
    3.52007
    
    
    3.12008
    
    
    2.7
 NOTE 6. LONG-TERM DEBT AND LINE OF CREDIT. In January 2004, the Company replaced its $150
million senior secured revolving credit facility (the Old Facility) with a new $200 million
senior secured revolving credit facility (the New Facility). Funds borrowed under the New
Facility are secured by domestic merchandise inventory and receivables. The Company may borrow up
to $200 million through the New Facility, subject to a sufficient borrowing base. The New Facility
bears interest at the London Inter-bank Offered Rate (LIBOR), plus a variable margin of 1.25
percent to 2.0 percent, or the base rate 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
July 31, 2004, was 2.95 percent. A quarterly 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
July 31, 2004. Based on its borrowing base, the Company may borrow up to $200.0 million under its
New Facility, less $16.1 million in outstanding letters of credit as of July 31, 2004. In July 2003, the Company sold $200.0 million of 8.25% Senior Subordinated Notes (the Notes) for
$196.7 million, due 2013. The discount of $3.3 million is being amortized to interest expense over
the life of the Notes. The Notes are guaranteed by all of the Companys domestic subsidiaries.
Interest on the Notes is payable semi-annually, beginning February 1, 2004. The Notes contain
various covenants including those that may limit the Companys ability to pay dividends, repurchase
stock, accelerate the retirement of other subordinated debt or make certain investments. As of July
31, 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 July 31, 2004, the fair value of the Notes was $195.0 million based
on recent trading activity of the Notes. On or after August 1, 2008, the Company may, on any one or
more occasions, redeem all or a part of the Notes at the redemption prices set forth below, plus
accrued and unpaid interest, if any, on the Notes redeemed, to the applicable redemption date: Year
    
    
    Percentage2008
    
    
    104.125
    %2009
    
    
    102.750
    %2010
    
    
    101.375
    %2011 and thereafter
    
    
    100.000
    %
 NOTE 7. PENSION PLAN. The Company has a nonqualified, supplementary defined benefit plan for
certain management employees. The plan is an unfunded, noncontributory plan and provides for
benefits based upon years of service and cash compensation during employment. Pension expense is based on information provided to an outside actuarial firm that uses assumptions
to estimate the total benefits ultimately payable to management employees and allocates this cost
to service periods. The actuarial assumptions used to calculate pension expense are reviewed
annually for reasonableness. 14




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##### Table of Contents



The components of net periodic benefit costs for the plan were: 13 Weeks Ended
    
    
    26 Weeks Ended(dollars in millions)
    
    July 31, 2004
    
    
    August 2, 2003
    
    
    July 31, 2004
    
    
    August 2, 2003Components of pension expense:Service cost
    
    $
    0.2
    
    
    $
    0.2
    
    
    $
    0.4
    
    
    $
    0.4Interest cost
    
    
    0.3
    
    
    
    0.3
    
    
    
    0.6
    
    
    
    0.6Amortization of prior service cost
    
    
    0.1
    
    
    
    
    
    
    
    0.2
    
    
    
    Amortization of actuarial loss
    
    
    0.1
    
    
    
    0.1
    
    
    
    0.2
    
    
    
    0.2Total
    
    $
    0.7
    
    
    $
    0.6
    
    
    $
    1.4
    
    
    $
    1.2
 NOTE 8. INCOME TAXES. In the second quarter of 2004, the impact of impairment charges and
expected restructuring costs on estimated annual taxable income resulted in a revised projection of
the effective income tax rate for the full fiscal year. In order to reflect the revised estimated
effective tax rate for the year, an 11.1 percent effective income tax expense for the second
quarter of 2004 and a 23.3 percent effective income tax rate for the first six months of 2004 were

utilized to record income taxes. The Companys effective income tax rate was 35.0 percent in the
second quarter and 35.1 percent in the first six months of 2003. NOTE 9. COMPREHENSIVE INCOME. The following table shows the computation of comprehensive income: 13 Weeks Ended
    
    
    26 Weeks Ended(dollars in millions)
    
    July 31, 2004
    
    
    August 2, 2003
    
    
    July 31, 2004
    
    
    August 2, 2003Net Income
    
    $
    3.8
    
    
    $
    5.2
    
    
    $
    17.9
    
    
    $
    19.3Other Comprehensive Gain (Loss):Change in fair value of derivatives
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.1Derivative losses translated into interest expense
    
    
    
    
    
    
    0.7
    
    
    
    
    
    
    
    1.7Foreign currency translation adjustments
    
    
    2.4
    
    
    
    1.8
    
    
    
    (0.9
    )
    
    
    4.1Total other comprehensive gain (loss)
    
    
    2.4
    
    
    
    2.5
    
    
    
    (0.9
    )
    
    
    5.9Total Comprehensive Income
    
    $
    6.2
    
    
    $
    7.7
    
    
    $
    17.0
    
    
    $
    25.2
 The changes in the Companys cumulative foreign currency translation adjustment were
not adjusted for income taxes, as they relate to specific indefinite investments in foreign
subsidiaries. NOTE 10. EARNINGS PER SHARE. Basic earnings per share are computed by dividing net earnings by the
weighted average number of shares of common stock outstanding during the period. Diluted earnings
per share include the effect of conversions of stock options and unearned restricted stock. The
calculation of diluted earnings per share for the thirteen-week and twenty-six-week periods ended
July 31, 2004, and August 2, 2003, excludes the impact of 7,659,303 and 7,989,902 stock options and
8,173,948 and 7,885,671 stock options, respectively, because to include them would be
anti-dilutive. 15




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##### Table of Contents



The following table presents a reconciliation of the numerators and denominators of basic and
diluted earnings per share from continuing operations: 13 Weeks Ended
    
    
    26 Weeks Ended(dollars and shares in millions, except per share)
    
    July 31, 2004
    
    
    August 2, 2003
    
    
    July 31, 2004
    
    
    August 2, 2003Diluted Computation:Net earnings from continuing operations
    
    $
    19.8
    
    
    $
    10.0
    
    
    $
    37.7
    
    
    $
    26.8Weighted average common shares outstanding
    
    
    68.0
    
    
    
    68.0
    
    
    
    68.0
    
    
    
    68.0Net effect of dilutive stock options and unearned
restricted stock based on the treasury stock
method
    
    
    0.1
    
    
    
    0.1
    
    
    
    0.0
    
    
    
    0.1Outstanding shares for diluted earnings per share
    
    
    68.1
    
    
    
    68.1
    
    
    
    68.0
    
    
    
    68.1Diluted earnings per share from continuing
operations
    
    $
    0.29
    
    
    $
    0.15
    
    
    $
    0.55
    
    
    $
    0.39Basic Computation:Net earnings from continuing operations
    
    $
    19.8
    
    
    $
    10.0
    
    
    $
    37.7
    
    
    $
    26.8Weighted average common shares outstanding
    
    
    68.0
    
    
    
    68.0
    
    
    
    68.0
    
    
    
    68.0Basic earnings per share from continuing operations
    
    $
    0.29
    
    
    $
    0.15
    
    
    $
    0.55
    
    
    $
    0.39
 NOTE 11. RESTRUCTURING CHARGES. During the second quarter of 2004, the Company initiated a
restructuring plan to build long-term shareowner value. As part of the restructuring, the Company
committed to a plan to sell or otherwise dispose of all 32 Payless ShoeSource stores in Chile and
Peru and their related operations, as well as its 181 Parade stores by the end of the fiscal year.
As part of the restructuring, the Company also committed to a plan to close approximately 260
Payless stores by the end of the fiscal year. The store closings differ from closings in the normal
course of business in that they have longer remaining lease terms. The operations in Chile and
Peru, Parade stores located in Puerto Rico and Payless stores located in 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. In accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets,
during the second quarter of 2004 the Company recorded a non-cash impairment charge of $36.7
million ($13.7 million relating to continuing operations and $23.0 million relating to discontinued
operations) 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 fair value of the long-lived assets evaluated for recoverability was
determined using the present value of estimated future cash flows. For the stores and operations
to be disposed, the non-cash impairment charge for the Payless Domestic and Payless International
segments were $27.5 million and $9.2 million, respectively. The Payless Domestic charge includes a
$1.9 million reduction in the carrying value of favorable leases. The Company estimates that the costs for lease terminations, severance, and other exit activities
relating to the strategic initiatives could be in the range of $40 million to $60 million.
However, the final financial impact of the strategic initiatives is dependent upon the ultimate
exit transactions. In accordance with SFAS No. 146, Accounting for Costs Associated with Exit or
Disposal Activities, no severance or contract termination charges have been recorded as of the end
of the second quarter because liabilities for these charges have not yet been incurred. 16




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##### Table of Contents



NOTE 12. DISCONTINUED OPERATIONS. Due to the updating of this filing for the restatement described
in Note 3, the condensed consolidated financial statements have been updated to include
discontinued operations presentation in order to conform to the current presentation of the
Companys operations. In accordance with SFAS No. 144, the results for the thirteen and twenty-six weeks ended July 31,
2004 and August 2, 2003 have been reclassified to show the results of operations for Parade, Peru,
Chile and 26 Payless closed stores as discontinued operations. The following is a summary of these
results by segment: Thirteen Weeks Ended July 31, 2004 Payless
    
    
    Payless
    
    
    Payless(dollars in millions)
    
    Domestic
    
    
    International
    
    
    ConsolidatedNet sales
    
    $
    29.8
    
    
    $
    2.4
    
    
    $
    32.2Loss from discontinued operations before income taxes and minority interest
    
    
    (1.2
    )
    
    
    (2.2
    )
    
    
    (3.4
    )(Benefit) provision for income taxes
    
    
    (0.6
    )
    
    
    0.1
    
    
    
    (0.5
    )Loss from discontinued operations before minority interest
    
    
    (0.6
    )
    
    
    (2.3
    )
    
    
    (2.9
    )Minority interest, net of income taxes
    
    
    
    
    
    
    0.9
    
    
    
    0.9Loss on disposal of discontinued operations, net of income taxes
of $5.6 and $0.0, respectively, and minority interest
of $0.0 and $3.4, respectively
    
    
    (8.9
    )
    
    
    (5.1
    )
    
    
    (14.0
    )Loss from discontinued operations, net of income taxes and minority interest
    
    $
    (9.5
    )
    
    $
    (6.5
    )
    
    $
    (16.0
    )
 Thirteen Weeks Ended August 2, 2003 Payless
    
    
    Payless
    
    
    Payless(dollars in millions)
    
    Domestic
    
    
    International
    
    
    ConsolidatedNet sales
    
    $
    30.6
    
    
    $
    2.7
    
    
    $
    33.3Loss from discontinued operations before income taxes and minority interest
    
    
    (6.1
    )
    
    
    (1.8
    )
    
    
    (7.9
    )Benefit for income taxes
    
    
    (2.2
    )
    
    
    (0.4
    )
    
    
    (2.6
    )Loss from discontinued operations before minority interest
    
    
    (3.9
    )
    
    
    (1.4
    )
    
    
    (5.3
    )Minority interest, net of income taxes
    
    
    
    
    
    
    0.5
    
    
    
    0.5Loss from discontinued operations, net of income taxes and minority interest
    
    $
    (3.9
    )
    
    $
    (0.9
    )
    
    $
    (4.8
    )
 17




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##### Table of Contents



Twenty-Six Weeks Ended July 31, 2004 Payless
    
    
    Payless
    
    
    Payless(dollars in millions)
    
    Domestic
    
    
    International
    
    
    ConsolidatedNet sales
    
    $
    56.9
    
    
    $
    4.9
    
    
    $
    61.8Loss from discontinued operations before income taxes and minority interest
    
    
    (5.6
    )
    
    
    (3.9
    )
    
    
    (9.5
    )(Benefit) provision for income taxes
    
    
    (2.4
    )
    
    
    0.3
    
    
    
    (2.1
    )Loss from discontinued operations before minority interest
    
    
    (3.2
    )
    
    
    (4.2
    )
    
    
    (7.4
    )Minority interest, net of income taxes
    
    
    
    
    
    
    1.6
    
    
    
    1.6Loss on disposal of discontinued operations, net of income taxes
of $5.6 and $0.0, respectively, and minority interest
of $0.0 and $3.4, respectively
    
    
    (8.9
    )
    
    
    (5.1
    )
    
    
    (14.0
    )Loss from discontinued operations, net of income taxes and minority interest
    
    $
    (12.1
    )
    
    $
    (7.7
    )
    
    $
    (19.8
    )
 Twenty-Six Weeks Ended August 2, 2003 Payless
    
    
    Payless
    
    
    Payless(dollars in millions)
    
    Domestic
    
    
    International
    
    
    ConsolidatedNet sales
    
    $
    58.4
    
    
    $
    5.3
    
    
    $
    63.7Loss from discontinued operations before income taxes and minority interest
    
    
    (8.9
    )
    
    
    (3.9
    )
    
    
    (12.8
    )Benefit for income taxes
    
    
    (3.2
    )
    
    
    (0.8
    )
    
    
    (4.0
    )Loss from discontinued operations before minority interest
    
    
    (5.7
    )
    
    
    (3.1
    )
    
    
    (8.8
    )Minority interest, net of income taxes
    
    
    
    
    
    
    1.3
    
    
    
    1.3Loss from discontinued operations, net of income taxes and minority interest
    
    $
    (5.7
    )
    
    $
    (1.8
    )
    
    $
    (7.5
    )
 18




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##### Table of Contents



Additionally, the Company has made certain reclassifications to its consolidated balance
sheets to reflect the assets of Parade, Peru, Chile and the 26 Payless closed stores as
discontinued operations. As of July 31, 2004, August 2, 2003 and January 31, 2004 the current and
non-current assets and liabilities of discontinued operations by financial reporting segment were
as follows: July 31, 2004 Payless
    
    
    Payless
    
    
    Payless(dollars in millions)
    
    Domestic
    
    
    International
    
    
    ConsolidatedAssetsCurrent assets:Cash and cash equivalents
    
    $
    0.1
    
    
    $
    1.6
    
    
    $
    1.7Inventories
    
    
    14.2
    
    
    
    2.0
    
    
    
    16.2Current deferred income taxes
    
    
    0.2
    
    
    
    
    
    
    
    0.2Other current assets
    
    
    2.5
    
    
    
    
    
    
    
    2.5Total current assets of discontinued operations
    
    $
    17.0
    
    
    $
    3.6
    
    
    $
    20.6Property and equipment, net
    
    $
    2.5
    
    
    $
    0.9
    
    
    $
    3.4Deferred income taxes
    
    
    7.7
    
    
    
    
    
    
    
    7.7Other assets
    
    
    0.1
    
    
    
    0.8
    
    
    
    0.9Total non-current assets of discontinued operations
    
    $
    10.3
    
    
    $
    1.7
    
    
    $
    12.0LiabilitiesCurrent liabilities:Accounts payable
    
    $
    3.0
    
    
    $
    0.4
    
    
    $
    3.4Accrued expenses
    
    
    1.1
    
    
    
    0.4
    
    
    
    1.5Total current liabilities of discontinued operations
    
    $
    4.1
    
    
    $
    0.8
    
    
    $
    4.9Other liabilities
    
    $
    9.8
    
    
    $
    0.1
    
    
    $
    9.9Total non-current liabilities of discontinued operations
    
    $
    9.8
    
    
    $
    0.1
    
    
    $
    9.9
 August 2, 2003 Payless
    
    
    Payless
    
    
    Payless(dollars in millions)
    
    Domestic
    
    
    International
    
    
    ConsolidatedAssetsCurrent assets:Cash and cash equivalents
    
    $
    0.1
    
    
    $
    1.1
    
    
    $
    1.2Inventories
    
    
    16.5
    
    
    
    2.9
    
    
    
    19.4Current deferred income taxes
    
    
    0.2
    
    
    
    
    
    
    
    0.2Other current assets
    
    
    2.6
    
    
    
    1.4
    
    
    
    4.0Total current assets of discontinued operations
    
    $
    19.4
    
    
    $
    5.4
    
    
    $
    24.8Property and equipment, net
    
    $
    16.6
    
    
    $
    6.6
    
    
    $
    23.2Favorable leases, net
    
    
    0.5
    
    
    
    1.2
    
    
    
    1.7Deferred income taxes
    
    
    2.2
    
    
    
    1.8
    
    
    
    4.0Other assets
    
    
    0.1
    
    
    
    2.0
    
    
    
    2.1Total non-current assets of discontinued operations
    
    $
    19.4
    
    
    $
    11.6
    
    
    $
    31.0LiabilitiesCurrent liabilities:Accounts payable
    
    $
    2.4
    
    
    $
    0.1
    
    
    $
    2.5Accrued expenses
    
    
    1.7
    
    
    
    0.3
    
    
    
    2.0Total current liabilities of discontinued operations
    
    $
    4.1
    
    
    $
    0.4
    
    
    $
    4.5Other liabilities
    
    $
    2.1
    
    
    $
    
    
    
    $
    2.11,4Total non-current liabilities of discontinued operations
    

    $
    2.1
    
    
    $
    
    
    
    $
    2.1
 19




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##### Table of Contents



January 31, 2004 Payless
    
    
    Payless
    
    
    Payless(dollars in millions)
    
    Domestic
    
    
    International
    
    
    ConsolidatedAssetsCurrent assets:Cash and cash equivalents
    
    $
    0.1
    
    
    $
    2.1
    
    
    $
    2.2Inventories
    
    
    14.4
    
    
    
    2.8
    
    
    
    17.2Current deferred income taxes
    
    
    0.2
    
    
    
    
    
    
    
    0.2Other current assets
    
    
    2.4
    
    
    
    2.2
    
    
    
    4.6Total current assets of discontinued operations
    
    $
    17.1
    
    
    $
    7.1
    
    
    $
    24.2Property and equipment, net
    
    $
    15.3
    
    
    $
    7.1
    
    
    $
    22.4Favorable leases, net
    
    
    0.4
    
    
    
    
    
    
    
    0.4Deferred income taxes
    
    
    2.6
    
    
    
    
    
    
    
    2.6Other assets
    
    
    0.1
    
    
    
    2.1
    
    
    
    2.2Total non-current assets of discontinued operations
    
    $
    18.4
    
    
    $
    9.2
    
    
    $
    27.6LiabilitiesCurrent liabilities:Accounts payable
    
    $
    2.7
    
    
    $
    0.7
    
    
    $
    3.4Accrued expenses
    
    
    2.0
    
    
    
    0.4
    
    
    
    2.4Total current liabilities of discontinued operations
    
    $
    4.7
    
    
    $
    1.1
    
    
    $
    5.8Other liabilities
    
    $
    2.0
    
    
    $
    0.1
    
    
    $
    2.1Total non-current liabilities of discontinued operations
    
    $
    2.0
    
    
    $
    0.1
    
    
    $
    2.1
 NOTE 13. SEGMENT REPORTING. The Company and its subsidiaries are principally engaged in the
operation of retail locations offering family footwear and accessories. The Company operates its
business in two reportable business segments: Payless Domestic and Payless International. These
segments have been determined based on internal management reporting and management
responsibilities. The Payless Domestic segment includes retail operations in the United States,
Guam and Saipan and sourcing operations. The Payless International segment includes retail
operations in Canada, the South American Region, the Central American Region, Puerto Rico and the
U.S. Virgin Islands. The Companys operations in its Central American and South American Regions
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 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 second
quarter of 2004 and $4.4 million during the same period in 2003. For the first six months of 2004,
these total costs and fees amounted to $9.5 million, compared with $8.3 million for the first six
months of 2003. The Companys reporting period for its operations in the South American and Central
American Regions 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 ConsolidatedQuarter ended July 31, 2004Revenues from external customers
    
    $
    609.8
    
    
    $
    85.8
    
    
    $
    695.6Operating profit from continuing operations
    
    
    19.8
    
    
    
    4.5
    
    
    
    24.3Six months ended July 31, 2004Revenues from external customers
    
    $
    1,232.0
    
    
    $
    155.9
    
    
    $
    1,387.9Operating profit from continuing operations
    
    
    45.5
    
    
    
    7.2
    
    
    
    52.7Total assets
    
    
    1,031.0
    
    
    
    211.9
    
    
    
    1,242.9Quarter ended August 2, 2003Revenues from external customers
    
    $
    619.3
    
    
    $
    78.7
    
    
    $
    698.0Operating profit from continuing operations
    
    
    16.1
    
    
    
    1.5
    
    
    
    17.6Six months ended August 2, 2003Revenues from external customers
    
    $
    1,222.7
    
    
    $
    142.6
    
    
    $
    1,365.3Operating profit from continuing operations
    

    
    46.9
    
    
    
    (0.2
    )
    
    
    46.7Total assets
    
    
    996.2
    
    
    
    194.5
    
    
    
    1,190.7
 20




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##### Table of Contents



Total assets for the Payless Domestic segment include $5.9 million in goodwill as of July 31,
2004, and August 2, 2003. NOTE 14. CONTINGENCIES. On or about December 20, 2001, a First Amended Complaint was filed against
the Company in the U.S. District Court for the District of Oregon, captioned Adidas America, Inc.
and Adidas-Salomon AG v. Payless ShoeSource, Inc. The First Amended Complaint seeks injunctive
relief and unspecified monetary damages for trademark and trade dress infringement, unfair
competition, deceptive trade practices and breach of contract. The Company believes it has
meritorious defenses to claims asserted in the lawsuit and has filed an answer and a motion for
summary judgment which the court granted in part. An estimate of the possible loss, if any, or the
range of loss cannot be made. On or about January 20, 2000, a complaint was filed against the Company in the U.S. District Court
for the District of New Hampshire, captioned Howard J. Dananberg, D.P.M. v. Payless ShoeSource,
Inc. The Complaint seeks injunctive relief, unspecified treble monetary damages, attorneys fees,
interest and costs for patent infringement. The Company believes it has meritorious defenses to
claims asserted in the lawsuit. An estimate of the possible loss, if any, or the range of loss
cannot be made. NOTE 15. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS. During May 2003, the FASB issued SFAS 150,
Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.
SFAS 150 clarifies the accounting for certain financial instruments with characteristics of both
liabilities and equity and requires that those instruments be classified as liabilities in
statements of financial position. SFAS 150 is effective for financial instruments entered into or
modified after May 31, 2003, and otherwise is effective at the beginning of the first interim
period beginning after June 15, 2003, except that certain provisions have been deferred pursuant to
FASB Staff Position No. FAS 150-3. The application of FAS 150-3 and the adoption of SFAS 150 did
not have a material impact on the Companys consolidated financial statements. In December 2003, the FASB issued FASB Interpretation No. 46R, Consolidation of Variable Interest
Entities and Interpretation of ARB No. 51. This interpretation, which replaces FASB Interpretation
No. 46, Consolidation of Variable Interest Entities, clarifies the application of Accounting
Research Bulletin No. 51, Consolidated Financial Statements, to certain entities in which equity
investors do not have the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without additional subordinated
financial support. This interpretation is required in financial statements for periods ending after
March 15, 2004, for those companies that have yet to adopt the provisions of FIN 46. The
application of FASB Interpretation No. 46R did not have a material impact on the Companys
condensed consolidated financial statements. In January 2003, the FASB issued SFAS 132 (revised 2003), Employers Disclosures about Pensions
and Other Postretirement Benefits, which retains all of the disclosures that are required by SFAS
132 and includes several additional disclosures. It also amends APB Opinion 28, Interim Financial
Reporting, to require certain disclosures about pension and other postretirement benefit plans in
interim financial statements. The provisions of SFAS 132 (revised 2003) are effective for fiscal
years ending after June 15, 2004. The interim disclosure provisions are effective for interim
periods beginning after December 15, 2003. The Company adopted the provisions of SFAS 132 (revised
2003) in the first quarter of fiscal year 2004. NOTE 16. SUBSIDIARY GUARANTORS OF SENIOR NOTES  CONDENSED CONSOLIDATING FINANCIAL
INFORMATION. The Company has issued Notes guaranteed by all of its domestic subsidiaries
(the Guarantor Subsidiaries). The Guarantor Subsidiaries are direct or indirect wholly owned
domestic subsidiaries of the Company. The guarantees are full and unconditional, to the extent
allowed by law, and joint and several. The following supplemental financial information sets forth, on a consolidating basis, the
statements of earnings 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 twenty-six-week
periods ended July 31, 2004, and August 2, 2003, and the related condensed consolidating balanced
sheets as of July 31, 2004, August 2, 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, 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. Stores in our Central American and South American Regions are included in our
results on a one-month lag relative to results from other regions. The effect of this one-month lag
on our financial position and results of operations is not significant. 21




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##### Table of Contents



CONDENSED CONSOLIDATING BALANCE SHEET
(UNAUDITED)
As of July 31, 2004 (Restated) Parent
    
    
    Guarantor
    
    
    Non-guarantor(dollars in millions)
    
    Company
    
    
    Subsidiaries

    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedASSETSCurrent Assets:Cash and cash equivalents
    
    $
    
    
    
    $
    125.1
    
    
    $
    49.9
    
    
    $
    
    
    
    $
    175.0Marketable securities, available for sale
    
    
    
    
    
    
    9.0
    
    
    
    
    
    
    
    
    
    
    
    9.0Restricted cash
    
    
    
    
    
    
    
    
    
    
    33.5
    
    
    
    
    
    
    
    33.5Inventories
    
    
    
    
    
    
    327.7
    
    
    
    73.8
    
    
    
    (3.3
    )
    
    
    398.2Current deferred income taxes
    
    
    
    
    
    
    22.4
    
    
    
    0.7
    
    
    
    
    
    
    
    23.1Other current assets
    
    
    11.6
    
    
    
    68.5
    
    
    
    36.8
    
    
    
    (48.7
    )
    
    
    68.2Current assets of discontinued operations
    
    
    
    
    
    
    16.9
    
    
    
    3.7
    
    
    
    
    
    
    
    20.6Total current assets
    
    
    11.6
    
    
    
    569.6
    
    
    
    198.4
    
    
    
    (52.0
    )
    
    
    727.6Property and Equipment:Land
    
    
    
    
    
    
    8.0
    
    
    
    
    
    
    
    
    
    
    
    8.0Buildings and leasehold improvements
    
    
    
    
    
    
    602.2
    
    
    
    68.3
    
    
    
    
    
    
    
    670.5Furniture, fixtures and equipment
    
    
    
    
    
    
    462.0
    
    
    
    61.4
    
    
    
    
    
    
    
    523.4Property under capital leases
    
    
    
    
    
    
    4.6
    
    
    
    
    
    
    
    
    
    
    
    4.6Total property and equipment
    
    
    
    
    
    
    1,076.8
    
    
    
    129.7
    
    
    
    
    
    
    
    1,206.5Accumulated depreciation and amortization
    
    
    
    
    
    
    (733.3
    )
    
    
    (60.5
    )
    
    
    
    
    
    
    (793.8
    )Property and equipment, net
    
    
    
    
    
    
    343.5
    
    
    
    69.2
    
    
    
    
    
    
    
    412.7Favorable leases, net
    
    
    
    
    
    
    24.3
    
    
    
    
    
    
    
    
    
    
    
    24.3Deferred income taxes
    
    
    
    
    
    
    25.4
    
    
    
    8.5
    
    
    
    
    
    
    
    33.9Goodwill, net
    
    
    
    
    
    
    5.9
    
    
    
    
    
    
    
    
    
    
    
    5.9Other assets
    
    
    1,100.3
    
    
    
    439.6
    
    
    
    0.9
    
    
    
    (1,514.3
    )
    
    
    26.5Non-current assets of discontinued operations
    
    
    
    
    
    
    10.4
    
    
    
    1.6
    
    
    
    
    
    
    
    12.0Total assets
    
    $
    1,111.9
    
    
    $
    1,418.7
    
    
    $
    278.6
    
    
    $
    (1,566.3
    )
    
    $
    1,242.9LIABILITIES AND SHAREOWNERS EQUITYCurrent Liabilities:Current maturities of long-term debt
    
    $
    
    
    
    $
    0.8
    
    
    $
    
    
    
    $
    
    
    
    $
    0.8Notes payable
    
    
    
    
    
    
    
    
    
    
    33.5
    
    
    
    
    
    
    
    33.5Accounts payable
    
    
    
    
    
    
    96.1
    
    
    
    71.4
    
    
    
    (41.0
    )
    
    
    126.5Accrued expenses
    
    
    7.2
    
    
    
    139.0
    
    
    
    16.7
    
    
    
    (11.0
    )
    
    
    151.9Current liabilities of discontinued operations
    
    
    
    
    
    
    4.1
    
    
    
    0.8
    
    
    
    
    
    
    
    4.9Total current liabilities
    
    
    7.2
    
    
    
    240.0
    
    
    
    122.4
    
    
    
    (52.0
    )
    
    
    317.6Long-term debt
    
    
    479.9
    
    
    
    1.6
    
    
    
    5.6
    
    
    
    (283.0
    )
    
    
    204.1Other liabilities
    
    
    0.3
    
    
    
    118.8
    
    
    
    12.9
    
    
    
    (50.6
    )
    
    
    81.4Non-current liabilities of discontinued operations
    
    
    
    
    
    
    9.8
    
    
    
    0.1
    
    
    
    
    
    
    
    9.9Minority interest
    
    
    
    
    
    
    
    
    
    
    8.0
    
    
    
    
    
    
    
    8.0Commitments and contingencies
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total shareowners equity
    
    
    624.5
    
    
    
    1,048.5
    
    
    
    129.6
    
    
    
    (1,180.7
    )
    
    
    621.9Total liabilities and shareowners equity
    
    $
    1,111.9
    
    
    $
    1,418.7
    
    
    $
    278.6
    
    
    $
    (1,566.3
    )
    
    $
    1,242.9
 22




---



##### Table of Contents



CONDENSED CONSOLIDATING BALANCE SHEET
(UNAUDITED)
As of August 2, 2003 (Restated) Parent
    
    
    Guarantor
    
    
    Non-guarantor(dollars in millions)
    
    Company
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedASSETSCurrent Assets:Cash and cash equivalents
    
    $
    
    
    
    $
    76.1
    
    
    $
    37.1
    
    
    $
    
    
    
    $
    113.2Marketable securities, available for sale
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Restricted cash
    
    
    
    
    
    
    
    
    
    
    33.0
    
    
    
    
    
    
    
    33.0Inventories
    
    
    
    
    
    
    330.3
    
    
    
    71.9
    
    
    
    (3.0
    )
    
    
    399.2Current deferred income taxes
    
    
    
    
    
    
    15.9
    
    
    
    
    
    
    
    
    
    
    
    15.9Other current assets
    
    
    3.1
    
    
    
    76.3
    
    
    
    36.1
    
    
    
    (51.7
    )
    
    
    63.8Current assets of discontinued operations
    
    
    
    
    
    
    19.4
    
    
    
    5.4
    
    
    
    
    
    
    
    24.8Total current assets
    
    
    3.1
    
    
    
    518.0
    
    
    
    183.5
    
    
    
    (54.7
    )
    
    
    649.9Property and Equipment:Land
    
    
    
    
    
    
    8.4
    
    
    
    
    
    
    
    
    
    
    
    8.4Buildings and leasehold improvements
    
    
    
    
    
    
    582.5
    
    
    
    67.1
    
    
    
    
    
    
    
    649.6Furniture, fixtures and equipment
    
    
    
    
    
    
    431.8
    
    
    
    52.8
    
    
    
    
    
    
    
    484.6Property under capital leases
    
    
    
    
    
    
    4.6
    
    
    
    
    
    
    
    
    
    
    
    4.6Total property and equipment
    
    
    
    
    
    
    1,027.3
    
    
    
    119.9
    
    
    
    
    
    
    
    1,147.2Accumulated depreciation and amortization
    
    
    
    
    
    
    (687.2
    )
    
    
    (50.0
    )
    
    
    
    
    
    
    (737.2
    )Property and equipment, net
    
    
    
    
    
    
    340.1
    
    
    
    69.9
    
    
    
    
    
    
    
    410.0Favorable leases, net
    
    
    
    
    
    
    31.3
    
    
    
    
    
    
    
    
    
    
    
    31.3Deferred income taxes
    
    
    
    
    
    
    25.0
    
    
    
    8.0
    
    
    
    
    
    
    
    33.0Goodwill, net
    
    
    
    
    
    
    5.9
    
    
    
    
    
    
    
    
    
    
    
    5.9Other assets
    
    
    1,106.0
    
    
    
    411.1
    
    
    
    17.0
    
    
    
    (1,504.5
    )
    
    
    29.6Non-current assets of discontinued operations
    
    
    
    
    
    
    19.5
    
    
    
    11.5
    
    
    
    
    
    
    
    31.0Total assets
    
    $
    1,109.1
    
    
    $
    1,350.9
    
    
    $
    289.9
    
    
    $
    (1,559.2
    )
    
    $
    1,190.7LIABILITIES AND SHAREOWNERS EQUITYCurrent Liabilities:Current maturities of long-term debt
    
    $
    
    
    
    $
    0.9
    
    
    $
    
    
    
    $
    
    
    
    $
    0.9Notes payable
    
    
    
    
    
    
    
    
    
    
    33.0
    
    
    
    
    
    
    
    33.0Accounts payable
    
    
    3.9
    
    
    
    71.2
    
    
    
    87.0
    
    
    
    (50.3
    )
    
    
    111.8Accrued expenses
    
    
    1.7
    
    
    
    106.6
    
    
    
    14.7
    
    
    
    (4.4
    )
    
    
    118.6Current liabilities of discontinued operations
    
    
    
    
    
    
    4.0
    
    
    
    0.5
    
    
    
    
    
    
    
    4.5Total current liabilities
    
    
    5.6
    
    
    
    182.7
    
    
    
    135.2
    
    
    
    (54.7
    )
    
    
    268.8Long-term debt
    
    
    479.8
    
    
    
    2.4
    
    
    
    4.0
    
    
    
    (283.1
    )
    
    
    203.1Other liabilities
    
    
    
    
    
    
    129.3
    
    
    
    10.6
    
    
    
    (61.9
    )
    
    
    78.0Non-current liabilities of discontinued operations
    
    
    
    
    
    
    2.1
    
    
    
    
    
    
    
    
    
    
    
    2.1Minority interest
    
    
    
    
    
    
    
    
    
    
    18.1
    
    
    
    
    
    
    
    18.1Commitments and contingencies
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total shareowners equity
    
    
    623.7
    
    
    
    1,034.4
    
    
    
    122.0
    
    
    
    (1,159.5
    )
    
    
    620.6Total liabilities and shareowners equity
    
    $
    1,109.1
    
    
    $
    1,350.9
    
    
    $
    289.9
    
    
    $
    (1,559.2
    )
    
    $
    1,190.7
 23




---



##### Table of Contents



CONDENSED CONSOLIDATING BALANCE SHEET
(UNAUDITED)
As of January 31, 2004 (Restated) Parent
    
    
    Guarantor
    
    
    Non-guarantor(dollars in millions)
    
    Company
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedASSETSCurrent Assets:Cash and cash equivalents
    
    $
    
    
    
    $
    67.4
    
    
    $
    69.3
    
    
    $
    
    
    
    $
    136.7Marketable securities, available for sale
    
    
    
    
    
    
    10.0
    
    
    
    
    
    
    
    
    
    
    
    10.0Restricted cash
    
    
    
    
    
    
    
    
    
    
    33.5
    
    
    
    
    
    
    
    33.5Inventories
    
    
    
    
    
    
    308.5
    
    
    
    70.9
    
    
    
    (4.2
    )
    
    
    375.2Current deferred income taxes
    
    
    
    
    
    
    17.0
    
    
    
    0.1
    
    
    
    
    
    
    
    17.1Other current assets
    
    
    6.6
    
    
    
    71.9
    
    
    
    41.7
    
    
    
    (55.3
    )
    
    
    64.9Current assets of discontinued operations
    
    
    
    
    
    
    17.0
    
    
    
    7.2
    
    
    
    
    
    
    
    24.2Total current assets
    
    
    6.6
    
    
    
    491.8
    
    
    
    222.7
    
    
    
    (59.5
    )
    
    
    661.6Property and Equipment:Land
    
    
    
    
    
    
    8.0
    
    
    
    
    
    
    
    
    
    
    
    8.0Buildings and leasehold improvements
    
    
    
    
    
    
    610.7
    
    
    
    69.1
    
    
    
    
    
    
    
    679.8Furniture, fixtures and equipment
    
    
    
    
    
    
    439.7
    
    
    
    54.9
    
    
    
    
    
    
    
    494.6Property under capital leases
    
    
    
    
    
    
    4.6
    
    
    
    
    
    
    
    
    
    
    
    4.6Total property and equipment
    
    
    
    
    
    
    1,063.0
    
    
    
    124.0
    
    
    
    
    
    
    
    1,187.0Accumulated depreciation and amortization
    
    
    
    
    
    
    (711.6
    )
    
    
    (51.9
    )
    
    
    
    
    
    
    (763.5
    )Property and equipment, net
    
    
    
    
    
    
    351.4
    
    
    
    72.1
    
    
    
    
    
    
    
    423.5Favorable leases, net
    
    
    
    
    
    
    28.8
    
    
    
    
    
    
    
    
    
    
    
    28.8Deferred income taxes
    
    
    
    
    
    
    27.7
    
    
    
    6.5
    
    
    
    
    
    
    
    34.2Goodwill, net
    
    
    
    
    
    
    5.9
    
    
    
    
    
    
    
    
    
    
    
    5.9Other assets
    
    
    1,085.1
    
    
    
    440.7
    
    
    
    1.4
    
    
    
    (1,504.5
    )
    
    
    22.7Non-current assets of discontinued operations
    
    
    
    
    
    
    18.4
    
    
    
    9.2
    
    
    
    
    
    
    
    27.6Total assets
    
    $
    1,091.7
    
    
    $
    1,364.7
    
    
    $
    311.9

    
    
    $
    (1,564.0
    )
    
    $
    1,204.3LIABILITIES AND SHAREOWNERS EQUITYCurrent Liabilities:Current maturities of long-term debt
    
    $
    
    
    
    $
    0.9
    
    
    $
    
    
    
    $
    
    
    
    $
    0.9Notes payable
    
    
    
    
    
    
    
    
    
    
    33.5
    
    
    
    
    
    
    
    33.5Accounts payable
    
    
    
    
    
    
    84.3
    
    
    
    97.3
    
    
    
    (52.0
    )
    
    
    129.6Accrued expenses
    
    
    7.5
    
    
    
    108.1
    
    
    
    15.8
    
    
    
    (7.5
    )
    
    
    123.9Current liabilities of discontinued operations
    
    
    
    
    
    
    4.8
    
    
    
    1.0
    
    
    
    
    
    
    
    5.8Total current liabilities
    
    
    7.5
    
    
    
    198.1
    
    
    
    147.6
    
    
    
    (59.5
    )
    
    
    293.7Long-term debt
    
    
    479.8
    
    
    
    2.0
    
    
    
    4.0
    
    
    
    (283.0
    )
    
    
    202.8Other liabilities
    
    
    
    
    
    
    137.3
    
    
    
    8.8
    
    
    
    (60.5
    )
    
    
    85.6Non-current liabilities of discontinued operations
    
    
    
    
    
    
    2.0
    
    
    
    0.1
    
    
    
    
    
    
    
    2.1Minority interest
    
    
    
    
    
    
    
    
    
    
    15.7
    
    
    
    
    
    
    
    15.7Commitments and contingencies
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total shareowners equity
    
    
    604.4
    
    
    
    1,025.3
    
    
    
    135.7
    
    
    
    (1,161.0
    )
    
    
    604.4Total liabilities and shareowners equity
    
    $
    1,091.7
    
    
    $
    1,364.7
    
    
    $
    311.9
    
    
    $
    (1,564.0
    )
    
    $
    1,204.3
 24




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##### Table of Contents



CONDENSED CONSOLIDATING STATEMENT OF EARNINGS
(UNAUDITED)
For the Thirteen Weeks Ended July 31, 2004 (Restated) Parent
    
    
    Guarantor
    
    
    Non-guarantor(dollars in millions)
    
    Company
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedNet sales
    
    $
    
    
    
    $
    638.5
    
    
    $
    166.6
    
    
    $
    (109.5
    )
    
    $
    695.6Cost of sales
    
    
    
    
    
    
    446.4
    
    
    
    137.1
    
    
    
    (107.4
    )
    
    
    476.1Selling, general and administrative expense
    
    
    0.5
    
    
    
    151.0
    
    
    
    32.1
    
    
    
    (2.1
    )
    
    
    181.5Restructuring charges
    
    
    
    
    
    
    13.1
    
    
    
    0.6
    
    
    
    
    
    
    
    13.7Operating (loss) profit from continuing operations
    
    
    (0.5
    )
    
    
    28.0
    
    
    
    (3.2
    )
    
    
    
    
    
    
    24.3Interest expense
    
    
    6.5
    
    
    
    
    
    
    
    1.6
    
    
    
    (2.3
    )
    
    
    5.8Interest income
    
    
    
    
    
    
    (2.7
    )
    
    
    (0.9
    )
    
    
    2.3
    
    
    
    (1.3
    )Equity in (loss) earnings of subsidiaries
    
    
    (8.2
    )
    
    
    3.5
    
    
    
    
    
    
    
    4.7
    
    
    
    Earnings (loss) from continuing operations before
income taxes and minority interest
    
    
    1.2
    
    
    
    27.2
    
    
    
    (3.9
    )
    
    
    (4.7
    )
    
    
    19.8(Benefit) provision for income taxes
    
    
    (2.6
    )
    
    
    9.5
    
    
    
    (4.7
    )
    
    
    
    
    
    
    2.2Earnings (loss) from continuing operations before
minority interest
    
    
    3.8
    
    
    
    17.7
    
    
    
    0.8
    
    
    
    (4.7
    )
    
    
    17.6Minority interest, net of income tax
    
    
    
    
    
    
    
    
    
    
    2.2
    
    
    
    
    
    
    
    2.2Net earnings (loss) from continuing operations
    
    
    3.8
    
    
    
    17.7
    
    
    
    3.0
    
    
    
    (4.7
    )
    
    
    19.8Loss from discontinued operations, net of income
taxes and minority interest
    
    
    
    
    
    
    (9.5
    )
    
    
    (6.5
    )
    
    
    
    
    
    
    (16.0
    )Net earnings (loss)
    
    $
    3.8
    
    
    $
    8.2
    
    
    $
    (3.5
    )
    
    $
    (4.7
    )
    
    $
    3.8
 25




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##### Table of Contents



CONDENSED CONSOLIDATING STATEMENT OF EARNINGS
(UNAUDITED)
For the Thirteen Weeks Ended August 2, 2003 (Restated) Parent
    
    
    Guarantor
    
    
    Non-guarantor(dollars in millions)
    
    Company
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedNet sales
    
    $
    
    
    
    $
    645.9
    
    
    $
    171.4
    
    
    $
    (119.3
    )
    
    $
    698.0Cost of sales
    
    
    
    
    
    
    483.1
    
    
    
    135.5
    
    
    
    (117.5
    )
    
    
    501.1Selling, general and administrative expense
    
    
    0.1
    
    
    
    159.0
    
    
    
    22.0
    
    
    
    (1.8
    )
    
    
    179.3Operating (loss) profit from continuing operations
    
    
    (0.1
    )
    
    
    3.8
    
    
    
    13.9
    
    
    
    
    
    
    
    17.6Interest expense
    
    
    3.4
    
    
    
    3.1
    
    
    
    0.9
    
    
    
    (3.1
    )
    
    
    4.3Interest income
    
    
    
    
    
    
    (3.3
    )
    
    
    (0.8
    )
    
    
    3.1
    
    
    
    (1.0
    )Equity in (loss) earnings of subsidiaries
    
    
    (7.4
    )
    
    
    (12.9
    )
    
    
    
    
    
    
    20.3
    
    
    
    Earnings (loss) from continuing operations before
income taxes and minority interest
    
    
    3.9
    
    
    
    16.9
    
    
    
    13.8
    
    
    
    (20.3
    )
    
    
    14.3(Benefit) provision for income taxes
    
    
    (1.3
    )
    
    
    5.6
    
    
    
    0.7
    
    
    
    
    
    
    
    5.0Earnings (loss) from continuing operations before
minority interest
    
    
    5.2
    
    
    
    11.3
    
    
    
    13.1
    
    
    
    (20.3
    )
    
    
    9.3Minority interest, net of income tax
    
    
    
    
    
    
    
    
    
    
    0.7
    
    
    
    
    
    
    
    0.7Net earnings (loss) from continuing operations
    
    
    5.2
    
    
    
    11.3
    
    
    
    13.8
    
    
    
    (20.3
    )
    
    
    10.0Loss from discontinued operations, net of income
taxes and minority interest
    
    
    
    
    
    
    (3.9
    )
    
    
    (0.9
    )
    
    
    
    
    
    
    (4.8
    )Net earnings (loss)
    
    $
    5.2
    
    
    $
    7.4
    
    
    $
    12.9
    
    
    $
    (20.3
    )
    
    $
    5.2
 26




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##### Table of Contents



CONDENSED CONSOLIDATING STATEMENT OF EARNINGS
(UNAUDITED)
For the Twenty-six Weeks Ended July 31, 2004 (Restated) Parent
    
    
    Guarantor
    
    
    Non-guarantor(dollars in millions)
    
    Company
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedNet sales
    
    $
    
    
    
    $
    1,289.9
    
    
    $
    328.1
    
    
    $
    (230.1
    )
    
    $
    1,387.9Cost of sales
    
    
    
    
    
    
    903.5
    
    
    
    273.9
    
    
    
    (225.8
    )
    
    
    951.6Selling, general and administrative expense
    
    
    1.0
    
    
    
    318.9
    
    
    

    54.3
    
    
    
    (4.3
    )
    
    
    369.9Restructuring charges
    
    
    
    
    
    
    13.1
    
    
    
    0.6
    
    
    
    
    
    
    
    13.7Operating (loss) profit from continuing operations
    
    
    (1.0
    )
    
    
    54.4
    
    
    
    (0.7
    )
    
    
    
    
    
    
    52.7Interest expense
    
    
    12.7
    
    
    
    0.3
    
    
    
    2.7
    
    
    
    (4.5
    )
    
    
    11.2Interest income
    
    
    
    
    
    
    (5.0
    )
    
    
    (1.8
    )
    
    
    4.5
    
    
    
    (2.3
    )Equity in (loss) earnings of subsidiaries
    
    
    (26.6
    )
    
    
    0.3
    
    
    
    
    
    
    
    26.3
    
    
    
    Earnings (loss) from continuing operations before
income taxes and minority interest
    
    
    12.9
    
    
    
    58.8
    
    
    
    (1.6
    )
    
    
    (26.3
    )
    
    
    43.8(Benefit) provision for income taxes
    
    
    (5.0
    )
    
    
    20.1
    
    
    
    (4.9
    )
    
    
    
    
    
    
    10.2Earnings (loss) from continuing operations before
minority interest
    
    
    17.9
    
    
    
    38.7
    
    
    
    3.3
    
    
    
    (26.3
    )
    
    
    33.6Minority interest, net of income tax
    
    
    
    
    
    
    
    
    
    
    4.1
    
    
    
    
    
    
    
    4.1Net earnings (loss) from continuing operations
    
    
    17.9
    
    
    
    38.7
    
    
    
    7.4
    
    
    
    (26.3
    )
    
    
    37.7Loss from discontinued operations, net of income
taxes and minority interest
    
    
    
    
    
    
    (12.1
    )
    
    
    (7.7
    )
    
    
    
    
    
    
    (19.8
    )Net earnings (loss)
    
    $
    17.9
    
    
    $
    26.6
    
    
    $
    (0.3
    )
    
    $
    (26.3
    )
    
    $
    17.9
 27




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##### Table of Contents



CONDENSED CONSOLIDATING STATEMENT OF EARNINGS
(UNAUDITED)
For the Twenty-six Weeks Ended August 2, 2003 (Restated) Parent
    
    
    Guarantor
    
    
    Non-guarantor(dollars in millions)
    
    Company
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedNet sales
    
    $
    
    
    
    $
    1,277.0
    
    
    $
    352.1
    
    
    $
    (263.8
    )
    
    $
    1,365.3Cost of sales
    
    
    
    
    
    
    936.7
    
    
    
    291.3
    
    
    
    (259.8
    )
    
    
    968.2Selling, general and administrative expense
    
    
    0.1
    
    
    
    311.6
    
    
    
    42.7
    
    
    
    (4.0
    )
    
    
    350.4Operating (loss) profit from continuing operations
    
    
    (0.1
    )
    
    
    28.7
    
    
    
    18.1
    
    
    
    
    
    
    
    46.7Interest expense
    
    
    6.5
    
    
    
    7.1
    
    
    
    2.1
    
    

    
    (6.4
    )
    
    
    9.3Interest income
    
    
    
    
    
    
    (6.7
    )
    
    
    (1.6
    )
    
    
    6.4
    
    
    
    (1.9
    )Equity in (loss) earnings of subsidiaries
    
    
    (23.5
    )
    
    
    (17.3
    )
    
    
    
    
    
    
    40.8
    
    
    
    Earnings (loss) from continuing operations before
income taxes and minority interest
    
    
    16.9
    
    
    
    45.6
    
    
    
    17.6
    
    
    
    (40.8
    )
    
    
    39.3(Benefit) provision for income taxes
    
    
    (2.4
    )
    
    
    16.4
    
    
    
    (0.2
    )
    
    
    
    
    
    
    13.8Earnings (loss) from continuing operations before
minority interest
    
    
    19.3
    
    
    
    29.2
    
    
    
    17.8
    
    
    
    (40.8
    )
    
    
    25.5Minority interest, net of income tax
    
    
    
    
    
    
    
    
    
    
    1.3
    
    
    
    
    
    
    
    1.3Net earnings (loss) from continuing operations
    
    
    19.3
    
    
    
    29.2
    
    
    
    19.1
    
    
    
    (40.8
    )
    
    
    26.8Loss from discontinued operations, net of income
taxes and minority interest
    
    
    
    
    
    
    (5.7
    )
    
    
    (1.8
    )
    
    
    
    
    
    
    (7.5
    )Net earnings (loss)
    
    $
    19.3
    
    
    $
    23.5
    
    
    $
    17.3
    
    
    $
    (40.8
    )
    
    $
    19.3
 28




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##### Table of Contents



CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
(UNAUDITED)
For the Twenty-six Weeks Ended July 31, 2004 (Restated) Parent
    
    
    Guarantor
    
    
    Non-guarantor(dollars in millions)
    
    Company
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedOperating Activities:Net earnings (loss)
    
    $
    17.9
    
    
    $
    26.6
    
    
    $
    (0.3
    )
    
    $
    (26.3
    )
    
    $
    17.9Loss from discontinued operations, net of
income taxes and minority interest
    
    
    
    
    
    
    (12.1

    )
    
    
    (7.7
    )
    
    
    
    
    
    
    (19.8
    )Net earnings from continuing operations
    
    
    17.9
    
    
    
    38.7
    
    
    
    7.4
    
    
    
    (26.3
    )
    
    
    37.7Adjustments for non-cash items included in
earnings from continuing operations:Non-cash component of restructuring charges
    
    
    
    
    
    
    13.7
    
    
    
    
    
    
    
    
    
    
    
    13.7Loss on impairment of and disposal of assets
    
    
    
    
    
    
    4.0
    
    
    
    0.7
    
    
    
    
    
    
    
    4.7Depreciation and amortization
    
    
    
    
    
    
    41.7
    
    
    
    5.8
    
    
    
    
    
    
    
    47.5Amortization of deferred financing costs
    
    
    
    
    
    
    0.5
    
    
    
    
    
    
    
    
    
    
    
    0.5Amortization of unearned restricted stock
    
    
    0.4
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.4Deferred income taxes
    
    
    
    
    
    
    (3.1
    )
    
    
    (4.1
    )
    
    
    
    
    
    
    (7.2
    )Minority interest, net of tax
    
    
    
    
    
    
    
    
    
    
    (4.1
    )
    
    
    
    
    
    
    (4.1
    )Changes in working capital:Inventories
    
    
    
    
    
    
    (19.2
    )
    
    
    (3.4
    )
    
    
    (0.9
    )
    
    
    (23.5
    )Other current assets
    
    
    (5.0
    )
    
    
    3.4
    
    
    
    0.3
    
    
    
    (6.6
    )
    
    
    (7.9
    )Accounts payable
    
    
    
    
    
    
    11.8
    
    
    
    (25.9
    )
    
    
    11.0
    
    
    
    (3.1
    )Accrued expenses
    
    
    (0.3
    )
    
    
    30.9
    
    
    
    0.9
    
    
    
    (3.5
    )
    
    
    28.0Other assets and liabilities, net
    
    
    (13.0
    )
    
    
    (16.3
    )
    
    
    3.9
    
    
    
    26.3
    
    
    
    0.9Cash flow provided by (used in) discontinued
operations
    
    
    
    
    
    
    3.1
    
    
    
    (2.0
    )
    
    
    
    
    
    
    1.1Cash flow provided by (used in) operating
activities
    
    
    
    
    
    
    109.2
    
    
    
    (20.5
    )
    
    
    
    
    
    
    88.7Investing Activities:Capital expenditures
    
    
    
    
    
    
    (49.5
    )
    
    
    (3.7
    )
    
    
    
    
    
    
    (53.2
    )Purchases of marketable securities
    
    
    
    
    
    
    (9.0
    )
    
    
    
    
    
    
    
    
    
    
    (9.0
    )Sale of marketable securities
    
    
    
    
    
    
    10.0
    
    
    
    
    
    
    
    
    
    
    
    10.0Investment in subsidiaries
    
    
    
    
    
    
    (2.3
    )
    
    
    
    
    
    
    2.3
    
    
    
    Cash flow used in investing activities from
continuing operations
    
    
    
    
    
    
    (50.8
    )
    
    
    (3.7
    )
    
    
    2.3
    
    
    
    (52.2
    )Financing Activities:Issuance of debt
    
    
    
    
    
    
    
    
    
    
    1.6
    
    
    
    
    
    
    

    1.6Payment of deferred financing costs
    
    
    
    
    
    
    (0.2
    )
    
    
    
    
    
    
    
    
    
    
    (0.2
    )Repayment of debt
    
    
    
    
    
    
    (0.5
    )
    
    
    
    
    
    
    
    
    
    
    (0.5
    )Contributions by parents
    
    
    
    
    
    
    
    
    
    
    2.3
    
    
    
    (2.3
    )
    
    
    Contributions by minority owners
    
    
    
    
    
    
    
    
    
    
    1.5
    
    
    
    
    
    
    
    1.5Cash flow (used in) provided by financing
activities from continuing operations
    
    
    
    
    
    
    (0.7
    )
    
    
    5.4
    
    
    
    (2.3
    )
    
    
    2.4Effect of exchange rate changes on cash
    
    
    
    
    
    
    
    
    
    
    (0.6
    )
    
    
    
    
    
    
    (0.6
    )Increase (decrease) in cash and cash equivalents
    
    
    
    
    
    
    57.7
    
    
    
    (19.4
    )
    
    
    
    
    
    
    38.3Cash and cash equivalents, beginning of period
    
    
    
    
    
    
    67.4
    
    
    
    69.3
    
    
    
    
    
    
    
    136.7Cash and cash equivalents, end of period
    
    $
    
    
    
    $
    125.1
    
    
    $
    49.9
    
    
    $
    
    
    
    $
    175.0
 29




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##### Table of Contents



CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
(UNAUDITED)
For the Twenty-six Weeks Ended August 2, 2003 (Restated) Parent
    
    
    Guarantor
    
    
    Non-guarantor(dollars in millions)
    
    Company
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedOperating Activities:Net earnings
    
    $
    19.3
    
    
    $
    23.5
    
    
    $
    17.3
    
    
    $
    (40.8
    )
    
    $
    19.3Loss from discontinued operations, net of
income taxes and minority interest
    
    
    
    
    
    
    (5.7
    )
    
    
    (1.8
    )
    
    
    
    
    
    
    (7.5
    )Net earnings from continuing operations
    
    
    19.3
    
    
    
    29.2
    
    
    
    19.1
    
    
    
    (40.8
    )
    
    
    26.8Adjustments for non-cash items included in
earnings from continuing operations:Loss on impairment of and disposal of assets
    
    
    
    
    
    
    5.3
    
    
    
    0.2
    
    
    
    
    
    
    
    5.5Depreciation and amortization
    
    
    
    
    
    
    42.3
    
    
    
    6.2
    
    
    
    
    
    
    
    48.5Amortization of deferred financing costs
    
    
    
    
    
    
    3.6
    
    
    
    
    
    
    
    
    
    
    
    3.6Amortization of unearned restricted stock
    
    
    0.3
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.3Deferred income taxes
    
    
    
    
    
    
    4.2
    
    
    
    (1.5
    )
    
    
    
    
    
    
    2.7Minority interest, net of tax
    
    
    
    
    
    
    
    
    
    
    (1.3
    )
    
    
    
    
    
    
    (1.3
    )Changes in working capital:Inventories
    
    
    
    
    
    
    22.2
    
    
    
    18.5
    
    
    
    (2.7
    )
    
    
    38.0Other current assets
    
    
    2.5
    
    
    
    89.8
    
    
    
    (18.0
    )
    
    
    (82.1
    )
    
    
    (7.8
    )Accounts payable
    
    
    3.9
    
    
    
    6.4
    
    
    
    15.7
    
    
    
    (16.4
    )
    
    
    9.6Accrued expenses
    
    
    (68.3
    )
    
    
    0.5
    
    
    
    (2.8
    )
    
    
    71.2
    
    
    
    0.6Other assets and liabilities, net
    
    
    (37.3
    )
    
    
    (30.5
    )
    
    
    3.2
    
    
    
    70.8
    
    
    
    6.2Cash flow used in discontinued operations
    
    
    
    
    
    
    (1.7
    )
    
    
    (6.8
    )
    
    
    
    
    
    
    (8.5
    )Cash flow (used in) provided by operating
activities
    
    
    (79.6
    )
    
    
    171.3
    
    
    
    32.5
    
    
    
    
    
    
    
    124.2Investing Activities:Capital expenditures
    
    
    
    
    
    
    (43.1
    )
    
    
    (13.2
    )
    
    
    
    
    
    
    (56.3
    )Investment in subsidiaries
    
    
    
    
    
    
    (6.4
    )
    
    
    
    
    
    
    6.4
    
    
    
    Repayment of loan from parent/subsidiary
    
    
    
    
    
    
    146.9
    
    
    
    
    
    
    
    (146.9
    )
    
    
    Cash flow provided by (used in) investing
activities from continuing operations
    
    
    
    
    
    
    97.4
    
    
    
    (13.2
    )
    
    
    (140.5
    )
    
    
    (56.3
    )Financing Activities:Issuance on notes payable
    
    
    
    
    
    
    
    
    
    
    4.5
    
    
    
    
    
    
    
    4.5Restricted cash
    
    
    
    
    
    
    
    
    
    
    (4.5
    )
    
    
    
    
    
    
    (4.5
    )Issuance of debt
    
    
    196.7
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    196.7Payment of deferred financing costs
    
    
    
    
    
    
    (8.6
    )
    
    
    
    
    
    
    
    
    
    
    (8.6
    )Repayment of debt
    
    
    
    
    
    
    (216.6
    )
    
    
    
    
    
    
    
    
    
    
    (216.6
    )Loan from parent/subsidiary
    
    
    (116.9
    )
    
    
    
    
    
    
    (30.0
    )
    
    
    146.9
    
    
    
    Net purchases of common stock
    
    
    (0.2
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (0.2
    )Contributions by parents
    
    
    
    
    
    
    
    
    
    
    6.4
    
    
    
    (6.4
    )
    
    
    Contributions by minority owners
    
    
    
    
    
    
    
    
    
    
    3.6
    
    
    
    
    
    
    
    3.6Cash flow provided by (used in) financing
activities from continuing operations
    
    
    79.6
    
    
    
    (225.2
    )
    
    
    (20.0
    )
    
    
    140.5
    
    
    
    (25.1
    )Effect of exchange rate changes on cash
    
    
    
    
    
    
    
    
    
    
    (1.3
    )
    
    
    
    
    
    
    (1.3
    )Increase (decrease) in cash and cash equivalents
    
    
    
    
    
    
    43.5
    
    
    
    (2.0
    )
    
    
    
    
    
    
    41.5Cash and cash equivalents, beginning of period

    
    
    
    
    
    
    32.6
    
    
    
    39.1
    
    
    
    
    
    
    
    71.7Cash and cash equivalents, end of period
    
    $
    
    
    
    $
    76.1
    
    
    $
    37.1
    
    
    $
    
    
    
    $
    113.2
 30




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##### Table of Contents



ITEM 2 - MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This discussion and analysis should be read in conjunction with the Condensed Consolidated
Financial Statements and Notes to the Condensed Consolidated Financial Statements included in this
Form 10-Q/A. FORWARD-LOOKING STATEMENTS This report contains, and from time to time we may publish, forward-looking statements relating to
such matters as anticipated financial performance, business prospects, technological developments,
new products, future store openings and closings, international expansion, possible strategic
alternatives, new business concepts, capital expenditures, fashion trends and similar matters.
Statements including the words expects, anticipates, intends, plans, believes, seeks,
or variations of such words and similar expressions are forward-looking statements. We note that a
variety of factors could cause our actual results and experience to differ materially from the
anticipated results or other expectations expressed in our forward-looking statements. The risks
and uncertainties that may affect the operations, performance, development and results of our
business include, but are not limited to, the following: changes in consumer spending patterns;
changes in consumer preferences and overall economic conditions; the impact of competition and
pricing; changes in weather patterns; the financial condition of the suppliers and manufacturers
from whom we source our merchandise; 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 we source products are located or in which we operate stores; changes in trade, customs
and/or tax laws; fluctuations in currency exchange rates; availability of suitable store locations
on appropriate terms; the ability to terminate leases on acceptable terms; the ability to hire,
train and retain associates; the 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; the performance of partners in joint ventures; the ability to
comply with local laws in foreign countries; threats or acts of terrorism or war; and strikes, work
stoppages or slow downs by unions that play a significant role in the manufacture, distribution or
sale of product. All subsequent written and oral forward-looking statements attributable to us or
persons acting on our behalf are expressly qualified in their entirety by these cautionary
statements. We do not undertake any obligation to release publicly any revisions to such
forward-looking statements to reflect events or circumstances after the date hereof or thereof or
to reflect the occurrence of unanticipated events. RESTATEMENT The accompanying Managements Discussion and Analysis of Financial Condition and Results of
Operations gives effect to the restatement described in Note 3 to the Condensed Consolidated
Financial Statements. OVERVIEW We are the largest specialty family footwear retailer in the Western Hemisphere with retail stores
in the United States, Canada, the Caribbean, and the Central American and South American Regions.
The Central American Region is composed of operations in Costa Rica, the Dominican Republic, El
Salvador, Guatemala, Honduras, Nicaragua, Panama and Trinidad & Tobago. The South American Region
is composed of operations in Chile, Ecuador and Peru; however, we have entered into a plan to sell
or dispose of all store operations in Chile and Peru during 2004. Our stores offer fashionable,
quality, private and branded label footwear and accessories for women, men and children at
affordable prices in a self-selection shopping format. During the second quarter of 2004, we initiated a restructuring plan and took action related to
five strategic initiatives that are directed toward sharpening our focus on our core business
strategy, increasing profitability, improving our operating margin and building long-term
shareowner value. The strategic initiatives include:  
    The sale or disposal of 181 Parade stores (the restructuring excludes 3 Parade stores
already scheduled to be closed in the normal course of business), and related operations;
    The sale or disposal of all 32 Payless ShoeSource stores in Peru and Chile, and
related operations;
    The closing of approximately 260 Payless ShoeSource stores, in addition to the
approximately 230 stores that had originally been scheduled for closing or relocation as
a part of the normal course of business in fiscal 2004;
    The reduction of wholesale businesses that provide no significant growth opportunity, and; 31




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##### Table of Contents




    A comprehensive review of our expense structure and appropriate reductions to improve profitability. Due to the restatement described in Note 3 to the Condensed Consolidated Financial Statements, we
have reflected the financial information of the Parade, Peru and Chile stores and 26 of the Payless
ShoeSource stores as discontinued operations in order to conform to the current presentation.
Unless otherwise noted, the amounts and discussions included in this Managements Discussion and
Analysis relate to continuing operations. As part of the strategic initiatives, we recorded a non-cash restructuring charge of $36.7 million
($13.7 relating to continuing operations and $23.0 relating to discontinued operations) related to
the impairment of the assets associated with Chile, Peru, Parade and the approximately 260 Payless
stores to be closed. In addition to the impairment charge, we estimate that the restructuring costs for lease
terminations, severance, and other exit activities relating to the strategic initiatives could be
in the range of $40 million to $60 million. However, the final financial impact of the strategic
initiatives is dependent upon the ultimate exit transactions. We intend to complete the strategic
initiatives by the end of fiscal 2004. For the second quarter of 2004, total sales decreased 0.3 percent, or $2.4 million, to $695.6
million as compared to the second quarter of the prior year. Same-store sales, one of the key
indicators we consider as a measure of performance, decreased 0.9 percent. Gross margin was 31.6
percent of sales in the current years second quarter, versus 28.2 percent in the prior years
second quarter. For the first six months of 2004, total sales increased 1.7 percent, or $22.6
million, to $1,387.9 as compared to the first six months of 2003. Same-store sales increased 1.0
percent. Gross margin was 31.4 percent of sales in the first six months of 2004, versus 29.1
percent in the same period in 2003. We began the second quarter with strong sales performance.
However, in June, sales softened across much of the country and many competitors in the apparel and
footwear market took clearance markdowns earlier in the season. In July, we chose to remain less
promotional than the prior year in order to protect our gross margins. Our cash and cash equivalents balance at the end of the 2004 second quarter was $175.0 million, an
increase of $38.3 million from the end of 2003 and $61.8 million over the 2003 second quarter.
Total inventories at the end of the 2004 second quarter were $398.2 million, a reduction of $1.0
million from the 2003 second quarter. Inventory per store declined by 1 percent on a cost basis and
8 percent on a unit basis over the same period. Despite disappointing sales results in the second quarter, we remain committed to our core business
strategy: to be the Merchandise Authority in value-priced footwear and accessories. Our strategy,
the result of intensive study, testing and review, is designed to distinctively position us in the
value-priced footwear and accessories marketplace. We believe that the effective execution of our
strategy is the best means for us to build shareowner value over the long term. We will attempt to do so through:  
    More consistent, improved execution of our Merchandise Authority strategy, delivering
value to customers through merchandise that is right, distinctive and targeted for our
customers;
    Tight control of inventory, reacting quickly to changes in consumer demand in order to
minimize the need for markdowns.
    Focused marketing with complete alignment of messages;
    Continued emphasis on educating our store associates to use key service behaviors that
have been identified to impact conversion; and,
    Completion of our restructuring plan in a timely manner. REVIEW OF OPERATIONS The following discussion summarizes the significant factors affecting operating results for the
quarters ended July 31, 2004 (2004) and August 2, 2003 (2003). 32




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##### Table of Contents



NET EARNINGS We posted net earnings of $3.8 million in the second quarter of 2004 compared with net earnings of
$5.2 million in the second quarter of 2003. For the first six months of 2004 net earnings were
$17.9 million compared with $19.3 million in the 2003 period.
The following table presents the components of costs and expenses, as a percent of revenues, for
the second quarter and first six months of 2004 and 2003. Second Quarter
    
    
    First Six Months2004
    
    
    2003
    
    
    2004
    
    
    2003Cost of sales
    
    
    68.4
    %
    
    
    71.8
    %
    
    
    68.6
    %
    
    
    70.9
    %Selling, general and administrative expense
    
    
    26.1
    
    
    
    25.7
    
    
    
    26.7
    
    
    
    25.7Restructuring charges
    
    
    2.0
    
    
    
    
    
    
    
    1.0
    
    
    
    Operating profit from continuing operations
    
    
    3.5
    
    
    
    2.5
    
    
    
    3.8
    
    
    
    3.4Interest expense, net
    
    
    0.6
    
    
    
    0.5
    
    
    
    0.6
    
    
    
    0.5Earnings from continuing operations before
income taxes and minority interest
    
    
    2.8
    
    
    
    2.0
    
    
    
    3.2
    
    
    
    2.9Effective income tax rate*
    
    
    11.1
    %
    
    
    35.0
    %
    
    
    23.3
    %
    
    
    35.1
    %Earnings from continuing operations before
minority interest
    
    
    2.5
    
    
    
    1.3
    
    
    
    2.4
    
    
    
    1.9Minority interest
    
    
    0.3
    
    
    
    0.1
    
    
    
    0.3
    
    
    
    0.1Net earnings from continuing operations
    
    
    0.5
    %
    
    
    0.7
    %
    
    
    1.3
    %
    
    
    1.4
    %
   *
    
    Percent of pre-tax earnings 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. Same-store sales are calculated on a
weekly basis. If a store is open the entire week in each of the two years being compared, its sales
are included in the same-store sales calculation for that week. Relocated and remodeled stores are
also included in the same-store sales calculation if they were open during the entire week in each
of the two years being compared. Same-store sales for the second quarter and first six months of
2004 and 2003 exclude 212 stores in the South American and Central American Regions. Sales percent increases (decreases) are as follows: Second Quarter
    
    
    First Six Months2004
    
    
    2003
    
    
    2004
    
    
    2003Net Sales
    
    
    (0.3
    )%
    
    
    (5.2
    )%
    
    
    1.7
    %
    
    
    (4.8
    )%Same-store Sales
    
    
    (0.9
    )
    
    
    (5.9
    )
    
    
    1.0
    
    
    
    (5.5
    )Average selling price per unit
    
    
    8.7
    
    
    
    0.6
    
    
    
    8.2
    
    
    
    3.4Unit volume
    
    
    (8.1
    )
    
    
    (5.3
    )
    
    
    (6.0
    )
    
    
    (7.5
    )Footwear average selling price per unit
    
    
    6.5
    
    
    
    0.6
    
    
    
    3.7
    
    
    
    3.6Footwear unit volume
    
    
    (6.1
    )%
    
    
    (7.0
    )%
    
    
    (2.2
    )%
    
    
    (9.0
    )%
 Net sales for the 2004 second quarter totaled $695.6 million compared with $698.0 million in
the 2003 second quarter. Net sales and same-store sales decreased in the second quarter of 2004
from 2003 primarily due to a more promotional footwear environment beginning in mid-June and our
decision to remain less promotional than last year in order to protect our gross margins.
Furthermore, in June, sales of seasonal merchandise were affected by the rainy and cool weather
across much of the country. It is also likely that consumer buying patterns throughout the quarter
were impacted by higher energy prices. Net sales for the first six months of 2004 totaled $1,387.9 million compared with $1,365.3 million
in the first six months of 2003. Net sales and same-store sales increased in the first six months
of 2004 from 2003 primarily due to positive sales performance in womens sandals and dress shoes,
and accessories. 33




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COST OF SALES Cost of sales includes cost of merchandise sold and our buying and occupancy costs. Cost of sales
was $476.1 million in the 2004 second quarter, down 5.0 percent from $501.1 million in the 2003
second quarter. For the first six months of 2004, cost of sales was $951.6 million, down 1.7
percent from $968.2 million in 2003. As a percentage of net sales, cost of sales was 68.4 percent in the second quarter of 2004,
compared with 71.8 percent in the second quarter of 2003. As a percentage of net sales, cost of
sales was 68.6 percent in the first six months of 2004, compared with 70.9 percent in the first six
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. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses were $181.5 million in the second quarter of 2004, an
increase of 1.2 percent from $179.3 million in the second quarter of 2003. For the first six months
of 2004, selling, general and administrative expenses were $369.9 million, an increase of 5.6
percent from $350.4 million in the 2003 period. As a percentage of net sales, selling, general and administrative expenses were 26.1 percent during
the second quarter of 2004 compared with 25.7 percent in the second quarter of 2003. For the first
six months of 2004, selling, general and administrative expenses as a percentage of net sales were
26.7 percent compared with 25.7 percent in the 2003 period. The increase in the second quarter of 2004 was primarily the result of $4.6 million of additional
payroll and payroll-related costs, $2.5 million in increased professional services related to a
proxy contest and Sarbanes-Oxley compliance, $2.2 million in increased workers compensation
insurance costs, and negative leverage due to lower sales partially offset by a $2.2 million
decrease in advertising expense and $2.5 million in decreased medical insurance costs. In
addition, during the second quarter of 2003 we wrote off $2.1 million in debt issuance costs in
conjunction with our debt restructuring. The increase in the first six months of 2004 was
primarily the result of $11.0 million of additional payroll and payroll-related costs, $4.1 million
of additional advertising expense, $4.2 million in increased workers compensation insurance costs,
$5.6 million in increased professional services related to the proxy contest and Sarbanes-Oxley
compliance, and $2.2 million in increased travel, partially offset by $3.8 million in decreased
medical insurance costs, positive leverage due to higher same-store sales and the write off of $3.1
million in debt costs in conjunction with our debt restructuring during the 2003 period. RESTRUCTURING The $36.7 million non-cash restructuring charge relates to the impairment of long-lived assets
associated with Chile, Peru, Parade and the approximately 260 Payless stores to be closed. The
$36.7 million charge was comprised of $13.7 relating to continuing operations and $23.0 relating to
discontinued operations. INTEREST EXPENSE, NET Net interest expense increased from $3.3 million in the second quarter of 2003 to $4.5 million in
the second quarter of 2004. For the first six months of 2004, net interest expense increased from
$7.4 million in the first six months of 2003 to $8.9 million. 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 2003. EFFECTIVE INCOME TAX RATE In the second quarter of 2004, the impact of impairment charges and expected restructuring costs on
estimated annual taxable income resulted in a revised projection of the effective income tax rate
for the full fiscal year. In order to reflect the revised estimated effective tax rate for the
year, an 11.1 percent effective income tax benefit for the second quarter of 2004 and a 23.3
percent effective income tax rate for the first six months of 2004 were utilized to record income
taxes. The Companys effective income tax rate was 35.0 percent in the second quarter and 35.1
percent in the first six months of 2003. 34




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##### Table of Contents



MINORITY INTEREST, NET OF TAX Minority interest represents our joint venture partners share of net earnings or losses on
international operations. LIQUIDITY AND CAPITAL RESOURCES We ended the second quarter of 2004 with a cash balance of $175.0 million, an increase of $61.8
million over the 2003 second 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 $88.7 million in the first six months of 2004, compared with
$124.2 million in the 2003 period. As a percentage of net sales, cash flow from operations was 6.4
percent in the first six months of 2004, compared with 9.1 percent in the same period in 2003. The
significant changes in cash flow during the first six months of 2004 as compared with the 2003
period are as follows: higher net earnings (excluding the $13.7 million non-cash restructuring
charge in the second quarter of 2004); inventory increased by $23.5 million in 2004 compared with a
$38.0 million decrease in 2003 for a net cash outflow of $61.5 million due primarily to lower
inventory at the beginning of 2004 compared with 2003; accounts payable decreased $3.1 million in
2004 compared with a $9.6 million increase in 2003 for a net cash outflow of $12.7 million; and
accrued expenses increased $28.0 million in 2004 compared with a $0.6 million increase in 2003 for
a net cash inflow of $28.6 million primarily due to accrued interest, accrued payroll-related costs
and accrued insurance costs. Cash Flow Used in Investing Activities In the first six months of 2004, our capital expenditures totaled $53.2 million, compared with
$56.3 million for the same period in 2003. We estimate that capital expenditures for the remainder
of the year will be $59.0 million, including $0.9 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 July 31, 2004, was 2.95 percent. A
quarterly 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 July 31, 2004. Based on our borrowing base,
we may borrow up to $200.0 million under the New Facility, less $16.1 million in outstanding
letters of credit as of July 31, 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 July 31, 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 July 31, 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 35




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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
    %
 We have entered into $33.5 million of demand notes payable to efficiently finance our Latin
American subsidiaries in the Central American and South American Regions. We maintain cash balances
of $33.5 million in certificates of deposit as compensating balances to collateralize these notes
payable. The notes payable accrue interest at a weighted average 8.44 percent. The certificates of
deposit earn interest at a weighted average of 8.05 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 lease terminations,
severance and other exit activities could be in the range $40 million to $60 million. However, the
final financial impact of the restructuring is dependent upon the ultimate exit transactions. As of July 31, 2004, no amounts were drawn against our $200 million revolving credit facility. The
availability under the New Facility has been reduced, however, by $16.1 million in outstanding
letters of credit. As a result of the restatement discussed in Note 3 to the condensed consolidated
financial statements, our operating lease obligations as of July 31, 2004, are as follows: (dollars in millions)Operating leasePayments Due by Period
    
    obligationsRemainder of Year
    
    $
    134.91-3 Years
    
    
    449.63-5 Years
    
    
    339.3More than Five Years
    
    
    328.7Total
    
    $
    1,252.5
 For a discussion of our other contractual obligations, see a discussion of future commitments
under Item 7, Managements Discussion and Analysis of Financial Condition and Results of
Operations, in our Form 10-K for the fiscal year ended January 31, 2004. With the exception of
restructuring and restatement 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: July 31,
    
    
    August 2,
    
    
    January 31,2004
    
    
    2003
    
    
    2004Current Ratio
    
    
    2.3
    
    
    
    2.4
    
    
    
    2.3Debt-Capitalization Ratio*
    
    
    27.7
    %
    
    
    27.6
    %
    
    
    28.2
    %
   *
    
    Debt-to-capitalization has been computed by dividing total debt by capitalization. Total
debt is defined as long-term debt including current maturities, notes payable and borrowings
under the revolving line of credit. Capitalization is defined as total debt and shareowners
equity. The debt-to-capitalization ratio, including the present value of future minimum rental
payments under operating leases as debt and as capitalization, was 68.1%, 66.1% and 66.8%
respectively, for the periods referred to above. 36




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##### Table of Contents



STORE ACTIVITY As of July 31, 2004, we operated 5,072 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 second quarter and first six months of
2004 and 2003. We consider a store relocation to be both a store opening and a store closing. Second Quarter
    
    
    First Six Months2004
    
    
    2003
    
    
    2004
    
    
    2003Beginning of period
    
    
    5,066
    
    
    
    5,003
    
    
    
    5,042
    
    
    
    4,992Stores opened
    
    
    68
    
    
    
    58
    
    
    
    148
    
    
    
    118Stores closed
    
    
    (62
    )
    
    
    (41
    )
    
    
    (118
    )
    
    
    (90
    )Ending store count
    
    
    5,072
    
    
    
    5,020
    
    
    
    5,072
    
    
    
    5,020
 As of July 31, 2004, we operated 150 stores in the Central America Region, 62 stores in the
South America Region and 296 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, will consolidate the results of such operations in our financial statements. We intend
to open the first test store in Japan during 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, 181 Parade stores and approximately 260
Payless stores pursuant to the restructuring plan strategic initiatives. Furthermore, 230 stores
were already scheduled for closing or relocation as part of the normal course of business in 2004.
In total, we now intend to close approximately 700 to 705 stores in 2004. In addition to store
closings, we remain on schedule to open approximately 300 new stores in 2004, resulting in a total
expected net reduction of 400 to 405 stores for the year. We began the year with 5,042 stores.
Thus, our store count is expected to be approximately 4,640 stores at the end of 2004. CRITICAL ACCOUNTING POLICIES In preparing the condensed consolidated financial statements included in this Form 10-Q/A,
management makes estimates and assumptions that affect the amounts reported within the financial
statements. Actual results could differ from these estimates, and such differences may be material
to the condensed consolidated financial statements. We believe that the following critical
accounting policies involve a higher degree of judgment or complexity (see the notes to our
condensed consolidated financial statements for a complete discussion of our significant accounting
policies). Inventories Merchandise inventories in our stores are valued by the retail method and are stated at the lower
of cost, determined using the first-in, first-out (FIFO) basis, or market. Prior to shipment to a
specific store, inventories are valued at the lower of cost using the FIFO basis, or market. The
retail method is widely used in the retail industry due to its practicality. Under the retail
method, cost is determined by applying a calculated cost-to-retail ratio across groupings of
similar items, known as departments. As a result, the retail method results in an averaging of
inventory costs across similar items within a department. The cost-to-retail ratio is applied to
ending inventory at its current owned retail valuation to determine the cost of ending inventory on
a department basis. Current owned retail represents the retail price for which merchandise is
offered for sale on a regular basis reduced for any permanent or clearance markdowns. As a result,
the retail method normally results in an inventory valuation that is lower than a traditional FIFO
cost basis. Inherent in the retail method calculation are certain significant management judgments and
estimates including initial mark-up, markdowns and shrinkage, which can significantly impact the
owned retail and, therefore, the ending inventory valuation at cost. Specifically, the failure to
take permanent or clearance markdowns on a timely basis can result in an overstatement of cost
under the retail method. We believe that our application of the retail method reasonably states
inventory at the lower of cost or market. 37




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##### Table of Contents



Property and Equipment Property and equipment are recorded at cost and depreciated on a straight-line basis over their
estimated useful lives. The useful lives of assets are based upon our expectations. Investments in
properties under capital leases and leasehold improvements are amortized over the shorter of their
useful lives or their related lease terms. Property and equipment are reviewed on a store-by-store basis if an indicator of impairment exists
to determine whether the carrying amount of the asset is recoverable. Estimated future cash flows
are used to determine if impairment exists. We use current operating results and historical
performance to estimate future cash flows on a store-by-store basis. Rent Expense Certain of the Companys lease agreements provide for scheduled rent increases during the lease
term, as well as provisions for renewal options. Rent expense is recognized on a straight-line
basis over the term of the lease from the time at which the Company takes possession of the
property. In instances where failure to exercise renewal options would result in an economic
penalty, the calculation of straight-line rent expense includes renewal option periods. Also,
landlord-provided tenant improvement allowances are recorded in other liabilities and amortized as
a credit to rent expense over the term of the lease. Insurance Programs We retain our normal expected losses related primarily to workers compensation, physical loss to
property and business interruption resulting from such loss and comprehensive general, product, and
vehicle liability. We purchase third party coverage for losses in excess of the normal expected
levels. Provisions for losses expected under these programs are recorded based upon estimates of
aggregate liability for claims incurred utilizing independent actuarial calculations. These
actuarial calculations utilize assumptions to estimate the frequency and severity of losses as well
as the patterns surrounding the emergence, development and settlement of claims based on historical
results. Accounting for Taxes We are routinely under audit by the United States federal, state, local or international tax
authorities in the areas of income taxes and sales and use taxes. In evaluating the potential
exposures associated with our various tax filings, we accrue charges for possible exposures. Based
on the annual evaluations of tax positions, we believe we have appropriately filed our tax returns
and accrued for possible exposures. To the extent we were to prevail in income tax matters for
which accruals have been established or be required to pay amounts in excess of reserves, our
effective income tax rate in a given financial period might be impacted. We have various state,
local and international tax examinations currently in process. The fiscal years ending February 2,
2002 and after could still be subject to a U.S. federal income tax audit but currently there is
none in process. We record valuation allowances against our deferred tax assets, when necessary, in accordance with
Statement of Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes.
Realization of deferred tax assets (such as net operating loss carryforwards) is dependent on
future taxable earnings and is therefore uncertain. We assess the likelihood that our deferred tax
assets in each of the jurisdictions in which we operate will be recovered from future taxable
income. Deferred tax assets are reduced by a valuation allowance to recognize the extent to which,
more likely than not, the future tax benefits will not be realized. 
 ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK INTEREST RATE RISK Interest on our senior secured revolving credit facility, which is entirely comprised of a
revolving line of credit, is based on the London Inter-Bank Offered Rate (LIBOR) plus a variable
margin of 1.25 percent to 2.0 percent, or the base rate, as defined in the credit agreement. There
are no outstanding borrowings on the revolving line of credit; however, if we were to borrow
against our revolving line of credit, borrowing costs may fluctuate depending upon the volatility
of LIBOR and amounts borrowed. 38




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##### Table of Contents



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 six-month periods ended July 31, 2004, and August 2, 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. 
 ITEM 4 - CONTROLS AND PROCEDURES As of July 31, 2004, we carried out an evaluation, under the supervision and with the participation
of our principal executive officer and principal financial officer, of the effectiveness of the
design and operation of our disclosure controls and procedures. Based on this evaluation, our
principal executive officer and principal financial officer concluded that our disclosure controls
and procedures are effective in alerting them in a timely manner to material information required
to be disclosed in our periodic reports filed with the Securities Exchange Commission .
The Company does not consider the impact of correcting its previously issued financial
statements for the restatement discussed in Note 3 to the condensed consolidated financial
statements to be material to any individual reporting period. In addition, there was no change in our internal control over financial reporting that occurred
during the fiscal quarter to which this report relates that has materially affected, or is
reasonably likely to materially affect, our internal control over financial reporting. 39




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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 July 31, 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)05/02/04  05/29/04
    
    
    
    12
    
    
    
    $
    16.02
    
    
    
    
    0
    
    
    
    $
    248.205/30/04  07/03/04
    
    
    
    4
    
    
    
    
    16.04
    
    
    
    
    0
    
    
    
    
    248.207/04/04  07/31/04
    
    
    
    4
    
    
    
    
    14.30
    
    
    
    
    0
    
    
    
    
    248.2Total
    
    
    
    20
    
    
    
    $
    15.67
    
    
    
    
    0
    
    
    
    
    248.2
   (1)
    We repurchased an aggregate of 19,636 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. 40




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##### Table of Contents



ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: Number
    
    Description31.1
    
    Certification Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 of the Chairman of the Board and Chief Executive
Officer*31.2
    
    Certification Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 of the Senior Vice President, Chief Financial
Officer and Treasurer*32.1
    
    Certification Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 of the Chairman of the Board and Chief Executive
Officer*32.2
    
    Certification Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 of the Senior Vice President, Chief Financial
Officer and Treasurer*
   *
    
    Filed herewith (b) Reports on Form 8-K On September 2, 2004, the Company filed a Current Report on Form 8-K furnishing under Items
5.02,701 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. 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. On July 29, 2004, the Company filed a Current Report on Form 8-K furnishing under Item 5 the
Companys press release announcing that it is considering certain strategic alternatives. On July 26, 2004, the Company filed a Current Report on Form 8-K furnishing under Item 5 the
Companys press release announcing the election of Judith K. Hofer to the Companys Board of
Directors and its Compensation, Nominating and Governance Committee. On July 8, 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 June, which ended July 3,
2004. On June 3, 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 May, which ended May 29, 2004. 41




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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: June 7, 2005
    By:

/s/ Steven J. DouglassSteven J. DouglassChairman of the Board andChief Executive Officer(Principal Executive Officer)Date: June 7, 2005
    By:
    /s/ Ullrich E. PorzigUllrich E. PorzigSenior Vice PresidentChief Financial Officer and Treasurer(Principal Financial and Accounting Officer)
 42




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##### Table of Contents



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