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SECURITIES AND EXCHANGE COMMISSION  FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D)
OF THE SECURITIES EXCHANGE ACT OF 1934 For The Quarterly Period Ended May 1, 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 [X]
NO [   ] Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934). YES [X]
NO [  ] Indicate the number of shares outstanding of each of the issuers classes of
common stock, as of the latest practicable date. Common Stock, $.01 par value
68,050,533 shares as of June 2, 2004




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TABLE OF CONTENTS  PART I - FINANCIAL INFORMATIONITEM 1 - FINANCIAL STATEMENTSCONDENSED CONSOLIDATED BALANCE SHEETSCONDENSED CONSOLIDATED STATEMENTS OF EARNINGSCONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWSNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTSITEM 2 - MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKITEM 4 - CONTROLS AND PROCEDURESPART II - OTHER INFORMATIONITEM 1 - LEGAL PROCEEDINGSITEM 2 - CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIESITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERSITEM 6 - EXHIBITS AND REPORTS ON FORM 8-KSIGNATURESComputation of Net Earnings Per ShareCertificationCertificationCertificationCertification    Table of Contents  
 PART I - FINANCIAL INFORMATION 
 ITEM 1 - FINANCIAL STATEMENTS 
 PAYLESS SHOESOURCE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED) (dollars in millions) May 1,
    
    May 3,
    
    January 31,2004
    
    2003
    
    2004ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    126.4
    
    
    $
    47.0
    
    
    $
    148.9Restricted cash
    
    
    33.5
    
    
    
    33.0
    
    
    
    33.5Inventories
    
    
    444.4
    
    
    
    489.2
    
    
    
    392.4Current deferred income taxes
    
    
    16.9
    
    
    
    20.0
    
    
    
    17.3Other current assets
    
    
    62.0
    
    
    
    63.0
    
    
    
    61.0Total current assets
    
    
    683.2
    
    
    
    652.2
    
    
    
    653.1Property and Equipment:Land
    
    
    8.0
    
    
    
    8.5
    
    
    
    8.0Buildings and leasehold improvements
    
    
    667.7
    
    
    
    627.9
    
    
    
    666.5Furniture, fixtures and equipment
    
    
    527.3
    
    
    
    505.8
    
    
    
    517.6Property under capital leases
    
    
    4.6
    
    
    
    4.6
    
    
    
    4.6Total property and equipment
    
    
    1,207.6
    
    
    
    1,146.8
    
    
    
    1,196.7Accumulated depreciation
and amortization
    
    
    (778.8
    )
    
    
    (720.5
    )
    
    
    (764.7
    )Property and equipment, net
    
    
    428.8
    
    
    
    426.3
    
    
    
    432.0Favorable leases, net
    
    
    27.3
    
    
    
    33.1
    
    
    
    29.2Deferred income taxes
    
    
    27.0
    
    
    
    25.5
    
    
    
    27.7Goodwill, net
    
    
    5.9
    
    
    
    5.9
    
    
    
    5.9Other assets
    
    
    24.7
    
    
    
    23.5
    
    
    
    24.9Total Assets
    
    $
    1,196.9
    
    
    $
    1,166.5
    
    
    $
    1,172.8LIABILITIES AND SHAREOWNERS EQUITYCurrent Liabilities:Current maturities of long-term debt
    
    $
    0.9
    
    
    $
    89.0
    
    
    $
    0.9Notes payable
    
    
    33.5
    
    
    
    33.0
    
    
    
    33.5Accounts payable
    
    
    130.3
    
    
    
    111.7
    
    
    
    133.0Accrued expenses
    
    
    135.5
    
    
    
    127.8
    
    
    
    117.8Total current liabilities
    
    
    300.2
    
    
    
    361.5
    
    
    
    285.2Long-term debt
    
    
    202.6
    
    
    
    118.7
    
    
    
    202.8Other liabilities
    
    
    63.0
    
    
    
    52.8
    
    
    
    61.3Minority interest
    
    
    13.3
    
    
    
    17.9
    
    
    
    16.0Total shareowners equity
    
    
    617.8
    
    
    
    615.6
    
    
    
    607.5Total Liabilities and Shareowners Equity
    
    $
    1,196.9
    
    
    $
    1,166.5
    
    
    $
    1,172.8
 See Notes to Condensed Consolidated Financial Statements. 2




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PAYLESS SHOESOURCE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED) (dollars and shares in millions, except per share) 13 Weeks EndedMay 1, 2004
    
    May 3, 2003Net sales
    
    $
    722.0
    
    
    $
    697.7Cost of sales
    
    
    500.8
    
    
    
    493.3Selling, general and administrative expenses
    
    
    199.3
    
    
    
    180.1Operating profit
    
    
    21.9
    
    
    
    24.3Interest expense
    
    
    5.4
    
    
    
    5.0Interest income
    
    
    (1.0
    )
    
    
    (0.9
    )Earnings before income taxes and minority interest
    
    
    17.5
    
    
    
    20.2Provision for income taxes
    
    
    6.4
    
    
    
    7.4Earnings before minority interest
    
    
    11.1
    
    
    
    12.8Minority interest
    
    
    2.7
    
    
    
    1.3Net Earnings
    
    $
    13.8
    
    
    $
    14.1Diluted Earnings per Share
    
    $
    0.20
    
    
    $
    0.21Basic Earnings per Share
    
    $
    0.20
    
    
    $
    0.21Diluted Weighted Average Shares Outstanding
    
    
    68.0
    
    
    
    68.1Basic Weighted Average Shares Outstanding
    
    
    67.9
    
    
    
    68.0
 See Notes to Condensed Consolidated Financial Statements. 3




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PAYLESS SHOESOURCE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED) (dollars in millions) 13 Weeks EndedMay 1, 2004
    
    May 3, 2003Operating Activities:Net earnings
    
    $
    13.8
    
    
    $
    14.1Adjustments for non-cash items included
in net earnings:Loss on impairment of and disposal of assets
    
    
    2.7
    
    
    
    0.3Depreciation and amortization
    
    
    25.6
    
    
    
    25.7Amortization of unearned
restricted stock
    
    
    0.2
    
    
    
    0.2Deferred income taxes
    
    
    1.0
    
    
    
    (0.1
    )Minority interest, net of tax
    
    
    (2.7
    )
    
    
    (1.3
    )Changes in working capital:Inventories
    
    
    (52.0
    )
    
    
    (36.7
    )Other current assets
    
    
    (0.9
    )
    
    
    (0.3
    )Accounts payable
    
    
    (2.7
    )
    
    
    5.4Accrued expenses
    
    
    17.7
    
    
    
    4.1Other assets and liabilities, net
    
    
    1.2
    
    
    
    1.7Cash flow provided by operating activities
    
    
    3.9
    
    
    
    13.1Investing Activities:Capital expenditures
    
    
    (25.6
    )
    
    
    (24.4
    )Cash flow used in investing activities
    
    
    (25.6
    )
    
    
    (24.4
    )Financing Activities:Issuance of notes payable
    
    
    
    
    
    
    4.5Restricted cash
    
    
    
    
    
    
    (4.5
    )Payment of deferred financing costs
    
    
    (0.1
    )
    
    
    Repayment of long-term debt
    
    
    (0.3
    )
    
    
    (16.2
    )Net purchases of common stock
    
    
    (0.4
    )
    
    
    (0.4
    )Contributions by minority owners
    
    
    
    
    
    
    1.8Other financing activities
    
    
    
    
    
    
    (0.4
    )Cash flow used in financing activities
    
    
    (0.8
    )
    
    
    (15.2
    )Decrease in cash and cash equivalents
    
    
    (22.5
    )
    
    
    (26.5
    )Cash and cash equivalents, beginning of year
    
    
    148.9
    
    
    
    73.5Cash and cash equivalents, end of period
    
    $
    126.4
    
    
    $
    47.0Cash paid (received) during the period:Interest
    
    $
    9.7
    
    
    $
    4.5Income Taxes
    
    $
    (0.3
    )
    
    $
    5.9
 See Notes to Condensed Consolidated Financial Statements. 4




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PAYLESS SHOESOURCE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 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 and should be read in conjunction
with the Notes to the Consolidated Financial Statements (pages 30-52) in the
Companys 2003 Annual Report on Form 10-K. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. In the opinion of management, the
unaudited Condensed Consolidated Financial Statements are fairly presented and
all adjustments (consisting only of normal recurring adjustments) necessary for
a fair statement of the results for the interim periods have been included;
however, certain items are included in these statements based upon estimates
for the entire year. During 2003, the Company changed the reporting period for
its operations in the Central American and South American Regions to use a
December 31 year-end. The Central American Region is composed of operations in
Costa Rica, the Dominican Republic, El Salvador, Guatemala, Honduras,
Nicaragua, Panama and Trinidad & Tobago. The South American Region is composed
of operations in Chile, Ecuador and Peru. The 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 ended May 1, 2004, are not necessarily
indicative of the results that may be expected for the entire fiscal year
ending January 29, 2005. NOTE 2. STOCK-BASED COMPENSATION. The Company follows the disclosure provisions
of Statement of Financial Accounting Standards (SFAS) No. 148, Accounting
for Stock-Based Compensation - Transition and Disclosure, an amendment of FASB
Statement No. 123. The Statement requires prominent disclosures in both annual
and interim financial statements regarding the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. The Company accounts for stock compensation awards under the intrinsic
value method of Accounting Principles Board (APB) Opinion No. 25. APB Opinion
No. 25 requires compensation cost to be recognized based on the excess, if any,
between the quoted market price of the stock at the date of grant and the
amount an employee must pay to acquire the stock. All options awarded under all
of the Companys plans are granted with an exercise price equal to the fair
market value on the date of the grant. SFAS 123, Accounting for Stock-Based Compensation, provides an alternative
method of accounting for stock-based compensation, which establishes a fair
value based method of accounting for employee stock options or similar equity
instruments. The Company uses the Black-Scholes option pricing model to
estimate the grant date fair value of its 1996 and later option grants. The
fair value is recognized over the option vesting period. The following table
presents the effect on net earnings 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. (dollars in millions, except per share amounts) 13 Weeks EndedMay 1, 2004
    
    May 3, 2003Net earnings:As reported
    
    $
    13.8
    
    
    $
    14.1Add: Total stock-based employee compensation expense included in
net earnings as reported, net of related income taxes
    
    
    0.5
    
    
    
    0.2Less: Total stock-based employee compensation expense determined
under fair value based method for all awards, net of related
income taxes
    
    
    1.2
    
    
    
    1.5Pro forma
    
    $
    13.1
    
    
    $
    12.8Diluted earnings per share:As reported
    
    $
    0.20
    
    
    $
    0.21Pro forma
    
    $
    0.19
    
    
    $
    0.19Basic earnings per share:As reported
    
    $
    0.20
    
    
    $
    0.21Pro forma
    
    $
    0.19
    
    
    $
    0.19
 NOTE 3. INVENTORIES. Merchandise inventories in our stores are valued by the
retail method and are stated at the lower of cost, determined using the
first-in, first-out (FIFO) basis, or market. Prior to shipment to a specific
store, inventories are valued at the lower of cost using the FIFO basis, or
market. Raw materials of $13.5 million, $13.7 million and $19.5 million are
included in inventories in the condensed consolidated balance sheet at May 1,
2004, May 3, 2003, and January 31, 2004, respectively. 5




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NOTE 4. INTANGIBLES. The Company follows SFAS No. 142, Goodwill and Other
Intangible Assets. SFAS No. 142 requires that an intangible asset that is
acquired other than by business combination shall be initially recognized and
measured based on its fair value. This Statement also provides that goodwill
and indefinitely-lived intangible assets should not be amortized, but shall be
tested for impairment annually, or more frequently if circumstances indicate
potential impairment, through a comparison of fair value to its carrying
amount. Intangible assets with finite lives will continue to be amortized over
their useful lives. The Company assesses the fair value of its relevant
reporting units annually. No impairment loss was recorded during the first
quarter of 2004. Favorable lease rights subject to amortization pursuant to SFAS 142 are as
follows: (dollars in millions)
    
    May 1, 2004
    
    May 3, 2003
    
    January 31, 2004Gross carrying amount
    
    $
    85.7
    
    
    $
    88.9
    
    
    $
    87.9Less: accumulated amortization
    
    
    58.4
    
    
    
    55.8
    
    
    
    58.7Carrying amount, end of period
    
    $
    27.3
    
    
    $
    33.1
    
    
    $
    29.2
 Amortization expense on intangible assets was as follows: (dollars in millions) 13 Weeks EndedMay 1, 2004
    
    May 3, 2003Amortization expense on intangible
assets
    
    $
    1.1
    
    
    $
    1.3
 The Company expects annual amortization expense for all intangible assets for
the next five years to be as follows (in millions): Year
    
    AmountRemainder of 2004
    
    $
    3.22005
    
    
    3.92006
    
    
    3.62007
    
    
    3.12008
    
    
    2.7
 NOTE 5. LONG-TERM DEBT AND LINE OF CREDIT. In January 2004, the Company
replaced its $150 million senior secured revolving credit facility with a new
senior secured revolving credit 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 revolving credit facility, subject to
a sufficient borrowing base. The new revolving credit 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 credit agreement. The margin on the revolving
credit facility varies based upon certain borrowing levels specified in the
credit agreement. The variable interest rate including the applicable variable
margin at May 1, 2004, was 2.4 percent. A quarterly commitment fee of 0.30
percent per annum is payable on the unborrowed balance. The new revolving
credit 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
revolving credit facility as of May 1, 2004. Based on its borrowing base, the
Company may borrow up to $200.0 million under its new revolving credit
facility, less $16.1 million in outstanding letters of credit as of May 1,
2004. 6




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In July 2003, the Company sold $200.0 million of 8.25% Senior Subordinated
Notes (the Notes) for $196.7 million, due 2013. The discount of $3.3 million
is being amortized to interest expense over the life of the Notes. The Notes
are guaranteed by all of the Companys domestic subsidiaries. Interest on the
Notes is payable semi-annually, beginning February 1, 2004. The Notes contain
various covenants including those that may limit the Companys ability to pay
dividends, repurchase stock, accelerate the retirement of other subordinated
debt or make certain investments. As of May 1, 2004, the Company is 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 previous credit facility. As of May 1, 2004, the fair value of the
Notes is $196.0 million based on recent trading activity of the Notes. On or
after August 1, 2008, the Company may, on any one or more occasions, redeem all
or a part of the Notes at the redemption prices set forth below, plus accrued
and unpaid interest, if any, on the Notes redeemed, to the applicable
redemption date: Year
    
    Percentage2008
    
    
    104.125
    %2009
    
    
    102.750
    %2010
    
    
    101.375
    %2011 and thereafter
    
    
    100.000
    %
 NOTE 6. PENSION PLAN. The Company has a nonqualified, supplementary defined
benefit plan for certain management employees. The plan is an unfunded,
noncontributory plan and provides for benefits based upon years of service and
cash compensation during employment. Pension expense is based on information provided to an outside actuarial firm
that uses assumptions to estimate the total benefits ultimately payable to
management employees and allocates this cost to service periods. The actuarial
assumptions used to calculate pension expense are reviewed annually for
reasonableness. The components of net periodic benefit costs and actuarial assumptions for the
plan were: (dollars in millions) 13 Weeks EndedMay 1, 2004
    
    May 3, 2003Components of pension expense:Service cost
    
    $
    0.2
    
    
    $
    0.2Interest cost
    
    
    0.3
    
    
    
    0.3Amortization of prior service cost
    
    
    0.1
    
    
    
    Amortization of actuarial loss
    
    
    0.1
    
    
    
    0.1Total
    
    $
    0.7
    
    
    $
    0.6
 NOTE 7. INCOME TAXES. The Companys effective income tax rate was 36.5 percent
in the first quarter of 2004 and 2003. 7




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NOTE 8. COMPREHENSIVE INCOME. The following table shows the computation of
comprehensive income: (dollars in millions) 13 Weeks EndedMay 1, 2004
    
    May 3, 2003Net Income
    
    $
    13.8
    
    
    $
    14.1Other Comprehensive (Loss) Gain:Change in fair value of derivatives
    
    
    
    
    
    
    0.1Derivative losses translated into interest expense
    
    
    
    
    
    
    1.0Foreign currency translation adjustments
    
    
    (3.3
    )
    
    
    2.3Total other comprehensive (loss) gain
    
    
    (3.3
    )
    
    
    3.4Total Comprehensive Income
    
    $
    10.5
    
    
    $
    17.5
 The changes in the Companys cumulative foreign currency translation
adjustment were not adjusted for income taxes, as they relate to
specific indefinite investments in foreign subsidiaries. NOTE 9. EARNINGS PER SHARE. Basic earnings per share are computed by dividing
net earnings by the weighted average number of shares of common stock
outstanding during the period. Diluted earnings per share include the effect of
exercise of stock options. NOTE 10. 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. 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. 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 $3.7 million
during the first quarter of 2004 and $4.3 million during the same period in
2003. During 2003, the Company changed the reporting period for its operations
in the South American and Central American Regions to use 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 May 1, 2004Revenues from external customers
    
    $
    649.3
    
    
    $
    72.7
    
    
    $
    722.0Operating profit
    
    
    20.4
    
    
    
    1.5
    
    
    
    21.9Total assets
    
    
    975.7
    
    
    
    221.2
    
    
    
    1,196.9Quarter ended May 3, 2003Revenues from external customers
    
    $

    629.7
    
    
    $
    68.0
    
    
    $
    697.7Operating profit (loss)
    
    
    28.1
    
    
    
    (3.8
    )
    
    
    24.3Total assets
    
    
    971.7
    
    
    
    194.8
    
    
    
    1,166.5
 NOTE 11. RECLASSIFICATIONS. Certain reclassifications have been made to prior
years balances to conform to the current year presentation. NOTE 12. 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 as a separate component of shareowners
equity. The changes in foreign currency translation adjustments were not
adjusted for income taxes since they relate to indefinite term investments in
non-United States subsidiaries. Income and expense items of these subsidiaries
are translated at average rates of exchange. 8




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NOTE 13. 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 14. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS. During May 2003, the
FASB issued SFAS 150, Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity. SFAS 150 clarifies the
accounting for certain financial instruments with characteristics of both
liabilities and equity and requires that those instruments be classified as
liabilities in statements of financial position. SFAS 150 is effective for
financial instruments entered into or modified after May 31, 2003, and
otherwise is effective at the beginning of the first interim period beginning
after June 15, 2003, except that certain provisions have been deferred pursuant
to FASB Staff Position No. FAS 150-3. The application of SFAS 150-3 is not
expected to have a material impact on the Companys consolidated financial
statements, and the adoption of SFAS 150 did not have a material impact on the
Companys consolidated financial statements. In December 2003, the FASB issued FASB Interpretation No. 46R, Consolidation
of Variable Interest Entities and Interpretation of ARB No. 51. This
interpretation, which replaces FASB Interpretation No. 46, Consolidation of
Variable Interest Entities, clarifies the application of Accounting Research
Bulletin No. 51, Consolidated Financial Statements, to certain entities in
which equity investors do not have the characteristics of a controlling
financial interest or do not have sufficient equity at risk for the entity to
finance its activities without additional subordinated financial support. This
interpretation is required in financial statements for periods ending after
March 15, 2004, for those companies that have yet to adopt the provisions of
FIN 46. The application of FASB Interpretation No. 46R did not have a material
impact on the Companys condensed consolidated financial statements. In January 2003, the FASB issued SFAS 132 (revised 2003), Employers
Disclosures about Pensions and Other Postretirement Benefits, which retains
all of the disclosures that are required by SFAS 132 and includes several
additional disclosures. It also amends APB Opinion 28, Interim Financial
Reporting, to require certain disclosures about pension and other
postretirement benefit plans in interim financial statements. The provisions of
SFAS 132 (revised 2003) are effective for fiscal years ending after June 15,
2004. The interim disclosure provisions are effective for interim periods
beginning December 15, 2003. The Company has adopted the provisions of SFAS 132
(revised 2003) in the first quarter of fiscal year 2004. NOTE 15. SUBSIDIARY GUARANTORS OF SENIOR NOTES  CONDENSED CONSOLIDATING
FINANCIAL INFORMATION. The Company has issued Notes guaranteed by certain of
its 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 the Company (the Parent
Company), for the Guarantor Subsidiaries and for the Companys non-guarantor
subsidiaries (the Non-guarantor Subsidiaries) and total consolidated Payless
ShoeSource, Inc. and subsidiaries for the thirteen-week periods ended May 1,
2004, and May 3, 2003, and the related condensed consolidating balanced sheets
as of May 1, 2004, May 3, 2003, and January 31, 2004. The inter-company
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. 9




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##### Table of Contents



CONDENSED CONSOLIDATING BALANCE SHEET
(UNAUDITED)
As of May 1, 2004 (dollars in millions) Parent
    
    Guarantor
    
    Non-guarantorCompany
    
    Subsidiaries
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedASSETSCurrent Assets:Cash and cash equivalents
    
    $
    
    
    
    $
    92.3
    
    
    $
    34.1
    
    
    $
    
    
    
    $
    126.4Restricted cash
    
    
    
    
    
    
    
    
    
    
    33.5
    
    
    
    
    
    
    
    33.5Inventories
    
    
    
    
    
    
    367.1
    
    
    
    83.2
    
    
    
    (5.9
    )
    
    
    444.4Current deferred income taxes
    
    
    
    
    
    
    16.8
    
    
    
    0.1
    
    
    
    
    
    
    
    16.9Other current assets
    
    
    9.0
    
    
    
    50.9
    
    
    
    40.1
    
    
    
    (38.0
    )
    
    
    62.0Total current assets
    
    
    9.0
    
    
    
    527.1
    
    
    
    191.0
    
    
    
    (43.9
    )
    
    
    683.2Property and Equipment:Land
    
    
    
    
    
    
    8.0
    
    
    
    
    
    
    
    
    
    
    
    8.0Buildings and leasehold improvements
    
    
    
    
    
    
    596.6
    
    
    
    71.1
    
    
    
    
    
    
    
    667.7Furniture, fixtures and equipment
    
    
    
    
    
    
    466.8
    
    
    
    60.5
    
    
    
    
    
    
    
    527.3Property under capital leases
    
    
    
    
    
    
    4.6
    
    
    
    
    
    
    
    
    
    
    
    4.6Total property and equipment
    
    
    
    
    
    
    1,076.0
    
    
    
    131.6
    
    
    
    
    
    
    
    1,207.6Accumulated depreciation and amortization
    
    
    
    
    
    
    (722.9
    )
    
    
    (55.9
    )
    
    
    
    
    
    
    (778.8
    )Property and equipment, net
    
    
    
    
    
    
    353.1
    
    
    
    75.7
    
    
    
    
    
    
    
    428.8Favorable leases, net
    
    
    
    
    
    
    27.3
    
    
    
    
    
    
    
    
    
    
    
    27.3Deferred income taxes
    
    
    
    
    
    
    20.7
    
    
    
    6.3
    
    
    
    
    
    
    
    27.0Goodwill, net
    
    
    
    
    
    
    5.9
    
    
    
    
    
    
    
    
    
    
    
    5.9Other assets
    
    
    1,091.5
    
    
    
    439.6
    
    
    
    3.6
    
    
    
    (1,510.0
    )
    
    
    24.7Total Assets
    
    $
    1,100.5
    
    
    $
    1,373.7
    
    
    $
    276.6
    
    
    $
    (1,553.9
    )
    
    $
    1,196.9LIABILITIES AND SHAREOWNERS EQUITYCurrent Liabilities:Current maturities of long-term debt
    
    $
    
    
    
    $
    0.9
    
    
    $
    
    
    
    $
    
    
    
    $
    0.9Notes payable
    
    
    
    
    
    
    
    
    
    
    33.5
    
    
    
    
    
    
    
    33.5Accounts payable
    
    
    
    
    
    
    96.0
    
    
    
    62.4
    
    
    
    (28.1
    )
    
    
    130.3Accrued expenses
    
    
    2.9
    
    
    
    129.8
    
    
    
    18.6
    
    
    
    (15.8
    )
    
    
    135.5Total current liabilities
    
    
    2.9
    
    
    
    226.7
    
    
    
    114.5
    
    
    
    (43.9
    )
    
    
    300.2Long-term debt
    
    
    479.8
    
    
    
    1.8
    
    
    
    4.0
    
    
    
    (283.0
    )
    
    
    202.6Other liabilities
    
    
    
    
    
    
    110.0
    
    
    
    9.3
    
    
    
    (56.3
    )
    
    
    63.0Minority interest
    
    
    
    
    
    
    
    
    
    
    13.3
    
    
    
    
    
    
    
    13.3Total shareowners equity
    
    
    617.8
    
    
    
    1,035.2
    
    
    
    135.5
    
    
    
    (1,170.7
    )
    
    
    617.8Total Liabilities and Shareowners Equity
    
    $
    1,100.5
    
    
    $
    1,373.7
    
    
    $
    276.6
    
    
    $
    (1,553.9
    )
    
    $
    1,196.9
 10




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##### Table of Contents



CONDENSED CONSOLIDATING BALANCE SHEET
(UNAUDITED)
As of May 3, 2003 (dollars in millions) Parent
    
    Guarantor
    
    Non-guarantorCompany
    
    Subsidiaries
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedASSETSCurrent Assets:Cash and cash equivalents
    
    $
    
    
    
    $
    14.7
    
    
    $
    32.3
    
    
    $
    
    
    
    $
    47.0Restricted cash
    
    
    
    
    
    
    
    
    
    
    33.0
    
    
    
    
    
    
    
    33.0Inventories
    
    
    
    
    
    
    419.4
    
    
    
    79.1
    
    
    
    (9.3
    )
    
    
    489.2Current deferred income taxes
    
    
    
    
    
    
    20.0
    
    
    
    
    
    
    
    
    
    
    
    20.0Other current assets
    
    
    1.1
    
    
    
    168.0
    
    
    
    16.0
    
    
    
    (122.1
    )
    
    
    63.0Total current assets
    
    
    1.1
    
    
    
    622.1
    
    
    
    160.4
    
    
    
    (131.4
    )
    
    
    652.2Property and Equipment:Land
    
    
    
    
    
    
    8.5
    
    
    
    
    
    
    
    
    
    
    
    8.5Buildings and leasehold improvements
    
    
    
    
    
    
    565.2
    
    
    
    62.7
    
    
    
    
    
    
    
    627.9Furniture, fixtures and equipment
    
    
    
    
    
    
    450.6
    
    
    
    55.2
    
    
    
    
    
    
    
    505.8Property under capital leases
    
    
    
    
    
    
    4.6
    
    
    
    
    
    
    
    
    
    
    
    4.6Total property and equipment
    
    
    
    
    
    
    1,028.9
    
    
    
    117.9
    
    
    
    
    
    
    
    1,146.8Accumulated depreciation and amortization
    
    
    
    
    
    
    (676.3
    )
    
    
    (44.2
    )
    
    
    
    
    
    
    (720.5
    )Property and equipment, net
    
    
    
    
    
    
    352.6
    
    
    
    73.7
    
    
    
    
    
    
    
    426.3Favorable leases, net
    
    
    
    
    
    
    33.1
    
    
    
    
    
    
    
    
    
    
    
    33.1Deferred income taxes
    
    
    
    
    
    
    15.4
    
    
    
    10.1
    
    
    
    
    
    
    
    25.5Goodwill, net
    
    
    
    
    
    
    5.9
    
    
    
    
    
    
    
    
    
    
    
    5.9Other assets
    
    
    1,087.8
    
    
    
    513.0
    
    
    
    18.1
    
    
    
    (1,595.4
    )
    
    
    23.5Total Assets
    
    $
    1,088.9
    
    
    $
    1,542.1
    
    
    $
    262.3
    
    
    $
    (1,726.8
    )
    
    $
    1,166.5LIABILITIES AND SHAREOWNERS EQUITYCurrent Liabilities:Current maturities of long-term debt
    
    $
    
    
    
    $
    89.0
    
    
    $
    5.0
    
    
    $
    (5.0
    )
    
    $
    89.0Notes payable
    
    
    
    
    
    
    
    
    
    
    33.0
    
    
    
    
    
    
    
    33.0Accounts payable
    
    
    
    
    
    
    78.8
    
    
    
    71.5
    
    
    
    (38.6
    )
    
    
    111.7Accrued expenses
    
    
    73.3
    
    
    
    126.2
    
    
    
    16.1
    
    
    
    (87.8
    )
    
    
    127.8Total current liabilities
    
    
    73.3
    
    
    
    294.0
    
    
    
    125.6
    
    
    
    (131.4
    )
    
    
    361.5Long-term debt
    
    
    400.0
    
    
    
    114.7
    
    
    
    4.0
    
    
    
    (400.0
    )
    
    
    118.7Other liabilities
    
    
    
    
    
    
    76.8
    
    
    
    6.3
    
    
    
    (30.3
    )
    
    
    52.8Minority interest
    
    
    
    
    
    
    
    
    
    
    17.9
    
    
    
    
    
    
    
    17.9Total shareowners equity
    
    
    615.6
    
    
    
    1,056.6
    
    
    
    108.5
    
    
    
    (1,165.1
    )
    
    
    615.6Total Liabilities and Shareowners Equity
    
    $
    1,088.9
    
    
    $
    1,542.1
    
    
    $
    262.3
    
    
    $
    (1,726.8
    )
    
    $
    1,166.5
 11




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##### Table of Contents



CONDENSED CONSOLIDATING BALANCE SHEET
(UNAUDITED)
As of January 31, 2004 (dollars in millions) Parent
    
    Guarantor
    
    Non-guarantorCompany
    
    Subsidiaries
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedASSETSCurrent Assets:Cash and cash equivalents
    
    $
    
    
    
    $
    77.5
    
    
    $
    71.4
    
    
    $
    
    
    
    $
    148.9Restricted cash
    
    
    
    
    
    
    
    
    
    
    33.5
    
    
    
    
    
    
    
    33.5Inventories
    
    
    
    
    
    
    322.9
    
    
    
    73.7
    
    
    
    (4.2
    )
    
    
    392.4Current deferred income taxes
    
    
    
    
    
    
    17.2
    
    
    
    0.1
    
    
    
    
    
    
    
    17.3Other current assets
    
    
    6.6
    
    
    
    65.9
    
    
    
    43.8
    
    
    
    (55.3
    )
    
    
    61.0Total current assets
    
    
    6.6
    
    
    
    483.5
    
    
    
    222.5
    
    
    
    (59.5
    )
    
    
    653.1Property and Equipment:Land
    
    
    
    
    
    
    8.0
    
    
    
    
    
    
    
    
    
    
    
    8.0Buildings and leasehold improvements
    
    
    
    
    
    
    593.9
    
    
    
    72.6
    
    
    
    
    
    
    
    666.5Furniture, fixtures and equipment
    
    
    
    
    
    
    457.4
    
    
    
    60.2
    
    
    
    
    
    
    
    517.6Property under capital leases
    
    
    
    
    
    
    4.6
    
    
    
    
    
    
    
    
    
    
    
    4.6Total property and equipment
    
    
    
    
    
    
    1,063.9
    
    
    
    132.8
    
    
    
    
    
    
    
    1,196.7Accumulated depreciation and amortization
    
    
    
    
    
    
    (711.2
    )
    
    
    (53.5
    )
    
    
    
    
    
    
    (764.7
    )Property and equipment, net
    
    
    
    
    
    
    352.7
    
    
    
    79.3
    
    
    
    
    
    
    
    432.0Favorable leases, net
    
    
    
    
    
    
    29.2
    
    
    
    
    
    
    
    
    
    
    
    29.2Deferred income taxes
    
    
    
    
    
    
    21.2
    
    
    
    6.5
    
    
    
    
    
    
    
    27.7Goodwill, net
    
    
    
    
    
    
    5.9
    
    
    
    
    
    
    
    
    
    
    
    5.9Other assets
    
    
    1,088.2
    
    
    
    440.7
    
    
    
    3.5
    
    
    
    (1,507.5
    )
    
    
    24.9Total Assets
    
    $
    1,094.8
    
    
    $
    1,333.2
    
    
    $
    311.8
    
    
    $
    (1,567.0
    )
    
    $
    1,172.8LIABILITIES AND SHAREOWNERS EQUITYCurrent Liabilities:Current maturities of long-term debt
    
    $
    
    
    
    $
    0.9
    
    
    $
    
    
    
    $
    
    
    
    $
    0.9Notes payable
    
    
    
    
    
    
    
    
    
    
    33.5
    
    
    
    
    
    
    
    33.5Accounts payable
    
    
    
    
    
    
    86.9
    
    
    
    98.1
    
    
    
    (52.0
    )
    
    
    133.0Accrued expenses
    
    
    7.5
    
    
    
    101.9
    
    
    
    15.9
    
    
    
    (7.5
    )
    
    
    117.8Total current liabilities
    
    
    7.5
    
    
    
    189.7
    
    
    
    147.5
    
    
    
    (59.5
    )
    
    
    285.2Long-term debt
    
    
    479.8
    
    
    
    2.0
    
    
    
    4.0
    
    
    
    (283.0
    )
    
    
    202.8Other liabilities
    
    
    
    
    
    
    113.0
    
    
    
    8.8
    
    
    
    (60.5
    )
    
    
    61.3Minority interest
    
    
    
    
    
    
    
    
    
    
    16.0
    
    
    
    
    
    
    
    16.0Total shareowners equity
    
    
    607.5
    
    
    
    1,028.5
    
    
    
    135.5
    
    
    
    (1,164.0
    )
    
    
    607.5Total Liabilities and Shareowners Equity
    
    $
    1,094.8
    
    
    $
    1,333.2
    
    
    $
    311.8
    
    
    $
    (1,567.0
    )
    
    $
    1,172.8
 12




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##### Table of Contents



CONDENSED CONSOLIDATING
STATEMENT OF EARNINGS
(UNAUDITED)
For the Thirteen Weeks Ended May 1, 2004 (dollars in millions) Parent
    
    Guarantor
    
    Non-guarantorCompany
    
    Subsidiaries
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedNet sales
    
    $
    
    
    
    $
    681.1
    
    
    $
    164.0
    
    
    $
    (123.1
    )
    
    $
    722.0Cost of sales
    
    
    
    
    
    
    482.4
    
    
    
    139.3
    
    
    
    (120.9
    )
    
    
    500.8Selling, general and administrative expense
    
    
    0.5
    
    
    
    177.1
    
    
    
    23.9
    
    
    
    (2.2
    )
    
    
    199.3Operating (loss) profit
    
    
    (0.5
    )
    
    
    21.6
    
    
    
    0.8
    
    
    
    
    
    
    
    21.9Interest expense
    
    
    6.2
    
    
    
    0.3
    
    
    
    1.1
    
    
    
    (2.2
    )
    
    
    5.4Interest income
    
    
    
    
    
    
    (2.3
    )
    
    
    (0.9
    )
    
    
    2.2
    
    
    
    (1.0
    )Equity in earnings of subsidiaries
    
    
    (18.1
    )
    
    
    (3.3
    )
    
    
    
    
    
    
    21.4
    
    
    
    Earnings before income taxes and minority
interest
    
    
    11.4
    
    
    
    26.9
    
    
    
    0.6
    
    
    
    (21.4
    )
    
    
    17.5(Benefit) Provision for income taxes
    
    
    (2.4
    )
    
    
    8.8
    
    
    
    
    
    
    
    
    
    
    
    6.4Earnings before minority interest
    
    
    13.8
    
    
    
    18.1
    
    
    
    0.6
    
    
    
    (21.4
    )
    
    
    11.1Minority interest
    
    
    
    
    
    
    
    
    
    
    2.7
    
    
    
    
    
    
    
    2.7Net earnings
    
    $
    13.8
    
    
    $
    18.1
    
    
    $
    3.3
    
    
    $
    (21.4
    )
    
    $
    13.8
 CONDENSED CONSOLIDATING STATEMENT OF EARNINGS
(UNAUDITED)
For the Thirteen Weeks Ended May 3, 2003 (dollars in millions) Parent
    
    Guarantor
    
    Non-guarantorCompany
    
    Subsidiaries
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedNet sales
    
    $
    
    
    
    $
    661.4
    
    
    $
    183.3
    
    
    $
    (147.0
    )
    
    $
    697.7Cost of sales
    
    
    
    
    
    
    479.7
    
    
    
    158.4
    
    
    
    (144.8
    )
    
    
    493.3Selling, general and administrative expense
    
    
    
    
    
    
    159.6
    
    
    
    22.7
    
    
    
    (2.2
    )
    
    
    180.1Operating profit
    
    
    
    
    
    
    22.1
    
    
    
    2.2
    
    
    
    
    
    
    
    24.3Interest expense
    
    
    3.1
    
    
    
    4.0
    
    
    
    1.2
    
    
    
    (3.2
    )
    
    
    5.1Interest income
    
    
    
    
    
    
    (3.4
    )
    
    
    (0.8
    )
    
    
    3.2
    
    
    
    (1.0
    )Equity in earnings of subsidiaries
    
    
    (16.1
    )
    
    
    (4.4
    )
    
    
    
    
    
    
    20.5
    
    
    
    Earnings before income taxes and minority
interest
    
    
    13.0
    
    
    
    25.9
    
    
    
    1.8
    
    
    
    (20.5
    )
    
    
    20.2(Benefit) Provision for income taxes
    
    
    (1.1
    )
    
    
    9.8
    
    
    
    (1.3
    )
    
    
    
    
    
    
    7.4Earnings before minority interest
    
    
    14.1
    
    
    
    16.1
    
    
    
    3.1
    
    
    
    (20.5
    )
    
    
    12.8Minority interest
    
    
    
    
    
    
    
    
    
    
    1.3
    
    
    
    
    
    
    
    1.3Net earnings
    
    $
    14.1
    
    
    $
    16.1
    
    
    $
    4.4
    
    
    $
    (20.5
    )
    
    $
    14.1
 13




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##### Table of Contents



CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
(UNAUDITED)
For the Thirteen Weeks Ended May 1, 2004 (dollars in millions) Parent
    
    Guarantor
    
    Non-guarantorCompany
    
    Subsidiaries
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedOperating Activities:Net Earnings
    
    $
    13.8
    
    
    $
    18.1
    
    
    $
    3.3
    
    
    $
    (21.4
    )
    
    $
    13.8Adjustments for non-cash items included in
earnings:Loss on impairment of and disposal of assets
    
    
    
    
    
    
    2.5
    
    
    
    0.2
    
    
    
    
    
    
    
    2.7Depreciation and amortization
    
    
    
    
    
    
    22.5
    
    
    
    3.1
    
    
    
    
    
    
    
    25.6Amortization of unearned restricted stock
    
    
    0.2
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.2Deferred income taxes
    
    
    
    
    
    
    0.8
    
    
    
    0.2
    
    
    
    
    
    
    
    1.0Minority interest, net of tax
    
    
    
    
    
    
    
    
    
    
    (2.7
    )
    
    
    
    
    
    
    (2.7
    )Changes in working capital:Inventories
    
    
    
    
    
    
    (44.2
    )
    
    
    (9.5
    )
    
    
    1.7
    
    
    
    (52.0
    )Other current assets
    
    
    (2.4
    )
    
    
    15.1
    
    
    
    3.7
    
    
    
    (17.3
    )
    
    
    (0.9
    )Accounts payable
    
    
    
    
    
    
    9.1
    
    
    
    (35.7
    )
    
    
    23.9
    
    
    
    (2.7
    )Accrued expenses
    
    
    (4.6
    )
    
    
    27.9
    
    
    
    2.7
    
    
    
    (8.3
    )
    
    
    17.7Other assets and liabilities, net
    
    
    (6.5
    )
    
    
    (13.5
    )
    
    
    (0.2
    )
    
    
    21.4
    
    
    
    1.2Cash flow provided by (used in) operating
activities
    
    
    0.5
    
    
    
    38.3
    
    
    
    (34.9
    )
    
    
    
    
    
    
    3.9Investing Activities:Capital expenditures
    
    
    
    
    
    
    (23.2
    )
    
    
    (2.4
    )
    
    
    
    
    
    
    (25.6
    )Cash flow used in investing activities
    
    
    
    
    
    
    (23.2
    )
    
    
    (2.4
    )
    
    
    
    
    
    
    (25.6
    )Financing Activities:Payment of deferred financing costs
    
    
    (0.1
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (0.1
    )Repayment of long-term debt
    
    
    
    
    
    
    (0.3
    )
    
    
    
    
    
    
    
    
    
    
    (0.3
    )Net purchases of common stock
    
    
    (0.4
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (0.4
    )Cash flow used in financing activities
    
    
    (0.5
    )
    
    
    (0.3
    )
    
    
    
    
    
    
    
    
    
    
    (0.8
    )Increase (decrease) in cash
    
    
    
    
    
    
    14.8
    
    
    
    (37.3
    )
    
    
    
    
    
    
    (22.5
    )Cash and cash equivalents, beginning of period
    
    
    
    
    
    
    77.5
    
    
    
    71.4
    
    
    
    
    
    
    
    148.9Cash and cash equivalents, end of period
    
    $
    
    
    
    $
    92.3
    
    
    $
    34.1
    
    
    $
    
    
    
    $
    126.4
 14




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##### Table of Contents



CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
(UNAUDITED)
For the Thirteen Weeks Ended May 3, 2003 (dollars in millions) Parent
    
    Guarantor
    
    Non-guarantorCompany
    
    Subsidiaries
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedOperating Activities:Net Earnings
    
    $
    14.1
    
    
    $
    16.1
    
    
    $
    4.4
    
    
    $
    (20.5
    )
    
    $
    14.1Adjustments for non-cash items included in
earnings:Loss on impairment of and disposal of assets
    
    
    
    
    
    
    0.3
    
    
    
    
    
    
    
    
    
    
    
    0.3Depreciation and amortization
    
    
    
    
    
    
    22.3
    
    
    
    3.4
    
    
    
    
    
    
    
    25.7Amortization of unearned restricted stock
    
    
    0.2
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.2Deferred income taxes
    
    
    
    
    
    
    1.2
    
    
    
    (1.3
    )
    
    
    
    
    
    
    (0.1
    )Minority interest, net of tax
    
    
    
    
    
    
    
    
    
    
    (1.3
    )
    
    
    
    
    
    
    (1.3
    )Changes in working capital:Inventories
    
    
    
    
    
    
    (50.2
    )
    
    
    9.9
    
    
    
    3.6
    
    
    
    (36.7
    )Other current assets
    
    
    4.5
    
    
    
    1.9
    
    
    
    5.0
    
    
    
    (11.7
    )
    
    
    (0.3
    )Accounts payable
    
    
    
    
    
    
    9.9
    
    
    
    0.2
    
    
    
    (4.7
    )
    
    
    5.4Accrued expenses
    
    
    3.3
    
    
    
    18.0
    
    
    
    (5.0
    )
    
    
    (12.2
    )
    
    
    4.1Other assets and liabilities, net
    
    
    (21.7
    )
    
    
    (25.5
    )
    
    
    3.4
    
    
    
    45.5
    
    
    
    1.7Cash flow provided by (used in) operating
activities
    
    
    0.4
    
    
    
    (6.0
    )
    
    
    18.7
    
    
    
    
    
    
    
    13.1Investing Activities:Capital expenditures
    
    
    
    
    
    
    (17.3
    )
    
    
    (7.1
    )
    
    
    
    
    
    
    (24.4
    )Investment in subsidiaries
    
    
    
    
    
    
    (2.7
    )
    
    
    
    
    
    
    2.7
    
    
    
    Repayment of loan from parent/subsidiary
    
    
    
    
    
    
    25.0
    
    
    
    
    
    
    
    (25.0
    )
    
    
    Cash flow provided by (used in) investing
activities
    
    
    
    
    
    
    5.0
    
    
    
    (7.1
    )
    
    
    (22.3
    )
    
    
    (24.4
    )Financing Activities:Issuance of notes payable
    
    
    
    
    
    
    
    
    
    
    4.5
    
    
    
    
    
    
    
    4.5Restricted cash
    
    
    
    
    
    
    
    
    
    
    (4.5
    )
    
    
    
    
    
    
    (4.5
    )Repayment of long-term debt
    
    
    
    
    
    
    (16.2
    )
    
    
    
    
    
    
    
    
    
    
    (16.2
    )Loan from parent/subsidiary
    
    
    
    
    
    
    
    
    
    
    (25.0
    )
    
    
    25.0
    
    
    
    Net purchases of common stock
    
    
    (0.4
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (0.4
    )Contributions by parents
    
    
    
    
    
    
    
    
    
    
    2.7
    
    
    
    (2.7
    )
    
    
    Contributions by minority owners
    
    
    
    
    
    
    
    
    
    
    1.8
    
    
    
    
    
    
    
    1.8Other financing activities
    
    
    
    
    
    
    
    
    
    
    (0.4
    )
    
    
    
    
    
    
    (0.4
    )Cash flow used in financing activities
    
    
    (0.4
    )
    
    
    (16.2
    )
    
    
    (20.9
    )
    
    
    22.3
    
    
    
    (15.2
    )Decrease in cash
    
    
    
    
    
    
    (17.2
    )
    
    
    (9.3
    )
    
    
    
    
    
    
    (26.5
    )Cash and cash equivalents, beginning of period
    
    
    
    
    
    
    31.9
    
    
    
    41.6
    
    
    
    
    
    
    
    73.5Cash and cash equivalents, end of period
    
    $
    
    
    
    $
    14.7
    
    
    $
    32.3
    
    
    $
    
    
    
    $
    47.0
 15




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##### Table of Contents



ITEM
2 - MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS This discussion and analysis should be read in conjunction with the Condensed
Consolidated Financial Statements and Notes to the Condensed Consolidated
Financial Statements included in this Form 10-Q. FORWARD-LOOKING STATEMENTS This report contains, 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, 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
hire, train and retain associates; 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. OVERVIEW We are the largest 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. Our 4,881 Payless ShoeSource
stores offer fashionable, quality, private and branded label footwear and
accessories for women, men and children at affordable prices in a
self-selection shopping format, and our 185 Parade stores offer fashionable,
quality, private label womens shoes at moderate prices in a self-selection
shopping format. For the first quarter of 2004, total sales increased 3.5 percent, or $24.3
million, to $722.0 million as compared to the first quarter of the prior year.
Same-store sales, one of the key indicators we consider as a measure of
performance, grew 2.8 percent. Gross margin was 30.6 percent of sales in the
current years first quarter, versus 29.3 percent in the prior years first
quarter. These performance achievements indicate that our strategy to become
famous as the Merchandise Authority in value-priced footwear and accessories is
progressing. Our strategy, the result of intensive study, testing and review,
is designed to distinctively position us in the value-priced footwear and
accessories marketplace. Our cash and cash equivalents balance at the end of the 2004 first quarter was
$126.4 million, an increase of $79.4 million over the 2003 first quarter. Total
inventories at the end of the 2004 first quarter were $444.4 million, a
reduction of $44.8 million from the 2003 first quarter. Inventory per store
declined by 10 percent over the same period. Looking to the remainder of the year, we expect the retail footwear environment
to remain highly competitive. Major trends in the market include the further
expansion of discount mass merchandisers who offer footwear at value prices;
mid-tier competitors continuing to offer promotional pricing of branded product
that approaches our regular retail prices; and further industry consolidation
resulting in fewer remaining weak competitors from which to gain market share.
We intend to continue to defend our market share in this environment. As we
move through the balance of the year, it is our intent that advertising costs
will come down so that on a full-year basis the Payless ShoeSource chain will
spend no more advertising dollars than last year. 16




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##### Table of Contents



We are encouraged by our first quarter 2004 results, but realize our challenge
is to achieve positive same-store sales on a consistent basis. Our focus for
the remainder of the year is the execution of our strategy. The following key
initiatives continue to be the basis for successful execution:  
    
    First and foremost, we must continue to deliver Merchandise
Authority, building on the momentum generated in the first quarter.  
    
    Second, we must continue to improve margins through tight inventory
control. Specifically, we must operate with less inventory and adjust
our receipts aggressively, reacting quickly to changes in consumer
demand in order to reduce the need for markdowns.  
    
    Third, we will continue to use focused marketing with complete
alignment of messages at all touch-points, with our in-store messaging
as the lead communication vehicle.  
    
    Finally, we will continue to educate our store associates on key
service behaviors, which have been identified to impact conversion, in
their interactions with customers. REVIEW OF OPERATIONS The following discussion summarizes the significant factors affecting operating
results for the quarters ended May 1, 2004 (2004) and May 3, 2003 (2003). NET EARNINGS We posted net earnings of $13.8 million in the first quarter of 2004 compared
with net earnings of $14.1 million in the first quarter of 2003. The following table presents the components of costs and expenses, as a percent
of revenues, for the first quarter of 2004 and 2003. First Quarter2004
    
    2003Cost of sales
    
    
    69.4
    %
    
    
    70.7
    %Selling, general and administrative expense
    
    
    27.6
    
    
    
    25.8Operating profit
    
    
    3.0
    
    
    
    3.5Interest expense, net
    
    
    0.6
    
    
    
    0.6Earnings before income taxes and minority interest
    
    
    2.4
    
    
    
    2.9Effective income tax rate*
    
    
    36.5
    %
    
    
    36.5
    %Earnings before minority interest
    
    
    1.5
    
    
    
    1.8Minority interest
    
    
    0.4
    
    
    
    0.2Net Earnings
    
    
    1.9
    %
    
    
    2.0
    %* 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 is calculated on a weekly basis. If a store is open the entire
week in each of the two years being compared, its GAAP sales are included in
the same-store sales calculation for that week. Relocated and remodeled stores
are also included in the same-store sales calculation if they were open during
the entire week in each of the two years being compared. Same-store sales for
the first quarter of 2004 exclude the South American and Central American
Regions (211 stores). 17




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##### Table of Contents



Sales percent increases (decreases) are as follows: First Quarter2004
    
    2003Net Sales
    
    
    3.5
    %
    
    
    (5.5
    )%Same-store Sales
    
    
    2.8
    
    
    
    (6.2
    )Average selling price per unit
    
    
    6.7
    
    
    
    5.6Unit volume
    
    
    (2.9
    )
    
    
    (10.3
    )Footwear average selling price per unit
    
    
    0.3
    
    
    
    6.0Footwear unit volume
    
    
    2.4
    %
    
    
    (12.0
    )%
 Net sales for the 2004 first quarter totaled $722.0 million compared with
$697.7 million in the 2003 first quarter. Net sales and same-store sales
increased in 2004 from 2003 primarily due to positive sales performance in
womens sandals and dress shoes, branded athletic shoes and accessories. COST OF SALES Cost of sales includes cost of merchandise sold and our buying and occupancy
costs. Cost of sales was $500.8 million in the 2004 first quarter, up 1.5
percent from $493.3 million in the 2003 first quarter. As a percentage of net sales, cost of sales was 69.4 percent in the first
quarter of 2004, compared with 70.7 percent in the first quarter of 2003. The
decrease in cost of sales as a percentage of net sales is due to higher average
retail prices driven primarily by the mix of accessories and positive leverage
on occupancy costs due to increased sales. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses were $199.3 million in the first
quarter of 2004, up 10.7 percent from $180.1 million in the first quarter of
2003. As a percentage of net sales, selling, general and administrative expenses were
27.6 percent during the first quarter of 2004 compared with 25.8 percent in the
first quarter of 2003. The 2004 increase is the result of an additional $7.9
million in advertising, $6.3 million in payroll-related costs and $2.0 million
in insurance costs, partially offset by positive leverage due to higher
same-store sales. INTEREST EXPENSE, NET Net interest expense increased to $4.4 million in the first quarter of 2004
from $4.1 million in the first quarter of 2003 reflecting the higher interest
rate associated with the Senior Subordinated Notes. EFFECTIVE INCOME TAX RATE Our effective income tax rate was 36.5 percent in the first quarter of 2004 and
2003. LIQUIDITY AND CAPITAL RESOURCES We ended the first quarter of 2004 with a cash balance of $126.4 million, a
decrease of $22.5 million from the end of 2003. Internally generated
cash flow from operations is expected to continue to be the most important
component of our capital resources. 18




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##### Table of Contents



Cash Flow Provided by Operating Activities Cash flow provided by operations was $3.9 million in the 2004 first quarter,
compared with $13.1 million in the 2003 first quarter. As a percentage of net
sales, cash flow from operations was 0.5 percent in the 2004 first quarter
compared with 1.9 percent in the 2003 first quarter. The decrease in cash flow
in the first quarter of 2004 is due primarily to higher net cash outflow for
merchandise inventories as compared to the first quarter of 2003, partially
offset by an increase in accrued expense over the prior years quarter. The
increased accrued expenses relate to higher levels of accrued marketing,
insurance, taxes and payroll-related costs. The increase in merchandise
inventories during the current quarter as compared to the same quarter last
year is due primarily to an increase in receipts. Receipts for the first
quarter of 2004 were higher than the first quarter of 2003 due to having lower
inventory levels at the beginning of 2004 as compared to 2003. Cash Flow Used in Investing Activities In the 2004 first quarter, our capital expenditures totaled $25.6 million,
compared with $24.4 million for 2003. We estimate that capital expenditures for
the remainder of the year will be $84.4 million, including $1.4 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 Used in Financing Activities In January 2004, we replaced our $150 million senior secured revolving credit
facility with a new senior secured revolving credit 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 revolving credit
facility, subject to a sufficient borrowing base. The new revolving credit
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 credit agreement. The
margin on the revolving credit facility varies based upon certain borrowing
levels specified in the credit agreement. The variable interest rate at May 1,
2004, was 2.4 percent. A quarterly commitment fee of 0.30 percent per annum is
payable on the unborrowed balance. The new revolving credit 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 revolving credit facility as of May
1, 2004. Based on our borrowing base, we may borrow up to $200.0 million under
the new revolving credit facility, less $16.1 million in outstanding letters of
credit as of May 1, 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 May 1, 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 previous credit
facility. As of May 1, 2004, the fair value of the Notes is $196.0 million
based on recent trading activity of the Notes. On or after August 1, 2008, we
may, on any one or more occasions, redeem all or a part of the Notes at the
redemption prices set forth below, plus accrued and unpaid interest, if any, on
the Notes redeemed, to the applicable redemption date: Year
    
    Percentage2008
    
    
    104.125
    %2009
    
    
    102.750
    %2010
    
    
    101.375
    %2011 and thereafter
    
    
    100.000
    %
 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. 19




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##### Table of Contents



Financial Commitments As of May 1, 2004, no amounts were drawn against our $200.0 million line of
credit. The availability under the line of credit has been reduced, however, by
$18.6 million in outstanding letters of credit. For a discussion of our
contractual obligations, see a discussion of future commitments under Item 7,
Managements Discussion and Analysis of Financial Condition and Results of
Operations, in our Form 10-K for the fiscal year ended January 31, 2004. 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: May 1,
    
    May 3,
    
    January 31,2004
    
    2003
    
    2004Current Ratio
    
    
    2.3
    
    
    
    1.8
    
    
    
    2.3Debt-Capitalization Ratio*
    
    
    27.7
    %
    
    
    28.1
    %
    
    
    28.1
    %
  *
    
    Debt-to-capitalization has been computed by dividing total debt by
capitalization. Total debt is defined as long-term debt including current
maturities, notes payable and borrowings under the revolving line of
credit. Capitalization is defined as total debt and shareowners equity.
The debt-to-capitalization ratio, including the present value of future
minimum rental payments under operating leases as debt and as
capitalization, was 66.1%, 64.6% and 66.0% respectively, for the periods
referred to above. STORE ACTIVITY As of May 1, 2004, we operated 5,066 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 first quarter of 2004 and 2003. We
consider a store relocation to be both a store opening and a store closing. First Quarter2004
    
    2003Beginning of period
    
    
    5,042
    
    
    
    4,992Stores opened
    
    
    80
    
    
    
    60Stores closed
    
    
    (56
    )
    
    
    (49
    )Ending store count
    
    
    5,066
    
    
    
    5,003
 We operate 151 stores in the Central America Region, 60 stores in the South
America Region and 295 stores in Canada. Operating results of stores in Chile
and Peru are currently not meeting our expectations, and we are monitoring the
results of these stores very closely. Among the challenges of the region is
ensuring that we have appropriate product in the stores given the
counter-seasonal nature of the region compared to that of our domestic
business. Additional merchandising and marketing staff is being devoted to
responding to the unique needs of customers in this region. Additional store
openings in Chile and Peru have been deferred until performance improves. As of
May 1, 2004, our share of net equity in Chile and Peru (net of our joint
venture partners interest) is $4.0 million and $3.1 million, respectively. 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. 20




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CRITICAL ACCOUNTING POLICIES In preparing the condensed consolidated financial statements included in this
Form 10-Q, management makes estimates and assumptions that affect the amounts
reported within the financial statements. Actual results could differ from
these estimates. For more information regarding our critical accounting
policies, estimates and judgments, see the discussion under Managements
Discussion and Analysis of Financial Condition and Results of Operations in our
Form 10-K for the year ended January 31, 2004. 
 ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK INTEREST RATE RISK Interest on our senior secured revolving credit facility, which is entirely
comprised of a revolving line of credit, is based on the London Inter-Bank
Offered Rate (LIBOR) plus a variable margin of 1.25 percent to 2.0 percent,
or the base rate, as defined in the credit agreement. There are no outstanding
borrowings on the revolving line of credit; however, if we were to borrow
against our revolving line of credit, borrowing costs may fluctuate depending
upon the volatility of LIBOR. 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 ended May 1, 2004, and May 3, 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 May 1, 2004, we carried out an evaluation, under the supervision and with
the participation of our principal executive officer and principal financial
officer, of the effectiveness of the design and operation of our disclosure
controls and procedures. Based on this evaluation, our principal executive
officer and principal financial officer concluded that our disclosure controls
and procedures are effective in alerting them in a timely manner to material
information required to be disclosed in our periodic reports filed with the
Securities Exchange Commission. In addition, there was no significant change in our internal control over
financial reporting that occurred during our most recently completed fiscal
quarter that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting. 21




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PART II - OTHER INFORMATION 
 ITEM 1 - LEGAL PROCEEDINGS Other than as described below, there are no material pending legal proceedings
other than ordinary, routine litigation incidental to the business to which the
Company is a party or of which any of its property is subject. On or about December 20, 2001, a First Amended Complaint was filed against the
Company in the U.S. District Court for the District of Oregon, captioned Adidas
America, Inc. and Adidas-Salomon AG v. Payless ShoeSource, Inc. The First
Amended Complaint seeks injunctive relief and unspecified monetary damages for
trademark and trade dress infringement, unfair competition, deceptive trade
practices and breach of contract. The Company believes it has meritorious
defenses to claims asserted in the lawsuit and has filed an answer and a motion
for summary judgment which the court granted in part. An estimate of the
possible loss, if any, or the range of loss cannot be made. On or about January 20, 2000, a complaint was filed against the Company in the
U.S. District Court for the District of New Hampshire, captioned Howard J.
Dananberg, D.P.M. v. Payless ShoeSource, Inc. The Complaint seeks injunctive
relief, unspecified treble monetary damages, attorneys fees, interest and
costs for patent infringement. The Company believes it has meritorious defenses
to claims asserted in the lawsuit. An estimate of the possible loss, if any, or
the range of loss cannot be made. 
 ITEM 2  CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY
SECURITIES The following table provides information about purchases by the Company (and
its affiliated purchasers) during the quarter ended May 1, 2004, of equity
securities that are registered by the Company pursuant to Section 12 of the
Exchange Act: ISSUER PURCHASES OF EQUITY SECURITIES Approximate DollarTotal Number of
    
    Value of SharesShares Purchased
    
    that May Yet BeTotal Number of
    
    
    
    
    
    as Part of Publicly
    
    Purchased Under theShares Purchased
    
    Average Price Paid
    
    Announced Plans or
    
    Plans or ProgramsPeriod
    
    (1) (in Thousands)
    
    per Share
    
    Programs (2)
    
    (in Millions) (3)02/01/04  02/28/04
    
    
    5
    
    
    $
    13.36
    
    
    
    0
    
    
    $
    248.202/29/04  04/03/04
    
    
    38
    
    
    
    13.87
    
    
    
    0
    
    
    
    248.204/04/04  05/01/04
    
    
    4
    
    
    
    14.24
    
    
    
    0
    
    
    
    248.2Total
    
    
    47
    
    
    
    13.84
    
    
    
    0
    
    
    
    248.2
  (1)
    
    We repurchased an aggregate of 47,000 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. 
 ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS  (a)
    
    The annual meeting of shareowners of the Registrant was held on May 27,
2004.(b)
    
    At the annual meeting of shareowners of the Registrant held on May 27,
2004, action was taken with respect to the election of three directors of the
Registrant: 42,921,333 shares were voted for Daniel Boggan Jr. while authority
was withheld with respect to 939,907 shares, 42,921,016 shares were voted for
Michael E. Murphy while authority was withheld with respect to 940,224 shares,
and 43,372,017 shares were voted for Robert C. Wheeler while authority was
withheld with respect to 489,223 shares. Other directors whose term of office
continued after the meeting include: Steven J. Douglass, Duane L. Cantrell,
Howard R. Fricke, Michael A. George, and Mylle H. Mangum.(c)
    
    Shareowners ratified the appointment of Deloitte & Touche LLP as the
Companys independent public accountants: 54,749,913 votes in favor, 782,875
votes against and 68,925 votes abstained. 22




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ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K  (a)
    
    Exhibits: Number
    
    Description11.1
    
    Computation of Net Earnings Per Share*31.1
    
    Certification Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 of the Chairman of the Board and Chief Executive
Officer*31.2
    
    Certification Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 of the Senior Vice President, Chief Financial
Officer and Treasurer*32.1
    
    Certification Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 of the Chairman of the Board and Chief Executive
Officer*32.2
    
    Certification Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 of the Senior Vice President, Chief Financial
Officer and Treasurer*
  *
    
    Filed herewith  (b)
    
    Reports on Form 8-K On May 13, 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
first quarter and fiscal year 2004, which ended May 1, 2004. On May 4, 2004, the Company filed a Current Report on Form 8-K furnishing under
Items 9 and 12 the Companys press release announcing its sales for the first
fiscal quarter and fiscal month of April, which ended May 1, 2004. On April 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 March, which ended April 1, 2004. On March 4, 2004, the Company filed a Current Report on Form 8-K furnishing
under Items 9 and 12 the Companys press release announcing its sales for the
fiscal month of February, which ended February 28, 2004. On February 27, 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
fourth quarter and fiscal year 2003, which ended January 31, 2004. 23




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SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.  PAYLESS SHOESOURCE, INC.Date: June 7, 2004
    By:
    /s/ Steven J. DouglassSteven J. DouglassChairman of the Board and
Chief Executive Officer
(Principal Executive Officer)Date: June 7, 2004
    By:
    /s/ Ullrich E. Porzig
Ullrich E. Porzig
Senior Vice President
Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer) 24