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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 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 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
68,050,533 shares as of June 2, 2004




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EXPLANATORY NOTE This Form 10-Q/A amends the Companys quarterly report on Form 10-Q for the fiscal quarter ended
May 1, 2004 (Original Filing), initially filed with the Securities and Exchange Commission
(SEC) on June 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 4, 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 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 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERSITEM 6 - EXHIBITS AND REPORTS ON FORM 8-KSIGNATURESIndex to ExhibitsCertification Pursuant to Section 302Certification Pursuant to Section 302Certification Pursuant to Section 906Certification Pursuant to Section 906    Table of Contents  
 PART I - FINANCIAL INFORMATION 
 ITEM 1 - FINANCIAL STATEMENTS PAYLESS SHOESOURCE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED) (as restated, see Note 3)May 1,
    
    
    May 3,
    
    
    January 31,(dollars in millions)
    
    2004
    
    
    2003
    
    
    2004ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    121.3
    
    
    $
    46.2
    
    
    $
    136.7Marketable securities, available for sale
    
    
    4.0
    
    
    
    
    
    
    
    10.0Restricted cash
    
    
    33.5
    
    
    
    33.0
    
    
    
    33.5Inventories
    
    
    422.2
    
    
    
    463.4
    
    
    
    375.2Current deferred income taxes
    
    
    16.7
    
    
    
    19.8
    
    
    
    17.1Other current assets
    
    
    64.9
    
    
    
    58.7
    
    
    
    64.9Current assets of discontinued operations
    
    
    27.4
    
    
    
    31.1
    
    
    
    24.2Total current assets
    
    
    690.0
    
    
    
    652.2
    
    
    
    661.6Property and Equipment:Land
    
    
    8.0
    
    
    
    8.5
    
    
    
    8.0Buildings and leasehold improvements
    
    
    682.5
    
    
    
    633.6
    
    
    
    679.8Furniture, fixtures and equipment
    
    
    504.2
    
    
    
    482.4
    
    
    
    494.6Property under capital leases
    
    
    4.6
    
    
    
    4.6
    
    
    
    4.6Total property and equipment
    
    
    1,199.3
    
    
    
    1,129.1
    
    
    
    1,187.0Accumulated depreciation
and amortization
    
    
    (777.4
    )
    
    
    (720.3
    )
    
    
    (763.5
    )Property and equipment, net
    
    
    421.9
    
    
    
    408.8
    
    
    
    423.5Favorable leases, net
    
    
    26.9
    
    
    
    32.6
    
    
    
    28.8Deferred income taxes
    
    
    33.7
    
    
    
    31.1
    
    
    
    34.2Goodwill, net
    
    
    5.9
    
    
    
    5.9
    
    
    
    5.9Other assets
    
    
    21.7
    
    
    
    21.3
    
    
    
    22.7Non-current assets of discontinued operations
    
    
    28.2
    
    
    
    35.8
    
    
    
    27.6Total Assets
    
    $
    1,228.3
    
    
    $
    1,187.7
    
    
    $
    1,204.3LIABILITIES AND SHAREOWNERS EQUITYCurrent Liabilities:Current maturities of long-term debt
    
    $
    0.9
    
    
    $
    89.0
    
    
    $
    0.9Notes payable
    
    
    33.5
    
    
    
    33.0
    
    
    
    33.5Accounts payable
    
    
    126.5
    
    
    
    108.1
    
    
    
    129.6Accrued expenses
    
    
    140.1
    
    
    
    125.1
    
    
    
    123.9Current liabilities of discontinued operations
    
    
    6.0
    
    
    
    6.3
    
    
    
    5.8Total current liabilities
    
    
    307.0
    
    
    
    361.5
    
    
    
    293.7Long-term debt
    
    
    202.6
    
    
    
    118.7
    
    
    
    202.8Other liabilities
    
    
    85.8
    
    
    
    75.3
    
    
    
    85.6Non-current liabilities of discontinued operations
    
    
    4.7
    
    
    
    2.1
    
    
    
    2.1Minority interest
    
    
    13.1
    
    
    
    17.7
    
    
    
    15.7Commitments and contingencies
    
    
    
    
    
    
    
    
    
    
    Total shareowners equity
    
    
    615.1
    
    
    
    612.4
    
    
    
    604.4Total Liabilities and Shareowners Equity
    
    $
    1,228.3
    
    
    $
    1,187.7
    
    
    $
    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) (dollars and shares in millions, except per share ) (as restated, see Note 3)13 Weeks Ended
    
    
    13 Weeks EndedMay 1, 2004
    
    
    May 3, 2003Net sales
    
    $
    692.3
    
    
    $
    667.3Cost of sales
    
    
    475.5
    
    
    
    467.1Selling, general and administrative expenses
    
    
    188.4
    
    
    
    171.1Operating profit from continuing operations
    
    
    28.4
    
    
    
    29.1Interest expense
    
    
    5.4
    
    
    
    5.0Interest income
    
    
    (1.0
    )
    
    
    (0.9
    )Earnings from continuing operations before income taxes
and minority interest
    
    
    24.0
    
    
    
    25.0Provision for income taxes
    
    
    8.0
    
    
    
    8.8Earnings from continuing operations before minority interest
    
    
    16.0
    
    
    
    16.2Minority interest, net of income taxes
    
    
    1.9
    
    
    
    0.6Net earnings from continuing operations
    
    
    17.9
    
    
    
    16.8Loss from discontinued operations, net of income taxes
and minority interest
    
    
    (3.8
    )
    
    
    (2.7
    )Net earnings
    
    $
    14.1
    
    
    $
    14.1Diluted earnings per share:Earnings from continuing operations
    
    $
    0.26
    
    
    $
    0.25Loss from discontinued operations
    
    
    (0.05
    )
    
    
    (0.04
    )Diluted earnings per share
    
    $
    0.21
    
    
    $
    0.21Basic earnings per share:Earnings from continuing operations
    
    $
    0.26
    
    
    $
    0.25Loss from discontinued operations
    
    
    (0.05
    )
    
    
    (0.04
    )Basic earnings per share
    
    $
    0.21
    
    
    $
    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. 4




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PAYLESS SHOESOURCE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED) (dollars in millions) (as restated, see Note 3)13 Weeks Ended
    
    
    13 Weeks EndedMay 1, 2004
    
    
    May 3, 2003Operating Activities:Net earnings
    
    $
    14.1
    
    
    $
    14.1Loss from discontinued operations, net of income
taxes and minority interest
    
    
    (3.8
    )
    
    
    (2.7
    )Net earnings from continuing operations
    
    
    17.9
    
    
    
    16.8Adjustments for non-cash items included
in net earnings:Loss on impairment of and disposal of assets
    
    
    2.8
    
    
    
    0.1Depreciation and amortization
    
    
    24.6
    
    
    
    24.9Amortization of deferred financing costs
    
    
    0.2
    
    
    
    0.4Amortization of unearned
restricted stock
    
    
    0.2
    
    
    
    0.2Deferred income taxes
    
    
    (0.8
    )
    
    
    1.8Minority interest, net of tax
    
    
    (1.9
    )
    
    
    (0.6
    )Changes in working capital:Inventories
    
    
    (48.0
    )
    
    
    (28.0
    )Other current assets
    
    
    (4.1
    )
    
    
    (2.7
    )Accounts payable
    
    
    (3.0
    )
    
    
    6.2Accrued expenses
    
    
    16.3
    
    
    
    5.9Other assets and liabilities, net
    
    
    6.9
    
    
    
    2.7Cash flow used in discontinued operations
    
    
    (5.5
    )
    
    
    (12.5
    )Cash flow provided by operating activities
    
    
    5.6
    
    
    
    15.2Investing Activities:Capital expenditures
    
    
    (26.2
    )
    
    
    (24.7
    )Purchases of marketable securities
    
    
    (4.0
    )
    
    
    Sales of marketable securities
    
    
    10.0
    
    
    
    Cash flow used in investing activities
    
    
    (20.2
    )
    
    
    (24.7
    )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
    )
    
    
    (16.6
    )Net purchases of common stock
    
    
    (0.4
    )
    
    
    (0.4
    )Contributions by minority owners
    
    
    
    
    
    
    1.8Cash flow used in financing activities
    
    
    (0.8
    )
    
    
    (15.2
    )Effect of exchange rate changes on cash
    
    
    
    
    
    
    (0.8
    )Decrease in cash and cash equivalents
    
    
    (15.4
    )
    
    
    (25.5
    )Cash and cash equivalents, beginning of year
    
    
    136.7
    
    
    
    71.7Cash and cash equivalents, end of period
    
    $
    121.3
    
    
    $
    46.2Cash paid (received) during the period:Interest
    
    $
    9.8
    
    
    $
    4.5Income Taxes
    
    $
    (0.3
    )
    
    $
    5.9
 See Notes to Condensed Consolidated Financial Statements. 5




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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. 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  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 $20.1 million, $18.1 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 May 1, 2004, May 3, 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 May 1, 2004 and January 31, 2004 marketable securities include $4.0 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 $13.5 million, $13.7 million and $19.5 million are included in inventories in the
condensed consolidated balance sheets at May 1, 2004, May 3, 2003, and January 31, 2004,
respectively, and are accounted for under the FIFO basis. Property and Equipment Property and equipment are recorded at cost and are depreciated on a straight-line basis over their
estimated useful lives. The costs of repairs and maintenance are expensed when incurred, while
expenditures for store remodels, refurbishments and improvements that 7




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significantly add to the productive capacity or extend the useful life of an asset are capitalized.
The estimated useful life for each major class of property and equipment is as follows: Buildings
    
    10 to 30 yearsLeasehold improvements
    
    the lesser of 10 years or the remaining expected lease term that is reasonably assured

(which may exceed the current non-cancelable term)Furniture, fixtures and equipment
    
    3 to 8 yearsProperty under capital lease
    
    10 to 30 years
 Property and equipment are reviewed for recoverability on a store-by-store basis if an indicator of
impairment exists to determine whether the carrying amount of the assets is recoverable. Estimated
future cash flows are used to determine if impairment exists. The Company uses current operating
results and historical performance to estimate future cash flows on a store-by-store basis. Insurance Programs The Company retains its normal expected losses related primarily to workers compensation, physical
loss to property and business interruption resulting from such loss and comprehensive general,
product, and vehicle liability. The Company purchases third-party coverage for losses in excess of
the normal expected levels. Provisions for losses expected under these programs are recorded based
upon estimates of the aggregate liability for claims incurred utilizing independent actuarial
calculations based on historical results. Foreign Currency Translation Local currencies are the functional currencies for all subsidiaries. Accordingly, assets and
liabilities of foreign subsidiaries are translated at the rate of exchange at the balance sheet
date. Adjustments from the translation process are accumulated as part of other comprehensive
income and are included within shareowners equity (see Note 10). 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. As the critical terms of the Companys
interest rate swap agreements matched those of the related hedged obligations, the Company
concluded that there was no ineffectiveness in its hedges. During the first quarter of 2003, the
Company recorded an after-tax gain of $0.1 million ($0.1 million pre-tax) to other accumulated
comprehensive income, representing the decline in fair value of its interest rate swap agreements.
As of May 3, 2003, the Company had a cumulative after-tax loss of $0.7 million ($1.1 million
pre-tax) included in other accumulated comprehensive income related to its interest rate swap
agreements on a notional amount of $80.0 million. The resulting liability was reflected in other
current liabilities and other liabilities in the accompanying condensed consolidated balance sheet.
The pre-tax loss was reclassified into interest expense as a yield adjustment in the same period in
which the related interest on the floating rate debt obligations affected earnings. During the
first quarter of 2003, $1.0 million of after-tax losses ($1.6 million pre-tax) included in
accumulated other comprehensive income related to interest rate swap agreements was reclassified to
interest expense. As of May 1, 2004 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 May 1, 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 8




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inappropriate. As a result, the Company has corrected its accounting practices in this area and
restated its condensed consolidated financial statements. Historically, when accounting for leases with renewal options, the Company had recorded rent
expense on a straight-line basis over the initial non-cancelable lease term, with the term
commencing when the store opened for business. The Company amortized leasehold improvements on
those properties over a period of typically 10 years that, in certain cases, would have included a
portion of the renewal option periods. In connection with the restatement, the Company corrected
its accounting to accelerate the recognition of rent expense on leases by recording lease expense
from the time at which it takes possession of the property, rather than at the time the store opens
for business. In addition, the Company corrected its calculation of rent expense on a straight line
basis to include certain option periods that are reasonably assured of renewal, because failure to
exercise such options would result in an economic penalty. When the renewal option periods are not
reasonably assured, the leasehold improvements are amortized over a period not to exceed the
existing non-cancelable lease term. 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 May 1, 2004, May 3, 2003 and January 31, 2004 and the Companys condensed
consolidated statements of earnings and cash flows for the thirteen weeks ended May 1, 2004 and May
3, 2003. The As previously reported amounts have been adjusted for the reclassifications
discussed in Notes 2 and 4 of the Notes to Condensed Consolidated Financial Statements . Condensed Consolidated Statements of Earnings (Loss)As previously(in millions, except per share data)
    
    Reported
    
    
    Adjustments
    
    
    As restatedThirteen weeks ended May 1, 2004Cost of sales
    
    $
    475.5
    
    
    $
    
    
    
    $
    475.5Operating profit from continuing operations
    
    
    28.4
    
    
    
    
    
    
    
    28.4Earnings from continuing operations before income
taxes and minority interest
    
    
    24.0
    
    
    
    
    
    
    
    24.0Provision for income taxes
    
    
    8.0
    
    
    
    
    
    
    
    8.0Earnings from continuing operations before minority interest
    
    
    16.0
    
    
    
    
    
    
    
    16.0Minority interest, net of income taxes
    
    
    1.9
    
    
    
    
    
    
    
    1.9Earnings from continuing operations
    
    
    17.9
    
    
    
    
    
    
    
    17.9Loss from discontinued operations, net of income taxes
and minority interest
    
    
    (4.1
    )
    
    
    0.3
    
    
    
    (3.8
    )Net earnings
    
    $
    13.8
    
    
    $
    0.3
    
    
    $
    14.1Diluted earnings (loss) per share:Earnings from continuing operations
    
    $
    0.26
    
    
    $
    
    
    
    $
    0.26Loss from discontinued operations
    
    
    (0.06
    )
    
    
    0.01
    
    
    
    (0.05
    )Diluted earnings per share
    
    $
    0.20
    
    
    $
    0.01
    
    
    $
    0.21Basic earnings (loss) per share:Earnings from continuing operations
    
    $
    0.26
    
    
    $
    
    
    
    $
    0.26Loss from discontinued operations
    
    
    (0.06
    )
    
    
    0.01
    
    
    
    (0.05
    )Basic earnings per share
    
    $
    0.20
    
    
    $
    0.01
    
    
    $
    0.21
 9




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##### Table of Contents



Condensed Consolidated Statements of Earnings (Loss)As previously(in millions, except per share data)
    
    Reported
    
    
    Adjustments
    
    
    As restatedThirteen weeks ended May 3, 2003Cost of sales
    
    $
    467.1
    
    
    $
    
    
    
    $
    467.1Operating profit from continuing operations
    
    
    29.1
    
    
    
    
    
    
    
    29.1Earnings from continuing operations before income
taxes and minority interest
    
    
    25.0
    
    
    
    
    
    
    

    25.0Provision for income taxes
    
    
    8.8
    
    
    
    
    
    
    
    8.8Earnings from continuing operations before minority interest
    
    
    16.2
    
    
    
    
    
    
    
    16.2Minority interest, net of income taxes
    
    
    0.6
    
    
    
    
    
    
    
    0.6Earnings from continuing operations
    
    
    16.8
    
    
    
    
    
    
    
    16.8Loss from discontinued operations, net of income taxes and
minority interest
    
    
    (2.7
    )
    
    
    
    
    
    
    (2.7
    )Net earnings
    
    $
    14.1
    
    
    $
    
    
    
    $
    14.1Diluted earnings (loss) per share:Earnings from continuing operations
    
    $
    0.25
    
    
    $
    
    
    
    $
    0.25Loss from discontinued operations
    
    
    (0.04
    )
    
    
    
    
    
    
    (0.04
    )Diluted earnings per share
    
    $
    0.21
    
    
    $
    
    
    
    $
    0.21Basic earnings (loss) per share:Earnings from continuing operations
    
    $
    0.25
    
    
    $
    
    
    
    $
    0.25Loss from discontinued operations
    
    
    (0.04
    )
    
    
    
    
    
    
    (0.04
    )Basic earnings per share
    
    $
    0.21
    
    
    $
    
    
    
    $
    0.21
 Condensed Consolidated Balance SheetsAs previouslyMay 1, 2004(1)
    
    Reported
    
    
    Adjustments
    
    
    As restatedProperty and equipment, net
    
    $
    406.3
    
    
    $
    15.6
    
    
    $
    421.9Deferred income taxes (asset)
    
    
    24.8
    
    
    
    8.9
    
    
    
    33.7Non-current assets of discontinued operations
    
    
    28.2
    
    
    
    
    
    
    
    28.2Total assets
    
    $
    1203.8
    
    
    $
    24.5
    
    
    $
    1,228.3Other liabilities
    
    $
    58.6
    
    
    $
    27.2
    
    
    $
    85.8Non-current liabilities of discontinued operations
    
    
    4.4
    
    
    
    0.3
    
    
    
    4.7Minority interest
    
    
    13.3
    
    
    
    (0.2
    )
    
    
    13.1Total shareowners equity
    
    
    617.9
    
    
    
    (2.8
    )
    
    
    615.1Total liabilities and shareowners equity
    
    $
    1203.8
    
    
    $
    24.5
    
    
    $
    1,228.3May 3, 2003Property and equipment, net
    
    $
    396.1
    
    
    $
    12.7
    
    
    $
    408.8Deferred income taxes (asset)
    
    
    22.3
    
    
    
    8.8
    
    
    
    31.1Non-current assets of discontinued operations
    
    
    36.1
    
    
    
    (0.3
    )
    
    
    35.8Total assets
    
    $
    1,166.5
    
    
    $
    21.2
    
    
    $
    1,187.7Other liabilities
    
    $
    51.1
    
    
    $
    24.2
    
    
    $
    75.3Non-current liabilities of discontinued operations
    
    
    1.8
    
    
    
    0.3
    
    
    
    2.1Minority interest
    
    
    17.9
    
    
    
    (0.2
    )
    
    
    17.7Total shareowners equity
    
    
    615.5
    
    
    
    (3.1
    )
    
    
    612.4Total liabilities and shareowners equity
    
    $
    1,166.5
    
    
    $
    21.2
    
    
    $
    1,187.7January 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
 10




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##### Table of Contents



Condensed Consolidated Statements of Cash FlowsAs previouslyThirteen weeks ended May 1, 2004
    
    reported
    
    
    Adjustments
    
    
    As restatedCash flow provided by operating activities
    
    $
    3.6
    
    
    $
    2.0
    
    
    $
    5.6Cash flow used in investing activities
    
    
    (18.2
    )
    
    
    (2.0
    )
    
    
    (20.2
    )Thirteen weeks ended May 3, 2003Cash flow provided by operating activities
    
    $
    13.8
    
    
    $
    1.4
    
    
    $
    15.2Cash flow used in investing activities
    
    
    (23.3
    )
    
    
    (1.4
    )
    
    
    (24.7
    )
   (1)
    
    Previously reported amounts include reclassifications to decrease cash by $4.0 million
and increase marketable securities, other current assets and accrued expenses by $4.0
million, $6.8 million, and $6.8 million, respectively, as of May 1, 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. DISCONTINUED OPERATIONS AND RESTRUCTURING CHARGES. Subsequent to the issuance of the
Companys condensed consolidated financial statements for the period ended May 1, 2004, the Company
initiated a restructuring plan. The restructuring began in the second quarter of 2004, and no
restructuring-related charges were incurred as of May 1, 2004. 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. Components of the restructuring plan include:  
    Exiting all 181 Parade stores, and related operations;  
    Exiting all 32 Payless ShoeSource stores in Chile and Peru;  
    The closing of approximately 260 Payless ShoeSource stores. These store closings differ from closings in the normal
course of business in that they have longer remaining lease terms;  
    The reduction of wholesale businesses that provide no significant growth opportunity, and;  
    A comprehensive review of the Companys expense structure and appropriate reductions to improve profitability 11




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##### Table of Contents



In accordance with SFAS No. 144, the results for the thirteen weeks ended May 1, 2004 and May 3,
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 May 1, 2004 Payless
    
    
    Payless
    
    
    Payless(dollars in millions)
    
    Domestic
    
    
    International
    
    
    ConsolidatedNet sales
    
    $
    27.1
    
    
    $
    2.5
    
    
    $
    29.6Loss from discontinued operations before income taxes and minority interest
    
    
    (4.4
    )
    
    
    (1.7
    )
    
    
    (6.1
    )(Benefit) provision for income taxes
    
    
    (1.8
    )
    
    
    0.2
    
    
    
    (1.6
    )Loss from discontinued operations before minority interest
    
    
    (2.6
    )
    
    
    (1.9
    )
    
    
    (4.5
    )Minority interest, net of income taxes
    
    
    
    
    
    
    0.7
    
    
    
    0.7Loss from discontinued operations, net of income taxes and minority interest
    
    $
    (2.6
    )
    
    $
    (1.2
    )
    
    $
    (3.8
    )
 Thirteen Weeks Ended May 3, 2003 Payless
    
    
    Payless
    
    
    Payless(dollars in millions)
    
    Domestic
    
    
    International
    
    
    ConsolidatedNet sales
    
    $
    27.8
    
    
    $
    2.6
    
    
    $
    30.4Loss from discontinued operations before income taxes and minority interest
    
    
    (2.8
    )
    
    
    (2.1
    )
    
    
    (4.9
    )Benefit for income taxes
    
    
    (1.0
    )
    
    
    (0.4
    )
    
    
    (1.4
    )Loss from discontinued operations before minority interest
    
    
    (1.8
    )
    
    
    (1.7
    )
    
    
    (3.5
    )Minority interest, net of income taxes
    
    
    
    
    
    
    0.8
    
    
    
    0.8Loss from discontinued operations, net of income taxes and minority interest
    
    $
    (1.8
    )
    
    $
    (0.9
    )
    
    $
    (2.7
    )
 12




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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 May 1, 2004, May 3, 2003 and January 31, 2004 the current and
non-current assets and liabilities of discontinued operations by financial reporting segment were
as follows: May 1, 2004 Payless
    
    
    Payless
    
    
    Payless(dollars in millions)
    
    Domestic
    
    
    International
    
    
    ConsolidatedAssetsCurrent assets:Cash and cash equivalents
    
    $
    0.2
    
    
    $
    1.0
    
    
    $
    1.2Inventories
    
    
    19.3
    
    
    
    2.9
    
    
    
    22.2Current deferred income taxes
    
    
    0.2
    
    
    
    
    
    
    
    0.2Other current assets
    
    
    2.5
    
    
    
    1.3
    
    
    
    3.8Total current assets of discontinued operations
    
    $
    22.2
    
    
    $
    5.2
    
    
    $
    27.4Property and equipment, net
    
    $
    15.7
    
    
    $
    6.7
    
    
    $
    22.4Favorable leases, net
    
    
    0.4
    
    
    
    
    
    
    
    0.4Deferred income taxes
    
    
    2.4
    
    
    
    
    
    
    
    2.4Other assets
    
    
    0.1
    
    
    
    2.9
    
    
    
    3.0Total non-current assets of discontinued operations
    
    $
    18.6
    
    
    $
    9.6
    
    
    $
    28.2LiabilitiesCurrent liabilities:Accounts payable
    
    $
    2.6
    
    
    $
    1.2
    
    
    $
    3.8Accrued expenses
    
    
    1.9
    
    
    
    0.3
    
    
    
    2.2Total current liabilities of discontinued operations
    
    $
    4.5
    
    
    $
    1.5
    
    
    $
    6.0Other liabilities
    
    $
    4.7
    
    
    $
    
    
    
    $
    4.7Total non-current liabilities of discontinued operations
    
    $
    4.7
    
    
    $
    
    
    
    $
    4.7
 May 3, 2003 Payless
    
    
    Payless
    
    
    Payless(dollars in millions)
    
    Domestic
    
    
    International
    
    
    ConsolidatedAssetsCurrent assets:Cash and cash equivalents
    
    $
    0.2
    
    
    $
    0.7
    
    
    $
    0.9Inventories
    
    
    22.8
    
    
    
    3.0
    
    
    
    25.8Current deferred income taxes
    
    
    0.2
    
    
    
    
    
    
    
    0.2Other current assets
    
    
    2.7
    
    
    
    1.5
    
    
    
    4.2Total current assets of discontinued operations
    
    $
    25.9
    
    
    $
    5.2
    
    
    $
    31.1Property and equipment, net
    
    $
    22.0
    
    
    $
    7.4
    
    
    $
    29.4Favorable leases, net
    
    
    0.6
    
    
    
    
    
    
    
    0.6Deferred income taxes
    
    
    0.6
    
    
    
    3.0
    
    
    
    3.6Other assets
    
    
    0.1
    
    
    
    2.1
    
    
    
    2.2Total non-current assets of discontinued operations
    
    $
    23.3
    
    
    $
    12.5
    
    
    $
    35.8LiabilitiesCurrent liabilities:Accounts payable
    
    $
    3.2
    
    
    $
    0.4
    
    
    $
    3.6Accrued expenses
    
    
    1.8
    
    
    
    0.9
    
    
    
    2.7Total current liabilities of discontinued operations
    
    $
    5.0
    
    
    $
    1.3
    
    
    $
    6.3Other liabilities
    
    $
    2.1
    
    
    $
    
    
    
    $
    2.1Total non-current liabilities of discontinued operations
    
    $
    2.1
    
    
    $
    
    
    
    $
    2.1
 13




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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 5. 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
    
    $
    14.1
    
    
    $
    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
    
    $
    13.4
    
    
    $
    12.8Diluted earnings per share:As reported
    
    $
    0.21
    
    
    $
    0.21Pro forma
    
    $
    0.20
    
    
    $
    0.19Basic earnings per share:As reported
    
    $
    0.21
    
    
    $
    0.21Pro forma
    
    $
    0.20
    
    
    $
    0.19
 14




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##### Table of Contents



NOTE 6. 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
    
    $
    84.8
    
    
    $
    87.9
    
    
    $
    87.0Less: accumulated amortization
    
    
    57.9
    
    
    
    55.3
    
    
    
    58.2Carrying amount, end of period
    
    $
    26.9
    
    
    $
    32.6
    
    
    $
    28.8
 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
    
    
    $
    1.2
 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
    
    $
    3.12005
    
    
    3.82006
    
    
    3.52007
    
    
    3.02008
    
    
    2.7
 NOTE 7. 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. 15




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##### Table of Contents



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 8. 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 9. INCOME TAXES. The Companys effective income tax rate on continuing operations was
33.3 percent in the first quarter of 2004 and 35.2 percent in the first quarter of 2003. 16




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NOTE 10. COMPREHENSIVE INCOME. The following table shows the computation of comprehensive income: (dollars in millions) 13 Weeks EndedMay 1, 2004
    
    
    May 3, 2003Net Income
    
    $
    14.1
    
    
    $
    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
    
    $
    10.8
    
    
    $
    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 11. 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 periods ended May 1,
2004, and May 3, 2003, excludes the impact of 7,777,763 and 6,038,189 stock options, respectively,
because to include them would be anti-dilutive. The following table presents a reconciliation of the numerators and denominators of basic and
diluted earnings per share from continuing operations: (dollars and shares in millions, except per share) 13 Weeks EndedMay 1, 2004
    
    
    May 3, 2003Diluted Computation:Net earnings from continuing operations
    
    $
    17.9
    
    
    $
    16.8Weighted average common shares outstanding
    
    
    67.9
    
    
    
    68.0Net effect of dilutive stock options and unearned
restricted stock based on the treasury stock method
    
    
    0.1
    
    
    
    0.1Outstanding shares for diluted earnings per share
    
    
    68.0
    
    
    
    68.1Diluted earnings per share from continuing operations
    
    $
    0.26
    
    
    $
    0.25Basic Computation:Net earnings from continuing operations
    
    $
    17.9
    
    
    $
    16.8Weighted average common shares outstanding
    
    
    67.9
    
    
    
    68.0Basic earnings per share from continuing operations
    
    $
    0.26
    
    
    $
    0.25
 17




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##### Table of Contents



NOTE 12. 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 $3.6 million during the first quarter of 2004 and $3.8 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
    
    $
    622.2
    
    
    $
    70.1
    
    
    $
    692.3Operating profit from continuing operations
    
    
    25.7
    
    
    
    2.7
    
    
    
    28.4Total assets
    
    
    1,004.3
    
    
    
    224.0
    
    
    
    1,228.3Quarter ended May 3, 2003Revenues from external customers
    
    $
    603.4
    
    
    $
    63.9
    
    
    $
    667.3Operating profit (loss) from
continuing operations
    
    
    30.8
    
    
    
    (1.7
    )
    
    
    29.1Total assets
    
    
    992.1
    
    
    
    195.6
    
    
    
    1,187.7
 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 18




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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. 19




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##### Table of Contents



CONDENSED CONSOLIDATING BALANCE SHEET
(UNAUDITED)
As of May 1, 2004 (Restated) (dollars in millions) Parent
    
    
    Guarantor
    
    
    Non-guarantorCompany
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedASSETSCurrent Assets:Cash and cash equivalents
    
    $
    
    
    
    $
    88.2
    
    
    $
    33.1
    
    
    $
    
    
    
    $
    121.3Marketable securities, available for sale
    
    
    
    
    
    
    4.0
    
    
    
    
    
    
    
    
    
    
    
    4.0Restricted cash
    
    
    
    
    
    
    
    
    
    
    33.5
    
    
    
    
    
    
    
    33.5Inventories
    
    
    
    
    
    
    347.9
    
    
    
    80.2
    
    
    
    (5.9
    )
    
    
    422.2Current deferred income taxes
    
    
    
    
    
    
    16.6
    
    
    
    0.1
    
    
    
    
    
    
    
    16.7Other current assets
    
    
    9.0
    
    
    
    55.1
    
    
    
    38.8
    
    
    
    (38.0
    )
    
    
    64.9Current assets of discontinued operations
    
    
    
    
    
    
    22.1
    
    
    
    5.3
    
    
    
    
    
    
    
    27.4Total current assets
    
    
    9.0
    
    
    
    533.9
    
    
    
    191.0
    
    
    
    (43.9
    )
    
    
    690.0Property and Equipment:Land
    
    
    
    
    
    
    8.0
    
    
    
    
    
    
    
    
    
    
    
    8.0Buildings and leasehold improvements
    
    
    
    
    
    
    610.5
    
    
    
    72.0
    
    
    
    
    
    
    
    682.5Furniture, fixtures and equipment
    
    
    
    
    
    
    448.9
    
    
    
    55.3
    
    
    
    
    
    
    
    504.2Property under capital leases
    
    
    
    
    
    
    4.6
    
    
    
    
    
    
    
    
    
    
    
    4.6Total property and equipment
    
    
    
    
    
    
    1,072.0
    
    
    
    127.3
    
    
    
    
    
    
    
    1,199.3Accumulated depreciation and amortization
    
    
    
    
    
    
    (721.2
    )
    
    
    (56.2
    )
    
    
    
    
    
    
    (777.4
    )Property and equipment, net
    
    
    
    
    
    
    350.8
    
    
    
    71.1
    
    
    
    
    
    
    
    421.9Favorable leases, net
    
    
    
    
    
    
    26.9
    
    
    
    
    
    
    
    
    
    
    
    26.9Deferred income taxes
    
    
    
    
    
    
    26.7
    
    
    
    7.0
    
    
    
    
    
    
    
    33.7Goodwill, net
    
    
    
    
    
    
    5.9
    
    
    
    
    
    
    
    
    
    
    
    5.9Other assets
    
    
    1,091.5
    
    
    
    439.5
    
    
    
    0.7
    
    
    
    (1,510.0
    )
    
    
    21.7Non-current assets of discontinued operations
    
    
    
    
    
    
    18.6
    
    
    
    9.6
    
    
    
    
    
    
    
    28.2Total assets
    
    $
    1,100.5
    
    
    $
    1,402.3
    
    
    $
    279.4
    
    
    $
    (1,553.9
    )
    
    $
    1,228.3LIABILITIES AND SHAREOWNERS EQUITYCurrent Liabilities:Current maturities of long-term debt
    
    $
    
    
    
    $
    0.9
    
    
    $
    
    
    
    $
    
    
    
    $
    0.9Notes payable
    
    
    
    
    
    
    
    
    
    
    33.5
    
    
    
    
    
    
    
    33.5Accounts payable
    
    
    
    
    
    
    93.4
    
    
    
    61.2
    
    
    
    (28.1
    )
    
    
    126.5Accrued expenses
    
    
    2.9
    
    
    
    134.8
    
    
    
    18.2
    
    
    
    (15.8
    )
    
    
    140.1Current liabilities of discontinued operations
    
    
    
    
    
    
    4.4
    
    
    
    1.6
    
    
    
    
    
    
    
    6.0Total current liabilities
    
    
    2.9
    
    
    
    233.5
    
    
    
    114.5
    
    
    
    (43.9
    )
    
    
    307.0Long-term debt
    
    
    479.8
    
    
    
    1.8
    
    
    
    4.0
    
    
    
    (283.0
    )
    
    
    202.6Other liabilities
    
    
    
    
    
    
    128.7
    
    
    
    13.4
    
    
    
    (56.3
    )
    
    
    85.8Non-current liabilities of discontinued operations
    
    
    
    
    
    
    4.6
    
    
    
    0.1
    
    
    
    
    
    
    
    4.7Minority interest
    
    
    
    
    
    
    
    
    
    
    13.1
    
    
    
    
    
    
    
    13.1Commitments and contingencies
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total shareowners equity
    
    
    617.8
    
    
    
    1,033.7
    
    
    
    134.3
    
    
    
    (1,170.7
    )
    
    
    615.1Total liabilities and shareowners equity
    
    $
    1,100.5
    
    
    $
    1,402.3
    
    
    $
    279.4
    
    
    $
    (1,553.9
    )
    
    $
    1,228.3
 20




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CONDENSED CONSOLIDATING BALANCE SHEET
(UNAUDITED)
As of May 3, 2003 (Restated) (dollars in millions) Parent
    
    

Guarantor
    
    

Non
- GuarantorCompany
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedASSETSCurrent Assets:Cash and cash equivalents
    
    $
    
    
    
    $
    14.7
    
    
    $
    31.5
    
    
    $
    
    
    
    $
    46.2Restricted cash
    
    
    
    
    
    
    
    
    
    
    33.0
    
    
    
    
    
    
    
    33.0Inventories
    
    
    
    
    
    
    396.5
    
    
    
    76.2
    
    
    
    (9.3
    )
    
    
    463.4Current deferred income taxes
    
    
    
    
    
    
    19.8
    
    
    
    
    
    
    
    
    
    
    
    19.8Other current assets
    
    
    1.1
    
    
    
    165.2
    
    
    
    14.5
    
    
    
    (122.1
    )
    
    
    58.7Current assets of discontinued operations
    
    
    
    
    
    
    25.9
    
    
    
    5.2
    
    
    
    
    
    
    
    31.1Total current assets
    
    
    1.1
    
    
    
    622.1
    
    
    
    160.4
    
    
    
    (131.4
    )
    
    
    652.2Property and Equipment:Land
    
    
    
    
    
    
    8.5
    
    
    
    
    
    
    
    
    
    
    
    8.5Buildings and leasehold improvements
    
    
    
    
    
    
    570.5
    
    
    
    63.1
    
    
    
    
    
    
    
    633.6Furniture, fixtures and equipment
    
    
    
    
    
    
    431.9
    
    
    
    50.5
    
    
    
    
    
    
    
    482.4Property under capital leases
    
    
    
    
    
    
    4.6
    
    
    
    
    
    
    
    
    
    
    
    4.6Total property and equipment
    
    
    
    
    
    
    1,015.5
    
    
    
    113.6
    
    
    
    
    
    
    
    1,129.1Accumulated depreciation and amortization
    
    
    
    
    
    
    (675.0
    )
    
    
    (45.3
    )
    
    
    
    
    
    
    (720.3
    )Property and equipment, net
    
    
    
    
    
    
    340.5
    
    
    
    68.3
    
    
    
    
    
    
    
    408.8Favorable leases, net
    
    
    
    
    
    
    32.6
    
    
    
    
    
    
    
    
    
    
    
    32.6Deferred income taxes
    
    
    
    
    
    
    23.3
    
    
    
    7.8
    
    
    
    
    
    
    
    31.1Goodwill, net
    
    
    
    
    
    
    5.9
    
    
    
    
    
    
    
    
    
    
    
    5.9Other assets
    
    
    1,087.8
    
    
    
    512.9
    
    
    
    16.0
    
    
    
    (1,595.4
    )
    
    
    21.3Non-current assets of discontinued operations
    
    
    
    
    
    
    23.3
    
    
    
    12.5
    
    
    
    
    
    
    
    35.8Total assets
    
    $
    1,088.9
    
    
    $
    1,560.6
    
    
    $
    265.0
    
    
    $
    (1,726.8
    )
    
    $
    1,187.7LIABILITIES AND SHAREOWNERS EQUITYCurrent Liabilities:Current maturities of long-term debt
    
    $
    
    
    
    $
    89.0
    
    
    $
    5.0
    
    
    $
    (5.0
    )
    
    $
    89.0Notes payable
    
    
    
    
    
    
    
    
    
    
    33.0
    
    
    
    
    
    
    
    33.0Accounts payable
    
    
    
    
    
    
    75.5
    
    
    
    71.2
    
    
    
    (38.6
    )
    
    
    108.1Accrued expenses
    
    
    73.3
    
    
    
    124.4
    
    
    
    15.2
    
    
    
    (87.8
    )
    
    
    125.1Current liabilities of discontinued operations
    
    
    
    
    
    
    5.1
    
    
    
    1.2
    
    
    
    
    
    
    
    6.3Total 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
    
    
    
    
    
    
    95.0
    
    
    
    10.6
    
    
    
    (30.3
    )
    
    
    75.3Non-current liabilities of discontinued operations
    
    
    
    
    
    
    2.1
    
    
    
    
    
    
    
    
    
    
    
    2.1Minority interest
    
    
    
    
    
    
    
    
    
    
    17.7
    
    
    
    
    
    
    
    17.7Commitments and contingencies
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total shareowners equity
    
    
    615.6
    
    
    
    1,054.8
    
    
    
    107.1
    
    
    
    (1,165.1
    )
    
    
    612.4Total liabilities and shareowners equity
    
    $
    1,088.9
    
    
    $
    1,560.6
    
    
    $
    265.0
    
    
    $
    (1,726.8
    )
    
    $
    1,187.7
 21




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##### Table of Contents



CONDENSED CONSOLIDATING BALANCE SHEET
(UNAUDITED)
As of January 31, 2004 (Restated) (dollars in millions) Parent
    
    
    Guarantor
    
    
    Non-guarantorCompany
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedASSETSCurrent Assets:Cash and cash equivalents
    
    $
    
    
    
    $
    67.4
    
    
    $
    69.3
    
    
    $
    
    
    
    $
    136.7Marketable securities, available for sale
    
    
    
    
    
    
    10.0
    
    
    
    
    
    
    
    
    
    
    
    10.0Restricted cash
    
    
    
    
    
    
    
    
    
    
    33.5
    
    
    
    
    
    
    
    33.5Inventories
    
    
    
    
    
    
    308.5
    
    
    
    70.9
    
    
    
    (4.2
    )
    
    
    375.2Current deferred income taxes
    
    
    
    
    
    
    17.0
    
    
    
    0.1
    
    
    
    
    
    
    
    17.1Other current assets
    
    
    6.6
    
    
    
    71.9
    
    
    
    41.7
    
    
    
    (55.3
    )
    
    
    64.9Current assets of discontinued operations
    
    
    
    
    
    
    17.0
    
    
    
    7.2
    
    
    
    
    
    
    
    24.2Total current assets
    
    
    6.6
    
    
    
    491.8
    
    
    
    222.7
    
    
    
    (59.5
    )
    
    
    661.6Property and Equipment:Land
    
    
    
    
    
    
    8.0
    
    
    
    
    
    
    
    
    
    
    
    8.0Buildings and leasehold improvements
    
    
    
    
    
    
    610.7
    
    
    
    69.1
    
    
    
    
    
    
    
    679.8Furniture, fixtures and equipment
    
    
    
    
    
    
    439.7
    
    
    
    54.9
    
    
    
    
    
    
    
    494.6Property under capital leases
    
    
    
    
    
    
    4.6
    
    
    
    
    
    
    
    
    
    
    
    4.6Total property and equipment
    
    
    
    
    
    
    1,063.0
    
    
    
    124.0
    
    
    
    
    
    
    
    1,187.0Accumulated depreciation and amortization
    
    
    
    
    
    
    (711.6
    )
    
    
    (51.9
    )
    
    
    
    
    
    
    (763.5
    )Property and equipment, net
    
    
    
    
    
    
    351.4
    
    
    
    72.1
    
    
    
    
    
    
    
    423.5Favorable leases, net
    
    
    
    
    
    
    28.8
    
    
    
    
    
    
    
    
    
    
    
    28.8Deferred income taxes
    
    
    
    
    
    
    27.7
    
    
    
    6.5
    
    
    
    
    
    
    
    34.2Goodwill, net
    
    
    
    
    
    
    5.9
    
    
    
    
    
    
    
    
    
    
    
    5.9Other assets
    
    
    1,085.1
    
    
    
    440.7
    
    
    
    1.4
    
    
    
    (1,504.5
    )
    
    
    22.7Non-current assets of discontinued operations
    
    
    
    
    
    
    18.4
    
    
    
    9.2
    
    
    
    
    
    
    
    27.6Total assets
    
    $
    1,091.7
    
    
    $
    1,364.7
    
    
    $
    311.9
    
    
    $
    (1,564.0
    )
    
    $
    1,204.3LIABILITIES AND SHAREOWNERS EQUITYCurrent Liabilities:Current maturities of long-term debt
    
    $
    
    
    
    $
    0.9
    
    
    $
    
    
    
    $
    
    
    
    $
    0.9Notes payable
    
    
    
    
    
    
    
    
    
    
    33.5
    
    
    
    
    
    
    
    33.5Accounts payable
    
    
    
    
    
    
    84.3
    
    
    
    97.3
    
    
    
    (52.0
    )
    
    
    129.6Accrued expenses
    
    
    7.5
    
    
    
    108.1
    
    
    
    15.8
    
    
    
    (7.5
    )
    
    
    123.9Current liabilities of discontinued operations
    
    
    
    
    
    
    4.8
    
    
    
    1.0
    
    
    
    
    
    
    
    5.8Total current liabilities
    
    
    7.5
    
    
    
    198.1
    
    
    
    147.6
    
    
    
    (59.5
    )
    
    
    293.7Long-term debt
    
    
    479.8
    
    
    
    2.0
    
    
    
    4.0
    
    
    
    (283.0
    )
    
    
    202.8Other liabilities
    
    
    
    
    
    
    137.3
    
    
    
    8.8
    
    
    
    (60.5
    )
    
    
    85.6Non-current liabilities of discontinued operations
    
    
    
    
    
    
    2.0
    
    
    
    0.1
    
    
    
    
    
    
    
    2.1Minority interest
    
    
    
    
    
    
    
    
    
    
    15.7
    
    
    
    
    
    
    
    15.7Commitments and contingencies
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total shareowners equity
    
    
    604.4
    
    
    
    1,025.3
    
    
    
    135.7
    
    
    
    (1,161.0
    )
    
    
    604.4Total liabilities and shareowners equity
    
    $
    1,091.7
    
    
    $
    1,364.7
    
    
    $
    311.9
    
    
    $
    (1,564.0
    )
    
    $
    1,204.3
 22




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##### Table of Contents



CONDENSED CONSOLIDATING STATEMENT OF EARNINGS
(UNAUDITED)  (dollars in millions) Parent
    
    
    Guarantor
    
    
    Non-guarantorCompany
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedNet sales
    
    $
    
    
    
    $
    651.4
    
    
    $
    161.5
    
    
    $
    (120.6
    )
    
    $
    692.3Cost of sales
    
    
    
    
    
    
    457.1
    
    
    
    136.8
    
    
    
    (118.4
    )
    
    
    475.5Selling, general and administrative expense
    
    
    0.5
    
    
    
    167.9
    
    
    
    22.2
    
    
    
    (2.2
    )
    
    
    188.4Restructuring charges
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Operating (loss) profit from continuing operations
    
    
    (0.5
    )
    
    
    26.4
    
    
    
    2.5
    
    
    
    
    
    
    
    28.4Interest expense
    
    
    6.2
    
    
    
    0.3
    
    
    
    1.1
    
    
    
    (2.2
    )
    
    
    5.4Interest income
    
    
    
    
    
    
    (2.3
    )
    
    
    (0.9
    )
    
    
    2.2
    
    
    
    (1.0
    )Equity in (loss) earnings of subsidiaries
    
    
    (18.4
    )
    
    
    (3.2
    )
    
    
    
    
    
    
    21.6
    
    
    
    Earnings (loss) from continuing operations before
income taxes and minority interest
    
    
    11.7
    
    
    
    31.6
    
    
    
    2.3
    
    
    
    (21.6
    )
    
    
    24.0(Benefit) provision for income taxes
    
    
    (2.4
    )
    
    
    10.6
    
    
    
    (0.2
    )
    
    
    
    
    
    
    8.0Earnings (loss) from continuing operations before
minority interest
    
    
    14.1
    
    
    
    21.0
    
    
    
    2.5
    
    
    
    (21.6
    )
    
    
    16.0Minority interest, net of income tax
    
    
    
    
    
    
    
    
    
    
    1.9
    
    
    
    
    
    
    
    1.9Net earnings (loss) from continuing operations
    
    
    14.1
    
    
    
    21.0
    
    
    
    4.4
    
    
    
    (21.6
    )
    
    
    17.9Loss from discontinued operations, net of income
taxes and minority interest
    
    
    
    
    
    
    (2.6
    )
    
    
    (1.2
    )
    
    
    
    
    
    
    (3.8
    )Net earnings (loss)
    
    $
    14.1
    
    
    $
    18.4
    
    
    $
    3.2
    
    
    $
    (21.6
    )
    
    $
    14.1
 23




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##### Table of Contents



CONDENSED CONSOLIDATING STATEMENT OF EARNINGS
(UNAUDITED)  (dollars in millions) Parent
    
    
    Guarantor
    
    
    Non-guarantorCompany
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedNet sales
    
    $
    
    
    
    $
    631.1
    
    
    $
    180.7
    
    
    $
    (144.5
    )
    
    $
    667.3Cost of sales
    
    
    
    
    
    
    453.6
    
    
    
    155.8
    
    
    
    (142.3
    )
    
    
    467.1Selling, general and administrative expense
    
    
    
    
    
    
    152.6
    
    
    
    20.7
    
    
    
    (2.2
    )
    
    
    171.1Operating profit from continuing operations
    
    
    
    
    
    
    24.9
    
    
    
    4.2
    
    
    
    
    
    
    
    29.1Interest expense
    
    
    3.1
    
    
    
    4.0
    
    
    
    1.2
    
    
    
    (3.3
    )
    
    
    5.0Interest income
    
    
    
    
    
    
    (3.4
    )
    
    
    (0.8
    )
    
    
    3.3
    
    
    
    (0.9
    )Equity in (loss) earnings of subsidiaries
    
    
    (16.1
    )
    
    
    (4.4
    )
    
    
    
    
    
    
    20.5
    
    
    
    Earnings (loss) from continuing operations
before income taxes and minority interest
    
    
    13.0
    
    
    
    28.7
    
    
    
    3.8
    
    
    
    (20.5
    )
    
    
    25.0(Benefit) provision for income taxes
    
    
    (1.1
    )
    
    
    10.8
    
    
    
    (0.9
    )
    
    
    
    
    
    
    8.8Earnings (loss) from continuing operations
before minority interest
    
    
    14.1
    
    
    
    17.9
    
    
    
    4.7
    
    
    
    (20.5
    )
    
    
    16.2Minority interest, net of income tax
    
    
    
    
    
    
    
    
    
    
    0.6
    
    
    
    
    
    
    
    0.6Net earnings (loss) from continuing operations
    
    
    14.1
    
    
    
    17.9
    
    
    
    5.3
    
    
    
    (20.5
    )
    
    
    16.8Loss from discontinued operations, net of
income taxes and minority interest
    
    
    
    
    
    
    (1.8
    )
    
    
    (0.9
    )
    
    
    
    
    
    
    (2.7
    )Net earnings (loss)
    
    $
    14.1
    
    
    $
    16.1
    
    
    $
    4.4
    
    
    $
    (20.5
    )
    
    $
    14.1
 24




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##### Table of Contents



CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
(UNAUDITED)  (dollars in millions) Parent
    
    
    Guarantor
    
    
    Non-guarantorCompany
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedOperating Activities:Net earnings
    
    $
    14.1
    
    
    $
    18.4
    
    
    $
    3.2
    
    
    $
    (21.6
    )
    
    $
    14.1Loss from discontinued operations, net of
income taxes and minority interest
    
    
    
    
    
    
    (2.6
    )
    
    
    (1.2
    )
    
    
    
    
    
    
    (3.8
    )Net earnings from continuing operations
    
    
    14.1
    
    
    
    21.0
    
    
    
    4.4
    
    
    
    (21.6
    )
    
    
    17.9Adjustments for non-cash items included in
earnings from continuing operations:Loss on impairment of and disposal of assets
    
    
    
    
    
    
    2.6
    
    
    
    0.2
    
    
    
    
    
    
    
    2.8Depreciation and amortization
    
    
    
    
    
    
    21.8
    
    
    
    2.8
    
    
    
    
    
    
    
    24.6Amortization of deferred financing costs
    
    
    
    
    
    
    0.2
    
    
    
    
    
    
    
    
    
    
    
    0.2Amortization of unearned restricted stock
    
    
    0.2
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.2Deferred income taxes
    
    
    
    
    
    
    1.4
    
    
    
    (2.2
    )
    
    
    
    
    
    
    (0.8
    )Minority interest, net of tax
    
    
    
    
    
    
    
    
    
    
    (1.9
    )
    
    
    
    
    
    
    (1.9
    )Changes in working capital:Inventories
    
    
    
    
    
    
    (39.4
    )
    
    
    (10.3
    )
    
    
    1.7
    
    
    
    (48.0
    )Other current assets
    
    
    (2.4
    )
    
    
    16.8
    
    
    
    (1.2
    )
    
    
    (17.3
    )
    
    
    (4.1
    )Accounts payable
    
    
    
    
    
    
    9.1
    
    
    
    (36.0
    )
    
    
    23.9
    
    
    
    (3.0
    )Accrued expenses
    
    
    (4.6
    )
    
    
    26.7
    
    
    
    2.5
    
    
    
    (8.3
    )
    
    
    16.3Other assets and liabilities, net
    
    
    (6.8
    )
    
    
    (15.6
    )
    
    
    7.7
    
    
    
    21.6
    
    
    
    6.9Cash flow (used in) provided by discontinued
operations
    
    
    
    
    
    
    (5.7
    )
    
    
    0.2
    
    
    
    
    
    
    
    (5.5
    )Cash flow provided by (used in) operating
activities
    
    
    0.5
    
    
    
    38.9
    
    
    
    (33.8
    )
    
    
    
    
    
    
    5.6Investing Activities:Capital expenditures
    
    
    
    
    
    
    (23.8
    )
    
    
    (2.4
    )
    
    
    
    
    
    
    (26.2
    )Purchase of marketable securities
    
    
    
    
    
    
    (4.0
    )
    
    
    
    
    
    
    
    
    
    
    (4.0
    )Sales of marketable securities
    
    
    
    
    
    
    10.0
    
    
    
    
    
    
    
    
    
    
    
    10.0Investment in subsidiaries
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Cash flow used in investing activities from
continuing operations
    
    
    
    
    
    
    (17.8
    )
    
    
    (2.4
    )
    
    
    
    
    
    
    (20.2
    )Financing Activities:Payment of deferred financing costs
    
    
    (0.1
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (0.1
    )Repayment of debt
    
    
    
    
    
    
    (0.3
    )
    
    
    
    
    
    
    
    
    
    
    (0.3
    )Net purchases of common stock
    
    
    (0.4
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (0.4
    )Cash flow used in financing activities from
continuing operations
    
    
    (0.5
    )
    
    
    (0.3
    )

    
    
    
    
    
    
    
    
    
    
    (0.8
    )Effect of exchange rate changes on cash
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Increase (decrease) in cash and cash equivalents
    
    
    
    
    
    
    20.8
    
    
    
    (36.2
    )
    
    
    
    
    
    
    (15.4
    )Cash and cash equivalents, beginning of period
    
    
    
    
    
    
    67.4
    
    
    
    69.3
    
    
    
    
    
    
    
    136.7Cash and cash equivalents, end of period
    
    $
    
    
    
    $
    88.2
    
    
    $
    33.1
    
    
    $
    
    
    
    $
    121.3
 25




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##### Table of Contents



CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
(UNAUDITED)  (dollars in millions) Parent
    
    
    Guarantor
    
    
    Non-guarantorCompany
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedOperating Activities:Net earnings
    
    $
    14.1
    
    
    $
    16.1
    
    
    $
    4.4
    
    
    $
    (20.5
    )
    
    $
    14.1Loss from discontinued operations, net of
income taxes and minority interest
    

    
    
    
    
    
    (1.8
    )
    
    
    (0.9
    )
    
    
    
    
    
    
    (2.7
    )Net earnings from continuing operations
    
    
    14.1
    
    
    
    17.9
    
    
    
    5.3
    
    
    
    (20.5
    )
    
    
    16.8Adjustments for non-cash items included in
earnings from continuing operations:Loss on impairment of and disposal of assets
    
    
    
    
    
    
    0.1
    
    
    
    
    
    
    
    
    
    
    
    0.1Depreciation and amortization
    
    
    
    
    
    
    21.7
    
    
    
    3.2
    
    
    
    
    
    
    
    24.9Amortization of deferred financing costs
    
    
    
    
    
    
    0.4
    
    
    
    
    
    
    
    
    
    
    
    0.4Amortization of unearned restricted stock
    
    
    0.2
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.2Deferred income taxes
    
    
    
    
    
    
    2.0
    
    
    
    (0.2
    )
    
    
    
    
    
    
    1.8Minority interest, net of tax
    
    
    
    
    
    
    
    
    
    
    (0.6
    )
    
    
    
    
    
    
    (0.6
    )Changes in working capital:Inventories
    
    
    
    
    
    
    (44.0
    )
    
    
    12.4
    
    
    
    3.6
    
    
    
    (28.0
    )Other current assets
    
    
    4.5
    
    
    
    0.9
    
    
    
    3.6
    
    
    
    (11.7
    )
    
    
    (2.7
    )Accounts payable
    
    
    
    
    
    
    10.7
    
    
    
    0.2
    
    
    
    (4.7
    )
    
    
    6.2Accrued expenses
    
    
    3.3
    
    
    
    18.3
    
    
    
    (3.5
    )
    
    
    (12.2
    )
    
    
    5.9Other assets and liabilities, net
    
    
    (21.7
    )
    
    
    (26.1
    )
    
    
    5.0
    
    
    
    45.5
    
    
    
    2.7Cash flow used in discontinued operations
    
    
    
    
    
    
    (7.0
    )
    
    
    (5.5
    )
    
    
    
    
    
    
    (12.5
    )Cash flow provided by (used in) operating
activities
    
    
    0.4
    
    
    
    (5.1
    )
    
    
    19.9
    
    
    
    

    
    
    
    15.2Investing Activities:Capital expenditures
    
    
    
    
    
    
    (18.5
    )
    
    
    (6.2
    )
    
    
    
    
    
    
    (24.7
    )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 from continuing operations
    
    
    
    
    
    
    3.8
    
    
    
    (6.2
    )
    
    
    (22.3
    )
    
    
    (24.7
    )Financing Activities:Issuance on notes payable
    
    
    
    
    
    
    
    
    
    
    4.5
    
    
    
    
    
    
    
    4.5Restricted cash
    
    
    
    
    
    
    
    
    
    
    (4.5
    )
    
    
    
    
    
    
    (4.5
    )Repayment of debt
    
    
    
    
    
    
    (16.6
    )
    
    
    
    
    
    
    
    
    
    
    (16.6
    )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
    
    
    
    
    
    
    
    1.8Cash flow (used in) provided by financing
activities from continuing operations
    
    
    (0.4
    )
    
    
    (16.6
    )
    
    
    (20.5
    )
    
    
    22.3
    
    
    
    (15.2
    )Effect of exchange rate changes on cash
    
    
    
    
    
    
    
    
    
    
    (0.8
    )
    
    
    
    
    
    
    (0.8
    )Decrease in cash and cash equivalents
    
    
    
    
    
    
    (17.9
    )
    
    
    (7.6
    )
    
    
    
    
    
    
    (25.5
    )Cash and cash equivalents, beginning of period
    
    
    
    
    
    
    32.6
    
    
    
    39.1
    
    
    
    
    
    
    
    71.7Cash and cash equivalents, end of period
    
    $
    
    
    
    $
    14.7
    
    
    $
    31.5
    
    
    $
    
    
    
    $
    46.2
 26




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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, 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. 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 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 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. Subsequent to the issuance of our condensed consolidated financial statements for the period ended
May 1, 2004, we initiated a restructuring plan to build long-term shareowner value. The
restructuring plan began in the second quarter of 2004, and no restructuring charges were incurred
as of May 1, 2004. Due to the updating of this filing for the restatement as described in Note 3
to the Condensed Consolidated Financial Statements, the condensed consolidated financial statements
have been updated to include discontinued operations presentation as described below. Components of the restructuring include:  
    Exiting all 181 Parade stores, and related operations;  
    Exiting all 32 Payless ShoeSource stores in Chile and Peru  
    The closing of approximately 260 Payless ShoeSource stores. These store closings differ from closings in the normal
course of business in that they have longer remaining lease terms; 27




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
    The reduction of wholesale businesses that provide no significant growth opportunity, and;  
    A comprehensive review of the Companys expense structure with 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
closed stores as discontinued operations. The results for the thirteen weeks ended May 1, 2004 and
May 3, 2003 have been reclassified 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. For the first quarter of 2004, total sales increased 3.7 percent, or $25.0 million, to $692.3
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 2.9 percent. Gross margin was 31.3 percent
of sales in the current years first quarter, versus 30.0 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 $121.3 million, a
decrease of $15.4 million from the end of 2003. Total inventories at the end of the 2004 first
quarter were $422.2 million, a reduction of $41.2 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. 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 $14.1 million in the first quarter of 2004 compared with net earnings of
$14.1 million in the first quarter of 2003. 28




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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
    
    
    68.7
    %
    
    
    70.0
    %Selling, general and administrative expense
    
    
    27.2
    
    
    
    25.6Operating profit from continuing operations
    
    
    4.1
    
    
    
    4.4Interest expense, net
    
    
    0.6
    
    
    
    0.6Earnings from continuing operations before
income taxes and minority interest
    
    
    3.5
    
    
    
    3.7Effective income tax rate*
    
    
    33.3
    %
    
    
    35.2
    %Earnings from continuing operations before
minority interest
    
    
    2.3
    
    
    
    2.4Minority interest
    
    
    0.3
    
    
    
    0.1Net earnings from continuing operations
    
    
    2.0
    %
    
    
    2.1
    %
   *
    
    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 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). Sales percent increases (decreases) are as follows: First Quarter2004
    
    
    2003Net Sales
    
    
    3.7
    %
    
    
    (4.4
    )%Same-store Sales
    
    
    2.9
    
    
    
    (5.2
    )Average selling price per unit
    
    
    7.5
    
    
    
    6.5Unit volume
    
    
    (3.7
    )
    
    
    (9.6
    )Footwear average selling price per unit
    
    
    0.4
    
    
    
    7.1Footwear unit volume
    
    
    2.5
    %
    
    
    (11.3
    )%
 Net sales for the 2004 first quarter totaled $692.3 million compared with $667.3 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 $475.5 million in the 2004 first quarter, up 1.8 percent from $467.1 million in the 2003 first
quarter. As a percentage of net sales, cost of sales was 68.7 percent in the first quarter of 2004, compared
with 70.0 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. 29




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SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses were $188.4 million in the first quarter of 2004, up
10.1 percent from $171.1 million in the first quarter of 2003. As a percentage of net sales, selling, general and administrative expenses were 27.2 percent during
the first quarter of 2004 compared with 25.6 percent in the first quarter of 2003. The 2004
increase is the result of an additional $6.4 million in payroll-related costs, $6.3 million in
advertising, 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 on continuing operations was 33.3 percent in the first quarter of
2004 and 35.2 percent in the first quarter of 2003. LIQUIDITY AND CAPITAL RESOURCES We ended the first quarter of 2004 with a cash balance of $121.3 million, an increase of $75.1
million over the 2003 first 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 $5.6 million in the 2004 first quarter, compared with $15.2
million in the 2003 first quarter. As a percentage of net sales, cash flow from operations was 0.8
percent in the 2004 first quarter compared with 2.3 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 $26.2 million, compared with $24.7
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 30




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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. 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. As a result of the restatement discussed in Note 3 to the condensed consolidated
financial statements, our operating lease obligations as of May 1, 2004, are as follows: (dollars in millions) Operating leasePayments Due by Period
    
    obligationsRemainder of Year
    
    $
    198.31-3 Years
    
    
    434.23-5 Years
    
    
    326.0More than Five Years
    
    
    311.0Total
    
    $
    1,269.5
 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
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: May 1,
    
    
    May 3,
    
    
    January 31,2004
    
    
    2003
    
    
    2004Current Ratio
    
    
    2.2
    
    
    
    1.8
    
    
    
    2.3Debt-Capitalization Ratio*
    
    
    27.8
    %
    
    
    28.2
    %
    
    
    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%, 66.4% and 66.8%
respectively, for the periods referred to above. 31




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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. 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. CRITICAL ACCOUNTING POLICIES In preparing the condensed consolidated financial statements included in this Form 10-Q/A,
management makes estimates and assumptions that affect the amounts reported within the financial
statements. Actual results could differ from these estimates, and such differences may be material
to the condensed consolidated financial statements. We believe that the following critical
accounting policies involve a higher degree of judgment or complexity (see the notes to our
condensed consolidated financial statements for a complete discussion of our significant accounting
policies). Inventories Merchandise inventories in our stores are valued by the retail method and are stated at the lower
of cost, determined using the first-in, first-out (FIFO) basis, or market. Prior to shipment to a
specific store, inventories are valued at the lower of cost using the FIFO basis, or market. The
retail method is widely used in the retail industry due to its practicality. Under the retail
method, cost is determined by applying a calculated cost-to-retail ratio across groupings of
similar items, known as departments. As a result, the retail method results in an averaging of
inventory costs across similar items within a department. The cost-to-retail ratio is applied to
ending inventory at its current owned retail valuation to determine the cost of ending inventory on
a department basis. Current owned retail represents the retail price for which merchandise is
offered for sale on a regular basis reduced for any permanent or clearance markdowns. As a result,
the retail method normally results in an inventory valuation that is lower than a traditional FIFO
cost basis. Inherent in the retail method calculation are certain significant management judgments and
estimates including initial mark-up, markdowns and shrinkage, which can significantly impact the
owned retail and, therefore, the ending inventory valuation at cost. Specifically, the failure to
take permanent or clearance markdowns on a timely basis can result in an overstatement of cost
under the retail method. We believe that our application of the retail method reasonably states
inventory at the lower of cost or market. Property and Equipment Property and equipment are recorded at cost and depreciated on a straight-line basis over their
estimated useful lives. The useful lives of assets are based upon our expectations. Investments in
properties under capital leases and leasehold improvements are amortized over the shorter of their
useful lives or their related lease terms. Property and equipment are reviewed on a store-by-store basis if an indicator of impairment exists
to determine whether the carrying amount of the asset is recoverable. Estimated future cash flows
are used to determine if impairment exists. We use current operating results and historical
performance to estimate future cash flows on a store-by-store basis. 32




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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. 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 33




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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. 
 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 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)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. 34




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(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. 
 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 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. 35




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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
and Chief 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)
 36




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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*