-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, TwFmZrzZRKoqp4zRmFvjDiOOoUDUp4siskOfAc/sIMYDP2DJPSXvHeiiHQFsUSWF vV+dTGDKEg08nclAEFGiDw== 0000950123-00-002222.txt : 20000314 0000950123-00-002222.hdr.sgml : 20000314 ACCESSION NUMBER: 0000950123-00-002222 CONFORMED SUBMISSION TYPE: SC TO-I/A PUBLIC DOCUMENT COUNT: 13 FILED AS OF DATE: 20000313 SUBJECT COMPANY: COMPANY DATA: COMPANY CONFORMED NAME: PAYLESS SHOESOURCE INC /DE/ CENTRAL INDEX KEY: 0001060232 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-SHOE STORES [5661] IRS NUMBER: 431813160 STATE OF INCORPORATION: DE FISCAL YEAR END: 0130 FILING VALUES: FORM TYPE: SC TO-I/A SEC ACT: SEC FILE NUMBER: 005-55149 FILM NUMBER: 568163 BUSINESS ADDRESS: STREET 1: 3231 SOUTH EAST SIXTH STREET CITY: TOPEKA STATE: KS ZIP: 66607-2207 BUSINESS PHONE: 9132335171 MAIL ADDRESS: STREET 1: 3231 S E 6TH ST CITY: TOPEKA STATE: KS ZIP: 66607-2207 FORMER COMPANY: FORMER CONFORMED NAME: PAYLESS SHOESOURCE HOLDINGS INC DATE OF NAME CHANGE: 19980421 FILED BY: COMPANY DATA: COMPANY CONFORMED NAME: PAYLESS SHOESOURCE INC /DE/ CENTRAL INDEX KEY: 0001060232 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-SHOE STORES [5661] IRS NUMBER: 431813160 STATE OF INCORPORATION: DE FISCAL YEAR END: 0130 FILING VALUES: FORM TYPE: SC TO-I/A BUSINESS ADDRESS: STREET 1: 3231 SOUTH EAST SIXTH STREET CITY: TOPEKA STATE: KS ZIP: 66607-2207 BUSINESS PHONE: 9132335171 MAIL ADDRESS: STREET 1: 3231 S E 6TH ST CITY: TOPEKA STATE: KS ZIP: 66607-2207 FORMER COMPANY: FORMER CONFORMED NAME: PAYLESS SHOESOURCE HOLDINGS INC DATE OF NAME CHANGE: 19980421 SC TO-I/A 1 AMENDMENT NO. 1 TO ISSUER TENDER OFFER STATEMENT 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------ SCHEDULE TO TENDER OFFER STATEMENT UNDER SECTION 14(d)(1) OR 13(e)(1) OF THE SECURITIES EXCHANGE ACT OF 1934 (AMENDMENT NO. 1) PAYLESS SHOESOURCE, INC. (NAME OF ISSUER) PAYLESS SHOESOURCE, INC. (ISSUER) (NAME OF FILING PERSON (IDENTIFYING STATUS AS OFFEROR, ISSUER OR OTHER PERSON)) COMMON STOCK, PAR VALUE $.01 PER SHARE (INCLUDING THE ASSOCIATED PREFERRED STOCK PURCHASE RIGHTS) (TITLE OF CLASS OF SECURITIES) 704379106 (CUSIP NUMBER OF CLASS OF SECURITIES) WILLIAM J. RAINEY, ESQ. PAYLESS SHOESOURCE, INC. 3231 SOUTH EAST SIXTH AVENUE, TOPEKA, KANSAS 66607-2207 TELEPHONE: (785) 233-5171 (NAME, ADDRESS AND TELEPHONE NUMBER OF PERSON AUTHORIZED TO RECEIVE NOTICES AND COMMUNICATIONS ON BEHALF OF FILING PERSONS) COPY TO: EDWARD D. HERLIHY, ESQ. WACHTELL, LIPTON, ROSEN & KATZ 51 WEST 52ND STREET NEW YORK, NEW YORK 10019 TELEPHONE: (212) 403-1000 CALCULATION OF FILING FEE TRANSACTION VALUATION* AMOUNT OF FILING FEE $400,000,010 $80,000
- --------------- * CALCULATED SOLELY FOR THE PURPOSE OF DETERMINING THE AMOUNT OF THE FILING FEE, BASED UPON THE PURCHASE OF 7,547,170 SHARES OF COMMON STOCK, PAR VALUE $.01 PER SHARE, AT THE MAXIMUM TENDER OFFER PRICE OF $53.00 PER SHARE. [ ]CHECK BOX IF ANY PART OF THE FEE IS OFFSET AS PROVIDED BY RULE 0-11(a)(2) AND IDENTIFY THE FILING WITH WHICH THE OFFSETTING FEE WAS PREVIOUSLY PAID. IDENTIFY THE PREVIOUS FILING BY REGISTRATION STATEMENT NUMBER, OR THE FORM OR SCHEDULE AND THE DATE OF ITS FILING. AMOUNT PREVIOUSLY PAID: N/A FORM OR REGISTRATION NO.: N/A FILING PARTY: N/A DATE FILED: N/A [ ] CHECK THE BOX IF THE FILING RELATES SOLELY TO PRELIMINARY COMMUNICATIONS MADE BEFORE THE COMMENCEMENT OF A TENDER OFFER. CHECK THE APPROPRIATE BOXES BELOW TO DESIGNATE ANY TRANSACTIONS TO WHICH THE STATEMENT RELATES: [ ]THIRD-PARTY TENDER OFFER SUBJECT TO RULE 14d-1. [X]ISSUER TENDER OFFER SUBJECT TO RULE 13e-4. [ ]GOING-PRIVATE TRANSACTION SUBJECT TO RULE 13e-3. [ ]AMENDMENT TO SCHEDULE 13D UNDER RULE 13d-2. CHECK THE FOLLOWING BOX IF THE FILING IS A FINAL AMENDMENT REPORTING THE RESULTS OF THE TENDER OFFER: [ ] 2 This Amendment No. 1 to the Tender Offer Statement on Schedule TO relates to the tender offer by Payless ShoeSource, Inc., a Delaware corporation, to purchase 7,547,170 shares, or such lesser number of shares as are properly tendered and not properly withdrawn, of its common stock, par value $.01 per share, including the associated preferred stock purchase rights issued under the Stockholder Protection Rights Agreement, dated as of April 20, 1998, as amended, between Payless ShoeSource, Inc. and UMB Bank, N.A., as Rights Agent, at prices not greater than $53.00 nor less than $48.00 per share, net to the seller in cash, without interest, as specified by stockholders tendering their shares, upon the terms and subject to the conditions set forth in the offer to purchase, dated March 13, 2000, and in the related letter of transmittal, which, as amended and supplemented from time to time, together constitute the tender offer. Unless the context otherwise requires, all references to shares shall include the associated preferred stock purchase rights. This Amendment No. 1 to the Schedule TO is intended to satisfy the reporting requirements of Rule 13e-4(c)(2) of the Securities Exchange Act of 1934, as amended. Copies of the offer to purchase and the related letter of transmittal are filed with this Amendment No. 1 to the Schedule TO as Exhibits (a)(1)(A) and (a)(1)(B), respectively. The information in the offer to purchase and the related letter of transmittal, copies of which are filed with this Amendment No. 1 to the Schedule TO as Exhibits (a)(1)(A) and (a)(1)(B), respectively, is incorporated in this Amendment No. 1 to the Schedule TO by reference in answer to Items 1 through 11 of Schedule TO. ITEM 12. EXHIBITS. (a)(1)(A) Offer to Purchase, dated March 13, 2000 (a)(1)(B) Letter of Transmittal (a)(1)(C) Notice of Guaranteed Delivery (a)(1)(D) Letter to brokers, dealers, commercial banks, trust companies and other nominees, dated March 13, 2000 (a)(1)(E) Letter to clients for use by brokers, dealers, commercial banks, trust companies and other nominees (a)(1)(F) Guidelines for Certification of Taxpayer Identification Number on Substitute Form W-9 (a)(1)(G) Summary Advertisement, dated March 13, 2000 (a)(1)(H) Letter to Participants in the Payless ShoeSource, Inc. Profit Sharing Plan and the Payless ShoeSource, Inc. Profit Sharing Plan for Puerto Rico Associates, dated March 13, 2000 (a)(1)(I) Letter to Participants in the Payless ShoeSource, Inc. Stock Ownership Plan, dated March 13, 2000 (a)(2)-(4) Not applicable (a)(5)(A) Press Release, dated March 8, 2000* (a)(5)(B) Press Release, dated March 13, 2000 (a)(5)(C) Letter to Stockholders from the Chairman of the Board and Chief Executive Officer of Payless ShoeSource, Inc., dated March 13, 2000 (b) Goldman Sachs Credit Partners L.P. $600,000,000 Term and Revolving Senior Facilities Commitment Letter, dated March 10, 2000 (c) Not applicable (d) Not applicable (e) Not applicable
- --------------- * Previously filed on Schedule TO 3 SIGNATURE After due inquiry and to the best of my knowledge and belief, I certify that the information set forth in this statement is true, complete and correct. PAYLESS SHOESOURCE, INC. By: /s/ ULLRICH E. PORZIG ------------------------------------ Name: Ullrich E. Porzig Title: Senior Vice President- Chief Financial Officer and Treasurer Dated: March 13, 2000 EX-99.A.1.A 2 OFFER TO PURCHASE 1 Payless ShoeSource OFFER TO PURCHASE FOR CASH 7,547,170 SHARES OF ITS COMMON STOCK (INCLUDING THE ASSOCIATED PREFERRED STOCK PURCHASE RIGHTS) AT A PURCHASE PRICE NOT IN EXCESS OF $53.00 NOR LESS THAN $48.00 PER SHARE THE TENDER OFFER, PRORATION PERIOD AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON MONDAY, APRIL 10, 2000, UNLESS THE TENDER OFFER IS EXTENDED. Payless ShoeSource, Inc., a Delaware corporation, is offering to purchase for cash 7,547,170 shares of its common stock, including the associated preferred stock purchase rights issued under the Stockholder Protection Rights Agreement, dated as of April 20, 1998, as amended, between Payless and UMB Bank, N.A., as Rights Agent, upon the terms and subject to the conditions set forth in this document and the related letter of transmittal (which together, as they may be amended and supplemented from time to time, constitute the tender offer). We are inviting you to tender your shares at prices specified by you that are not greater than $53.00 nor less than $48.00 per share, net to you in cash, without interest, upon the terms and subject to the conditions of the tender offer. Unless the context otherwise requires, all references to shares shall include the associated preferred stock purchase rights; and, unless the associated preferred stock purchase rights are redeemed prior to the expiration of the offer, a tender of shares will also constitute a tender of the associated preferred stock purchase rights. On the terms and subject to the conditions of the tender offer, we will determine the single per share price, not in excess of $53.00 nor less than $48.00 per share net to you in cash, without interest, that we will pay for shares properly tendered and not properly withdrawn in the tender offer, taking into account the total number of shares so tendered and the prices specified by you. We will select the lowest purchase price that will allow us to purchase 7,547,170 shares, or such lesser number of shares as are properly tendered and not properly withdrawn, at prices not in excess of $53.00 nor less than $48.00 per share. All shares properly tendered at prices at or below the purchase price and not properly withdrawn will be purchased at the purchase price, on the terms and subject to the conditions of the tender offer, including the odd lot and proration provisions. We reserve the right, in our sole discretion, to purchase more than 7,547,170 shares in the tender offer, subject to applicable law. Shares tendered at prices in excess of the purchase price and shares not purchased because of proration provisions will not be purchased in the tender offer. Shares not purchased in the tender offer will be returned to the tendering stockholders at our expense as promptly as practicable after the expiration of the tender offer. Payless reserves the right to purchase all shares duly tendered by any stockholder who tenders all shares owned beneficially or of record at or below the purchase price and who, as a result of proration, would then The Dealer Manager for the Tender Offer is: GOLDMAN, SACHS & CO. March 13, 2000 2 beneficially or of record own an aggregate of fewer than 100 shares. If you own beneficially or of record less than 100 shares, properly tender all of them at or below the purchase price before the tender offer expires and complete the section entitled "Odd Lots" in the related letter of transmittal, we will purchase all of your shares without subjecting them to the proration procedure. See Section 1. THE TENDER OFFER IS NOT CONDITIONED ON THE TENDER OF ANY MINIMUM NUMBER OF SHARES BEING TENDERED. THE TENDER OFFER IS, HOWEVER, SUBJECT TO OTHER CONDITIONS. SEE SECTION 6. The shares are listed and traded on the New York Stock Exchange under the trading symbol "PSS". On March 7, 2000, the last trading day before the date of the public announcement of the tender offer, the last reported sale price of the shares on the NYSE Composite Tape was $41.75. Stockholders are urged to obtain current market quotations for the shares. See Section 7. OUR BOARD OF DIRECTORS HAS APPROVED THE TENDER OFFER. HOWEVER, NEITHER WE NOR OUR BOARD OF DIRECTORS MAKES ANY RECOMMENDATION TO YOU AS TO WHETHER YOU SHOULD TENDER OR REFRAIN FROM TENDERING YOUR SHARES OR AS TO THE PRICE OR PRICES AT WHICH YOU MAY CHOOSE TO TENDER YOUR SHARES. YOU MUST MAKE YOUR OWN DECISION AS TO WHETHER TO TENDER YOUR SHARES AND, IF SO, HOW MANY SHARES TO TENDER AND THE PRICE OR PRICES AT WHICH YOUR SHARES SHOULD BE TENDERED. OUR DIRECTORS AND EXECUTIVE OFFICERS HAVE ADVISED US THAT THEY DO NOT INTEND TO TENDER ANY SHARES IN THE TENDER OFFER. --------------------------------- IMPORTANT If you wish to tender all or any part of your shares, you should either (1) (a) complete and sign a letter of transmittal, or a facsimile of it, according to the instructions in the related letter of transmittal and mail or deliver it, together with any required signature guarantee and any other required documents, to EquiServe, the depositary for the tender offer, and mail or deliver the certificates for the shares to the depositary together with any other documents required by the letter of transmittal or (b) tender the shares according to the procedure for book-entry transfer described in Section 3, or (2) request a broker, dealer, commercial bank, trust company or other nominee to effect the transaction for you. If your shares are registered in the name of a broker, dealer, commercial bank, trust company or other nominee, you should contact that person if you desire to tender your shares. If you desire to tender your shares and (1) your certificates for the shares are not immediately available or cannot be delivered to the depositary, or (2) you cannot comply with the procedure for book-entry transfer, or (3) your other required documents cannot be delivered to the depositary by the expiration of the tender offer, you must tender your shares according to the guaranteed delivery procedure described in Section 3. TO TENDER SHARES PROPERLY, YOU MUST PROPERLY COMPLETE AND DULY EXECUTE THE RELATED LETTER OF TRANSMITTAL, INCLUDING THE SECTION RELATING TO THE PRICE AT WHICH YOU ARE TENDERING YOUR SHARES. Questions and requests for assistance may be directed to D.F. King & Co., Inc., the information agent for the tender offer, or to Goldman, Sachs & Co., the dealer manager for the tender offer, at their respective addresses and telephone numbers set forth on the back cover page of this document. Requests for additional copies of this document, the related letter of transmittal or the notice of guaranteed delivery may be directed to the information agent. 3 WE HAVE NOT AUTHORIZED ANY PERSON TO MAKE ANY RECOMMENDATION ON OUR BEHALF AS TO WHETHER YOU SHOULD TENDER OR REFRAIN FROM TENDERING YOUR SHARES IN THE TENDER OFFER. WE HAVE NOT AUTHORIZED ANY PERSON TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION IN CONNECTION WITH THE TENDER OFFER OTHER THAN THOSE CONTAINED IN THIS DOCUMENT OR IN THE RELATED LETTER OF TRANSMITTAL. IF GIVEN OR MADE, ANY RECOMMENDATION OR ANY SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY US OR THE DEALER MANAGER. 4 TABLE OF CONTENTS
SECTION PAGE - ------- ---- Summary Term Sheet................................................. 1 The Tender Offer................................................... 4 1. Number of Shares; Proration................................. 4 2. Purpose of the Tender Offer; Material Effects of the Tender Offer..................................................... 6 3. Procedures for Tendering Shares............................. 8 4. Withdrawal Rights........................................... 12 5. Purchase of Shares and Payment of Purchase Price............ 13 6. Conditions of the Tender Offer.............................. 14 7. Price Range of Shares; Dividends............................ 16 8. Source and Amount of Funds.................................. 18 9. Certain Information Concerning Payless...................... 21 10. Interest of Directors and Executive Officers and Principal Stockholders; Transactions and Arrangements Concerning Shares.................................................... 24 11. Effects of the Tender Offer on the Market for Shares; Registration Under the Exchange Act....................... 27 12. Legal Matters; Regulatory Approvals......................... 27 13. United States Federal Income Tax Consequences............... 27 14. Extension of the Tender Offer; Termination; Amendment....... 30 15. Fees and Expenses........................................... 31 16. Miscellaneous............................................... 32
i 5 FORWARD-LOOKING STATEMENTS This offer to purchase, including the Summary Term Sheet, the Introduction and Sections 2, 6, 7, 8, 9, 10, 11 and 13 contains statements that are not historical facts and constitute projections, forecasts or forward-looking statements. These statements may be identified by the use of forward-looking words or phrases such as "anticipate", "believe", "expect", "intend", "may", "planned", "potential", "should", "will" and "would". Such forward-looking statements are inherently subject to known and unknown risks and uncertainties. Our actual actions or results may differ materially from those expected or anticipated in the forward-looking statements. Specific factors that might cause such a difference, include, but are not limited to: - change in consumer spending patterns; - change in consumer preferences and overall economic conditions; - impact of competition and pricing; - changes in weather patterns; - successful implementations of new technologies; - the financial condition of the suppliers and manufacturers from whom the Company sources its merchandise; - changes in existing or potential duties, tariffs or quotas; - changes in political instability in foreign countries or restrictive actions by the governments of foreign countries in which suppliers and manufacturers from whom the Company sources are located; - changes in trade and foreign tax laws; - fluctuations in currency exchanges rates; - availability of suitable store locations on acceptable terms; - the ability to achieve expected advantages of operating shoe departments in speciality discount stores; - the ability to hire, train and retain associates; and - general economic, business and social conditions. In addition, please refer to our 1998 Annual Report and our Form 10-K for the fiscal year ended January 30, 1999, for more information on these and other risk factors. We undertake no obligation to make any revisions to the forward-looking statements contained in this document or to update them to reflect events or circumstances occurring after the date of this document. ii 6 SUMMARY TERM SHEET We are providing this summary term sheet for your convenience. It highlights the most material information in this document, but you should realize that it does not describe all of the details of the tender offer to the same extent described in this document. We urge you to read the entire document and the related letter of transmittal because they contain the full details of the tender offer. We have included references to the Sections of this document where you will find a more complete discussion. WHO IS OFFERING TO PURCHASE MY SHARES?..................... Payless ShoeSource, Inc. is offering to purchase your shares of Payless common stock and the associated preferred stock purchase rights. WHAT WILL THE PURCHASE PRICE FOR THE SHARES BE?............ We will determine the purchase price that we will pay per share as promptly as practicable after the tender offer expires. The purchase price will be the lowest price at which, based on the number of shares tendered and the prices specified by the tendering stockholders, we can purchase 7,547,170 shares, or such lesser number of shares as are properly tendered. The purchase price will not be greater than $53.00 nor less than $48.00 per share. We will pay this purchase price in cash, without interest, for all the shares we purchase under the tender offer, even if some of the shares are tendered below the purchase price. See Section 1. HOW MANY SHARES WILL PAYLESS PURCHASE?................... We will purchase 7,547,170 shares in the tender offer, or such lesser number of shares as are properly tendered. We also expressly reserve the right to purchase additional shares of up to 2% of the outstanding shares and could decide to purchase more shares subject to applicable legal requirements. Each share is coupled with an associated preferred stock purchase right that we will reacquire with the shares we purchase. No additional consideration will be paid for the preferred stock purchase rights. See Section 1. The tender offer is not conditioned on any minimum number of shares being tendered. See Section 6. HOW WILL PAYLESS PAY FOR THE SHARES?..................... We anticipate that we will obtain all of the funds necessary to purchase shares tendered in the offer, to refinance Payless' existing indebtedness and to pay related fees and expenses by means of (1) a senior secured credit facility consisting of (a) up to $400 million under a senior secured term loan facility and (b) borrowings of up to $50 million under a $200 million senior secured revolving credit facility and (2) available cash. The tender offer is not subject to the receipt of financing. See Section 8. HOW LONG DO I HAVE TO TENDER MY SHARES?.................... You may tender your shares until the tender offer expires. The tender offer will expire on Monday, April 10, 2000, at 5:00 p.m., New York City time, unless we extend it. See Section 1. We may choose to extend the tender offer for any reason. See Section 14. 1 7 HOW WILL I BE NOTIFIED IF PAYLESS EXTENDS THE TENDER OFFER?...................... We will issue a press release by 9:00 a.m., New York City time, on the business day after the previously scheduled expiration date if we decide to extend the tender offer. See Section 14. ARE THERE ANY CONDITIONS TO THE TENDER OFFER?............. Yes. The tender offer is subject to conditions such as the absence of court and governmental action prohibiting the tender offer and changes in general market conditions or our business that, in our judgment, is or may be materially adverse to us. See Section 6. HOW DO I TENDER MY SHARES?.... To tender your shares, prior to 5:00 p.m., New York City time, on Monday, April 10, 2000, unless the offer is extended: - you must deliver your share certificate(s) and a properly completed and duly executed letter of transmittal to the depositary at the address appearing on the back cover page of this document; or - the depositary must receive a confirmation of receipt of your shares by book-entry transfer and a properly completed and duly executed letter of transmittal; or - you must comply with the guaranteed delivery procedure. Contact the information agent or the dealer manager for assistance. See Section 3 and the instructions to the letter of transmittal. ONCE I HAVE TENDERED SHARES IN THE TENDER OFFER, CAN I WITHDRAW MY TENDER?......... You may withdraw any shares you have tendered at any time before 5:00 p.m., New York City time, on Monday, April 10, 2000, unless we extend the tender offer. If we have not accepted for payment the shares you have tendered to us, you may also withdraw your shares after 12:00 Midnight, New York City time, on Friday, May 5, 2000. See Section 4. HOW DO I WITHDRAW SHARES I PREVIOUSLY TENDERED?........ You must deliver on a timely basis a written, telegraphic or facsimile notice of your withdrawal to the depositary at the address appearing on the back cover page of this document. Your notice of withdrawal must specify your name, the number of shares to be withdrawn and the name of the registered holder of such shares. Some additional requirements apply if the certificates for shares to be withdrawn have been delivered to the depositary or if your shares have been tendered under the procedure for book-entry transfer set forth in Section 3. See Section 4. HAS PAYLESS OR ITS BOARD OF DIRECTORS ADOPTED A POSITION ON THE TENDER OFFER?........ Our Board of Directors has approved the tender offer. However, neither we nor our Board of Directors makes any recommendation to you as to whether you should tender or 2 8 refrain from tendering your shares or as to the price or prices at which you may choose to tender your shares. You must make your own decision as to whether to tender your shares and, if so, how many shares to tender and the price or prices at which your shares should be tendered. Our directors and executive officers have advised us that they do not intend to tender any shares in the tender offer. See Section 10. IF I OWN LESS THAN 100 SHARES, AND I TENDER ALL OF MY SHARES, WILL I BE SUBJECT TO PRORATION?.................. If you own beneficially or of record less than 100 shares, tender all of them at or below the purchase price before the tender offer expires and complete the section entitled "Odd Lots" in the related letter of transmittal, we will purchase all of your shares without subjecting them to the proration procedure. See Section 1. WHEN WILL PAYLESS PAY FOR THE SHARES I TENDER?............ We will pay the purchase price, net in cash, without interest, for the shares we purchase as promptly as practicable after the expiration of the tender offer and the acceptance of the shares for payment. See Section 5. WILL I HAVE TO PAY BROKERAGE COMMISSIONS IF I TENDER MY SHARES?..................... If you are a registered stockholder and you tender your shares directly to the depositary, you will not incur any brokerage commissions. If you hold shares through a broker or bank, we urge you to consult your broker or bank to determine whether transaction costs are applicable. See Section 2. WHAT ARE THE UNITED STATES FEDERAL INCOME TAX CONSEQUENCES IF I TENDER MY SHARES?..................... Generally, you will be subject to United States federal income taxation when you receive cash from us in exchange for the shares you tender. In addition, such receipt of cash for your tendered shares will be treated either as (1) a sale or exchange eligible for capital gains treatment or (2) a dividend subject to ordinary income tax rates. See Section 13. WILL I HAVE TO PAY STOCK TRANSFER TAX IF I TENDER MY SHARES?..................... If you instruct the depositary in the related letter of transmittal to make the payment for the shares to the registered holder, you will not incur any stock transfer tax. See Section 5. WHO CAN I TALK TO IF I HAVE QUESTIONS?.................. The information agent and the dealer manager can help answer your questions. The information agent is D.F. King & Co., Inc. and the dealer manager is Goldman, Sachs & Co. Their contact information is set forth on the back cover page of this document. 3 9 THE TENDER OFFER 1. NUMBER OF SHARES; PRORATION. General. Upon the terms and subject to the conditions of the tender offer, Payless will purchase 7,547,170 shares, or such lesser number of shares as are properly tendered and not properly withdrawn in accordance with Section 4, before the scheduled expiration date of the tender offer at prices not in excess of $53.00 nor less than $48.00 per share, net to the seller in cash, without interest. The term "expiration date" means 5:00 p.m., New York City time, on Monday, April 10, 2000, unless and until Payless, in its sole discretion, shall have extended the period of time during which the tender offer will remain open, in which event the term "expiration date" shall refer to the latest time and date at which the tender offer, as so extended by Payless, shall expire. See Section 14 for a description of Payless' right to extend, delay, terminate or amend the tender offer. In accordance with the rules of the Securities and Exchange Commission, Payless may, and Payless expressly reserves the right to, purchase under the tender offer an additional amount of shares not to exceed 2% of the outstanding shares without amending or extending the tender offer. See Section 14. In the event of an over-subscription of the tender offer as described below, shares tendered at or below the purchase price will be subject to proration, except for odd lots. The proration period and withdrawal rights expire on the expiration date. If (1)(a) Payless increases the price to be paid for shares above $53.00 per share or decreases the price to be paid for shares below $48.00 per share, (b) Payless increases the number of shares being sought in the tender offer and such increase in the number of shares being sought exceeds 2% of the outstanding shares or (c) Payless decreases the number of shares being sought and (2) the tender offer is scheduled to expire at any time earlier than the expiration of a period ending on the tenth business day (as defined below) from, and including, the date that notice of any such increase or decrease is first published, sent or given in the manner specified in Section 14, the tender offer will be extended until the expiration of such period of ten business days. For the purposes of the tender offer, a "business day" means any day other than a Saturday, Sunday or United States federal holiday and consists of the time period from 12:01 a.m. through 12:00 Midnight, New York City time. THE TENDER OFFER IS NOT CONDITIONED ON THE TENDER OF ANY MINIMUM NUMBER OF SHARES BEING TENDERED. THE TENDER OFFER IS, HOWEVER, SUBJECT TO OTHER CONDITIONS. SEE SECTION 6. In accordance with Instruction 5 of the related letter of transmittal, stockholders desiring to tender shares must specify the price or prices, not in excess of $53.00 nor less than $48.00 per share, at which they are willing to sell their shares to Payless under the tender offer. Alternatively, stockholders desiring to tender shares can choose to not specify a price and, instead, specify that they will sell their shares at the purchase price ultimately paid for shares properly tendered in the tender offer, which could result in the tendering stockholder receiving a price per share as low as $48.00 or as high as $53.00. As promptly as practicable following the expiration date, Payless will, in its sole discretion, determine the purchase price that it will pay for shares properly tendered and not properly withdrawn, taking into account the number of shares tendered and the prices specified by tendering stockholders. Payless will select the lowest purchase price, not in excess of $53.00 nor less than $48.00 net per share in cash, without interest, that will enable it to purchase 7,547,170 shares, or such lesser number of shares as are properly tendered, under the tender offer. Shares properly tendered under the tender offer at or below the purchase price and not properly withdrawn will be purchased at the purchase price, upon the terms and subject to the conditions of the tender offer, including the odd lot and proration provisions. All shares tendered and not purchased under the tender offer, including shares tendered at prices in excess of the purchase price and shares not purchased because of proration provisions will not be purchased in the tender offer. Shares not purchased in the tender offer will be returned to the tendering stockholders at 4 10 Payless's expense as promptly as practicable following the expiration date. By following the instructions to the letter of transmittal, stockholders can specify one minimum price for a specified portion of their shares and a different minimum price for other specified shares but a separate letter of transmittal must be submitted for shares tendered at each price. Stockholders can also specify the order in which the specified portions will be purchased in the event that, as a result of the proration provisions or otherwise, some but not all of the tendered shares are purchased pursuant to the tender offer. If the number of shares properly tendered at or below the purchase price and not properly withdrawn prior to the expiration date is less than or equal to 7,547,170 shares, or such greater number of shares as Payless may elect to purchase, subject to applicable law, Payless will, upon the terms and subject to the conditions of the tender offer, purchase all shares so tendered at the purchase price. Priority of Purchases. Upon the terms and subject to the conditions of the tender offer, if more than 7,547,170 shares, or such greater number of shares as Payless may elect to purchase, subject to applicable law, have been properly tendered at prices at or below the purchase price and not properly withdrawn before the expiration date, Payless will purchase properly tendered shares on the basis set forth below: (1) Payless will purchase all shares properly tendered and not properly withdrawn before the expiration date by any odd lot holder (as defined below) who: (a) tenders all shares owned beneficially or of record by such odd lot holder at a price at or below the purchase price (tenders of less than all the shares owned by such odd lot holder will not qualify for this preference); and (b) completes the section entitled "Odd Lots" in the related letter of transmittal and, if applicable, in the notice of guaranteed delivery; and (2) after the purchase of all of the foregoing shares, Payless will purchase all other shares properly tendered at prices at or below the purchase price and not properly withdrawn before the expiration date, on a pro rata basis with appropriate adjustments to avoid purchases of fractional shares, as described below. Odd Lots. For purposes of the tender offer, the term "odd lots" shall mean all shares properly tendered prior to the expiration date at prices at or below the purchase price and not properly withdrawn by any person, referred to as an "odd lot holder," who owns beneficially or of record an aggregate of fewer than 100 shares and so certifies in the appropriate place on the related letter of transmittal and, if applicable, on the notice of guaranteed delivery. To qualify for this preference, an odd lot holder must tender all shares owned beneficially or of record by the odd lot holder in accordance with the procedures described in Section 3. As set forth above, odd lots will be accepted for payment before proration, if any, of the purchase of other tendered shares. This preference is not available to partial tenders or to beneficial or record holders of an aggregate of 100 or more shares, even if these holders have separate accounts or certificates representing fewer than 100 shares. By accepting the tender offer, an odd lot holder who holds shares in its name and tenders its shares directly to the depositary would not only avoid the payment of brokerage commissions, but also would avoid any applicable odd lot discounts in a sale of the holder's shares on the NYSE. Any stockholder wishing to tender all of such stockholder's shares pursuant to the tender offer should complete the section entitled "Odd Lots" in the related letter of transmittal and, if applicable, in the notice of guaranteed delivery. Payless also reserves the right, but will not be obligated, to purchase all shares duly tendered by any stockholder who tenders all shares beneficially or of record owned at or below the purchase price and who, as a result of proration, would then beneficially or of record own an aggregate of fewer than 100 shares. If Payless exercises this right, it will increase the number of shares that it is 5 11 offering to purchase in the tender offer by the number of shares purchased through the exercise of such right, subject to applicable law. Proration. If proration of tendered shares is required, Payless will determine the proration factor as soon as practicable following the expiration date. Proration for each stockholder tendering shares, other than odd lot holders, shall be based on the ratio of the number of shares properly tendered and not properly withdrawn by such stockholder to the total number of shares properly tendered and not properly withdrawn by all stockholders, other than odd lot holders, at or below the purchase price. Because of the difficulty in determining the number of shares properly tendered, including shares tendered by guaranteed delivery procedures, as described in Section 3, and not properly withdrawn, and because of the odd lot procedure, Payless does not expect that it will be able to announce the final proration factor or commence payment for any shares purchased under the tender offer until seven to ten business days after the expiration date. The preliminary results of any proration will be announced by press release as promptly as practicable after the expiration date. Stockholders may obtain preliminary proration information from the information agent or the dealer manager and may be able to obtain such information from their brokers. As described in Section 13, the number of shares that Payless will purchase from a stockholder under the tender offer may affect the United States federal income tax consequences to that stockholder and, therefore, may be relevant to a stockholder's decision whether or not to tender shares. This offer to purchase and the related letter of transmittal will be mailed to record holders of shares and will be furnished to brokers, dealers, commercial banks and trust companies whose names, or the names of whose nominees, appear on Payless' stockholder list or, if applicable, who are listed as participants in a clearing agency's security position listing for subsequent transmittal to beneficial owners of shares. 2. PURPOSE OF THE TENDER OFFER; MATERIAL EFFECTS OF THE TENDER OFFER. Purpose of the Tender Offer. Payless is making the tender offer because the Payless Board of Directors believes that its shares are undervalued in the public market. Payless believes that the tender offer is a prudent use of its financial resources given its business profile, assets and current market price, and that investing in its own shares is an attractive use of capital and an efficient means to provide value to its stockholders. The tender offer is consistent with its historical commitment of repurchasing shares from time to time as a means of increasing stockholder value. Since Payless was spun-off from The May Department Stores Company in 1996, it has repurchased an aggregate of approximately $582 million of shares. Over the past year, Payless has been considering various strategic alternatives, such as acquisitions and share repurchases, as a use of available resources to create stockholder value. To date, Payless has not found a suitable acquisition candidate available on appropriate terms. In addition, during the course of its general stockholder relations efforts, several of Payless' large stockholders have indicated their view that large share repurchases would be a preferable use of available resources to increase stockholder value. Therefore, in order to achieve the potential benefits described below, Payless has commenced the tender offer. In connection with its decision to commence the tender offer, the Company has raised its earnings per share growth targets above its previous goal of 15 percent, to 20 percent on the current fiscal year, excluding non-recurring and extraordinary charges. The Company will take approximately $11.8 million of pre-tax charges for non-recurring and extraordinary items against earnings of the first fiscal quarter 2000, principally for costs associated with the analysis and consideration of various strategic alternatives, refinancing costs and costs associated with the self- tender. 6 12 After the completion of the tender offer, Payless expects to have sufficient cash flow and access to other funding (including as a result of the financing described in Section 8) to meet its cash needs for normal operations and anticipated capital expenditures. Potential Benefits of the Tender Offer. Payless believes the tender offer may provide several benefits to the Company and its stockholders, including: - The tender offer and related borrowings will provide a capital structure that makes greater use of financial leverage at reasonable interest rates, thus making possible improved earnings per share for continuing stockholders if future earnings are at the level anticipated, without imposing excessive risk on the Company or its stockholders if future earnings are weaker than expected. - Payless believes that after the tender offer is completed its financial condition, access to capital and outlook for continued favorable cash generation will allow Payless to continue to pursue the development of its core business, including ongoing product development activities, important retail marketing initiatives, capital expenditures, strategic acquisitions and expansion in Canada. - The tender offer represents the opportunity to return a portion of its cash to stockholders who elect to tender their shares. Stockholders who sell all or a portion of their common stock have the opportunity to receive a premium of 15% to 27% to Payless' closing price per share of $41.75 on March 7, 2000, the last trading day prior to the announcement of the tender offer. In addition, where common stock is tendered by the registered owner of that stock directly to the depositary, the sale of those shares in the tender offer will permit the seller to avoid the usual transaction costs associated with open market sales. Furthermore, odd lot holders who hold common stock registered in their names and tender their shares directly to the depositary and whose shares are purchased under the tender offer will avoid not only the payment of brokerage commissions but also any applicable odd lot discounts that might be payable on sales of their shares in New York Stock Exchange transactions. - Stockholders who determine not to participate in the tender offer will realize a proportionate increase in their relative equity interest in the Company and thus in the Company's future earnings and assets. Accordingly, the Board of Directors of Payless believes that the tender offer is consistent with the Company's long-term corporate goal of increasing stockholder value. Potential Risks and Disadvantages of the Tender Offer. The tender offer also presents some potential risks and disadvantages to the Company and its continuing stockholders, including: - Payless will incur significant additional indebtedness in order to pay for the tendered shares. If the tender offer is fully subscribed, Payless' ratio of total debt to total capital will increase materially. In addition, its stockholders' equity will decrease from $704 million to $274 million. See Section 9. Payless cannot determine whether stock market or other third party perceptions of the Company will be adversely affected by the additional indebtedness. Payless' higher leverage will also result in its continuing stockholders bearing a higher risk in the event of future losses or earnings reductions. - The pro forma balance sheet contained in Section 9 shows that Payless' interest expense for fiscal year 1999 on a pro forma basis was approximately $38.7 million compared to its actual interest income for fiscal year 1999 of approximately $900,000, thereby reducing its available cash for normal operations, capital expenditures and other growth initiatives. - Payless will incur a one-time extraordinary charge of approximately $3.7 million after taxes in connection with the tender offer as a result of the early retirement of existing borrowings. See Section 9. 7 13 - The tender offer will reduce the Company's "public float" (the number of shares owned by non-affiliate stockholders and available for trading in the securities markets). This reduction in Payless' public float, combined with higher leverage, may result in lower stock prices or reduced liquidity in the trading market for its common stock following the completion of the tender offer. NEITHER PAYLESS NOR ITS BOARD OF DIRECTORS MAKES ANY RECOMMENDATION TO ANY STOCKHOLDER AS TO WHETHER TO TENDER OR REFRAIN FROM TENDERING ANY SHARES OR AS TO THE PRICE OR PRICES AT WHICH STOCKHOLDERS MAY CHOOSE TO TENDER THEIR SHARES. PAYLESS HAS NOT AUTHORIZED ANY PERSON TO MAKE ANY SUCH RECOMMENDATION. STOCKHOLDERS SHOULD CAREFULLY EVALUATE ALL INFORMATION IN THE TENDER OFFER, SHOULD CONSULT THEIR OWN INVESTMENT AND TAX ADVISORS, AND SHOULD MAKE THEIR OWN DECISIONS ABOUT WHETHER TO TENDER SHARES AND, IF SO, HOW MANY SHARES TO TENDER AND THE PRICE OR PRICES AT WHICH TO TENDER. PAYLESS HAS BEEN INFORMED THAT NONE OF ITS DIRECTORS OR EXECUTIVE OFFICERS INTENDS TO TENDER ANY SHARES IN THE TENDER OFFER. Payless may in the future purchase additional shares of common stock on the open market, in private transactions, through tender offers or otherwise. Any additional purchases may be on the same terms or on terms that are more or less favorable to stockholders than the terms of the tender offer. However, SEC Rule 13e-4 prohibits Payless and its affiliates from purchasing any shares, other than pursuant to the tender offer, until at least ten business days after the expiration date of the tender offer, except pursuant to certain limited exceptions provided in Rule 14e-5. Shares the Company acquires pursuant to the tender offer will be canceled and returned to the status of authorized but unissued stock, and will be available for the Company to issue without further stockholder action (except as required by applicable law or the rules of NYSE or any other securities exchange on which the shares are listed) for purposes including, without limitation, acquisitions, raising additional capital and the satisfaction of obligations under existing or future employee benefit or compensation programs or stock plans or compensation programs for directors. 3. PROCEDURES FOR TENDERING SHARES. Proper Tender of Shares. For shares to be tendered properly under the tender offer, (1) the certificates for such shares (or confirmation of receipt of such shares under the procedure for book-entry transfer set forth below), together with a properly completed and duly executed letter of transmittal (or a manually signed facsimile thereof), including any required signature guarantees, or an "agent's message" (as defined below), and any other documents required by the letter of transmittal, must be received before 5:00 p.m., New York City time, on the expiration date by the depositary at its address set forth on the back cover page of this document or (2) the tendering stockholder must comply with the guaranteed delivery procedure set forth below. IN ACCORDANCE WITH INSTRUCTION 5 OF THE LETTER OF TRANSMITTAL, STOCKHOLDERS DESIRING TO TENDER SHARES UNDER THE TENDER OFFER MUST PROPERLY INDICATE IN THE SECTION CAPTIONED (1) "PRICE (IN DOLLARS) PER SHARE AT WHICH SHARES ARE BEING TENDERED" ON THE LETTER OF TRANSMITTAL THE PRICE (IN MULTIPLES OF $0.125) AT WHICH SHARES ARE BEING TENDERED OR (2) "SHARES TENDERED AT PRICE DETERMINED UNDER THE TENDER OFFER" ON THE LETTER OF TRANSMITTAL THAT THE STOCKHOLDER WILL ACCEPT THE PURCHASE PRICE DETERMINED BY PAYLESS IN ACCORDANCE WITH THE TERMS OF THE TENDER OFFER. Stockholders who desire to tender shares at more than one price must complete a separate letter of transmittal for each price at which shares are tendered, provided that the same shares cannot be tendered (unless properly withdrawn previously in accordance with Section 4) at more than one price. TO TENDER SHARES PROPERLY, ONE AND ONLY ONE PRICE BOX MUST BE CHECKED IN THE APPROPRIATE SECTION ON EACH LETTER OF TRANSMITTAL. IN ADDITION, ODD LOT HOLDERS WHO TENDER ALL SHARES MUST COMPLETE THE SECTION CAPTIONED "ODD LOTS" IN THE LETTER OF TRANSMITTAL AND, IF APPLICABLE, IN THE NOTICE OF GUARANTEED DELIVERY, TO QUALIFY FOR THE PREFERENTIAL TREATMENT AVAILABLE TO ODD LOT HOLDERS AS SET FORTH IN SECTION 1. 8 14 STOCKHOLDERS WHO HOLD SHARES THROUGH BROKERS OR BANKS ARE URGED TO CONSULT THE BROKERS OR BANKS TO DETERMINE WHETHER TRANSACTION COSTS ARE APPLICABLE IF STOCKHOLDERS TENDER SHARES THROUGH THE BROKERS OR BANKS AND NOT DIRECTLY TO THE DEPOSITARY. Stockholders who own shares under the Payless ShoeSource, Inc. Stock Ownership Plan and who wish to tender shares in the tender offer should so indicate (1) by marking "Yes" in the section of the letter of transmittal captioned "Payless ShoeSource, Inc. Stock Ownership Plan" and (2) stating whether they are tendering all or a percentage of their stock fund account. Participants in the Payless ShoeSource, Inc. Profit Sharing Plan and those in the Payless ShoeSource, Inc. Profit Sharing Plan for Puerto Rico Associates will receive separate instructions from the applicable plan trustee on how to tender shares held under the applicable plan. For all three plans, because of the manner in which the plans are administered, participants will tender a designated percentage of their shares rather than a set number of shares. Signature Guarantees and Method of Delivery. No signature guarantee is required: (1) if the letter of transmittal is signed by the registered holder of the shares (which term, for purposes of this Section 3, shall include any participant in The Depository Trust Company, referred to as the "book-entry transfer facility", whose name appears on a security position listing as the owner of the shares) tendered therewith and such holder has not completed either the box captioned "Special Delivery Instructions" or the box captioned "Special Payment Instructions" on the letter of transmittal; or (2) if shares are tendered for the account of a bank, broker, dealer, credit union, savings association or other entity which is a member in good standing of the Securities Transfer Agents Medallion Program or a bank, broker, dealer, credit union, savings association or other entity which is an "eligible guarantor institution", as such term is defined in Rule 17Ad-15 under the Exchange Act. See Instruction 1 of the letter of transmittal. If a certificate for shares is registered in the name of a person other than the person executing a letter of transmittal, or if payment is to be made to a person other than the registered holder, then the certificate must be endorsed or accompanied by an appropriate stock power, in either case signed exactly as the name of the registered holder appears on the certificate, with the signature guaranteed by an eligible guarantor institution. Payment for shares tendered and accepted for payment under the tender offer will be made only after timely receipt by the depositary of certificates for such shares or a timely confirmation of the book-entry transfer of such shares into the depositary's account at the book-entry transfer facility as described above, a properly completed and duly executed letter of transmittal or a manually signed facsimile thereof, or an agent's message in the case of a book-entry transfer, and any other documents required by the letter of transmittal. THE METHOD OF DELIVERY OF ALL DOCUMENTS, INCLUDING CERTIFICATES FOR SHARES, THE LETTER OF TRANSMITTAL AND ANY OTHER REQUIRED DOCUMENTS, IS AT THE ELECTION AND RISK OF THE TENDERING STOCKHOLDER. IF DELIVERY IS BY MAIL, REGISTERED MAIL WITH RETURN RECEIPT REQUESTED, PROPERLY INSURED, IS RECOMMENDED. Book-Entry Delivery. The depositary will establish an account with respect to the shares for purposes of the tender offer at the book-entry transfer facility within two business days after the date of this document, and any financial institution that is a participant in the book-entry transfer facility's system may make book-entry delivery of the shares by causing the book-entry transfer facility to transfer shares into the depositary's account in accordance with the book-entry transfer facility's procedures for transfer. Although delivery of shares may be effected through a book-entry transfer into the depositary's account at the book-entry transfer facility, either (1) a properly completed and duly executed letter of transmittal or a manually signed facsimile thereof with any required signature guarantees, or an agent's message, and any other required documents must, in any case, be transmitted to and received by the depositary at its address set forth on the back cover page of this document before the expiration date or (2) the guaranteed delivery procedure described below must be followed. Delivery of the letter of transmittal and any other required documents to the book-entry transfer facility does not constitute delivery to the depositary. 9 15 The term "agent's message" means a message transmitted by the book-entry transfer facility to, and received by, the depositary, which states that the book-entry transfer facility has received an express acknowledgment from the participant in the book-entry transfer facility tendering the shares that such participant has received and agrees to be bound by the terms of the letter of transmittal and that Payless may enforce such agreement against such participant. Federal Backup Withholding Tax. Under the United States federal backup withholding tax rules, 31% of the gross proceeds payable to a stockholder or other payee under the tender offer must be withheld and remitted to the United States Treasury, unless the stockholder or other payee provides such person's taxpayer identification number (employer identification number or social security number) to the depositary and certifies under penalties of perjury that such number is correct or otherwise establishes an exemption. If the depositary is not provided with the correct taxpayer identification number or another adequate basis for exemption, the holder may be subject to certain penalties imposed by the Internal Revenue Service. Therefore, each tendering stockholder should complete and sign the Substitute Form W-9 included as part of the letter of transmittal in order to provide the information and certification necessary to avoid backup withholding, unless such stockholder otherwise establishes to the satisfaction of the depositary that the stockholder is not subject to backup withholding. Specified stockholders (including, among others, all corporations and certain foreign stockholders (in addition to foreign corporations)) are not subject to these backup withholding and reporting requirements rules. In order for a foreign stockholder to qualify as an exempt recipient, that stockholder must submit an IRS Form W-8 or a Substitute Form W-8, signed under penalties of perjury, attesting to that stockholder's exempt status. The applicable form can be obtained from the Information Agent. See Instructions 13 and 14 of the related letter of transmittal. TO PREVENT FEDERAL BACKUP WITHHOLDING TAX EQUAL TO 31% OF THE GROSS PAYMENTS MADE TO STOCKHOLDERS FOR SHARES PURCHASED UNDER THE TENDER OFFER, EACH STOCKHOLDER WHO DOES NOT OTHERWISE ESTABLISH AN EXEMPTION FROM SUCH WITHHOLDING MUST PROVIDE THE DEPOSITARY WITH THE STOCKHOLDER'S CORRECT TAXPAYER IDENTIFICATION NUMBER AND PROVIDE OTHER INFORMATION BY COMPLETING THE SUBSTITUTE FORM W-9 INCLUDED WITH THE LETTER OF TRANSMITTAL. For a discussion of United States federal income tax consequences to tendering stockholders, see Section 13. Federal Income Tax Withholding on Foreign Stockholders. Even if a foreign stockholder has provided the required certification as described in the preceding paragraph to avoid backup withholding, the depositary will withhold United States federal income taxes at a rate of 30% of the gross payment payable to a foreign stockholder or his or her agent unless the depositary determines that an exemption from, or a reduced rate of, withholding tax is available under a tax treaty or that an exemption from withholding is applicable because such gross proceeds are effectively connected with the conduct of a trade or business of the foreign stockholder within the United States. For this purpose, a foreign stockholder is any stockholder that is not a "United States holder" (as defined in Section 13). In order to obtain a reduced rate of withholding under a tax treaty, a foreign stockholder must deliver to the depositary before the payment a properly completed and executed IRS Form 1001 or W-8BEN. In order to obtain an exemption from withholding on the grounds that the gross proceeds paid under the tender offer are effectively connected with the conduct of a trade or business within the United States, a foreign stockholder must deliver to the depositary a properly completed and executed IRS Form 4224 or W-8ECI. A foreign stockholder may be eligible to obtain a refund of all or a portion of any tax withheld if such stockholder satisfies one of the "Section 302 tests" for capital gain treatment described in Section 13 or is otherwise able to establish that no withholding or a reduced amount of withholding is due. Federal backup withholding generally will not apply to amounts subject to the 30% or a treaty-reduced rate of federal income tax withholding. 10 16 FOREIGN STOCKHOLDERS ARE URGED TO CONSULT THEIR TAX ADVISORS REGARDING THE APPLICATION OF UNITED STATES FEDERAL INCOME TAX WITHHOLDING, INCLUDING ELIGIBILITY FOR A REDUCTION OF OR AN EXEMPTION FROM WITHHOLDING TAX, AND THE REFUND PROCEDURE. SEE INSTRUCTIONS 13 AND 14 OF THE LETTER OF TRANSMITTAL. Guaranteed Delivery. If a stockholder desires to tender shares under the tender offer and the stockholder's share certificates are not immediately available or cannot be delivered to the depositary before the expiration date, or the procedure for book-entry transfer cannot be completed on a timely basis, or if time will not permit all required documents to reach the depositary before the expiration date, the shares may nevertheless be tendered, provided that all of the following conditions are satisfied: (a) the tender is made by or through an eligible guarantor institution; (b) the depositary receives by hand, mail, overnight courier, telegram or facsimile transmission, before the expiration date, a properly completed and duly executed notice of guaranteed delivery in the form Payless has provided with this document, specifying the price at which shares are being tendered, including (where required) a signature guarantee by an eligible guarantor institution in the form set forth in such notice of guaranteed delivery; and (c) the certificates for all tendered shares, in proper form for transfer, or confirmation of book-entry transfer of such shares into the depositary's account at the book-entry transfer facility, together with a properly completed and duly executed letter of transmittal, or a manually signed facsimile thereof, and any required signature guarantees, or an agent's message, or other documents required by the letter of transmittal, are received by the depositary within three NYSE trading days after the date of receipt by the depositary of the notice of guaranteed delivery. Return of Unpurchased Shares. If any tendered shares are not purchased under the tender offer or are properly withdrawn before the expiration date, or if less than all shares evidenced by a stockholder's certificates are tendered, certificates for unpurchased shares will be returned as promptly as practicable after the expiration or termination of the tender offer or the proper withdrawal of the shares, as applicable, or, in the case of shares tendered by book-entry transfer at the book-entry transfer facility, the shares will be credited to the appropriate account maintained by the tendering stockholder at the book-entry transfer facility, in each case without expense to the stockholder. Determination of Validity; Rejection of Shares; Waiver of Defects; No Obligation to Give Notice of Defects. All questions as to the number of shares to be accepted, the price to be paid for shares to be accepted and the validity, form, eligibility (including time of receipt) and acceptance for payment of any tender of shares will be determined by Payless, in its sole discretion, and its determination will be final and binding on all parties. Payless reserves the absolute right to reject any or all tenders of any shares that it determines are not in proper form or the acceptance for payment of or payment for which Payless determines may be unlawful. Payless also reserves the absolute right to waive any of the conditions of the tender offer or any defect or irregularity in any tender with respect to any particular shares or any particular stockholder and Payless's interpretation of the terms of the tender offer will be final and binding on all parties. No tender of shares will be deemed to have been properly made until all defects or irregularities have been cured by the tendering stockholder or waived by Payless. None of Payless, the depositary, the information agent, the dealer manager or any other person will be under any duty to give notification of any defects or irregularities in any tender or incur any liability for failure to give any such notification. Tendering Stockholder's Representation and Warranty; Payless' Acceptance Constitutes an Agreement. A tender of shares under any of the procedures described above will constitute the tendering stockholder's acceptance of the terms and conditions of the tender offer, as well as the tendering stockholder's representation and warranty to Payless that (1) the stockholder has a net 11 17 long position in the shares or equivalent securities at least equal to the shares tendered within the meaning of Rule 14e-4 promulgated by the Commission under the Exchange Act and (2) the tender of shares complies with Rule 14e-4. It is a violation of Rule 14e-4 for a person, directly or indirectly, to tender shares for that person's own account unless, at the time of tender and at the end of the proration period or period during which shares are accepted by lot (including any extensions thereof), the person so tendering (1) has a net long position equal to or greater than the amount tendered in (x) the subject securities or (y) securities immediately convertible into, or exchangeable or exercisable for, the subject securities and (2) will deliver or cause to be delivered the shares in accordance with the terms of the tender offer. Rule 14e-4 provides a similar restriction applicable to the tender or guarantee of a tender on behalf of another person. Payless' acceptance for payment of shares tendered under the tender offer will constitute a binding agreement between the tendering stockholder and Payless upon the terms and conditions of the tender offer. Lost or Destroyed Certificates. Stockholders whose certificate for part or all of their shares have been lost, stolen, misplaced or destroyed may contact UMB Bank, the transfer agent for Payless shares, at (800) 884-4225, for instructions as to obtaining a replacement certificate. That certificate will then be required to be submitted together with the letter of transmittal in order to receive payment for shares that are tendered and accepted for payment. A bond may be required to be posted by the stockholder to secure against the risk that the certificates may be subsequently recirculated. Stockholders are urged to contact UMB Bank immediately in order to permit timely processing of this documentation and to determine if the posting of a bond is required. CERTIFICATES FOR SHARES, TOGETHER WITH A PROPERLY COMPLETED AND DULY EXECUTED LETTER OF TRANSMITTAL OR FACSIMILE THEREOF, OR AN AGENT'S MESSAGE, AND ANY OTHER DOCUMENTS REQUIRED BY THE LETTER OF TRANSMITTAL, MUST BE DELIVERED TO THE DEPOSITARY AND NOT TO PAYLESS, THE DEALER MANAGER OR THE INFORMATION AGENT. ANY SUCH DOCUMENTS DELIVERED TO PAYLESS, THE DEALER MANAGER OR THE INFORMATION AGENT WILL NOT BE FORWARDED TO THE DEPOSITARY AND THEREFORE WILL NOT BE DEEMED TO BE PROPERLY TENDERED. 4. WITHDRAWAL RIGHTS. Except as otherwise provided in this Section 4, tenders of shares under the tender offer are irrevocable. Shares tendered under the tender offer may be withdrawn at any time before the expiration date and, unless theretofore accepted for payment by Payless under the tender offer, may also be withdrawn at any time after 12:00 midnight, New York City time, on Friday, May 5, 2000. For a withdrawal to be effective, a written, telegraphic or facsimile transmission notice of withdrawal must be timely received by the depositary at its address set forth on the back cover page of this document. Any such notice of withdrawal must specify the name of the tendering stockholder, the number of shares to be withdrawn and the name of the registered holder of such shares. If the certificates for shares to be withdrawn have been delivered or otherwise identified to the depositary, then, before the release of such certificates, the serial numbers shown on such certificates must be submitted to the depositary and the signature(s) on the notice of withdrawal must be guaranteed by an eligible guarantor institution, unless such shares have been tendered for the account of an eligible guarantor institution. If shares have been tendered under the procedure for book-entry transfer set forth in Section 3, any notice of withdrawal also must specify the name and the number of the account at the book-entry transfer facility to be credited with the withdrawn shares and must otherwise comply with such book-entry transfer facility's procedures. All questions as to the form and validity (including the time of receipt) of any notice of withdrawal will be determined by Payless, in its sole discretion, whose determination will be final and binding. None of Payless, the depositary, the information agent, the dealer manager or any other person will be under any duty to give notification of any defects or irregularities in any notice of withdrawal or incur any liability for failure to give any such notification. 12 18 Withdrawals may not be rescinded and any shares properly withdrawn will thereafter be deemed not properly tendered for purposes of the tender offer unless the withdrawn shares are properly re-tendered before the expiration date by following one of the procedures described in Section 3. If Payless extends the tender offer, is delayed in its purchase of shares or is unable to purchase shares under the tender offer for any reason, then, without prejudice to Payless' rights under the tender offer, the depositary may, subject to applicable law, retain tendered shares on behalf of Payless, and such shares may not be withdrawn except to the extent tendering stockholders are entitled to withdrawal rights as described in this Section 4. 5. PURCHASE OF SHARES AND PAYMENT OF PURCHASE PRICE. Upon the terms and subject to the conditions of the tender offer, as promptly as practicable following the expiration date, Payless (1) will determine the purchase price it will pay for shares properly tendered and not properly withdrawn before the expiration date, taking into account the number of shares so tendered and the prices specified by tendering stockholders, and (2) will accept for payment and pay for, and thereby purchase, shares properly tendered at prices at or below the purchase price and not properly withdrawn before the expiration date. For purposes of the tender offer, Payless will be deemed to have accepted for payment and therefore purchased shares that are properly tendered at or below the purchase price and not properly withdrawn, subject to the proration provisions of the tender offer, only when, as and if it gives oral or written notice to the depositary of its acceptance of the shares for payment under the tender offer. Upon the terms and subject to the conditions of the tender offer, as promptly as practicable after the expiration date, Payless will accept for payment and pay a single per share purchase price for 7,547,170 shares, subject to increase or decrease as provided in Section 14, if properly tendered and not properly withdrawn, or such lesser number of shares as are properly tendered and not properly withdrawn, at prices not in excess of $53.00 nor less than $48.00 per share. Payless will pay for shares purchased under the tender offer by depositing the aggregate purchase price for such shares with the depositary, which will act as agent for tendering stockholders for the purpose of receiving payment from Payless and transmitting payment to the tendering stockholders. In the event of proration, Payless will determine the proration factor and pay for those tendered shares accepted for payment as soon as practicable after the expiration date; however, Payless does not expect to be able to announce the final results of any proration and commence payment for shares purchased until approximately seven to ten business days after the expiration date. Certificates for all shares tendered and not purchased, including all shares tendered at prices in excess of the purchase price and shares not purchased due to proration, will be returned to the tendering stockholder, or, in the case of shares tendered by book-entry transfer, will be credited to the account maintained with the book-entry transfer facility by the participant therein who so delivered the shares, at Payless' expense as promptly as practicable after the expiration date or termination of the tender offer without expense to the tendering stockholders. UNDER NO CIRCUMSTANCES WILL INTEREST ON THE PURCHASE PRICE BE PAID BY PAYLESS REGARDLESS OF ANY DELAY IN MAKING SUCH PAYMENT. In addition, if certain events occur, Payless may not be obligated to purchase shares under the tender offer. See Section 6. Payless will pay all stock transfer taxes, if any, payable on the transfer to it of shares purchased under the tender offer. If, however, payment of the purchase price is to be made to any person other than the registered holder, or if tendered certificates are registered in the name of any person other than the person signing the letter of transmittal, the amount of all stock transfer taxes, if any (whether imposed on the registered holder or the other person), payable on account of the transfer to the person will be deducted from the purchase price unless satisfactory evidence of the payment 13 19 of the stock transfer taxes, or exemption therefrom, is submitted. See Instruction 7 of the letter of transmittal. ANY TENDERING STOCKHOLDER OR OTHER PAYEE WHO FAILS TO COMPLETE FULLY, SIGN AND RETURN TO THE DEPOSITARY THE SUBSTITUTE FORM W-9 INCLUDED WITH THE LETTER OF TRANSMITTAL MAY BE SUBJECT TO FEDERAL INCOME TAX BACKUP WITHHOLDING OF 31% OF THE GROSS PROCEEDS PAID TO THE STOCKHOLDER OR OTHER PAYEE UNDER THE TENDER OFFER. SEE SECTION 3. ALSO SEE SECTION 13 REGARDING UNITED STATES FEDERAL INCOME TAX CONSEQUENCES FOR FOREIGN STOCKHOLDERS. 6. CONDITIONS OF THE TENDER OFFER. Notwithstanding any other provision of the tender offer, Payless will not be required to accept for payment, purchase or pay for any shares tendered, and may terminate or amend the tender offer or may postpone the acceptance for payment of, or the purchase of and the payment for shares tendered, subject to Rule 13e-4(f) under the Exchange Act, if at any time on or after March 13, 2000 and before the expiration date any of the following events shall have occurred (or shall have been determined by Payless to have occurred) that, in Payless' judgment and regardless of the circumstances giving rise to the event or events (including any action or omission to act by Payless), makes it inadvisable to proceed with the tender offer or with acceptance for payment: (a) there shall have been threatened, instituted or pending any action or proceeding by any government or governmental, regulatory or administrative agency, authority or tribunal or any other person, domestic or foreign, before any court, authority, agency or tribunal that directly or indirectly (i) challenges the making of the tender offer, the acquisition of some or all of the shares under the tender offer or otherwise relates in any manner to the tender offer or (ii) in Payless' judgment, could materially and adversely affect the business, condition (financial or other), income, operations or prospects of Payless and its subsidiaries, taken as a whole, or otherwise materially impair in any way the contemplated future conduct of the business of Payless or any of its subsidiaries or materially impair the contemplated benefits of the tender offer to Payless; (b) there shall have been any action threatened, pending or taken, or approval withheld, or any statute, rule, regulation, judgment, order or injunction threatened, proposed, sought, promulgated, enacted, entered, amended, enforced or deemed to be applicable to the tender offer or Payless or any of its subsidiaries, by any court or any authority, agency or tribunal that, in Payless' judgment, would or might directly or indirectly (i) make the acceptance for payment of, or payment for, some or all of the shares illegal or otherwise restrict or prohibit completion of the tender offer, (ii) delay or restrict the ability of Payless, or render Payless unable, to accept for payment or pay for some or all of the shares, (iii) materially impair the contemplated benefits of the tender offer to Payless or (iv) materially and adversely affect the business, condition (financial or other), income, operations or prospects of Payless and its subsidiaries, taken as a whole, or otherwise materially impair in any way the contemplated future conduct of the business of Payless or any of its subsidiaries; (c) there shall have occurred (i) any general suspension of trading in, or limitation on prices for, securities on any national securities exchange or in the over-the-counter market in the United States or the European Union, (ii) the declaration of a banking moratorium or any suspension of payments in respect of banks in the United States or the European Union, (iii) the commencement of a war, armed hostilities or other international or national calamity directly or indirectly involving the United States or any of its territories, (iv) any limitation (whether or not mandatory) by any governmental, regulatory or administrative agency or authority on, or any event, or any disruption or adverse change in the financial or capital markets generally or the market for loan syndications in particular, that, in Payless' judgment, might affect, the extension of credit by banks or other lending institutions in the United States or the European Union, (v) any significant decrease in the market price of the shares or any 14 20 change in the general political, market, economic or financial conditions in the United States or abroad that could, in the judgment of Payless, have a material adverse effect on Payless' business, operations or prospects or the trading in the shares, (vi) in the case of any of the foregoing existing at the time of the commencement of the tender offer, a material acceleration or worsening thereof or (vii) any decline in either the Dow Jones Industrial Average or the Standard and Poor's Index of 500 Industrial Companies by a material amount (including, without limitation, an amount in excess of 10%) from the close of business on March 7, 2000; (d) a tender offer or exchange offer for any or all of the shares (other than this tender offer), or any merger, business combination or other similar transaction with or involving Payless or any subsidiary, shall have been proposed, announced or made by any person; (e) (i) any entity, "group" (as that term is used in Section 13(d)(3) of the Exchange Act) or person shall have acquired or proposed to acquire beneficial ownership of more than 5% of the outstanding shares (other than any such person, entity or group who has filed a Schedule 13D or Schedule 13G with the Commission on or before March 7, 2000), (ii) any such entity, group or person who has filed a Schedule 13D or Schedule 13G with the Commission on or before March 7, 2000 shall have acquired or proposed to acquire beneficial ownership of an additional 2% or more of the outstanding shares or (iii) any person, entity or group shall have filed a Notification and Report Form under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, or made a public announcement reflecting an intent to acquire Payless or any of its subsidiaries or any of their respective assets or securities other than in connection with a transaction authorized by the board of directors of Payless; (f) any change or changes shall have occurred in the business, financial condition, assets, income, operations, prospects or stock ownership of Payless or its subsidiaries that, in Payless' judgment, is or may be material and adverse to Payless or its subsidiaries; or (g) Payless determines that the completion of the tender offer and the purchase of the shares may cause the shares to be delisted from the NYSE or to be eligible for deregistration under the Exchange Act. The foregoing conditions are for the sole benefit of Payless and may be asserted by Payless regardless of the circumstances (including any action or inaction by Payless) giving rise to any such condition, and may be waived by Payless, in whole or in part, at any time and from time to time in its sole discretion. Payless' failure at any time to exercise any of the foregoing rights shall not be deemed a waiver of any such right, and each such right shall be deemed an ongoing right which may be asserted at any time and from time to time. Any determination or judgment by Payless concerning the events described above will be final and binding on all parties. 15 21 7. PRICE RANGE OF SHARES; DIVIDENDS. The shares are listed and traded on the NYSE under the trading symbol "PSS." The following table sets forth, for the fiscal quarters indicated, the intraday high and low sales prices per share on the NYSE Composite Tape, as applicable. The Company has declared no dividends between January 1, 1998 and the date of this document.
HIGH LOW ------- ------- Fiscal 1998: First Quarter........................................ $77.000 $65.125 Second Quarter....................................... 74.375 56.375 Third Quarter........................................ 57.688 37.000 Fourth Quarter....................................... 53.000 41.625 Fiscal 1999: First Quarter........................................ $59.250 $44.375 Second Quarter....................................... 59.813 48.438 Third Quarter........................................ 54.125 44.750 Fourth Quarter....................................... 47.750 40.000 Fiscal 2000: First Quarter (through March 10, 2000)............... $49.750 $38.750
On March 7, 2000, the last trading day before the date of announcement of the tender offer, the last reported sale price of the shares on the NYSE Composite Tape was $41.75. STOCKHOLDERS ARE URGED TO OBTAIN CURRENT MARKET QUOTATIONS FOR THE SHARES. Rights Agreement. On April 20, 1998, Payless entered into a Stockholder Protection Rights Agreement with UMB Bank, N.A., as Rights Agent (as amended, the "Rights Agreement"). The rights attach to all certificates representing shares of common stock outstanding at the close of business on May 21, 1998 and will attach to any shares of common stock issued by Payless, including upon the exercise of any warrants and options or upon conversion of any convertible debt securities, after May 21, 1998, and prior to the "separation time," as defined below. The rights will become exercisable and will separate from the common stock and be represented by separate certificates at the separation time, which generally will be the date 10 days after anyone acquires or commences a tender or exchange offer to acquire 15% or more of Payless' outstanding common stock (such person being referred to as an "acquiring person"). The rights will not be exercisable until such date, if any, and will expire on May 21, 2008, unless this date is extended or unless the rights are earlier exchanged or redeemed by Payless. Upon the distribution date, the rights will initially be exercisable, at a price of $250, for one one-hundredth of a share of Payless' preferred stock, although the terms of the exercise are subject to adjustment under the Rights Agreement. Under the Rights Agreement, the following are not acquiring persons: - Payless; - any of Payless' subsidiaries; - employee benefit plans of Payless or any of its subsidiaries; - any person who becomes the beneficial owner of more than 15% or more of the shares without any plan or intention to seek or affect control of Payless if such person promptly enters into an irrevocable commitment to divest (and actually divests) sufficient shares of Payless common stock so that such person ceases to be the beneficial owner of 15% or more of the Payless common stock; 16 22 - any person who becomes the beneficial owner of 15% or more of Payless common stock solely as a result of an acquisition by Payless of common stock (including as a result of this tender offer), except that such a person will be an acquiring person if such person acquires any additional shares of Payless common stock); or - certain other limited exceptions. Upon any person becoming an acquiring person, subject to the exception noted below in this paragraph, each right will entitle the holder to purchase the number of shares of common stock of Payless having a then current market value of twice the exercise price of the right. For example, at the initial exercise price of $250, upon exercise, each right would entitle its holder to receive $500 worth of common stock of Payless or other consideration, as described below. In addition, each right will entitle the holder to purchase the number of shares of common stock of the acquiring company having a current market value of twice the exercise price of the right, if, after the date upon which someone has become an acquiring person: - Payless is party to certain merger or another business combination transactions; or - Payless sells or disposes of 50% or more of its consolidated assets, operating income or cash flow. If either of the above events occur, the acquiring company shall assume all of Payless' obligations under the Rights Agreement. From and after the occurrence of the event which triggers the exercise of the rights, any rights that are or were acquired or beneficially owned by any acquiring person, any associate or any affiliate shall be void and any holder of those rights shall thereafter have no right to exercise or transfer those rights. At any time prior to the earlier of ten business days following the date upon which it has been publicly announced by Payless that someone has become an acquiring person (or such later date as the Payless Board of Directors may determine prior to such an announcement), the Payless Board of Directors may redeem all, but not less than all, of the outstanding rights at a price of $0.01 per right, subject to adjustment, payable in cash, shares of common stock of Payless or other securities of Payless. Immediately upon any redemption of the rights, the right to exercise the rights will terminate, and the only right of the holders of rights will be to receive the redemption price. At any time after a person becomes an acquiring person and prior to the time that any acquiring person becomes the beneficial owner of more than 50% of the outstanding shares of Payless common stock, Payless' Board of Directors may exchange all, but not less than all, the then outstanding rights, other than those rights owned by the acquiring person or any associate or affiliate thereof for shares of Payless common stock at an exchange ratio of one share of common stock per right. In the event that, after the rights become exercisable for shares of the Payless common stock, there is an insufficient number of shares of the Payless common stock available to permit the full exercise of the rights, Payless' Board of Directors has the ability to substitute an equivalent value in debt or equity securities or other assets (or a combination thereof). Prior to the time that any person has become an acquiring person, the Rights Agreement may be amended in any respect by the Payless Board of Directors without the consent of the holders of the rights. The foregoing description of the rights is qualified in its entirety by reference to the Stockholder Protection Rights Agreement, a copy of which has been filed as Exhibit 4 to Form 8-K filed by Payless on June 3, 1998 with the Commission. Such report and exhibit may be obtained from the Commission in the manner provided in Section 9. 17 23 8. SOURCE AND AMOUNT OF FUNDS. Assuming that the maximum 7,547,170 shares are tendered in the offer at a price between $48.00 and $53.00 per share, the aggregate purchase price will be between $362,264,160 and $400,000,010. Payless expects that its fees and expenses for the offer will be approximately $16,500,000 (including fees and expenses incurred as a result of refinancing its existing indebtedness of approximately $122 million). Payless anticipates that it will obtain all of the funds necessary to purchase shares tendered in the offer and to refinance the Company's existing indebtedness, as well as to pay related fees and expenses, by means of (1) a senior secured credit facility consisting of (a) up to $400 million under a senior secured term loan facility ("Term Facility") and (b) a $200 million senior secured revolving credit facility ("Revolving Credit Facility" and, together with the Term Facility, the "Facilities") and (2) available cash. In addition, Payless will also use funds available under the Revolving Credit Facility to provide working capital and for general and other corporate purposes. The availability of funds under the Facilities is subject to the satisfaction or waiver of certain conditions, as summarized below. While it is the Company's expectation that those conditions will be satisfied, such conditions are not all within the Company's control, and there can be no assurance that the conditions will be satisfied. The Company intends to repay amounts borrowed under the Facilities from available cash flow as payments come due under the Facilities. The Facilities are to be established pursuant to a commitment letter, dated March 10, 2000, from Goldman Sachs Credit Partners L.P. ("GSCP"), an affiliate of Goldman, Sachs & Co. (the "Commitment Letter"). Under the Commitment Letter, GSCP will act as sole lead arranger to provide Payless with structuring advice and as sole syndication agent to provide Payless with syndication advice relating to the Facilities. In addition, GSCP has committed, subject to the terms and conditions of the Commitment Letter, to provide the full $600 million of the Facilities. Payless is currently in the process of negotiating definitive documentation for the Facilities (the "Credit Agreements"). GSCP's commitments are subject, in its discretion, to certain conditions precedent, including without limitation (1) that there has not been any change in Payless' capital stock or long-term debt or any adverse change in or affecting its general affairs, management, financial position, stockholders' equity, results of operations or prospects since January 30, 1999 that GSCP, in its reasonable good faith judgment, deems material, (2) that there shall not have been any disruption or adverse change in the financial or capital markets generally, or in the market for loan syndications in particular that GSCP, in its reasonable good faith judgment, deems material, (3) the Facilities being assigned a credit rating by each of Moody's Investor Service, Inc. ("Moody's") and Standard & Poor's Rating Group ("S&P"), (4) the negotiation, execution and delivery of appropriate loan documents relating to the Facilities and (5) GSCP has not become aware of any new or inconsistent information with respect to legal or regulatory issues relevant to Payless that GSCP deems material and adverse. Payless does not have alternative financing arrangements or plans in the event that the financing contemplated by the Commitment Letter is not available. It is GSCP's intention to syndicate the Facilities to other financial institutions (the "Lenders"), which will be selected by GSCP with Payless' consent (not to be unreasonably withheld). One of the Lenders will act as collateral agent and administrative agent for the Lenders (the "Administrative Agent"). General Description of Facilities. Pursuant to the Commitment Letter, the Term Facility is expected to consist of a $400 million senior term loan maturing on the fifth anniversary of the date on which Payless pays for shares accepted in the tender offer and the funding occurs (the "Closing Date"). The Term Facility will be drawn on only one time and will be used to finance the tender offer and possibly, depending upon the resulting aggregate purchase price in the offer, to refinance a portion of Payless' existing indebtedness and to pay transaction costs. The Term Facility will be amortized in equal quarterly installments that will equal 5.0% in the first year following the Closing 18 24 Date, 12.5% in the second year, 20.0% in the third year, 27.5% in the fourth year and 35.0% in the fifth year. Pursuant to the Commitment Letter, the Revolving Credit Facility is expected to consist of a $200 million senior revolving credit facility maturing on the fifth anniversary of the Closing Date. The Revolving Credit Facility will be available beginning on the Closing Date to provide working capital and for general and other corporate purposes. Amounts available under the Revolving Credit Facility may be borrowed, repaid and reborrowed until maturity. The $200 million available under the Revolving Credit Facility will also be available for the issuance of letters of credit, which will require Payless to pay certain fees in connection therewith. Interest Rates. Amounts borrowed under the Facilities will bear interest during the period beginning on the Closing Date and ending on the six-month anniversary of the Closing Date at Payless' option as follows: - at the rate per annum equal to a 2.00% per annum margin plus the reserve adjusted Eurodollar Rate (as defined in the Commitment Letter) or - at the rate per annum equal to a 1.00% per annum margin plus the greater of (1) the Administrative Agent's prime lending rate in effect from time to time and (2) the Base Rate (as defined in the Commitment Letter) in effect from time to time plus 0.50%. If during the six-month period Payless receives a senior unsecured debt rating of at least Ba1 and BB+ from each of Moody's and S&P, respectively, in connection with the ratings required to be received on the Closing Date, the additional interest rate margin for the adjusted Eurodollar Rate and the Base Rate will be reduced to 1.75% and 0.75%, respectively. After the six-month anniversary, the margins will be subject to adjustment based on a performance pricing grid as follows:
TOTAL DEBT/EBITDA RATIO APPLICABLE MARGINS - ------------------------ ---------------------------- EURODOLLAR FROM TO RATE BASE RATE - ---- ---------- ---------- --------- >1.75 x 2.00% 1.00% 1.25 1.75 1.75% 0.75% 0.75 1.25 1.50% 0.50% <0.75 x 1.25% 0.25%
If Payless receives a senior unsecured debt rating of at least Ba1 and BB+ from each of Moody's and S&P, respectively, in connection with the ratings required to be received on the Closing Date, the margins for the adjusted Eurodollar Rate and the Base Rate will not exceed 1.75% and 0.75%, respectively. If an Event of Default (as that term will be defined in the Credit Agreements) occurs and is continuing, the applicable interest rates will be equal to the rate of interest on then applicable Base Rate loans plus 2.00% per annum. Commitment Fees. Commitment fees on the unused portion of the Revolving Credit Facility will accrue from the Closing Date at a rate per annum equal to 0.50% (0.35% if Payless receives a senior unsecured debt rating of at least Ba1 and BB+ from each of Moody's and S&P, respectively, in connection with the ratings required to be received on the Closing Date) until the six-month anniversary of the Closing Date. After the six-month anniversary, commitment fees will accrue at a rate per annum based on a performance pricing grid as follows (except that if Payless receives a senior unsecured debt rating of at least Ba1 and BB+ from each of Moody's and S&P, respectively, 19 25 in connection with the ratings required to be received on the Closing Date the fees will not exceed 0.350%):
TOTAL DEBT/EBITDA RATIO - ------------------------ FROM TO COMMITMENT FEE - ---- ---------- -------------- >1.75 x 0.500% 1.25 1.75 0.350% 0.75 1.25 0.300% <0.75 x 0.250%
Voluntary Prepayments. The Facilities may be prepaid in whole or in part without premium or penalty except that loans bearing interest with reference to the adjusted Eurodollar Rate will be prepayable only with certain associated fees unless prepaid on the last day of the related interest period. Voluntary prepayments will be applied between the Facilities in the manner in which Payless chooses; however, voluntary prepayments of the Term Facility will be applied as follows: the first 50% to the next scheduled amortization payments in the order of maturity and the second 50% on a pro rata basis to the then-remaining scheduled amortization payments. Mandatory Prepayments. Until Payless obtains a senior unsecured debt rating of at least Baa3 and BBB- from each of Moody's and S&P, respectively, Payless will be required to make prepayments on the Facilities under certain customary circumstances, including without limitation: - all net proceeds from any asset sales of more than $10 million in any fiscal year; - all net proceeds from any debt or preferred stock issuance in excess of $25 million in any fiscal year subject to certain exceptions to be agreed upon; and - all net proceeds from any issuance or condemnation events totaling more than $10 million in any fiscal year. Security Interests. Until Payless obtains a senior unsecured debt rating of at least Baa3 and BBB- from each of Moody's and S&P, respectively, the Facilities will be secured by a first priority perfected security interest in all of Payless' current and future domestic subsidiaries' capital stock and 65% of the capital stock of each of Payless' foreign subsidiaries. In addition, all of Payless' other assets and properties, including those of Payless' domestic subsidiaries, will be subject to a negative pledge. Representations, Warranties, Covenants and Events of Default. The Facilities will contain certain representations and warranties, certain affirmative covenants, certain negative covenants, certain financial covenants, certain conditions and events of default that are customarily required for similar financings. Such covenants will include restrictions and limitations on liens, consolidations and mergers, indebtedness, capital expenditures, asset dispositions, sale-leaseback transactions, limitations on stock repurchases, subsidiary indebtedness, advances and investments, acquisitions and other restrictions and limitations. Furthermore, the Company will be required to maintain compliance with certain financial covenants such as a Total Debt to EBITDA, Minimum Fixed Charge Coverage and Total Debt to Total Capitalization Ratios (as those terms will be defined in the Credit Agreements). Funding Protections. Pursuant to the Commitment Letter, there will be certain funding protections in favor of the Lenders customary for transactions of the type contemplated by the Facilities, including breakage costs, gross-ups for withholding, compensation for increased costs and compliance with capital adequacy and other regulatory restrictions. Facilities are Subject to Finalization and the Description of the Facilities is Qualified by Reference to the Commitment Letter. The terms of the Facilities have not yet been finalized and are still being negotiated. Accordingly, the foregoing description of the Facilities is preliminary and necessarily incomplete. In addition, the terms and provisions of the Facilities, to the extent described, are 20 26 subject to change if the terms of the Offer change, and may be changed after consultation with Payless in limited respects under certain circumstances. In any event, the ultimate Facilities might contain terms that are more or less onerous than those currently contemplated. Conditions to Initial Funding. Pursuant to the Commitment Letter, the initial funding under the Facilities is subject to certain conditions precedent, including but not limited to (i) the negotiation, execution and delivery of definitive documents reasonably satisfactory to GSCP, the Lenders and the Administrative Agent for the financing, (ii) the Administrative Agent, on behalf of the Lenders, shall have been granted a perfected first priority security interest in all of the assets constituting security for the lending under the Facilities, (iii) there shall have been no adverse change in our general affairs, management, financial position, stockholders' equity, results of operations or prospects since January 30, 1999 that GSCP deems material, (iv) there shall have been no disruption or adverse change in the financial or capital markets generally or in the market for loan syndications in particular that GSCP deems material, (v) all necessary governmental and third party approvals in connection with the Facilities and the transactions contemplated by the Facilities have been obtained and remain in effect (and all applicable waiting periods shall have expired without any action being taken by any applicable authority) and no applicable law or regulation shall restrain, prevent or impose materially adverse conditions on the transactions contemplated by the tender offer or the financings contemplated by the Facilities, (vi) GSCP and the Administrative Agent shall be reasonably satisfied with the structure utilized to consummate the tender offer and the refinancing of our existing indebtedness, (vii) completion of the tender offer and retirement of the acquired shares in accordance with the terms of the offer to purchase and (viii) such other conditions as are set forth in the Commitment Letter, which is filed as an exhibit to the Schedule of which this offer to purchase forms a part, and which is incorporated herein by reference. In addition, all borrowings are subject to conditions precedent that include without limitation requirements relating to prior written notice of borrowing, the accuracy of representations and warranties that we will make in the definitive loan documentation, the absence of any "default" or "potential default" (as those terms will be defined in the definitive loan documentation) and other customary conditions for financing of the sort undertaken pursuant to the Commitment Letter. The foregoing description is qualified in its entirety by reference to the Commitment Letter, a copy of which is filed as an exhibit to the Schedule TO in which this document has been filed with the Commission and is incorporated herein by reference. 9. CERTAIN INFORMATION CONCERNING PAYLESS. General. Payless, first founded in 1956 under the name "Volume Distributors," was acquired by The May Department Stores Company in 1979, was spun-off by The May Department Stores Company in 1996 and was reorganized into its current holding company structure in June 1998. Today Payless, together with its subsidiaries, is the largest family footwear retailer in the United States. Payless sold approximately 215 million pairs of shoes in fiscal 1999 and served nearly 160 million customers. As of January 29, 2000, Payless operated 4,492 Payless ShoeSource stores in 50 states, the District of Columbia, Puerto Rico, the U.S. Virgin Islands, Guam, Saipan, and Canada. Payless ShoeSource stores feature fashionable, quality footwear for men, women and children, including athletic, casual, dress, sandals, work boots and slippers. In addition, the Company operated 220 Parade stores in 16 states. Parade offers fashionable women's footwear and accessories at moderate prices. Payless has approximately 26,000 employees. Payless considers itself part of the value-priced segment of the footwear industry. In 1999, the Company's sales accounted for approximately 7.1% of the total sales of the estimated $38 billion United States footwear market. Payless stores offer a broad assortment of fashionable, quality footwear for men, women and children, including athletic, casual, dress, sandals, work boots and slippers. Shoes are constructed with leather, canvas and man-made materials. Styling is updated 21 27 regularly in an effort to remain current with proven fashion trends. In addition to shoes, Payless ShoeSource stores offer accessories, including handbags, shoe polish and hosiery. Parade stores are self-selection and feature fashionable women's dress, casual and athletic footwear priced in the $20 to $40 per pair range. SUMMARY HISTORICAL CONSOLIDATED FINANCIAL DATA AND SUMMARY PRO FORMA FINANCIAL DATA The following summary historical consolidated financial data has been derived from the accounting records of Payless. The historical information accords with the information contained in the Company's press release reporting the results of their operations for the year ended January 29, 2000. In the opinion of management of the Company, the summary historical financial information as of and for the year ended January 29, 2000, includes all adjusting entries (consisting of normal recurring adjustments) necessary to present fairly the information set forth therein. For additional historical financial information, please refer to the Company's Annual Report on Form 10-K for the fiscal year ended January 30, 1999, and to its Quarterly Report on Form 10-Q for the fiscal quarter ended October 30, 1999. The following pro forma financial information gives effect to the purchase of shares pursuant to the tender offer and the financing described in Section 8, based on the assumptions described in the footnotes below, as if such transactions had occurred on the first day of the year ended January 29, 2000. This pro forma information does not purport to be indicative of the results that would have been obtained or results that may be obtained in the future, or the financial condition that would have resulted if the purchase of the shares pursuant to the tender offer and the financing had been completed at the date indicated. PAYLESS SHOESOURCE, INC. CONSOLIDATED CONDENSED STATEMENT OF EARNINGS
PRO FORMA FOR FISCAL YEAR 1999 ACTUAL FOR FISCAL ---------------------------- YEAR 1999 $48.00 SHARE $53.00 SHARE ----------------- ------------ ------------ ($ MILLIONS, EXCEPT PER SHARE) Net Retail Sales................................. $ 2,730.1 $ 2,730.1 $ 2,730.1 Cost of Sales.................................... (1,868.3) (1,868.3) (1,868.3) --------- --------- --------- Gross Margin..................................... $ 861.8 $ 861.8 $ 861.8 Selling, General and Administrative Expenses..... 635.7 635.7 635.7 Interest (Income) expense, net................... (0.9) 36.3 38.7 --------- --------- --------- Earnings Before Income Taxes..................... $ 227.0 $ 189.8 $ 187.4 Provisions for Income Taxes...................... (90.5) (75.7) (74.8) --------- --------- --------- Net Earnings..................................... $ 136.5 $ 114.1 $ 112.6 ========= ========= ========= Diluted Earnings Per Share....................... $ 4.35 $ 4.79 $ 4.73 Basic Earnings Per Share......................... $ 4.37 $ 4.82 $ 4.76 Diluted Average Shares Outstanding............... 31.4 23.8 23.8 Basic Average Shares Outstanding................. 31.2 23.7 23.7
22 28 PAYLESS SHOESOURCE, INC. CONSOLIDATED CONDENSED BALANCE SHEET
PRO FORMA AS OF THE END OF FISCAL YEAR 1999 ACTUAL ---------------------------- 1999 $48.00 SHARE $53.00 SHARE -------- ------------ ------------ ($ MILLIONS) ASSETS Cash and Cash Equivalents............................. $ 164.2 $ 22.3 $ 23.1 Merchandise Inventories............................... $ 349.7 $ 349.7 $ 349.7 Current Deferred Income Taxes......................... 12.1 12.1 12.1 Other Current Assets.................................. 40.9 40.9 40.9 -------- -------- -------- Total Current Assets........................ $ 566.9 $ 425.0 $ 425.8 Gross Property, Plant & Equipment..................... $1,037.8 $1,037.8 $1,037.8 Accumulated Depreciation.............................. (554.9) (554.9) (554.9) -------- -------- -------- Property, Plant & Equipment, Net...................... $ 482.9 $ 482.9 $ 482.9 Deferred Income Taxes................................. $ 21.3 $ 21.3 $ 21.3 Other Assets.......................................... 4.4 10.0 10.0 -------- -------- -------- Total Assets................................ $1,075.5 $ 939.2 $ 940.0 ======== ======== ======== LIABILITIES AND SHAREOWNERS' EQUITY Current Maturities of Long-term Debt.................. $ 0.7 $ 50.7 $ 90.7 Accounts Payable...................................... 81.2 81.2 81.2 Accrued Expenses...................................... 115.9 112.7 112.7 -------- -------- -------- Total Current Liabilities............................. $ 197.8 $ 244.6 $ 284.6 Long Term Debt........................................ $ 126.1 $ 334.1 $ 334.1 Other Liabilities..................................... $ 47.8 $ 47.8 $ 47.8 Shareowners' Equity................................... $ 703.8 $ 312.7 $ 273.5 -------- -------- -------- Total Liabilities and Shareowners' Equity... $1,075.5 $ 939.2 $ 940.0 ======== ======== ========
- --------------- NOTES TO UNAUDITED PRO FORMA FINANCIAL INFORMATION (1) The pro forma financial information reflects the repurchase of 7,547,170 shares at $48.00 and $53.00 per share, as appropriate. (2) The unaudited pro forma financial information gives effect to the purchase of shares pursuant to the offer as if such transaction had occurred on January 31, 1999, the first day of the fiscal year ended January 29, 2000. (3) The funds used to purchase shares were obtained through additional borrowings and available cash held in interest bearing short-term investments. The additional borrowings will require the retirement of existing borrowings. The balance sheet and income statement give effect to these borrowing activities as if they had occurred on January 31, 1999, the first day of the fiscal year ended January 29, 2000. The pro forma data assumes interest of 9.5% on the new debt and 5% on interest bearing deposits. (4) The pro forma data assumes an incremental tax rate of 40%. (5) No earnings statement effect has been given to the one-time costs associated with the early retirement of existing borrowings. These costs are estimated to be $6.2 million pre tax ($3.7 million after tax) and will be classified as extraordinary expenses when incurred. These costs were reflected in the balance sheet and cash flows in arriving at the pro forma data. 23 29 Additional Information. Payless is subject to the information requirements of the Exchange Act, and in accordance therewith files periodic reports, proxy statements and other information relating to its business, financial condition and other matters. Payless is required to disclose in such proxy statements certain information, as of particular dates, concerning the Payless directors and executive officers, their compensation, stock options granted to them, the principal holders of the securities of Payless and any material interest of such persons in transactions with Payless. Pursuant to Rule 13e-4(c)(2) under the Exchange Act, Payless has filed with the Commission an Issuer Tender Offer Statement on Schedule TO and Amendment No. 1 to the Schedule TO which include additional information with respect to the tender offer. Such material and other information may be inspected at the public reference facilities maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549; and also should be available for inspection and copying at the following regional offices of the Commission: 7 World Trade Center, Suite 1300, New York, New York 10048; and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such material can also be obtained by mail, upon payment of the Commission's customary charges, by writing to the Public Reference Section at 450 Fifth Street, N.W., Washington, D.C. 20549. The Commission also maintains a web site on the Internet at http://www.sec.gov that contains reports, proxy and information statements and other information regarding registrants that file electronically with the Commission. These reports, statements and other information concerning Payless can also be inspected at the offices of the New York Stock Exchange, 20 Broad Street, New York, New York 10005. Payless urges you to review its Annual Report on Form 10-K for the year ended January 30, 1999 and its Quarterly Reports on Form 10-Q for the quarters ended May 1, 1999, July 31, 1999 and October 30, 1999. 10. INTEREST OF DIRECTORS AND EXECUTIVE OFFICERS; TRANSACTIONS AND ARRANGEMENTS CONCERNING SHARES. As of March 7, 2000, Payless had 29,601,406 issued and outstanding shares and held 7,322,721 shares in treasury. The 7,547,170 shares Payless is offering to purchase under the tender offer represent approximately 25.5% of the shares outstanding as of March 7, 2000. As of March 7, 2000, the Company's directors and executive officers as a group (14 persons) beneficially owned an aggregate of 455,363 shares of Payless common stock, representing approximately 1.53% of outstanding shares. The directors and executive officers of the Company are entitled to participate in the tender offer on the same basis as all other stockholders. However, they have advised the Company that they do not intend to tender any shares in the tender offer. As of March 7, 2000, the aggregate number and percentage of Payless securities that were beneficially owned by the directors and executive officers of Payless were as appears in columns two and three of the table below. No director or executive officer beneficially owned more than 1.0% of the Company's shares as of such date. Assuming Payless purchases 7,547,170 shares of common stock and that no director or executive officer tenders any shares under the tender offer (as is intended by the directors and executive officers), then after the purchase of shares under the tender offer, the directors and executive officers as a group will beneficially own approximately 2.04% of the outstanding common stock. None of Payless' directors or executive officers will beneficially own more than 1.0% of the Company's shares after the tender offer. The percentage 24 30 beneficial ownership of each director and officer will be approximately as appears in column four of the table below.
PERCENTAGE OWNERSHIP AFTER TENDER OFFER SHARES OF PERCENTAGE (ASSUMING PAYLESS PAYLESS OWNERSHIP OF PURCHASES 7,547,170 COMMON STOCK SHARES SHARES AND NO DIRECTOR OR BENEFICIALLY OUTSTANDING AS EXECUTIVE OFFICER DIRECTORS AND OFFICERS(1) OWNED(2)(3) OF MARCH 7, 2000 TENDERS) - ------------------------- ------------ ---------------- ------------------------- Steven J. Douglass.................... 211,124 0.71% 0.95% (Chairman of the Board & Chief Executive Officer) Ken C. Hicks.......................... 17,706 *** *** (President and Director) Duane L. Cantrell..................... 49,543 0.17% 0.22% (Executive Vice President -- Operations) John N. Haugh......................... 2,800 *** *** (Senior Vice President -- Marketing) Jed L. Norden......................... 46,091(4) 0.16% 0.21% (Senior Vice President -- Human Resources) Ullrich E. Porzig..................... 37,432 0.13% 0.17% (Senior Vice President -- Chief Financial Officer and Treasurer) William J. Rainey..................... 29,641(5) 0.10% 0.13% (Senior Vice President -- General Counsel and Secretary) Gary M. Stone......................... 20,861 *** *** (Senior Vice President -- Corporate Development) Daniel Boggan, Jr. ................... 0(6) *** *** (Director) Howard R. Fricke...................... 7,070(6)(7) *** *** (Director) Thomas A. Hays........................ 24,575(6)(8) *** 0.11% (Director) Mylle B. Mangum....................... 100 *** *** (Director) Michael E. Murphy..................... 5,254 *** *** (Director) Robert L. Stark....................... 3,166 *** *** (Director)
- --------------- (1) The business address of each of the directors and executive officers of Payless is as follows: Payless ShoeSource, Inc., 3231 South East Sixth Avenue, Topeka, Kansas 66607-2207. (2) Shares shown as beneficially owned include shares subject to options which are presently exercisable or which will become exercisable on or before May 6, 2000, as follows: Steven J. Douglass -- 151,000 shares; Duane L. Cantrell -- 30,813 shares; Jed L. Norden -- 26,250 shares; Ullrich E. Porzig -- 18,750 shares; William J. Rainey -- 18,750 shares; and Gary M. Store -- 11,875 shares. (3) The Payless ShoeSource, Inc. Profit Sharing Plan provides for an investment fund which is invested in shares of Payless common stock. Shares shown as beneficially owned by the persons referred to in the table include any shares allocated to their accounts under this plan. (4) Includes 464 shares held by Mr. Norden's children, of which he disclaims beneficial ownership. 25 31 (5) Includes 4,382 shares held by a revocable trust. (6) Does not include units credited to non-employee directors' accounts under the Deferred Compensation Plan for Non-Management Directors. As of March 1, 2000, the following directors had the following units credited to their account under the Plan: Mr. Boggan -- 2,557 units; Mr. Fricke -- 1,184 units; Mr. Hays -- 1,184 units; Ms. Mangum -- 2,466 units; and Mr. Stark -- 1,184 units. At the end of the deferred period, the units will be paid out in an equivalent number of shares of Payless common stock. (7) Includes 4,000 shares owned by Mr. Fricke's spouse. (8) Includes 21,505 shares held by a limited partnership of which Mr. Hays is a general and limited partner. Mr. Hays disclaims beneficial ownership of these shares except to the extent of his pecuniary interest therein. *** Less than 0.10% ownership. Based on Payless' records and information provided to Payless by its directors, executive officers, associates and subsidiaries, neither Payless, nor any associate or subsidiary of Payless nor, to the best of Payless' knowledge, any directors or executive officers of Payless or any associates or subsidiaries thereof, has effected any transactions in Payless shares during the 60 days before the date hereof, except as stated below. STOCK REPURCHASES (EFFECTED BY PAYLESS IN OPEN MARKET TRANSACTIONS ON THE NEW YORK STOCK EXCHANGE THROUGH A REGISTERED BROKER-DEALER)
DATE NUMBER OF SHARES SHARE PRICE($) TRANSACTION VALUE($) ---- ---------------- -------------- -------------------- January 10, 2000........................ 17,896 44.700 799,956.57 January 11, 2000........................ 17,666 44.284 799,990.68 January 12, 2000........................ 18,000 44.338 798,089.40 January 13, 2000........................ 18,101 44.192 799,913.96 January 14, 2000........................ 17,809 44.914 799,873.43 January 18, 2000........................ 18,693 42.796 799,978.15 January 19, 2000........................ 19,171 41.726 799,925.31 January 20, 2000........................ 19,142 41.792 799,986.29 January 21, 2000........................ 18,986 42.136 799,984.60
OPTIONS EXERCISED(++)
NUMBER OF EXERCISE OPTION DATE SHARES PRICE($) PRICE($) ---- --------- -------------- ------------ January 11, 2000..................................... 75 44.875 29.250 January 21, 2000..................................... 75 41.375 29.250 February 18, 2000.................................... 548 39.687 27.027 February 18, 2000.................................... 375 39.687 29.250
- --------------- ++ By persons other than Payless directors or executive officers. No directors or executive officers of Payless exercised any options in Payless securities in the 60 days prior to the date hereof. Except as otherwise described herein, neither Payless nor, to the best of Payless' knowledge, any of its affiliates, directors or executive officers, is a party to any agreement, arrangement or understanding with any other person relating, directly or indirectly, to the tender offer or with respect to any securities of Payless, including, but not limited to, any agreement, arrangement or understanding concerning the transfer or the voting of the securities of Payless, joint ventures, loan or 26 32 option arrangements, puts or calls, guarantees of loans, guarantees against loss or the giving or withholding of proxies, consents or authorizations. 11. EFFECTS OF THE TENDER OFFER ON THE MARKET FOR SHARES; REGISTRATION UNDER THE EXCHANGE ACT. The purchase by Payless of shares under the tender offer will reduce the number of shares that might otherwise be traded publicly and may reduce the number of stockholders. Nonetheless, Payless anticipates that there will be a sufficient number of shares outstanding and publicly traded following completion of the tender offer to ensure a continued trading market for the shares. Based upon published guidelines of the NYSE, Payless does not believe that its purchase of shares under the tender offer will cause the remaining outstanding shares of Payless common stock to be delisted from the NYSE. The shares are now "margin securities" under the rules of the Federal Reserve Board. This has the effect, among other things, of allowing brokers to extend credit to their customers using such shares as collateral. Payless believes that, following the purchase of shares under the tender offer, the shares will continue to be "margin securities" for purposes of the Federal Reserve Board's margin rules and regulations. The shares are registered under the Exchange Act, which requires, among other things, that Payless furnish certain information to its stockholders and the Commission and comply with the Commission's proxy rules in connection with meetings of the Payless stockholders. Payless believes that its purchase of shares under the tender offer will not result in the shares becoming eligible for deregistration under the Exchange Act. 12. LEGAL MATTERS; REGULATORY APPROVALS. Except as described above, Payless is not aware of any license or regulatory permit that appears material to its business that might be adversely affected by its acquisition of shares as contemplated by the tender offer or of any approval or other action by any government or governmental, administrative or regulatory authority or agency, domestic, foreign or supranational, that would be required for the acquisition or ownership of shares by Payless as contemplated by the tender offer. Should any such approval or other action be required, Payless presently contemplates that it will seek that approval or other action. Payless is unable to predict whether it will be required to delay the acceptance for payment of or payment for shares tendered under the tender offer pending the outcome of any such matter. There can be no assurance that any such approval or other action, if needed, would be obtained or would be obtained without substantial cost or conditions or that the failure to obtain the approval or other action might not result in adverse consequences to its business and financial condition. The obligations of Payless under the tender offer to accept for payment and pay for shares is subject to conditions. See Section 6. 13. UNITED STATES FEDERAL INCOME TAX CONSEQUENCES. The following summary describes the material United States federal income tax consequences relating to the tender offer. This summary is based upon the Internal Revenue Code of 1986, as amended (the "Code"), Treasury regulations promulgated thereunder, administrative pronouncements and judicial decisions, all as in effect as of the date hereof and all of which are subject to change, possibly with retroactive effect. This summary addresses only shares that are held as capital assets within the meaning of Section 1221 of the Code and does not address all of the tax consequences that may be relevant to stockholders in light of their particular circumstances or to certain types of stockholders subject to special treatment under the Code, including, without limitation, certain financial institutions, dealers in securities or commodities, traders in securities who elect to apply a mark-to-market method of accounting, insurance companies, tax-exempt organizations, persons who hold shares as a position in a "straddle" or as a part of a "hedging," "conversion" or "constructive sale" transaction for United States federal income tax purposes or 27 33 persons who received their shares through the exercise of employee stock options or otherwise as compensation. In addition, except as otherwise specifically noted, this discussion applies only to "United States holders" (as defined below). This summary also does not address the state, local or foreign tax consequences of participating in the tender offer. For purposes of this discussion, a "United States holder" means: - a citizen or resident of the United States; - a corporation or other entity taxable as a corporation created or organized in the United States or under the laws of the United States or of any political subdivision thereof; - an estate, the income of which is includible in gross income for United States federal income tax purposes regardless of its source; or - a trust whose administration is subject to the primary supervision of a United States court and which has one or more United States persons who have the authority to control all of its substantial decisions. If a partnership holds shares, the tax treatment of a partner will generally depend upon the status of the partner and upon the activities of the partnership and the "Section 302 test" (as defined below) will apply at the partnership level. Partners of partnerships holding shares should consult their tax advisors. Holders of shares who are not United States holders should consult their tax advisors regarding the United States federal income tax consequences and any applicable foreign tax consequences of the tender offer and should also see Section 3 for a discussion of the applicable United States withholding rules and the potential for obtaining a refund of all or a portion of any tax withheld. STOCKHOLDERS ARE URGED TO CONSULT THEIR TAX ADVISOR TO DETERMINE THE PARTICULAR TAX CONSEQUENCES TO THEM OF PARTICIPATING OR NOT PARTICIPATING IN THE TENDER OFFER. Characterization of the Purchase. The purchase of a United States holder's shares by Payless under the tender offer will be a taxable transaction for United States federal income tax purposes. As a consequence of the purchase, a United States holder will, depending on the United States holder's particular circumstances, be treated either as having sold the United States holder's shares or as having received a distribution in respect of stock from Payless. Under Section 302 of the Code, a United States holder whose shares are purchased by Payless under the tender offer will be treated as having sold its shares, and thus will recognize capital gain or loss if the purchase: - results in a "complete termination" of the United States holder's equity interest in Payless; - results in a "substantially disproportionate" redemption with respect to the United States holder; or - is "not essentially equivalent to a dividend" with respect to the United States holder. Each of these tests, referred to as the "Section 302 tests," is explained in more detail below. If a United States holder satisfies any of the Section 302 tests explained below, the United States holder will be treated as if it sold its shares to Payless and will recognize capital gain or loss equal to the difference between the amount of cash received under the tender offer and the United States holder's adjusted tax basis in the shares surrendered in exchange therefor. This gain or loss will be long-term capital gain or loss if the United States holder's holding period for the shares that were sold exceeds one year as of the date of purchase by Payless under the tender offer. Specified limitations apply to the deductibility of capital losses by United States holders. Gain or loss must be determined separately for each block of shares (shares acquired at the same cost in a single transaction) that is purchased by Payless from a United States holder under the tender offer. A United States holder may be able to designate, generally through its broker, which blocks of shares 28 34 it wishes to tender under the tender offer if less than all of its shares are tendered under the tender offer, and the order in which different blocks will be purchased by Payless in the event of proration under the tender offer. United States holders should consult their tax advisors concerning the mechanics and desirability of that designation. If a United States holder does not satisfy any of the Section 302 tests explained below, the purchase of a United States holder's shares by Payless under the tender offer will not be treated as a sale or exchange under Section 302 of the Code with respect to the United States holder. Instead, the entire amount received by a United States holder with respect to the purchase of its shares by Payless under the tender offer will be treated as a dividend distribution to the United States holder with respect to its shares under Section 301 of the Code, taxable at ordinary income tax rates, to the extent of the United States holder's share of the current and accumulated earnings and profits (within the meaning of the Code) of Payless. To the extent the amount exceeds the United States holder's share of the current and accumulated earnings and profits of Payless, the excess first will be treated as a tax-free return of capital to the extent of the United States holder's adjusted tax basis in its shares and any remainder will be treated as capital gain (which may be long-term capital gain as described above). To the extent that a purchase of a United States holder's shares by Payless under the tender offer is treated as the receipt by the United States holder of a dividend, the United States holder's adjusted tax basis in the purchased shares will be added to any shares retained by the United States holder. Constructive Ownership of Stock and Other Issues. In applying each of the Section 302 tests explained below, United States holders must take into account not only shares that they actually own but also shares they are treated as owning under the constructive ownership rules of Section 318 of the Code. Under the constructive ownership rules, a United States holder is treated as owning any shares that are owned (actually and in some cases constructively) by certain related individuals and entities as well as shares that the United States holder has the right to acquire by exercise of an option or by conversion or exchange of a security. Due to the factual nature of the Section 302 tests explained below, United States holders should consult their tax advisors to determine whether the purchase of their shares under the tender offer qualifies for sale treatment in their particular circumstances. Payless cannot predict whether or the extent to which the tender offer will be oversubscribed. If the tender offer is oversubscribed, proration of tenders under the tender offer will cause Payless to accept fewer shares than are tendered. Therefore, no assurance can be given that Payless will purchase a sufficient number of a United States holder's shares under the tender offer to ensure that the United States holder receives sale treatment, rather than dividend treatment, for United States federal income tax purposes under the rules discussed below. Section 302 Tests. One of the following tests must be satisfied in order for the purchase of shares by Payless under the tender offer to be treated as a sale or exchange for federal income tax purposes: - Complete Termination Test. The purchase of a United States holder's shares by Payless under the tender offer will result in a "complete termination" of the United States holder's equity interest in Payless if all of the shares that are actually owned by the United States holder are sold under the tender offer and all of the shares that are constructively owned by the United States holder, if any, are sold under the tender offer or, with respect to shares owned by certain related individuals, the United States holder effectively waives, in accordance with Section 302(c) of the Code, attribution of shares which otherwise would be considered as constructively owned by the United States holder. United States holders wishing to satisfy the "complete termination" test through waiver of the constructive ownership rules should consult their tax advisors. - Substantially Disproportionate Test. The purchase of a United States holder's shares by Payless under the tender offer will result in a "substantially disproportionate" redemption 29 35 with respect to the United States holder if, among other things, the percentage of the then outstanding shares actually and constructively owned by the United States holder immediately after the purchase is less than 80% of the percentage of the shares actually and constructively owned by the United States holder immediately before the purchase (treating as outstanding all shares purchased under the tender offer). - Not Essentially Equivalent to a Dividend Test. The purchase of a United States holder's shares by Payless under the tender offer will be treated as "not essentially equivalent to a dividend" if the reduction in the United States holder's proportionate interest in Payless as a result of the purchase constitutes a "meaningful reduction" given the United States holder's particular circumstances. Whether the receipt of cash by a stockholder who sells shares under the tender offer will be "not essentially equivalent to a dividend" will depend upon the stockholder's particular facts and circumstances. The IRS has indicated in a published revenue ruling that even a small reduction in the percentage interest of a stockholder whose relative stock interest in a publicly held corporation is minimal (for example, an interest of less than 1%) and who exercises no control over corporate affairs should constitute a "meaningful reduction." United States holders should consult their tax advisors as to the application of this test in their particular circumstances. Corporate Stockholder Dividend Treatment. In the case of a corporate United States holder, to the extent that any amounts received under the tender offer are treated as a dividend, such holder may be eligible for the dividends-received deduction. The dividends-received deduction is subject to certain limitations. In addition, any amount received by a corporate United States holder pursuant to the tender offer that is treated as a dividend may constitute an "extraordinary dividend" under Section 1059 of the Code. Corporate United States holders should consult their own tax advisors as to the application of Section 1059 of the Code to the tender offer, and to the tax consequences of dividend treatment in their particular circumstances. Foreign Stockholders. Generally, the depositary will withhold United States federal income tax at a rate of 30% from the gross proceeds paid under the tender offer to a foreign stockholder (as defined in Section 3) or his agent, unless the depositary determines that an exemption from, or a reduced rate of, withholding tax is available under a tax treaty or that an exemption from withholding otherwise applies. See Section 3 for a discussion of the applicable United States withholding rules and the potential for a foreign stockholder being subject to reduced withholding and for obtaining a refund of all or a portion of any tax withheld. Stockholders Who do Not Receive Cash Under the Tender Offer. Stockholders whose shares are not purchased by Payless under the tender offer will not incur any tax liability as a result of the completion of the tender offer. Backup Withholding. See Section 3 with respect to the application of United States federal backup withholding tax. THE DISCUSSION SET FORTH ABOVE IS INCLUDED FOR GENERAL INFORMATION ONLY. STOCKHOLDERS ARE URGED TO CONSULT THEIR TAX ADVISOR TO DETERMINE THE PARTICULAR TAX CONSEQUENCES TO THEM OF THE TENDER OFFER, INCLUDING THE APPLICABILITY AND EFFECT OF STATE, LOCAL AND FOREIGN TAX LAWS. 14. EXTENSION OF THE TENDER OFFER; TERMINATION; AMENDMENT. Payless expressly reserves the right, in its sole discretion, at any time and from time to time, and regardless of whether or not any of the events set forth in Section 6 shall have occurred or shall be deemed by Payless to have occurred, to extend the period of time during which the tender offer is open and thereby delay acceptance for payment of, and payment for, any shares by giving oral or written notice of such extension to the depositary and making a public announcement of such extension. Payless also expressly reserves the right, in its sole discretion, to terminate the tender offer and not accept for payment or pay for any shares not theretofore accepted for payment or paid 30 36 for or, subject to applicable law, to postpone payment for shares upon the occurrence of any of the conditions specified in Section 6 hereof by giving oral or written notice of such termination or postponement to the depositary and making a public announcement of such termination or postponement. Payless' reservation of the right to delay payment for shares which it has accepted for payment is limited by Rule 13e-4(f)(5) promulgated under the Exchange Act, which requires that Payless must pay the consideration offered or return the shares tendered promptly after termination or withdrawal of a tender offer. Subject to compliance with applicable law, Payless further reserves the right, in its sole discretion, and regardless of whether any of the events set forth in Section 6 shall have occurred or shall be deemed by Payless to have occurred, to amend the tender offer in any respect, including, without limitation, by decreasing or increasing the consideration offered in the tender offer to holders of shares or by decreasing or increasing the number of shares being sought in the tender offer. Amendments to the tender offer may be made at any time and from time to time effected by public announcement, such announcement, in the case of an extension, to be issued no later than 9:00 a.m., New York City time, on the next business day after the last previously scheduled or announced expiration date. Any public announcement made under the tender offer will be disseminated promptly to stockholders in a manner reasonably designed to inform stockholders of such change. Without limiting the manner in which Payless may choose to make a public announcement, except as required by applicable law, Payless shall have no obligation to publish, advertise or otherwise communicate any such public announcement other than by making a release through Business Wire. If Payless materially changes the terms of the tender offer or the information concerning the tender offer, Payless will extend the tender offer to the extent required by Rules 13e-4(d)(2), 13e-4(e)(2) and 13e-4(f)(1) promulgated under the Exchange Act. These rules and certain related releases and interpretations of the Commission provide that the minimum period during which a tender offer must remain open following material changes in the terms of the tender offer or information concerning the tender offer (other than a change in price or a change in percentage of securities sought) will depend on the facts and circumstances, including the relative materiality of such terms or information. If (1) Payless increases or decreases the price to be paid for shares or increases or decreases the number of shares being sought in the tender offer and, if an increase in the number of shares being sought, such increase exceeds 2% of the outstanding shares and (2) the tender offer is scheduled to expire at any time earlier than the expiration of a period ending on the tenth business day from, and including, the date that such notice of an increase or decrease is first published, sent or given to security holders in the manner specified in this Section 14, the tender offer will be extended until the expiration of such period of ten business days. 15. FEES AND EXPENSES. Payless has retained Goldman, Sachs & Co. to act as its financial advisor, as well as the dealer manager, in connection with the tender offer. Goldman, Sachs & Co. will receive reasonable and customary compensation. Payless also has agreed to reimburse Goldman, Sachs & Co. for reasonable out-of-pocket expenses incurred in connection with the tender offer, including reasonable fees and expenses of counsel, and to indemnify Goldman, Sachs & Co. against certain liabilities in connection with the tender offer, including liabilities under the federal securities laws. Goldman, Sachs & Co. has rendered various investment banking and other services to Payless in the past and may continue to render such services, for which they have received and may continue to receive customary compensation from Payless. In the ordinary course of its trading and brokerage activities, Goldman, Sachs & Co. and its affiliates may hold positions, for their own accounts or for those of their customers, in securities of Payless. Payless has retained D.F. King & Co., Inc. to act as information agent and EquiServe to act as depositary in connection with the tender offer. The information agent may contact holders of shares by mail, telephone, telegraph and in person and may request brokers, dealers, commercial banks, trust companies and other nominee stockholders to forward materials relating to the tender offer to 31 37 beneficial owners. The information agent and the depositary will each receive reasonable and customary compensation for their respective services, will be reimbursed by Payless for specified reasonable out-of-pocket expenses and will be indemnified against certain liabilities in connection with the tender offer, including certain liabilities under the federal securities laws. No fees or commissions will be payable by Payless to brokers, dealers, commercial banks or trust companies (other than fees to the dealer manager and the information agent as described above) for soliciting tenders of shares under the tender offer. Stockholders holding shares through brokers or banks are urged to consult the brokers or banks to determine whether transaction costs are applicable if stockholders tender shares through such brokers or banks and not directly to the depositary. Payless, however, upon request, will reimburse brokers, dealers, commercial banks and trust companies for customary mailing and handling expenses incurred by them in forwarding the tender offer and related materials to the beneficial owners of shares held by them as a nominee or in a fiduciary capacity. No broker, dealer, commercial bank or trust company has been authorized to act as the agent of Payless, the dealer manager, the information agent or the depositary for purposes of the tender offer. Payless will pay or cause to be paid all stock transfer taxes, if any, on its purchase of shares except as otherwise provided in this document and Instruction 7 in the related Letter of Transmittal. 16. MISCELLANEOUS. Payless is not aware of any jurisdiction where the making of the tender offer is not in compliance with applicable law. If Payless becomes aware of any jurisdiction where the making of the tender offer or the acceptance of shares pursuant thereto is not in compliance with applicable law, Payless will make a good faith effort to comply with the applicable law. If, after such good faith effort, Payless cannot comply with the applicable law, the tender offer will not be made to (nor will tenders be accepted from or on behalf of) the holders of shares in such jurisdiction. In any jurisdiction where the securities, blue sky or other laws require the tender offer to be made by a licensed broker or dealer, the tender offer shall be deemed to be made on behalf of Payless by the dealer manager or one or more registered brokers or dealers licensed under the laws of that jurisdiction. Pursuant to Rule 13e-4(c)(2) under the Exchange Act, Payless has filed with the Commission an Issuer Tender Offer Statement on Schedule TO and Amendment No. 1 to the Schedule TO which contain additional information with respect to the tender offer. The Schedule TO and Amendment No. 1 thereto, including the exhibits and any amendments and supplements thereto, may be examined, and copies may be obtained, at the same places and in the same manner as is set forth in Section 9 with respect to information concerning Payless. PAYLESS HAS NOT AUTHORIZED ANY PERSON TO MAKE ANY RECOMMENDATION ON BEHALF OF PAYLESS AS TO WHETHER YOU SHOULD TENDER OR REFRAIN FROM TENDERING YOUR SHARES IN THE TENDER OFFER. PAYLESS HAS NOT AUTHORIZED ANY PERSON TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION IN CONNECTION WITH THE TENDER OFFER OTHER THAN THOSE CONTAINED IN THIS DOCUMENT OR IN THE RELATED LETTER OF TRANSMITTAL. IF GIVEN OR MADE, ANY RECOMMENDATION OR ANY SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY PAYLESS OR THE DEALER MANAGER. March 13, 2000 32 38 The letter of transmittal and certificates for shares and any other required documents should be sent or delivered by each stockholder or such stockholder's broker, dealer, commercial bank, trust company or nominee to the depositary at one of its addresses set forth below. The depositary for the tender offer is: EQUISERVE By hand delivery: By overnight delivery or By Mail: express mail: EquiServe Securities Transfer & Reporting EquiServe Attn: Corporate Actions Services, Inc. Attn: Corporate Actions P.O. Box 9573 c/o EquiServe 40 Campanelli Drive Boston, MA 02205-9573 100 Williams Street, Galleria Braintree, MA 02184 New York, NY 10038
Any questions or requests for assistance may be directed to the information agent or the dealer manager at their respective telephone numbers and addresses set forth below. Requests for additional copies of the offer to purchase, the related letter of transmittal or the notice of guaranteed delivery may be directed to the information agent at the telephone number and address set forth below. Stockholders may also contact their broker, dealer, commercial bank, trust company or nominee for assistance concerning the tender offer. To confirm delivery of shares, stockholders are directed to contact the depositary. The information agent for the tender offer is: D.F. KING & CO., INC. 77 WATER STREET, 20TH FLOOR NEW YORK, NEW YORK 10005 TOLL FREE: (800) 848-3416 BANKS AND BROKERAGE FIRMS PLEASE CALL: (212) 269-5550 The dealer manager for the tender offer is: GOLDMAN, SACHS & CO. 85 BROAD STREET NEW YORK, NEW YORK 10004 (212) 902-1000 (CALL COLLECT) (800) 323-5678 (CALL TOLL FREE) EX-99.A.1.B 3 LETTER OF TRANSMITTAL 1 LETTER OF TRANSMITTAL TO ACCOMPANY SHARES OF COMMON STOCK, PAR VALUE $0.01 PER SHARE (INCLUDING THE ASSOCIATED PREFERRED STOCK PURCHASE RIGHTS) OF PAYLESS SHOESOURCE TENDERED UNDER THE OFFER TO PURCHASE, DATED MARCH 13, 2000 THE TENDER OFFER, PRORATION PERIOD AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON MONDAY, APRIL 10, 2000, UNLESS THE TENDER OFFER IS EXTENDED. The Depositary for the tender offer is: EQUISERVE By Mail: By Hand Delivery: By Overnight Delivery or Express Mail: EquiServe Securities Transfer & Attn: Corporate Actions Reporting Services, Inc. EquiServe P.O. Box 9573 c/o EquiServe Attn: Corporate Actions Boston, MA 02205-9573 100 Williams Street, Galleria 40 Campanelli Drive New York, NY 10038 Braintree, MA 02184
The Information Agent for the offer is: D.F. KING & CO., INC. All questions regarding the tender offer should be directed to D.F. King & Co., Inc. at (800) 848-3416. ------------------------ THIS LETTER OF TRANSMITTAL, INCLUDING THE ACCOMPANYING INSTRUCTIONS, SHOULD BE READ CAREFULLY BEFORE YOU COMPLETE THIS LETTER OF TRANSMITTAL. DELIVERY OF THIS LETTER OF TRANSMITTAL TO AN ADDRESS OTHER THAN ONE OF THOSE SHOWN ABOVE DOES NOT CONSTITUTE A VALID DELIVERY. DELIVERIES TO PAYLESS SHOESOURCE, INC., GOLDMAN, SACHS & CO., THE DEALER MANAGER OF THE TENDER OFFER, OR D.F. KING & CO., INC., THE INFORMATION AGENT OF THE TENDER OFFER, WILL NOT BE FORWARDED TO THE DEPOSITARY AND THEREFORE WILL NOT CONSTITUTE VALID DELIVERY TO THE DEPOSITARY. DELIVERIES TO THE BOOK-ENTRY TRANSFER FACILITY WILL NOT CONSTITUTE VALID DELIVERY TO THE DEPOSITARY. - -------------------------------------------------------------------------------- DESCRIPTION OF SHARES TENDERED (SEE INSTRUCTIONS 3 AND 4)
- --------------------------------------------------------------------------------------------------------------------------------- CERTIFICATE(S) TENDERED NAME(S) AND ADDRESS(ES) OF REGISTERED HOLDER(S) (ATTACH ADDITIONAL SIGNED LIST, IF NECESSARY) (PLEASE FILL IN EXACTLY AS APPEARS ON CERTIFICATE(S)) - --------------------------------------------------------------------------------------------------------------------------------- NUMBER OF SHARES NUMBER CERTIFICATE REPRESENTED BY OF SHARES NUMBER(S)* CERTIFICATE(S)* TENDERED** - --------------------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------------------- Total Shares Tendered* - ---------------------------------------------------------------------------------------------------------------------------------
Indicate in this box the order (by certificate number) in which shares are to be purchased in event of proration (attach additional signed list if necessary):*** See Instruction 9. 1st: ; 2nd: ; 3rd: ; 4th: ; 5th: ; 6th: - -------------------------------------------------------------------------------- * Need not be completed if shares are delivered by book-entry transfer. ** If you desire to tender fewer than all shares evidenced by any certificates listed above, please indicate in this column the number of shares you wish to tender. Otherwise, all shares evidenced by such certificates will be deemed to have been tendered. See Instruction 4. *** If you do not designate an order, in the event less than all shares tendered are purchased due to proration, shares will be selected for purchase by the depositary. See Instruction 9. - -------------------------------------------------------------------------------- [ ] CHECK HERE IF ANY CERTIFICATES REPRESENTING SHARES TENDERED HEREBY HAVE BEEN LOST, STOLEN, DESTROYED OR MUTILATED. YOU MUST COMPLETE AN AFFIDAVIT OF LOSS AND RETURN IT WITH YOUR LETTER OF TRANSMITTAL. A BOND MAY BE REQUIRED TO BE POSTED BY THE STOCKHOLDER TO SECURE AGAINST THE RISK THAT THE CERTIFICATES MAY BE SUBSEQUENTLY RECIRCULATED. PLEASE CALL UMB BANK, AS THE TRANSFER AGENT FOR THE SHARES, AT (800) 884-4225, TO OBTAIN AN AFFIDAVIT OF LOSS AND FOR FURTHER INSTRUCTIONS AND AS TO THE DETERMINATION OF THE REQUIREMENT FOR POSTING OF A BOND. SEE INSTRUCTION 15. 2 PAYLESS SHOESOURCE, INC. STOCK OWNERSHIP PLAN (SEE INSTRUCTION 16) - -------------------------------------------------------------------------------- THE UNDERSIGNED IS TENDERING SHARES THAT ARE HELD IN HIS OR HER NAME PURSUANT TO THE PAYLESS SHOESOURCE, INC. STOCK OWNERSHIP PLAN (THE "STOCK OWNERSHIP PLAN"):* [ ] YES [ ] NO
IF YOU SAID "YES," INDICATE WHETHER YOU ARE TENDERING ALL OR A PARTIAL AMOUNT OF SUCH SHARES. [ ] ALL (INCLUDES ANY FRACTIONAL SHARES) [ ] PARTIAL TENDER (INDICATE PERCENTAGE OF YOUR SHARES HELD UNDER THE STOCK OWNERSHIP PLAN THAT YOU WISH TO TENDER -- ONLY WHOLE SHARES MAY BE TENDERED): [ ] 10% [ ] 50% [ ] 90% [ ] 20% [ ] 60% [ ] 100% [ ] 30% [ ] 70% [ ] 40% [ ] 80%
- --------------- * You must provide the letter of transmittal to EquiServe no later than 5:00 p.m., New York City time, on Friday, April 7, 2000 if you want to tender shares owned under the Stock Ownership Plan. If you do not meet that deadline, your shares owned pursuant to the Stock Ownership Plan will not be tendered. This letter of transmittal is to be used only if (1) certificates for shares are to be forwarded with it, or such certificates will be delivered under a notice of guaranteed delivery previously sent to the depositary or (2) a tender of shares is to be made by book-entry transfer to the account maintained by the depositary at The Depository Trust Company, referred to as the "book-entry transfer facility," under Section 3 of the offer to purchase. Stockholders who desire to tender shares under the tender offer and who cannot deliver the certificates for their shares or who are unable to comply with the procedures for book-entry transfer before the "expiration date" (as defined in Section 1 of the offer to purchase), and who cannot deliver all other documents required by this letter of transmittal to the depositary before the expiration date may tender their shares according to the guaranteed delivery procedures set forth in Section 3 of the offer to purchase. See Instruction 2. Delivery of documents to the book-entry transfer facility does not constitute delivery to the depositary. [ ] CHECK HERE IF TENDERED SHARES ARE BEING DELIVERED BY BOOK-ENTRY TRANSFER TO AN ACCOUNT MAINTAINED BY THE DEPOSITARY WITH THE BOOK-ENTRY TRANSFER FACILITY AND COMPLETE THE FOLLOWING: Name of tendering institution: --------------------------------------------- Account number: -------------------------------------------------- Transaction code number: ---------------------------------------- [ ] CHECK HERE IF CERTIFICATES FOR TENDERED SHARES ARE BEING DELIVERED UNDER A NOTICE OF GUARANTEED DELIVERY PREVIOUSLY SENT TO THE DEPOSITARY AND COMPLETE THE FOLLOWING: Name(s) of registered holder(s): ------------------------------ Date of execution of notice of guaranteed delivery: ---------- Name of institution which guaranteed delivery: --------------- Account number: --------------------------------------------- 3 ODD LOTS (SEE INSTRUCTION 8) To be completed ONLY if shares are being tendered by or on behalf of a person owning beneficially or of record an aggregate of fewer than 100 shares. On the date hereof, the undersigned either (check one box): [ ] owned beneficially or of record an aggregate of fewer than 100 shares, and is tendering all of such shares, or [ ] is a broker, dealer, commercial bank, trust company or other nominee which: (a) is tendering, for the beneficial owners thereof, shares with respect to which it is the record owner, and (b) believes, based upon representations made to it by such beneficial owners, that each such person was the beneficial owner of an aggregate of fewer than 100 shares and is tendering all of such shares. In addition, the undersigned is tendering shares either (check one box): [ ] at the purchase price, as the same shall be determined by Payless in accordance with the terms of the tender offer (persons checking this box need not indicate the price per share below), or [ ] at the price per share indicated below under "Price (in Dollars) Per Share at Which Shares are Being Tendered" in this letter of transmittal. 4 To EquiServe: The undersigned hereby tenders to Payless ShoeSource, Inc., a Delaware corporation, the above-described shares of Payless' common stock, par value $0.01 per share, including the associated preferred stock purchase rights, issued under the Stockholder Protection Rights Agreement, dated as of April 20, 1998, as amended, between Payless and UMB Bank, N.A., as the Rights Agent, at the price per share indicated in this letter of transmittal, net to the seller in cash, without interest, upon the terms and subject to the conditions set forth in Payless' offer to purchase, dated March 13, 2000, receipt of which is hereby acknowledged, and in this letter of transmittal which, as amended and supplemented from time to time, together constitute the tender offer. Unless the context requires otherwise, all reference herein to shares shall include the associated preferred stock purchase rights. Subject to and effective on acceptance for payment of the shares tendered hereby in accordance with the terms of the tender offer, including, if the tender offer is extended or amended, the terms or conditions of any such extension or amendment, the undersigned hereby sells, assigns and transfers to or upon the order of Payless all right, title and interest in and to all shares tendered hereby and orders the registration of such shares tendered by book-entry transfer that are purchased under the tender offer to or upon the order of Payless and hereby irrevocably constitutes and appoints the depositary as attorney-in-fact of the undersigned with respect to such shares, with the full knowledge that the depositary also acts as the agent of Payless, with full power of substitution, such power of attorney being an irrevocable power coupled with an interest, to: (a) deliver certificates for shares, or transfer ownership of such shares on the account books maintained by the book-entry transfer facility, together in either such case with all accompanying evidences of transfer and authenticity, to or upon the order of Payless, upon receipt by the depositary, as the undersigned's agent, of the purchase price with respect to such shares; (b) present certificates for such shares for cancellation and transfer on Payless' books; and (c) receive all benefits and otherwise exercise all rights of beneficial ownership of such shares, subject to the next paragraph, all in accordance with the terms of the tender offer. The undersigned hereby covenants, represents and warrants to Payless that: (a) the undersigned understands that tendering of shares under any one of the procedures described in Section 3 of the offer to purchase and in the instructions hereto will constitute the undersigned's acceptance of the terms and conditions of the tender offer, including the undersigned's representation and warranty that (i) the undersigned has a net long position in shares or equivalent securities at least equal to the shares tendered within the meaning of Rule 14e-4 under the Securities Exchange Act of 1934, as amended, and (ii) such tender of shares complies with Rule 14e-4 under the Exchange Act; (b) when and to the extent Payless accepts the shares for purchase, Payless will acquire good, marketable and unencumbered title to them, free and clear of all security interests, liens, charges, encumbrances, conditional sales agreements or other obligations relating to their sale or transfer, and not subject to any adverse claim; (c) on request, the undersigned will execute and deliver any additional documents the depositary or Payless deems necessary or desirable to complete the assignment, transfer and purchase of the shares tendered hereby; and (d) the undersigned has read and agrees to all of the terms of the tender offer. The names and addresses of the registered holders should be printed, if they are not already printed above, exactly as they appear on the certificates representing shares tendered hereby. The certificate numbers, the number of shares represented by such certificates, and the number of shares that the undersigned wishes to tender, should be set forth in the appropriate boxes above. The undersigned understands that Payless will, upon the terms and subject to the conditions of the tender offer, determine a single per share price, not in excess of $53.00 nor less than $48.00 per share, that it will pay for shares properly tendered and not withdrawn under the tender offer, taking into account the number of shares so tendered and the prices specified by tendering stockholders. The undersigned understands that 5 Payless will select the purchase price that will allow it to purchase 7,547,170 shares, or such lesser number of shares as are properly tendered, at prices not greater than $53.00 nor less than $48.00 per share, under the tender offer, subject to its right to increase the total number of shares purchased to the extent permitted by law. The undersigned understands that all shares properly tendered at prices at or below the purchase price and not properly withdrawn will be purchased at the purchase price, net to the seller in cash, without interest, upon the terms and subject to the conditions of the tender offer, including its odd lot and proration provisions, and that Payless will return all other shares, including shares tendered at prices greater than the purchase price and not properly withdrawn and shares not purchased because of proration, as promptly as practicable following the expiration date. The undersigned recognizes that under certain circumstances set forth in the offer to purchase, Payless may terminate or amend the tender offer or may postpone the acceptance for payment of, or the payment for, shares tendered or may accept for payment fewer than all of the shares tendered hereby. The undersigned understands that certificate(s) for any shares not tendered or not purchased will be returned to the undersigned at the address indicated above. The undersigned recognizes that Payless has no obligation, under the Special Payment Instructions, to transfer any certificate for shares from the name of its registered holder, or to order the registration or transfer of shares tendered by book-entry transfer, if Payless purchases none of the shares represented by such certificate or tendered by such book-entry transfer. The undersigned understands that acceptance of shares by Payless for payment will constitute a binding agreement between the undersigned and Payless upon the terms and subject to the conditions of the tender offer. The check for the aggregate net purchase price for such of the tendered shares as are purchased by Payless will be issued to the order of the undersigned and mailed to the address indicated above unless otherwise indicated under either of the "Special Payment Instructions" or the "Special Delivery Instructions" boxes below. All authority conferred or agreed to be conferred in this letter of transmittal shall survive the death or incapacity of the undersigned and any obligations or duties of the undersigned under this letter of transmittal shall be binding upon the heirs, personal representatives, successors and assigns of the undersigned. Except as stated in the offer to purchase, this tender is irrevocable. 6 SHARES TENDERED AT PRICE DETERMINED BY STOCKHOLDER (SEE INSTRUCTION 5) By checking ONE of the following boxes below INSTEAD OF THE BOX UNDER "Shares Tendered at Price Determined Under the Tender Offer," the undersigned hereby tenders shares at the price checked. This action could result in none of the shares being purchased if the purchase price determined by Payless for the shares is less than the price checked below. A stockholder who desires to tender shares at more than one price must complete a separate letter of transmittal for each price at which shares are tendered. The same shares cannot be tendered, unless previously properly withdrawn as provided in Section 4 of the offer to purchase, at more than one price. PRICE (IN DOLLARS) PER SHARE AT WHICH SHARES ARE BEING TENDERED [ ] $48.000 [ ] $49.250 [ ] $50.500 [ ] $51.750 [ ] $48.125 [ ] $49.375 [ ] $50.625 [ ] $51.875 [ ] $48.250 [ ] $49.500 [ ] $50.750 [ ] $52.000 [ ] $48.375 [ ] $49.625 [ ] $50.875 [ ] $52.125 [ ] $48.500 [ ] $49.750 [ ] $51.000 [ ] $52.250 [ ] $48.625 [ ] $49.875 [ ] $51.125 [ ] $52.375 [ ] $48.750 [ ] $50.000 [ ] $51.250 [ ] $52.500 [ ] $48.875 [ ] $50.125 [ ] $51.375 [ ] $52.625 [ ] $49.000 [ ] $50.250 [ ] $51.500 [ ] $52.750 [ ] $49.125 [ ] $50.375 [ ] $51.625 [ ] $52.875 [ ] $53.000
CHECK ONLY ONE BOX ABOVE. IF YOU CHECK MORE THAN ONE BOX ABOVE, YOU WILL NOT HAVE VALIDLY TENDERED THE SHARES. 7 SHARES TENDERED AT PRICE DETERMINED UNDER THE TENDER OFFER (SEE INSTRUCTION 5) [ ] The undersigned wants to maximize the chance of having Payless purchase all of the shares the undersigned is tendering (subject to the possibility of proration). Accordingly, by checking THIS BOX INSTEAD OF ONE OF THE PRICE BOXES ABOVE, the undersigned hereby tenders shares and is willing to accept the purchase price determined by Payless in accordance with the terms of the tender offer. This action could result in receiving a price per share as low as $48.00. ------------------------------------------------------------ SPECIAL PAYMENT INSTRUCTIONS (SEE INSTRUCTIONS 1, 4, 6, 7 AND 10) To be completed ONLY if the check for the purchase price of shares purchased is to be issued in the name of someone other than the undersigned. Issue check to: Name: --------------------------------------------------- (PLEASE PRINT) Address: ------------------------------------------------- ------------------------------------------------------------ ------------------------------------------------------------ ------------------------------------------------------------ (INCLUDING ZIP CODE) ------------------------------------------------------------ (TAX IDENTIFICATION OR SOCIAL SECURITY NUMBER) (SEE SUBSTITUTE FORM W-9 INCLUDED HEREWITH) ------------------------------------------------------------ ------------------------------------------------------------ SPECIAL DELIVERY INSTRUCTIONS (SEE INSTRUCTIONS 1, 4, 6 AND 10) To be completed ONLY if the check for the purchase price of shares purchased is to be sent to someone other than the undersigned or to the undersigned at an address other than that shown above. Deliver check to: Name: --------------------------------------------------- (PLEASE PRINT) Address: ------------------------------------------------- ------------------------------------------------------------ ------------------------------------------------------------ ------------------------------------------------------------ (INCLUDING ZIP CODE) ------------------------------------------------------------ (TAX IDENTIFICATION OR SOCIAL SECURITY NUMBER) (SEE SUBSTITUTE FORM W-9 INCLUDED HEREWITH) ------------------------------------------------------------ 8 STOCKHOLDER(S) SIGN HERE (SEE INSTRUCTIONS 1 AND 6) (PLEASE COMPLETE SUBSTITUTE FORM W-9 ON REVERSE SIDE) (Must be signed by registered holder(s) exactly as name(s) appear(s) on Share Certificate(s) or on a security position listing or by person(s) authorized to become registered holder(s) by Share Certificates and documents transmitted herewith. If a signature is by an officer on behalf of a corporation or by an executor, administrator, trustee, guardian, attorney-in-fact, agent or other person acting in a fiduciary or representative capacity, please provide full title and see Instruction 6.) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (SIGNATURE(S)) Dated: - -------------------------------------------------------------------------------- Name(s): - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (PLEASE PRINT) Capacity (full title): - -------------------------------------------------------------------------------- Address: - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (INCLUDE ZIP CODE) (Area Code) Telephone Number: - -------------------------------------------------------------------------------- Taxpayer Identification or Social Security No.: - ----------------------------------------------------------------------- GUARANTEE OF SIGNATURE(S) (SEE INSTRUCTIONS 1 AND 6) - -------------------------------------------------------------------------------- AUTHORIZED SIGNATURE - -------------------------------------------------------------------------------- NAME(S) - -------------------------------------------------------------------------------- TITLE - -------------------------------------------------------------------------------- NAME OF FIRM - -------------------------------------------------------------------------------- ADDRESS - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (AREA CODE) TELEPHONE NO. Dated: - ------------------------------, 2000 9 INSTRUCTIONS TO LETTER OF TRANSMITTAL FORMING PART OF THE TERMS OF THE TENDER OFFER 1. GUARANTEE OF SIGNATURES. No signature guarantee is required if either: (a) this letter of transmittal is signed by the registered holder of the shares exactly as the name of the registered holder appears on the certificate, which term, for purposes of this document, shall include any participant in a book-entry transfer facility whose name appears on a security position listing as the owner of shares, tendered with this letter of transmittal, and payment and delivery are to be made directly to such registered holder unless such registered holder has completed either the box entitled "Special Payment Instructions" or "Special Delivery Instructions" above; or (b) such shares are tendered for the account of a bank, broker, dealer, credit union, savings association or other entity which is a member in good standing of the Securities Transfer Agents Medallion Program or a bank, broker, dealer, credit union, savings association or other entity which is an "eligible guarantor institution," as such term is defined in Rule 17Ad-15 under the Securities Exchange Act of 1934, as amended, each such entity, referred to as an "eligible guarantor institution." In all other cases, signatures must be guaranteed by an eligible guarantor institution. See Instruction 6. 2. DELIVERY OF LETTER OF TRANSMITTAL AND CERTIFICATES; GUARANTEED DELIVERY PROCEDURES. This letter of transmittal is to be used only if certificates are delivered with it to the depositary, or such certificates will be delivered under a notice of guaranteed delivery previously sent to the depositary, or if tenders are to be made under the procedure for tender by book-entry transfer set forth in Section 3 of the offer to purchase. Certificates for all physically tendered shares, or confirmation of a book-entry transfer into the depositary's account at the book-entry transfer facility of shares tendered electronically, together in each case with a properly completed and duly executed letter of transmittal or manually signed facsimile of it, or an agent's message, and any other documents required by this letter of transmittal, should be mailed or delivered to the depositary at the appropriate address set forth herein and must be delivered to the depositary before the expiration date. The term "agent's message" means a message transmitted by the book-entry transfer facility to, and received by, the depositary, which states that the book-entry transfer facility has received an express acknowledgment from the participant in such book-entry transfer facility tendering the shares, that such participant has received and agrees to be bound by the terms of the letter of transmittal, and that Payless may enforce such agreement against such participant. Stockholders whose certificates are not immediately available or who cannot deliver certificates for their shares and all other required documents to the depositary before the expiration date, or whose shares cannot be delivered before the expiration date under the procedures for book-entry transfer, may tender their shares by or through any eligible guarantor institution by properly completing and duly executing and delivering a notice of guaranteed delivery, or facsimile of it, and by otherwise complying with the guaranteed delivery procedure set forth in Section 3 of the offer to purchase. Under such procedure, the certificates for all physically tendered shares or book-entry confirmation, as the case may be, as well as a properly completed and duly executed letter of transmittal, or manually signed facsimile of it, or an agent's message, and all other documents required by this letter of transmittal, must be received by the depositary within three New York Stock Exchange trading days after receipt by the depositary of such notice of guaranteed delivery, all as provided in Section 3 of the offer to purchase. The notice of guaranteed delivery may be delivered by hand or transmittal by telegram, facsimile transmission or mail to the depositary and must include, if necessary, a guarantee by an eligible guarantor institution in the form set forth in such notice. For shares to be tendered validly under the guaranteed delivery procedure, the depositary must receive the notice of guaranteed delivery before the expiration date. THE METHOD OF DELIVERY OF ALL DOCUMENTS, INCLUDING CERTIFICATES FOR SHARES, IS AT THE OPTION AND RISK OF THE TENDERING STOCKHOLDER. IF DELIVERY IS BY MAIL, REGISTERED MAIL WITH RETURN RECEIPT REQUESTED, PROPERLY INSURED, IS RECOMMENDED. IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE DELIVERY. 10 Payless will not accept any alternative, conditional or contingent tenders, nor will it purchase any fractional shares. All tendering stockholders, by execution of this letter of transmittal, or a facsimile of it, waive any right to receive any notice of the acceptance of their tender. 3. INADEQUATE SPACE. If the space provided in the box captioned "Description of Shares Tendered" is inadequate, the certificate numbers and/or the number of shares should be listed on a separate signed schedule and attached to this letter of transmittal. 4. PARTIAL TENDERS AND UNPURCHASED SHARES. (Not applicable to stockholders who tender by book-entry transfer.) If fewer than all of the shares evidenced by any certificate are to be tendered, fill in the number of shares which are to be tendered in the column entitled "Number of Shares Tendered." In such case, if any tendered shares are purchased, a new certificate for the remainder of the shares evidenced by the old certificates will be issued and sent to the registered holder(s) as promptly as practicable after the expiration date. Unless otherwise indicated, all shares represented by the certificates listed and delivered to the depositary will be deemed to have been tendered. 5. INDICATION OF PRICE AT WHICH SHARES ARE BEING TENDERED. For shares to be properly tendered, the stockholder MUST check the box indicating the price per share at which such stockholder is tendering shares under "Price (in Dollars) per Share at Which Shares are Being Tendered" in this letter of transmittal; provided, however, that (1) an "odd lot holder" (as defined in Instruction 8) may check the box above in the section entitled "Odd Lots" indicating that such holder is tendering all of such holder's shares at the purchase price determined by Payless under the tender offer or (2) a stockholder may check the box above in the section captioned "Shares Tendered at Price Determined Under the Tender Offer" in order to maximize the chance of having Payless purchase all of the shares tendered (subject to the possibility of proration). Selecting the option under (1) or (2) could result in the stockholder receiving a price per share as low as $48.00. ONLY ONE BOX MAY BE CHECKED. IF MORE THAN ONE BOX IS CHECKED OR IF NO BOX IS CHECKED, THERE IS NO PROPER TENDER OF SHARES. A stockholder wishing to tender portions of such stockholder's share holdings at different prices must complete a separate letter of transmittal for each price at which such stockholder wishes to tender each such portion of such stockholder's shares. The same shares cannot be tendered more than once, unless previously properly withdrawn as provided in Section 4 of the offer to purchase, at more than one price. 6. SIGNATURES ON LETTER OF TRANSMITTAL, STOCK POWERS AND ENDORSEMENTS. (a) If this letter of transmittal is signed by the registered holder(s) of the shares tendered hereby, the signature(s) must correspond exactly with the name(s) as written on the face of the certificate(s) without any change whatsoever. (b) If the shares are registered in the names of two or more joint holders, each such holder must sign this letter of transmittal. (c) If any tendered shares are registered in different names on several certificates, it will be necessary to complete, sign and submit as many separate letters of transmittal, or photocopies of it, as there are different registrations of certificates. (d) When this letter of transmittal is signed by the registered holder(s) of the shares listed and transmitted hereby, no endorsements of certificate(s) representing such shares or separate stock powers are required unless payment is to be made or the certificates for shares not tendered or not purchased are to be issued to a person other than the registered holder(s). SIGNATURE(S) ON SUCH CERTIFICATE(S) MUST BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION. If this letter of transmittal is signed by a person other than the registered holder(s) of the certificate(s) listed, or if payment is to be made to a person other than the registered holder(s), the certificate(s) must be endorsed or accompanied by appropriate stock powers, in either case signed exactly as the name(s) of the registered holder(s) appear(s) on the certificate(s), and the signature(s) on such certificates or stock power(s) must be guaranteed by an eligible guarantor institution. See Instruction 1. 11 (e) If this letter of transmittal or any certificates or stock powers are signed by trustees, executors, administrators, guardians, attorneys-in-fact, officers of corporations or others acting in a fiduciary or representative capacity, such persons should so indicate when signing and must submit proper evidence to the depositary that is satisfactory to Payless of their authority so to act. 7. STOCK TRANSFER TAXES. Except as provided in this Instruction 7, no stock transfer tax stamps or funds to cover such stamps need to accompany this letter of transmittal. Payless will pay or cause to be paid any stock transfer taxes payable on the transfer to it of shares purchased under the tender offer. If, however: (a) payment of the purchase price is to be made to any person other than the registered holder(s); or (b) tendered certificates are registered in the name of any person(s) other than the person(s) signing this letter of transmittal; then the depositary will deduct from the purchase price the amount of any stock transfer taxes (whether imposed on the registered holder(s), such other person(s) or otherwise) payable on account thereof, unless satisfactory evidence of the payment of such taxes or an exemption from them is submitted. 8. ODD LOTS. As described in Section 1 of the offer to purchase, if Payless is to purchase fewer than all shares tendered before the expiration date and not properly withdrawn, the shares purchased first will consist of all shares tendered by any stockholder who owned beneficially or of record an aggregate of fewer than 100 shares, and who tenders all of such holder's shares at or below the purchase price. This preference will not be available unless all of such holder's shares are tendered at or below the purchase price. This preference will not be available unless the box captioned "Odd Lots" is completed. 9. ORDER OF PURCHASE IN EVENT OF PRORATION. As described in Section 1 of the offer to purchase, stockholders may designate the order in which their shares are to be purchased in the event of proration. The order of purchase may have an effect on the federal income tax classification of any gain or loss on the shares purchased. See Sections 1 and 13 of the offer to purchase. 10. SPECIAL PAYMENT AND DELIVERY INSTRUCTIONS. If check(s) are to be issued in the name of a person other than the signer of the letter of transmittal or if such check(s) are to be sent to someone other than the person signing the letter of transmittal or to the signer at a different address, the boxes captioned "Special Payment Instructions" and/or "Special Delivery Instructions" on this letter of transmittal should be completed as applicable and signatures must be guaranteed as described in Instructions 1 and 6. 11. IRREGULARITIES. All questions as to the number of shares to be accepted, the price to be paid therefor and the validity, form, eligibility, including time of receipt, and acceptance for payment of any tender of shares will be determined by Payless in its sole discretion, which determinations shall be final and binding on all parties. Payless reserves the absolute right to reject any or all tenders of shares it determines not be in proper form or the acceptance of which or payment for which may, in the opinion of Payless, be unlawful. Payless also reserves the absolute right to waive any of the conditions of the tender offer and any defect or irregularity in the tender of any particular shares, and Payless' interpretation of the terms of the tender offer, including these instructions, will be final and binding on all parties. No tender of shares will be deemed to be properly made until all defects and irregularities have been cured or waived. Unless waived, any defects or irregularities in connection with tenders must be cured within such time as Payless shall determine. None of Payless, the dealer manager (as defined in the offer to purchase), the depositary, the information agent (as defined in the offer to purchase) or any other person is or will be obligated to give notice of any defects or irregularities in tenders and none of them will incur any liability for failure to give any such notice. 12. QUESTIONS AND REQUESTS FOR ASSISTANCE AND ADDITIONAL COPIES. Any questions or requests for assistance or for additional copies of the offer to purchase, the letter of transmittal or the notice of guaranteed delivery may be directed to the information agent at the telephone number and address set forth below. You may also contact the dealer manager or your broker, dealer, commercial bank or trust company for assistance concerning the tender offer. 12 13. TAX IDENTIFICATION NUMBER AND BACKUP WITHHOLDING. Each tendering stockholder is required to provide the depositary with a correct Taxpayer Identification Number ("TIN") on the Substitute Form W-9 which is provided below, and to certify, under penalties of perjury, that such number is correct and that such stockholder is not subject to backup withholding of Federal income tax. If a tendering stockholder has been notified by the Internal Revenue Service that such stockholder is subject to backup withholding, such stockholder must cross out item (2) of the certification box of the Substitute Form W-9, unless such stockholder has since been notified by the Internal Revenue Service that such stockholder is no longer subject to backup withholding. Failure to provide the information on the Substitute Form W-9 may subject the tendering stockholder to a $50 penalty imposed by the Internal Revenue Service and to a 31% Federal income tax withholding on the payment of the purchase price of all shares purchased from such stockholder. If the tendering stockholder has not been issued a TIN and has applied for one or intends to apply for one in the near future, such stockholder should write "Applied For" in the space provided for the TIN in Part I of the Substitute Form W-9, and sign and date the Substitute Form W-9 and the Certificate of Awaiting Taxpayer Identification Number. If "Applied For" is written in Part I and the depositary is not provided with a TIN within 60 days, the depositary will withhold 31% on all payments of the purchase price to such stockholder until a TIN is provided to the depositary. Each foreign stockholder must complete and submit Form W-8 in order to be exempt from the 31% Federal income tax backup withholding due on payments with respect to the Shares. See Instruction 14. 14. WITHHOLDING ON FOREIGN HOLDER. The following discussion applies to any "foreign stockholder," that is a stockholder that, for United States federal income tax purposes, is a non-resident alien individual, a foreign corporation, a foreign partnership, a foreign estate or a foreign trust. A foreign stockholder who has provided the necessary certification to the depositary will not be subject to backup withholding. However, foreign stockholders generally are subject to withholding under Internal Revenue Code sections 1441 or 1442 at a rate of 30% of the gross payments. If a stockholder's address is outside the United States, and if the depositary has not received a Substitute Form W-9, the depositary will assume that the stockholder is a foreign stockholder. The general 30% withholding rate may be reduced under a tax treaty, if appropriate certification is furnished to the depositary. A foreign stockholder may be eligible to obtain a refund of all or a portion of any tax withheld if such holder meets those tests described in Section 13 of the offer to purchase that would characterize the exchange as a sale (as opposed to a dividend) or is otherwise able to establish that no tax or a reduced amount of tax is due. FOREIGN STOCKHOLDERS ARE URGED TO CONSULT THEIR TAX ADVISORS REGARDING THE APPLICATION OF UNITED STATES FEDERAL INCOME TAX WITHHOLDING, INCLUDING ELIGIBILITY FOR A WITHHOLDING TAX REDUCTION OR EXEMPTION, AND THE REFUND PROCEDURE. 15. LOST, STOLEN, DESTROYED OR MUTILATED CERTIFICATES. If any certificate representing shares has been lost, stolen, destroyed or mutilated, the stockholder should notify U.M.B. Bank, the transfer agent for the shares, of that fact by calling UMB Bank at (800) 884-4225 and asking for instructions on obtaining a replacement certificate(s). UMB Bank will require you to complete an affidavit of loss and return it to UMB Bank. Such stockholder will then be instructed by UMB Bank as to the steps that must be taken in order to replace the certificate. A bond may be required to be posted by the stockholder to secure against the risk that the certificate may be subsequently recirculated. This letter of transmittal and related documents cannot be processed until the procedures for replacing lost, stolen, destroyed or mutilated certificates have been followed. 16. TENDER OF PROFIT SHARING PLAN SHARES. Shareholders who are participants in the Payless ShoeSource, Inc. Stock Ownership Plan and who wish to tender all or a percentage of their shares in the tender offer should so indicate (a) by marking "Yes" in the appropriate bracket in the section captioned "PAYLESS SHOESOURCE, INC. STOCK OWNERSHIP PLAN" and (b) indicating whether they are tendering all (including any fractional shares) or a percentage of their shares, and if the latter, stating what percentage (only whole shares will be accepted for purchase in any partial tender). EquiServe will then work with Mellon Bank to determine the number of shares that you are tendering based on the percentage you have determined to tender. Then EquiServe will notify Mellon Bank of the number of shares you are tendering and will request Mellon Bank to effect the book-entry transfer of your shares to the depositary's account at the book-entry transfer facility. By executing this letter of transmittal, you hereby appoint EquiServe to act as your agent for the purpose of making such determination and so requesting Mellon Bank to effect the book-entry transfer of 13 your shares. Because EquiServe and Mellon Bank will have to determine the number of shares you hold under the Stock Ownership Plan and will have to calculate the number of shares represented by the percentage of shares you have elected to tender, you must submit the letter of transmittal relating to those shares no later than 5:00 p.m., New York City time, on Friday, April 7, 2000. IMPORTANT: THIS LETTER OF TRANSMITTAL OR A MANUALLY SIGNED PHOTOCOPY OF IT (TOGETHER WITH CERTIFICATE(S) FOR SHARES OR CONFIRMATION OF BOOK-ENTRY TRANSFER AND ALL OTHER REQUIRED DOCUMENTS) OR, IF APPLICABLE, THE NOTICE OF GUARANTEED DELIVERY MUST BE RECEIVED BY THE DEPOSITARY BEFORE THE EXPIRATION DATE. 14 IMPORTANT TAX INFORMATION Under the Federal income tax law, a stockholder whose tendered shares are accepted for payment is required by law to provide the depositary (as payer) with such stockholder's correct TIN on Substitute Form W-9 below. If such stockholder is an individual, the TIN is such stockholder's social security number. If the depositary is not provided with the correct TIN, the stockholder may be subject to a $50 penalty imposed by the Internal Revenue Service and payments that are made to such stockholder with respect to shares purchased pursuant to the tender offer may be subject to backup withholding of 31%. Certain stockholders including, among others, all corporations and certain foreign individuals are not subject to these backup withholding and reporting requirements. In order for a foreign individual to qualify as an exempt recipient, such individual must submit a Form W-8, signed under penalties of perjury, attesting to such individual's exempt status. A Form W-8 can be obtained from the depositary. Exempt stockholders should furnish their TIN, write "Exempt" on the face of the Substitute Form W-9, and sign, date and return the Substitute Form W-9 to the information agent. See the enclosed Guidelines for Certification of Taxpayer Identification Number on Substitute Form W-9 for additional instructions. A stockholder should consult his or her tax advisor as to such stockholder's qualification for an exemption from backup withholding and the procedure for obtaining such exemption. If backup withholding applies, the depositary is required to withhold 31% of any payments made to the stockholder. Backup withholding is not an additional tax. Rather, the Federal income tax liability of persons subject to backup withholding will be reduced by the amount of tax withheld. If withholding results in an overpayment of taxes, a refund may be obtained from the Internal Revenue Service. PURPOSE OF SUBSTITUTE FORM W-9 To prevent backup withholding on payments that are made to a stockholder with respect to shares purchased pursuant to the tender offer, the stockholder is required to notify the depositary of such stockholder's correct TIN by completing the form below certifying that (a) the TIN provided on Substitute Form W-9 is correct (or that such stockholder is awaiting a TIN) and (b) that (i) such stockholder has not been notified by the Internal Revenue Service that such stockholder is subject to backup withholding as a result of a failure to report all interest or dividends or (ii) the Internal Revenue Service has notified such stockholder that such stockholder is no longer subject to backup withholding. WHAT NUMBER TO GIVE THE DEPOSITARY The stockholder is required to give the depositary the social security number or employer identification number of the record holder of the shares tendered hereby. If the shares are in more than one name or are not in the name of the actual owner, consult the enclosed Guidelines for Certification of Taxpayer Identification Number on Substitute Form W-9 for additional guidance on which number to report. If the tendering stockholder has not been issued a TIN and has applied for a number or intends to apply for a number in the near future, the stockholder should write "Applied For" in the space provided for the TIN in Part I, and sign and date the Substitute Form W-9 and the Certificate of Awaiting Taxpayer Identification Number. If "Applied For" is written in Part I and the depositary is not provided with a TIN within 60 days, the depositary will withhold 31% of all payments of the purchase price to such stockholder until a TIN is provided to the depositary. 15 TAXPAYER IDENTIFICATION NUMBER - ------------------------------------------------------------------------------------------------------------------------ PAYER'S NAME: EQUISERVE - ------------------------------------------------------------------------------------------------------------------------ SUBSTITUTE Name ---------------------------------------------------------------------------------- FORM W-9 Address-------------------------------------------------------------------------------- (Number and Street) ----------------------------------------------------------------------------------------- (City) (State) (Zip Code) ------------------------------------------------------------------------------------------- Department of the PART 1--Please provide your Taxpayer Identification Treasury, Internal Number in the box at the right and certify by signing Revenue Service and dating below. If awaiting TIN, write "Applied For." TIN: ----------------------- Social Security Number or Employer Identification Number ------------------------------------------------------------------------------------------- PAYER'S REQUEST FOR PART 2--For Payees exempt from Backup Withholding: TAXPAYER IDENTIFICATION Check the box if you are NOT subject to backup withholding [ ] NUMBER AND CERTIFICATION ----------------------------------------------------------------------------------------- PART 3--CERTIFICATION UNDER PENALTIES OF PERJURY, I CERTIFY THAT (1) The number shown on this form is my correct taxpayer identification number (or I am waiting for a number to be issued to me), and (2) I am not subject to backup withholding because (A) I am exempt from backup withholding, or (B) I have not been notified by the Internal Revenue Service that I am subject to backup withholding as a result of a failure to report all interest or dividends, or (C) the Internal Revenue Service has notified me that I am no longer subject to backup withholding. ----------------------------------------------------------------------------------------- SIGNATURE ___________________________________ DATE ______________ - ------------------------------------------------------------------------------------------------------------------------
You must cross out Item (2) of Part 3 above if you have been notified by the Internal Revenue Service that you are currently subject to backup withholding because of underreporting interest or dividends on your tax return. However, if after being notified by the Internal Revenue Service that you were subject to backup withholding you received another notification from the Internal Revenue Service that you are no longer subject to backup withholding, do not cross out Item (2) of Part 3 above. (Also see certification under instructions in the enclosed guidelines.) YOU MUST COMPLETE THE FOLLOWING CERTIFICATE IF YOU CHECKED THE BOX IN PART 1(b) OF THE SUBSTITUTE FORM W-9 INDICATING YOU HAVE APPLIED FOR, AND ARE AWAITING RECEIPT OF, YOUR TAXPAYER IDENTIFICATION NUMBER. - -------------------------------------------------------------------------------------------------- CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER I certify under penalties of perjury that a taxpayer identification number has not been issued to me, and that I mailed or delivered an application to receive a taxpayer identification number to the appropriate Internal Revenue Service center or Social Security Administration office (or I intend to mail or deliver an application in the near future). I understand that if I do not provide a taxpayer identification number to the payer, 31% of all payments made to me under the tender offer shall be retained until I provide a taxpayer identification number to the payer and that, if I do not provide my taxpayer identification number within sixty days, such retained amounts shall be remitted to the Internal Revenue Service as backup withholding and 31% of all reportable payments made to me thereafter will be withheld and remitted to the Internal Revenue Service until I provide a taxpayer identification number. Signature ________________________________________________ Date --------------------- - --------------------------------------------------------------------------------------------------
16 NOTE: FAILURE TO COMPLETE AND RETURN THIS FORM MAY RESULT IN BACKUP WITHHOLDING OF 31% OF ANY CASH PAYMENTS. PLEASE REVIEW THE ENCLOSED GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION NUMBER ON SUBSTITUTE FORM W-9 FOR ADDITIONAL DETAILS. Facsimile copies of the letter of transmittal will be accepted from eligible guarantor institutions. The letter of transmittal and certificates for shares and any other required documents should be sent or delivered by each tendering stockholder or its broker, dealer, commercial bank, trust company or other nominee to the depositary at one of its addresses set forth above. Any questions or requests for assistance or for additional copies of the offer to purchase, the letter of transmittal or the notice of guaranteed delivery may be directed to the information agent at the telephone number and address set forth below. You may also contact the dealer manager or your broker, dealer, commercial bank or trust company for assistance concerning the tender offer. To confirm delivery of your shares, you are directed to contact the depositary. The information agent for the Offer is: D.F. KING & CO., INC. 77 Water Street, 20th Floor New York, New York 10005 Toll Free: (800) 848-3416 Banks and Brokerage Firms Please Call: (212) 269-5550 The dealer manager for the Offer is: GOLDMAN, SACHS & CO. 85 Broad Street New York, New York 10004 (212) 902-1000 (call collect) (800) 323-5678 (call toll free) EX-99.A.1.C 4 NOTICE OF GUARANTEED DELIVERY 1 EXHIBIT (a)(1)(C) NOTICE OF GUARANTEED DELIVERY FOR PAYLESS SHOESOURCE OFFER TO PURCHASE FOR CASH 7,547,170 SHARES OF ITS COMMON STOCK, PAR VALUE $0.01 PER SHARE (INCLUDING THE ASSOCIATED PREFERRED STOCK PURCHASE RIGHTS) AT A PURCHASE PRICE NOT IN EXCESS OF $53.00 NOR LESS THAN $48.00 PER SHARE As set forth in Section 3 of the offer to purchase, dated March 13, 2000, this notice of guaranteed delivery, or a facsimile hereof, must be used to accept the tender offer if: (a) certificates representing shares of common stock, par value $0.01 per share, of Payless ShoeSource, Inc., a Delaware corporation, cannot be delivered prior to the "expiration date" (as defined in Section 1 of the offer to purchase); or (b) the procedure for book-entry transfer cannot be completed before the "expiration date" (as defined in Section 1 of the offer to purchase); or (c) time will not permit a properly completed and duly executed letter of transmittal, or manually signed facsimile thereof, and all other required documents to reach the depositary referred to below before the expiration date. This form or a facsimile of it, signed and properly completed, may be delivered by hand or transmitted by facsimile transmission or mailed to the depositary so that it is received by the depositary before the expiration date. See Section 3 of the offer to purchase. The Depositary for the tender offer is: EQUISERVE By Mail: Facsimile Transmission: EquiServe (781) 575-4826 Attn: Corporate Actions (for eligible guarantor institutions only) P.O. Box 9573 Confirm by telephone: Boston, MA 02205-9573 (781) 575-4816 By Hand: By Overnight Delivery or Express Mail: Securities Transfer & Reporting Services, EquiServe Inc. Attn: Corporate Actions c/o EquiServe 40 Campanelli Drive 100 Williams Street, Galleria Braintree, MA 02184 New York, NY 10038
DELIVERY OF THIS NOTICE OF GUARANTEED DELIVERY TO AN ADDRESS OTHER THAN THOSE SHOWN ABOVE OR TRANSMISSION OF INSTRUCTIONS VIA THE FACSIMILE NUMBER OTHER THAN THE ONE LISTED ABOVE DOES NOT CONSTITUTE A VALID DELIVERY. DELIVERIES TO PAYLESS, THE DEALER MANAGER OF THE TENDER OFFER OR THE INFORMATION AGENT OF THE TENDER OFFER WILL NOT BE FORWARDED TO THE DEPOSITARY AND THEREFORE WILL NOT CONSTITUTE VALID DELIVERY. DELIVERIES TO THE BOOK-ENTRY TRANSFER FACILITY (AS DEFINED IN THE OFFER TO PURCHASE) WILL NOT CONSTITUTE VALID DELIVERY TO THE DEPOSITARY. This notice of guaranteed delivery form is not to be used to guarantee signatures. If a signature on the letter of transmittal is required to be guaranteed by an "eligible guarantor institution" (as defined in Section 3 of the offer to purchase) under the instructions thereto, such signature must appear in the applicable space provided in the signature box on the letter of transmittal. 2 Ladies and Gentlemen: The undersigned hereby tenders the above described shares (including the associated preferred stock purchase rights) to Payless at the price per share indicated below, net to the seller in cash, without interest, upon the terms and subject to the conditions set forth in the offer to purchase, and the related letter of transmittal, which, as may be amended and supplemented from time to time, together constitute the tender offer, receipt of which are hereby acknowledged. Unless the context requires otherwise, all references to shares herein shall include the associated preferred stock purchase rights. SHARES TENDERED AT PRICE DETERMINED BY STOCKHOLDER (See Instruction 5 of the letter of transmittal) By checking ONE of the following boxes below INSTEAD OF THE BOX UNDER "Shares Tendered at Price Determined Under the Tender Offer," the undersigned hereby tenders shares at the price checked. This action could result in none of the shares being purchased if the purchase price determined by Payless for the shares is less than the price checked below. A stockholder who desires to tender shares at more than one price must complete a separate letter of transmittal for each price at which shares are tendered. The same shares cannot be tendered, unless previously properly withdrawn as provided in Section 4 of the offer to purchase, at more than one price. PRICE (IN DOLLARS) PER SHARE AT WHICH SHARES ARE BEING TENDERED [ ] $48.000 [ ] $49.250 [ ] $50.500 [ ] $51.750 [ ] $48.125 [ ] $49.375 [ ] $50.625 [ ] $51.875 [ ] $48.250 [ ] $49.500 [ ] $50.750 [ ] $52.000 [ ] $48.375 [ ] $49.625 [ ] $50.875 [ ] $52.125 [ ] $48.500 [ ] $49.750 [ ] $51.000 [ ] $52.250 [ ] $48.625 [ ] $49.875 [ ] $51.125 [ ] $52.375 [ ] $48.750 [ ] $50.000 [ ] $51.250 [ ] $52.500 [ ] $48.875 [ ] $50.125 [ ] $51.375 [ ] $52.625 [ ] $49.000 [ ] $50.250 [ ] $51.500 [ ] $52.750 [ ] $49.125 [ ] $50.375 [ ] $51.625 [ ] $52.875 [ ] $53.000
CHECK ONLY ONE BOX ABOVE. IF MORE THAN ONE BOX IS CHECKED ABOVE, THE SHARES WILL NOT BE VALIDLY TENDERED. SHARES TENDERED AT PRICE DETERMINED UNDER THE TENDER OFFER (See Instruction 5 of the letter of transmittal) [ ] The undersigned wants to maximize the chance of having Payless purchase all of the shares the undersigned is tendering (subject to the possibility of proration). Accordingly, by checking this box instead of one of the price boxes above, the undersigned hereby tenders shares and is willing to accept the purchase price determined by Payless in accordance with the terms of the tender offer. This action could result in receiving a price per share as low as $48.00. ODD LOTS To be completed ONLY if shares are being tendered by or on behalf of a person owning beneficially or of record an aggregate of fewer than 100 shares. 2 3 On the date hereof, the undersigned either (check one): [ ] was the beneficial or record owner of an aggregate of fewer than 100 shares and is tendering all of those shares; or [ ] is a broker, dealer, commercial bank, trust company or other nominee that: (a) is tendering, for the beneficial owner(s) thereof, shares with respect to which it is the record holder; and (b) believes, based upon representations made to it by each such beneficial owner, that each such person was the beneficial owner of an aggregate of fewer than 100 shares, and is tendering all of such shares. In addition, the undersigned is tendering shares either (check one): [ ] at the purchase price, as the same shall be determined by Payless in accordance with the terms of the tender offer (persons checking this box need not indicate the price per share above); or [ ] at the price per share indicated above under "Price (in Dollars) per Share at Which Shares are Being Tendered" on this notice of guaranteed delivery. Please type or print --------------------------- SIGN HERE: ----------------------------------- Certificate No.(s) (if available) -------------- Dated: ------------------------------------------ - --------------------------------------------------- - --------------------------------------------------- Name(s) --------------------------------------- - --------------------------------------------------- - --------------------------------------------------- - --------------------------------------------------- Address(es) ----------------------------------- If shares will be tendered by book-entry transfer, provide the following information: Area code and telephone number ----------- Account No.: ---------------------------------
3 4 GUARANTEE (NOT TO BE USED FOR SIGNATURE GUARANTEE) THE UNDERSIGNED, A BANK, BROKER, DEALER, CREDIT UNION, SAVINGS ASSOCIATION OR OTHER ENTITY WHICH IS A MEMBER IN GOOD STANDING OF THE SECURITIES TRANSFER AGENTS MEDALLION PROGRAM OR A BANK, BROKER, DEALER, CREDIT UNION, SAVINGS ASSOCIATION OR OTHER ENTITY WHICH IS AN "ELIGIBLE GUARANTOR INSTITUTION," AS SUCH TERM IS DEFINED IN RULE 17Ad-15 UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, EACH OF THE FOREGOING CONSTITUTING AN "ELIGIBLE GUARANTOR INSTITUTION," GUARANTEES THE DELIVERY TO THE DEPOSITARY OF THE SHARES TENDERED HEREBY, IN PROPER FORM FOR TRANSFER, OR A CONFIRMATION THAT THE SHARES TENDERED HEREBY HAVE BEEN DELIVERED UNDER THE PROCEDURE FOR BOOK-ENTRY TRANSFER SET FORTH IN THE OFFER TO PURCHASE INTO THE DEPOSITARY'S ACCOUNT AT THE BOOK-ENTRY TRANSFER FACILITY, TOGETHER WITH A PROPERLY COMPLETED AND DULY EXECUTED LETTER OF TRANSMITTAL, OR A MANUALLY SIGNED FACSIMILE THEREOF, AND ANY OTHER REQUIRED DOCUMENTS, ALL WITHIN THREE NEW YORK STOCK EXCHANGE TRADING DAYS OF THE DATE HEREOF. Name of Firm: -------------------------------------- Authorized Signature: -------------------------------------- Name: -------------------------------------- Title: -------------------------------------- Address: -------------------------------------- Zip Code: -------------------------------------- Area Code and Telephone Number: -------------------------------------- Dated: -------------------------------------- , 2000 DO NOT SEND SHARE CERTIFICATES WITH THIS NOTICE OF GUARANTEED DELIVERY. SHARE CERTIFICATES SHOULD BE SENT WITH YOUR LETTER OF TRANSMITTAL. 4 EX-99.A.1.D 5 BROKER DEALER LETTER 1 EXHIBIT (a)(1)(D) Goldman, Sachs & Co. 85 Broad Street New York, New York 10004 PAYLESS SHOESOURCE, INC. OFFER TO PURCHASE FOR CASH 7,547,170 SHARES OF ITS COMMON STOCK, PAR VALUE $0.01 PER SHARE (INCLUDING THE ASSOCIATED PREFERRED STOCK PURCHASE RIGHTS) AT A PURCHASE PRICE NOT IN EXCESS OF $53.00 NOR LESS THAN $48.00 PER SHARE THE TENDER OFFER, PRORATION PERIOD AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON MONDAY, APRIL 10, 2000, UNLESS THE TENDER OFFER IS EXTENDED. March 13, 2000 To Brokers, Dealers, Commercial Banks, Trust Companies and Other Nominees: Payless ShoeSource, Inc., a Delaware corporation, has appointed us to act as the dealer manager in connection with its offer to purchase for cash 7,547,170 shares of its common stock, par value $0.01 per share, including the associated preferred stock purchase rights issued under the Stockholder Protection Rights Agreement, dated as of April 20, 1998, as amended, between Payless and UMB Bank, N.A., as Rights Agent, at prices, net to the seller in cash, without interest, not greater than $53.00 nor less than $48.00 per share, specified by its stockholders, upon the terms and subject to the conditions set forth in its offer to purchase, dated March 13, 2000, and in the related letter of transmittal which, as may be amended and supplemented from time to time, together constitute the tender offer. Unless the context requires otherwise, all references herein to shares shall include the associated preferred stock purchase rights. Payless will, upon the terms and subject to the conditions of the tender offer, determine a single per share price, not in excess of $53.00 nor less than $48.00 per share, that it will pay for shares properly tendered and not properly withdrawn under the tender offer, taking into account the number of shares so tendered and the prices specified by tendering stockholders. Payless will select the lowest purchase price that will allow it to purchase 7,547,170 shares, or such lesser number of shares as are properly tendered, at prices not in excess of $53.00 nor less than $48.00 per share, under the tender offer. All shares properly tendered before the "expiration date" (as defined in Section 1 of the offer to purchase), at prices at or below the purchase price and not properly withdrawn, will be purchased by Payless at the purchase price, net to the seller in cash, without interest, upon the terms and subject to the conditions of the tender offer, including the odd lot and proration provisions thereof. See Section 1 of the offer to purchase. Shares tendered at prices in excess of the purchase price and shares not purchased because of proration will be returned at Payless' expense to the stockholders who tendered such shares as promptly as practicable after the expiration date. Payless reserves the right, in its sole discretion, to purchase more than 7,547,170 shares under the tender offer, subject to applicable law. If, at the expiration date, more than 7,547,170 shares, or such greater number of shares as Payless may elect to purchase in accordance with applicable law, are properly tendered at or below the purchase price and not properly withdrawn, Payless will, upon the terms and subject to the 2 conditions of the tender offer, accept shares for purchase first from "odd lot holders" (as defined in Section 1 of the offer to purchase) who properly tender all of their shares at or below the purchase price and then on a pro rata basis from all other stockholders whose shares are properly tendered at or below the purchase price and not properly withdrawn. THE TENDER OFFER IS NOT CONDITIONED ON ANY MINIMUM NUMBER OF SHARES BEING TENDERED. THE TENDER OFFER IS, HOWEVER, SUBJECT TO OTHER CONDITIONS. SEE SECTION 6 OF THE OFFER TO PURCHASE. For your information and for forwarding to your clients for whom you hold shares registered in your name or in the name of your nominee, we are enclosing the following documents: 1. Offer to purchase, dated March 13, 2000; 2. Letter to clients that you may send to your clients for whose accounts you hold shares registered in your name or in the name of your nominee, with space provided for obtaining such clients' instructions with regard to the tender offer; 3. Letter dated March 13, 2000, from the Chairman of the Board and Chief Executive Officer of Payless, to stockholders of Payless; 4. Letter of transmittal for your use and for the information of your clients (together with accompanying instructions and Substitute Form W-9); 5. Notice of guaranteed delivery to be used to accept the tender offer if the share certificates and all other required documents cannot be delivered to the depositary before the expiration date or if the procedure for book-entry transfer cannot be completed before the expiration date; and 6. Guidelines of the Internal Revenue Service for Certification of Taxpayer Identification Number on Substitute Form W-9. WE URGE YOU TO CONTACT YOUR CLIENTS AS PROMPTLY AS POSSIBLE. THE TENDER OFFER, PRORATION PERIOD AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON MONDAY, APRIL 10, 2000, UNLESS THE TENDER OFFER IS EXTENDED. No fees or commissions will be payable to brokers, dealers, commercial banks, trust companies or any person for soliciting tenders of shares under the tender offer other than fees paid to the dealer manager and the information agent, as described in the offer to purchase. Payless will, however, upon request, reimburse you for customary mailing and handling expenses incurred by you in forwarding any of the enclosed materials to the beneficial owners of shares held by you as a nominee or in a fiduciary capacity. Payless will pay or cause to be paid any stock transfer taxes applicable to its purchase of shares, except as otherwise provided in the offer to purchase and letter of transmittal. In order to take advantage of the tender offer, a properly completed and duly executed letter of transmittal, or a manually signed facsimile thereof, including any required signature guarantees and any other required documents, should be sent to the depositary with either a certificate or certificates representing the tendered shares or confirmation of their book-entry transfer, all in accordance with the instructions set forth in the offer to purchase and letter of transmittal. Holders of shares whose certificate(s) for such shares are not immediately available, holders who cannot deliver such certificate(s) and all other required documents to the depositary or holders who cannot complete the procedures for book-entry transfer before the expiration date must tender their shares according to the procedure for guaranteed delivery set forth in Section 3 of the offer to purchase. Any inquiries you may have with respect to the tender offer should be addressed to Goldman, Sachs & Co. or to the information agent, D.F. King & Co., Inc., at their respective addresses and telephone numbers set forth on the back cover page of the offer to purchase. 2 3 Additional copies of the enclosed material may be obtained from D.F. King & Co., Inc., by calling them at: (800) 848-3416. Very truly yours, GOLDMAN, SACHS & CO. ENCLOSURES NOTHING CONTAINED HEREIN OR IN THE ENCLOSED DOCUMENTS SHALL CONSTITUTE YOU OR ANY OTHER PERSON AS AN AGENT OF PAYLESS, THE DEALER MANAGER, THE INFORMATION AGENT OR THE DEPOSITARY OR ANY AFFILIATE OF THE FOREGOING, OR AUTHORIZE YOU OR ANY OTHER PERSON TO USE ANY DOCUMENT OR MAKE ANY STATEMENT ON BEHALF OF ANY OF THEM IN CONNECTION WITH THE TENDER OFFER OTHER THAN THE DOCUMENTS ENCLOSED HEREWITH AND THE STATEMENTS CONTAINED THEREIN. 3 EX-99.A.1.E 6 CLIENT LETTER 1 EXHIBIT (a)(1)(E) PAYLESS SHOESOURCE, INC. OFFER TO PURCHASE FOR CASH 7,547,170 SHARES OF ITS COMMON STOCK, PAR VALUE $0.01 PER SHARE (INCLUDING THE ASSOCIATED PREFERRED STOCK PURCHASE RIGHTS) AT A PURCHASE PRICE NOT IN EXCESS OF $53.00 NOR LESS THAN $48.00 PER SHARE March 13, 2000 To Our Clients: Enclosed for your consideration are the offer to purchase, dated March 13, 2000, and the related letter of transmittal, which, as amended and supplemented from time to time, together constitute the tender offer, in connection with the tender offer by Payless ShoeSource, Inc., a Delaware corporation, to purchase up to 7,547,170 shares of its common stock, par value $0.01 per share, including the associated preferred stock purchase rights issued under the Stockholder Protection Rights Agreement, dated as of April 20, 1998, as amended, between Payless and UMB Bank, N.A., as Rights Agent, at prices, net to the seller in cash, without interest, not greater than $53.00 nor less than $48.00 per share, specified by tendering stockholders, upon the terms and subject to the conditions set forth in the tender offer. Unless the context requires otherwise, all references herein to shares shall include the associated preferred stock purchase rights. Payless will, upon the terms and subject to the conditions of the tender offer, determine a single per share price, not in excess of $53.00 nor less than $48.00 per share, that it will pay for shares properly tendered and not withdrawn under the tender offer, taking into account the number of shares so tendered and the prices specified by tendering stockholders. Payless will select the lowest purchase price that will allow it to purchase 7,547,170 shares, or such lesser number of shares as are properly tendered, at prices not in excess of $53.00 nor less than $48.00 per share, under the tender offer. All shares properly tendered prior to the "expiration date" (as defined in Section 1 of the offer to purchase) at prices at or below the purchase price and not properly withdrawn will be purchased at the purchase price, net to the seller in cash, without interest, upon the terms and subject to the conditions of the tender offer, including the odd lot and proration provisions. Payless will return as promptly as practicable after the expiration date, all shares, including shares tendered at prices greater than the purchase price and shares not purchased because of proration. Payless reserves the right, in its sole discretion, to purchase more than 7,547,170 shares under the tender offer in accordance with applicable law. If, prior to the expiration date, more than 7,547,170 shares, or such greater number of shares as Payless may elect to purchase, are properly tendered and not withdrawn, Payless will, upon the terms and subject to the conditions of the tender offer, accept shares for purchase first from "odd lot holders" (as defined in Section 1 of the offer to purchase) who properly tender their shares at or below the purchase price and then on a pro rata basis from all other stockholders whose shares are properly tendered at or below the purchase price and not properly withdrawn. We are the owner of record of shares held for your account. As such, we are the only ones who can tender your shares, and then only pursuant to your instructions. WE ARE SENDING YOU THE LETTER OF TRANSMITTAL FOR YOUR INFORMATION ONLY; YOU CANNOT USE IT TO TENDER SHARES WE HOLD FOR YOUR ACCOUNT. Please instruct us as to whether you wish us to tender any or all of the shares we hold for your account on the terms and subject to the conditions of the tender offer. 2 We call your attention to the following: 1. You may tender shares at prices not in excess of $53.00 nor less than $48.00 per share as indicated in the attached instruction form, net to you in cash, without interest. 2. You should consult with your broker on the possibility of designating the priority in which your shares will be purchased in the event of proration. 3. The tender offer is not conditioned upon any minimum number of shares being tendered. The tender offer is, however, subject to certain other conditions set forth in Section 6 of the offer to purchase. 4. The tender offer, proration period and withdrawal rights will expire at 5:00 p.m., New York City time, on Monday, April 10, 2000, unless Payless extends the tender offer. 5. The tender offer is for 7,547,170 shares, constituting approximately 25% of the shares outstanding as of March 7, 2000. 6. Tendering stockholders who are registered stockholders or who tender their shares directly to EquiServe will not be obligated to pay any brokerage commissions or fees, solicitation fees, or, except as set forth in the offer to purchase and the letter of transmittal, stock transfer taxes on Payless' purchase of shares under the tender offer. 7. If you own beneficially or of record an aggregate of fewer than 100 shares, and you instruct us to tender on your behalf all such shares at or below the purchase price before the expiration date and check the box captioned "Odd Lots" in the attached instruction form, Payless, upon the terms and subject to the conditions of the tender offer, will accept all such shares for purchase before proration, if any, of the purchase of other shares properly tendered at or below the purchase price and not properly withdrawn. 8. If you wish to tender portions of your shares at different prices, you must complete a separate instruction form for each price at which you wish to tender each such portion of your shares. We must submit separate letters of transmittal on your behalf for each price you will accept. 9. The Board of Directors of Payless has approved the tender offer. However, neither Payless nor its board of directors makes any recommendation to stockholders as to whether to tender or refrain from tendering their shares or as to the price or prices at which stockholders may choose to tender their shares. Stockholders must make their own decision as to whether to tender their shares and, if so, how many shares to tender and the price or prices at which such shares should be tendered. Payless' directors and executive officers have advised Payless that they do not intend to tender any shares in the tender offer. If you wish to have us tender any or all of your shares, please so instruct us by completing, executing, detaching and returning to us the attached instruction form. If you authorize us to tender your shares, we will tender all such shares unless you specify otherwise on the attached instruction form. YOUR INSTRUCTION FORM SHOULD BE FORWARDED TO US IN AMPLE TIME TO PERMIT US TO SUBMIT A TENDER ON YOUR BEHALF BEFORE THE EXPIRATION DATE OF THE TENDER OFFER. THE TENDER OFFER, PRORATION PERIOD AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON MONDAY, APRIL 10, 2000, UNLESS PAYLESS EXTENDS THE TENDER OFFER. As described in the offer to purchase, if more than 7,547,170 shares, or such greater number of shares as Payless may elect to purchase in accordance with applicable law, are properly tendered at 2 3 or below the purchase price and not properly withdrawn before the expiration date, Payless will accept shares for purchase at the purchase price in the following order of priority: (a) all shares properly tendered at or below the purchase price and not properly withdrawn before the expiration date by any odd lot holder who: (1) tenders all shares owned beneficially or of record by such odd lot holder at or below the purchase price (partial tenders will not qualify for this preference); and (2) completes the section captioned "Odd Lots" on the letter of transmittal and, if applicable, on the notice of guaranteed delivery; and (b) after purchase of all of the foregoing shares, all other shares properly tendered at or below the purchase price and not properly withdrawn before the expiration date on a pro rata basis, if necessary, with adjustments to avoid purchases of fractional shares, as provided in the offer to purchase. The tender offer is being made solely under the offer to purchase and the related letter of transmittal and is being made to all record holders of shares. The tender offer is not being made to, nor will tenders be accepted from or on behalf of, holders of shares residing in any jurisdiction in which the making of the tender offer or acceptance thereof would not be in compliance with the securities, blue sky or other laws of such jurisdiction. 3 4 INSTRUCTION FORM WITH RESPECT TO PAYLESS SHOESOURCE OFFER TO PURCHASE FOR CASH 7,547,170 SHARES OF ITS COMMON STOCK, PAR VALUE $0.01 PER SHARE (INCLUDING THE ASSOCIATED PREFERRED STOCK PURCHASE RIGHTS) AT A PURCHASE PRICE NOT IN EXCESS OF $53.00 NOR LESS THAN $48.00 PER SHARE The undersigned acknowledge(s) receipt of your letter and the enclosed offer to purchase, dated March 13, 2000, and the related letter of transmittal, which, as may be amended and supplemented from time to time, together constitute the tender offer in connection with the tender offer by Payless ShoeSource, Inc., a Delaware corporation, to purchase 7,547,170 shares of its common stock, par value $0.01 per share, including the associated preferred stock purchase rights issued under the Stockholder Protection Rights Agreement, dated as of April 20, 1998, as amended, between Payless and UMB Bank, N.A., as Rights Agent, at prices, net to the seller in cash, without interest, not greater than $53.00 nor less than $48.00 per share, specified by the undersigned, upon the terms and subject to the conditions of the tender offer. Unless the context requires otherwise, all references herein to shares shall include the associated preferred stock purchase rights. The undersigned understands that Payless will, upon the terms and subject to the conditions of the tender offer, determine a single per share price not in excess of $53.00 nor less than $48.00 per share that it will pay for the shares properly tendered and not withdrawn under the tender offer taking into account the number of shares so tendered and the prices specified by tendering stockholders. Payless will select the lowest purchase price that will allow it to purchase 7,547,170 shares, or such lesser number of shares as are properly tendered, at prices not in excess of $53.00 nor less than $48.00 per share under the tender offer. All shares properly tendered at prices at or below the purchase price and not properly withdrawn will be purchased at the purchase price, net to the seller in cash, without interest, upon the terms and subject to the conditions of the tender offer, including the odd lot and proration provisions described in the offer to purchase. Payless will return as promptly as practicable all other shares, including shares tendered at prices in excess of the purchase price and shares not purchased because of proration. The undersigned hereby instruct(s) you to tender to Payless the number of shares indicated below or, if no number is indicated, all shares you hold for the account of the undersigned, at the price per share indicated below, under the terms and subject to the conditions of the tender offer. Aggregate number of shares to be tendered by you for the account of the undersigned:
---------------- shares* ----------------
- --------------- * UNLESS OTHERWISE INDICATED, ALL OF THE SHARES, INCLUDING THE ASSOCIATED PREFERRED STOCK PURCHASE RIGHTS, HELD FOR THE ACCOUNT WILL BE TENDERED. ODD LOTS [ ] By checking this box, the undersigned represents that the undersigned owns beneficially or of record an aggregate of fewer than 100 shares and is instructing the holder to tender all such shares. 4 5 In addition, the undersigned is tendering shares either (check one box): [ ] at the purchase price, as the same shall be determined by Payless in accordance with the terms of the tender offer (persons checking this box need not indicate the price per share below), or [ ] at the price per share indicated below under "Price (in Dollars) Per Share at Which Shares are Being Tendered." 5 6 SHARES TENDERED AT PRICE DETERMINED BY STOCKHOLDER (See Instruction 5 to the letter of transmittal) By checking ONE of the following boxes below INSTEAD OF THE BOX UNDER "Shares Tendered at Price Determined under the Tender Offer," the undersigned hereby tenders shares at the price checked. This action could result in none of the shares being purchased if the purchase price determined by Payless for the shares is less than the price checked below. A stockholder who desires to tender shares at more than one price must complete a separate letter of transmittal for each price at which shares are tendered. The same shares cannot be tendered, unless previously properly withdrawn as provided in Section 4 of the offer to purchase, at more than one price. PRICE (IN DOLLARS) PER SHARE AT WHICH SHARES ARE BEING TENDERED [ ] $48.000 [ ] $49.250 [ ] $50.500 [ ] $51.750 [ ] $48.125 [ ] $49.375 [ ] $50.625 [ ] $51.875 [ ] $48.250 [ ] $49.500 [ ] $50.750 [ ] $52.000 [ ] $48.375 [ ] $49.625 [ ] $50.875 [ ] $52.125 [ ] $48.500 [ ] $49.750 [ ] $51.000 [ ] $52.250 [ ] $48.625 [ ] $49.875 [ ] $51.125 [ ] $52.375 [ ] $48.750 [ ] $50.000 [ ] $51.250 [ ] $52.500 [ ] $48.875 [ ] $50.125 [ ] $51.375 [ ] $52.625 [ ] $49.000 [ ] $50.250 [ ] $51.500 [ ] $52.750 [ ] $49.125 [ ] $50.375 [ ] $51.625 [ ] $52.875 [ ] $53.000
CHECK ONLY ONE BOX ABOVE. IF MORE THAN ONE BOX IS CHECKED ABOVE, THERE IS NO VALID TENDER OF SHARES. SHARES TENDERED AT PRICE DETERMINED UNDER THE TENDER OFFER (See Instruction 5 to the letter of transmittal) [ ] The undersigned wants to maximize the chance of having Payless purchase all of the shares the undersigned is tendering (subject to the possibility of proration, if applicable). Accordingly, by checking this box instead of one of the price boxes above, the undersigned hereby tenders shares and is willing to accept the purchase price determined by Payless, in accordance with the terms of the tender offer. This action could result in receiving a price per share as low as $48.00 6 7 THE METHOD OF DELIVERY OF THIS DOCUMENT IS AT THE OPTION AND RISK OF THE TENDERING STOCKHOLDER. IF DELIVERY IS BY MAIL, REGISTERED MAIL WITH RETURN RECEIPT REQUESTED, PROPERLY INSURED, IS RECOMMENDED. IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE DELIVERY. SIGNATURE BOX Signature(s) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Dated --------------------------------------------------------------------, 2000 Name(s) and address(es) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (PLEASE PRINT) Area code and telephone number ------------------------------------------------- Taxpayer Identification or Social Security Number ------------------------------ 7 EX-99.A.1.F 7 SUBSTITUTE W-9 TAX GUIDELINES 1 GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION NUMBER ON SUBSTITUTE FORM W-9 GUIDELINES FOR DETERMINING THE PROPER IDENTIFICATION NUMBER TO GIVE THE PAYER.--Social Security numbers have nine digits separated by two hyphens: i.e., 000-00-0000. Employer identification numbers have nine digits separated by only one hyphen: i.e., 00-0000000. The table below will help determine the number to give the payer.
- ------------------------------------------------------------ GIVE THE SOCIAL SECURITY FOR THIS TYPE OF ACCOUNT: NUMBER OF-- - ------------------------------------------------------------ 1. An individual's account The individual 2. Two or more individuals (joint The actual owner of account) the account or, if combined funds, the first individual on the account(1) 3. Custodian account of a minor The minor(2) (Uniform Gift to Minors Act) 4. a. The usual revocable savings The grantor- trust account (grantor is also trustee(1) trustee) b. So-called trust account that is The actual owner(1) not a legal or valid trust under State law - ------------------------------------------------------------
- ------------------------------------------------------------ GIVE THE EMPLOYER IDENTIFICATION FOR THIS TYPE OF ACCOUNT: NUMBER OF-- - ------------------------------------------------------------ 5. Sole proprietorship account The owner(3) 6. A valid trust, estate, or pension Legal entity (Do trust not furnish the TIN of the personal representative or trustee unless the legal entity itself is not designated in the account title.)(4) 7. Corporate account The corporation 8. Partnership The partnership 9. Association, club, religious, The organization charitable, educational or other tax-exempt organization 10. A broker or registered nominee The broker or nominee 11. Account with the Department of The public entity Agriculture in the name of a public entity (such as a State or local government, school district, or prison) that receives agricultural program payments - ------------------------------------------------------------
(1) List first and circle the name of the person whose number you furnish. (2) Circle the minor's name and furnish the minor's social security number. (3) Show the name of the owner. (4) List first and circle the name of the legal trust, estate, or pension trust. NOTE: If no name is circled when more than one name is listed, the number will be considered to be that of the first name listed. 2 GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION NUMBER ON SUBSTITUTE FORM W-9 PAGE 2 OBTAINING A NUMBER If you don't have a taxpayer identification number or you don't know your number, obtain Form SS-5, Application for a Social Security Card, or Form SS-4, Application for Employer Identification Number (for business and all other entities), at the local office of the Social Security Administration or the Internal Revenue Service and apply for a number. PAYEES EXEMPT FROM BACKUP WITHHOLDING Payees specifically exempted from backup withholding on ALL payments include the following: - An organization exempt from tax under Section 501(a) of the Internal Revenue Code of 1986, as amended (the "Code"), any IRA, or a custodial account under Section 403(b)(7), if the account satisfies the requirements of Section 401(f)(2). - The United States or any of its agencies or instrumentalities. - A State, the District of Columbia, a possession of the United States, or any of their political subdivisions or instrumentalities. - A foreign government, a political subdivision of a foreign government, or any agency or instrumentality thereof. - An international organization or any agency or instrumentality thereof. Other payees that may be exempt from back-up withholding include: - A corporation. - A foreign central bank of issue. - A dealer in securities or commodities required to register in the U.S., the District of Columbia or a possession of the U.S. - A real estate investment trust. - An entity registered at all times during the tax year under the Investment Company Act of 1940. - A common trust fund operated by a bank under Section 584(a) of the Code. - A financial institution. - A middleman known in the investment community as a nominee or who is listed in the most recent publication of the American Society of Corporate Securities, Inc. Nominee List. - A trust exempt from tax under Section 664 or described in Section 4947(a)(1) of the Code. Payments of dividends and patronage dividends not generally subject to backup withholding include the following: - Payments to nonresident aliens subject to withholding under Section 1441 of the Code. - Payments to partnerships not engaged in a trade or business in the U.S. and which have at least one nonresident partner. - Payments of patronage dividends where the amount received is not paid in money. - Payments made by certain foreign organizations. - Section 404(k) payments made by an ESOP. Payments of interest not generally subject to backup withholding include the following: - Payments of interest on obligations issued by individuals. NOTE: You may be subject to backup withholding if this interest is $600 or more and is paid in the course of the payer's trade or business and you have not provided your correct taxpayer identification number to the payer. - Payments of tax-exempt interest (including exempt-interest dividends under Section 852 of the Code). - Payments described in Section 6049(b)(5) of the Code to non-resident aliens. - Payments on tax-free covenant bonds under Section 1451 of the Code. - Payments made by certain foreign organizations. - Payments made to a nominee. - Mortgage interest paid to you. EXEMPT PAYEES DESCRIBED ABOVE SHOULD FILE A FORM W-9 TO AVOID POSSIBLE ERRONEOUS BACKUP WITHHOLDING. FILE THIS FORM WITH THE PAYER, FURNISH YOUR TAXPAYER IDENTIFICATION NUMBER, WRITE "EXEMPT" ON THE FACE OF THE FORM, SIGN AND DATE THE FORM AND RETURN IT TO THE PAYER. IF YOU ARE A NONRESIDENT ALIEN OR A FOREIGN ENTITY NOT SUBJECT TO BACKUP WITHHOLDING, FILE WITH A PAYER A COMPLETED INTERNAL REVENUE FORM W-8 (CERTIFICATE OF FOREIGN STATUS). Certain payments other than interest, dividends, and patronage dividends that are not subject to information reporting are also not subject to backup withholding. For details, see the regulations under Sections 6041, 6041A(a), 6042, 6044, 6045, 6049, 6050A and 6050N of the Code and the regulations promulgated thereunder. PRIVACY ACT NOTICE.--Section 6109 requires most recipients of dividend, interest, or other payments to give taxpayer identification numbers to payers who must report the payments to IRS. IRS uses the numbers for identification purposes, and to help verify the accuracy of your tax return. The IRS may also provide this information to the Department of Justice for civil and criminal litigation and to cities, states, and the District of Columbia to carry out their tax laws. Payers must be given the numbers whether or not recipients are required to file tax returns. Payers must generally withhold 31% of taxable interest, dividend, and certain other payments to a payee who does not furnish a taxpayer identification number to a payer. Certain penalties may also apply. PENALTIES (1) PENALTY FOR FAILURE TO FURNISH TAXPAYER IDENTIFICATION NUMBER.--If you fail to furnish your correct taxpayer identification number to a payer, you are subject to a penalty of $50 for each such failure unless your failure is due to reasonable cause and not to willful neglect. (2) CIVIL PENALTY FOR FALSE INFORMATION WITH RESPECT TO WITHHOLDING.--If you make a false statement with no reasonable basis that results in no imposition of backup withholding, you are subject to a penalty of $500. (3) CRIMINAL PENALTY FOR FALSIFYING INFORMATION.--Willfully falsifying certifications or affirmations may subject you to criminal penalties including fines and/or imprisonment. FOR ADDITIONAL INFORMATION CONTACT YOUR TAX CONSULTANT OR THE INTERNAL REVENUE SERVICE. EX-99.A.1.G 8 SUMMARY ADVERTISEMENT 1 This announcement is neither an offer to purchase nor a solicitation of an offer to sell Shares. The Offer is made solely by the Offer to Purchase, dated March 13, 2000, and the related Letter of Transmittal, and any amendments or supplements thereto. The Offer is not being made to, nor will tenders be accepted from or on behalf of, holders of Shares in any jurisdiction in which the making or acceptance of offers to sell Shares would not be in compliance with the laws of that jurisdiction. In any jurisdiction where the securities, blue sky or other laws require the Offer to be made by a licensed broker or dealer, the Offer shall be deemed to be made on behalf of the Company by Goldman, Sachs & Co., the dealer manager of the Offer, or by one or more registered brokers or dealers licensed under the laws of that jurisdiction. NOTICE OF OFFER TO PURCHASE FOR CASH BY PAYLESS SHOESOURCE, INC. OF UP TO 7,547,170 SHARES OF ITS COMMON STOCK (INCLUDING THE ASSOCIATED PREFERRED STOCK PURCHASE RIGHTS) AT A PURCHASE PRICE NOT GREATER THAN $53.00 NOR LESS THAN $48.00 PER SHARE Payless ShoeSource, Inc., a Delaware corporation ("Payless"), is offering to purchase for cash up to 7,547,170 shares of its common stock, par value $0.01 per Share (including the associated preferred stock purchase rights, the "Shares"), upon the terms and subject to the conditions set forth in the Offer to Purchase dated March 13, 2000 (the "Offer to Purchase"), and in the related Letter of Transmittal (which together, as they may be amended and supplemented from time to time, constitute the "Offer"). Payless is inviting its stockholders to tender their Shares at prices specified by the tendering stockholder that are not greater than $53.00 nor less than $48.00 per Share, net to the seller in cash, without interest, upon the terms and subject to the conditions of the Offer. The Offer is not conditioned on any minimum number of Shares being tendered. The Offer is, however, subject to other conditions set forth in the Offer to Purchase and the related Letter of Transmittal. THE OFFER, PRORATION PERIOD AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON MONDAY, APRIL 10, 2000, UNLESS THE OFFER IS EXTENDED. THE BOARD OF DIRECTORS OF PAYLESS HAS APPROVED THE OFFER, BUT NEITHER PAYLESS NOR ITS BOARD OF DIRECTORS IS MAKING ANY RECOMMENDATION TO ITS STOCKHOLDERS AS TO WHETHER TO TENDER OR REFRAIN FROM TENDERING THEIR SHARES OR AS TO THE PRICE OR PRICES AT WHICH STOCKHOLDERS MAY CHOOSE TO TENDER THEIR SHARES. STOCKHOLDERS MUST MAKE THEIR OWN DECISION AS TO WHETHER TO TENDER THEIR SHARES AND, IF SO, HOW MANY SHARES TO TENDER AND THE PRICE OR PRICES AT WHICH SUCH SHARES SHOULD BE TENDERED. PAYLESS DIRECTORS AND EXECUTIVE OFFICERS HAVE ADVISED PAYLESS THAT THEY WILL NOT TENDER ANY SHARES IN THE OFFER. Payless will, upon the terms and subject to the conditions of the Offer, determine the single per Share price, not in excess of $53.00 nor less than $48.00 per Share, that it will pay for Shares properly tendered under the Offer, taking into account the number of Shares so tendered and the prices specified by tendering stockholders. Payless will select the lowest purchase price (the "Purchase Price") that will allow it to purchase 7,547,170 Shares, or such lesser number of Shares as are properly tendered (and not properly withdrawn) pursuant to the Offer at prices not in excess of $53.00 nor less than $48.00 per Share. All Shares properly tendered (and not properly withdrawn) prior to the "expiration date" (as defined below) at prices at or below the Purchase Price will be purchased at the Purchase Price, upon the terms and subject to the conditions of the Offer, including the "odd lot" and proration provisions. Under no circumstances will interest be paid on the Purchase Price for the Shares, regardless of any delay in making such payment. All Shares acquired in the Offer will be acquired at the Purchase Price regardless of whether the stockholder selected a lower price. The term "expiration date" means 5:00 p.m., New York City time, on Monday, April 10, 2000, unless and until Payless, in its sole discretion, shall have extended the period 2 of time during which the Offer will remain open, in which event the term expiration date shall refer to the latest time and date at which the Offer, as so extended by Payless, shall expire. Payless reserves the right, in its sole discretion, to purchase more than 7,547,170 Shares under the Offer subject to applicable law. For purposes of the Offer, Payless will be deemed to have accepted for payment (and therefore purchased) Shares properly tendered at or below the Purchase Price and not properly withdrawn, subject to the "odd lot" and proration provisions of the Offer, only when, as and if Payless gives oral or written notice to EquiServe, the depositary of the Offer, of its acceptance for payment of such Shares under the Offer. Payment for Shares tendered and accepted for payment under the Offer will be made only after timely receipt by the depositary of certificates for such Shares or a timely confirmation of a book-entry transfer of such Shares into the depositary's account at the "book-entry transfer facility" (as defined in the Offer to Purchase), a properly completed and duly executed Letter of Transmittal, or a manually signed facsimile thereof, or an "agent's message" (as defined in the Offer to Purchase) in the case of a book-entry transfer, and any other documents required by the Letter of Transmittal. Upon the terms and subject to the conditions of the Offer, if more than 7,547,170 Shares, or such greater number of Shares as Payless may elect to purchase subject to applicable law, have been properly tendered (and not properly withdrawn) prior to the expiration date at prices at or below the Purchase Price, Payless will purchase properly tendered Shares on the following basis: (1) all Shares properly tendered and not properly withdrawn prior to the expiration date by any odd lot holder who (a) tenders all Shares owned beneficially or of record by such odd lot holder at a price at or below the Purchase Price (partial tenders will not qualify for this preference) and (b) completes the section entitled "Odd Lots" in the Letter of Transmittal and, if applicable, in the Notice of Guaranteed Delivery and (2) after the purchase of all of the foregoing Shares, all other Shares properly tendered at prices at or below the Purchase Price and not properly withdrawn prior to the expiration date, on a pro rata basis, with appropriate adjustments to avoid purchases of fractional Shares. All other Shares that have been tendered and not purchased will be returned to the stockholder as promptly as practicable after the expiration date. Payless expressly reserves the right, in its sole discretion, at any time and from time to time, to extend the period of time during which the Offer is open and thereby delay acceptance for payment of, and payment for, any Shares by giving oral or written notice of such extension to the depositary and making a public announcement thereof no later than 9:00 a.m., New York City time, on the next business day after the previously scheduled expiration date. During any such extension, all Shares previously tendered and not properly withdrawn will remain subject to the Offer and to the right of a tendering stockholder to withdraw such stockholder's Shares. Payless is making the Offer because (1) its Board of Directors believes that its Shares are undervalued in the public market, (2) its Board of Directors believes that the purchase of Shares pursuant to the Offer is a prudent use of its financial resources given Payless's business profile, assets and prospects and (3) the Offer provides stockholders who are considering a sale of all or a portion of their Shares with the opportunity to determine the price, not in excess of $53.00 nor less than $48.00 per Share, at which they are willing to sell their Shares. In addition, where Shares are tendered by the registered owner thereof directly to the depositary pursuant to the Offer, the sale of those Shares in the Offer will permit the seller to avoid the usual transaction costs associated with open market sales. Also, "odd lot holders" (as defined in the Offer to Purchase) who hold Shares registered in their names and tender all of their Shares directly to the depositary and whose Shares are purchased under the Offer not only will avoid the payment of brokerage commissions but also will avoid any applicable odd lot discounts that might be payable on sales of their Shares in New York Stock Exchange transactions. The Offer also allows stockholders to sell a portion of their Shares while retaining a continuing equity interest in Payless. Tenders of Shares under the Offer are irrevocable, except that such Shares may be withdrawn at any time prior to the expiration date and, unless previously accepted for payment by Payless under the Offer, may also be withdrawn at any time after 12:00 Midnight, New York City time, on Friday, May 5, 2000. For such withdrawal to be effective, a written, telegraphic or facsimile transmission notice of withdrawal must be timely received by EquiServe at its address set forth on the back cover page of the Offer to Purchase. Any such notice of withdrawal must specify the name of the tendering stockholder, the number of Shares to be withdrawn and 3 the name of the registered holder of such Shares. If the certificates for Shares to be withdrawn have been delivered or otherwise identified to the depositary, then, before the release of such certificates, the serial numbers shown on such certificates must be submitted to the depositary and the signature(s) on the notice of withdrawal must be guaranteed by an "eligible guarantor institution" (as defined in the Offer to Purchase), unless such Shares have been tendered for the account of an eligible guarantor institution. If Shares have been tendered pursuant to the procedure for book-entry transfer set forth in the Offer to Purchase, any notice of withdrawal also must specify the name and the number of the account at the book-entry transfer facility to be credited with the withdrawn Shares and must otherwise comply with such book-entry transfer facility's procedures. All questions as to the form and validity of any notice of withdrawal, including the time of receipt, will be determined by Payless, in its sole discretion, whose determination will be final and binding. None of Payless, EquiServe as the depositary, D.F. King & Co., Inc. as the information agent, Goldman, Sachs & Co. as the dealer manager or any other person will be under any duty to give notification of any defects or irregularities in any tender or notice of withdrawal or incur any liability for failure to give any such notification. The information required to be disclosed by Rule 13e-4(d)(1) under the Securities Exchange Act of 1934, as amended, is contained in the Offer to Purchase and is incorporated herein by reference. The Offer to Purchase and the related Letter of Transmittal are being mailed promptly to record holders of Shares whose names appear on Payless's stockholder list and will be furnished to brokers, dealers, commercial banks, trust companies and similar persons whose names, or the names of whose nominees, appear on the stockholder list or, if applicable, who are listed as participants in a clearing agency's security position listing for subsequent transmittal to beneficial owners of Shares. THE OFFER TO PURCHASE AND THE RELATED LETTER OF TRANSMITTAL CONTAIN IMPORTANT INFORMATION THAT SHOULD BE READ CAREFULLY BEFORE ANY DECISION WITH RESPECT TO THE OFFER IS MADE. Additional copies of the Offer to Purchase and Letter of Transmittal may be obtained from the Information Agent at the address and telephone number set forth below and will be furnished promptly at the Company's expense. Any questions or requests for assistance may be directed to the information agent or the dealer manager at the respective telephone numbers and addresses set forth below. Requests for additional copies of the Offer to Purchase, the Letter of Transmittal or the Notice of Guaranteed Delivery may be directed to the information agent at the telephone number and address set forth below. Stockholders may also contact their broker, dealer, commercial bank, trust company or nominee for assistance concerning the Offer. To confirm delivery of Shares, stockholders are directed to contact the depositary. The information agent for the Offer is: D.F. KING & CO., INC. 77 Water Street, 20th Floor New York, New York 10005 Toll Free: (800) 348-3416 Banks and Brokerage Firms Please Call: (212) 269-5550 The dealer manager for the Offer is: GOLDMAN, SACHS & CO. 85 Broad Street New York, New York 10004 (212) 902-1000 (call collect) (800) 323-5678 (call toll free) MARCH 13, 2000 EX-99.A.1.H 9 LETTER TO PARTICIPANTS 1 PAYLESS SHOESOURCE, INC. MARCH 13, 2000 TO THE PARTICIPANTS IN THE PAYLESS SHOESOURCE, INC. PROFIT SHARING PLAN AND THE PAYLESS SHOESOURCE, INC. PROFIT SHARING PLAN FOR PUERTO RICO ASSOCIATES Enclosed are materials that require immediate attention. The materials describe events that may affect your interest in the Payless ShoeSource, Inc. Profit Sharing Plan or the Payless ShoeSource, Inc. Profit Sharing Plan for Puerto Rico Associates, and any successor plans (together, the "Plan"). As you probably already know, Payless ShoeSource, Inc. ("Payless") has made a tender offer to acquire up to 7,547,170 shares of its outstanding common stock at a price not in excess of $53.00 nor less than $48.00 per share, net to the seller in cash, without interest. Your account in the Plan includes an investment in the Payless Common Stock Fund (the "Stock Fund"). Your account balance in the Stock Fund represents an interest in a specific number of shares determined at each valuation date and as a participant with an investment in the Stock Fund, you have a right to direct the Plan trustee to tender shares allocated to your Stock Fund account. The number of shares you may direct the trustee to tender and the price at which those shares will be tendered is discussed below. You will be allowed to direct the Trustee to tender up to and including the number of shares allocated to your Plan account on February 29, 2000, adjusted for purchases, exchanges, or withdrawals from the Stock Fund after that date through the closing day of the tender offer, April 10, 2000, as a percentage of the number of shares allocated to your Stock Fund account. The February 29, 2000, allocation is not available at this time. For informational purposes only, the number of shares allocated to your Stock Fund account as of January 31, 2000, is listed on the label affixed to the attached designation form. Because your interest in the Stock Fund is comprised of units representing shares of Payless common stock rather than shares of Payless common stock, The Bank of New York, as the Plan's current trustee, is the record holder of the shares. As of April 1, 2000, American Express Trust Company will succeed The Bank of New York as trustee of the Payless ShoeSource, Inc. Profit Sharing Plan and Banco Popular de Puerto Rico will succeed The Bank of New York as trustee of the Payless ShoeSource, Inc. Profit Sharing Plan for Puerto Rico Associates. Therefore, American Express Trust Company or Banco Popular de Puerto Rico, as the applicable successor trustee, will respond to the tender offer on your behalf. As you may be aware, the Plan is changing its recordkeeper and investment options effective April 1, 2000. This requires a "quiet period" for the plan. After March 20, 2000 you will not be allowed to make investment changes or change your contribution rate through the end of the quiet period, which will run through mid-June. Any Payless common stock allocated to your Stock Fund account not accepted in the tender offer cannot be sold during the quiet period. If you want to change the way your Plan contributions are invested, or change the funds in which your current Plan account is invested prior to the beginning of the quiet period, you must act by 12:00 p.m., Central time, on March 20, 2000. Please see the materials describing the Plan changes that you recently received from Payless. IF YOU DO NOT WISH TO PARTICIPATE IN THIS OFFER, YOU DO NOT NEED TO TAKE ANY ACTION. IF YOU DO WISH TO DIRECT THE TRUSTEE TO TENDER SOME OR ALL OF THE SHARES ALLOCATED TO YOUR STOCK FUND ACCOUNT, THE INSTRUCTIONS ON HOW TO TENDER THOSE SHARES ARE EXPLAINED IN DETAIL IN THE ACCOMPANYING MATERIALS. YOU SHOULD READ AND FOLLOW THE INSTRUCTIONS IN THIS LETTER CAREFULLY. PLEASE ALSO CAREFULLY READ THE OTHER MATERIALS PROVIDED WITH THIS LETTER PRIOR TO RESPONDING. 2 The enclosed documents describe the terms and conditions of the tender offer, as well as other information relating to the tender offer and Payless. You should read these documents carefully and in their entirety. However, for your information, the following are answers to some of the questions you might have regarding the offer: WHAT IS A TENDER OFFER? A tender offer is a process through which Payless can offer to purchase shares of its common stock, and the owners of those shares can decide whether or not they want to tender their shares, and if so, at what price they would like to tender their shares within the price range Payless has established. HOW MANY SHARES CAN I DIRECT THE TRUSTEE TO TENDER FROM THE PLAN? You may tender all shares allocated to your Stock Fund account as of February 29, 2000, adjusted for purchases, exchanges, or withdrawals from the Stock Fund after that date through April 10, 2000. The Plan is currently valued on a monthly basis. The latest date for which the valuation reconciliation is complete is January 31, 2000. The number of shares allocated to your Stock Fund account as of that date is listed on the attached designation form. When the tender offer is completed, the last reconciled valuation date will be as of February 29, 2000. If you have directed contribution dollars to the Stock Fund, transferred Stock Fund assets to another investment option, transferred another investment option to Stock Fund assets or taken a withdrawal from the Stock Fund, the number of shares in your account will vary from the shares that you owned at the January 31, 2000 valuation date. The Plan's trustee will use its best efforts to determine the number of shares that you own as of April 10, 2000, and can tender pursuant to your direction. However, it is possible that the shares the trustee tenders on your behalf will differ from the actual shares allocated to your Stock Fund account. Therefore, if you tender all of your allocated shares and Payless accepts your tender offer, you may still have a balance in the Stock Fund after the tender offer is completed. The balance left in your Stock Fund account would equal the difference between your actual balance in the Stock Fund on April 10, 2000, and the estimated Stock Fund balance determined by the trustee. As a result of the monthly valuation, you will be required to direct the trustee to tender the shares allocated to your Stock Fund account as a percentage, to the nearest 10%, of the number of shares allocated to your Stock Fund account. WHY MUST I DIRECT THE TENDER OF THE SHARES ALLOCATED TO MY STOCK FUND ACCOUNT BY PERCENTAGE? The Plan is currently valued on a monthly basis. As discussed above, the number of shares listed on the attached designation form does not reflect activity in your Plan account after January 31, 2000. This activity may include your contribution dollars to the Stock Fund, transfers of Stock Fund assets to another investment option, transfers of another investment option to Stock Fund assets or withdrawals from the Stock Fund. A percentage designation will allow the trustee to include the above transactions and maximize the number of shares you are able to instruct the trustee to tender on your behalf. However, it is possible that the shares the trustee tenders on your behalf will differ from the actual shares that you own. Therefore, if you tender all of your allocated shares and Payless accepts your tender offer, you may still have a balance in the Stock Fund after the tender offer is completed. You must designate the percentage of shares allocated to your Stock Fund account that you instruct the trustee to tender in 10% increments. 3 AT WHAT PRICE MAY I DIRECT THE TRUSTEE TO TENDER THE SHARES ALLOCATED TO MY STOCK FUND ACCOUNT? The attached designation form contains a price designation block. Check the box of the price at which you would like to have the trustee tender the shares allocated to your Stock Fund account. You must designate one of the listed prices. Alternatively, you may instruct the trustee to tender your shares at the price that is paid in the tender offer by checking the box labeled "Shares Tendered at Price Determined Under the Tender Offer." IF I SELECT A PRICE, WILL THE TRUSTEE TENDER MY SHARES AT THAT PRICE? Generally, the trustee will tender the shares you have designated in accordance with your instructions. However, the law requires that the trustee not tender any shares at a price less than the closing price of Payless' common stock on April 10, 2000, as reported on the New York Stock Exchange. As a result, if the closing price of Payless' common stock on April 10, 2000 is higher than the price you designate on the enclosed form, the trustee will automatically increase the price you have designated to the closing price. The trustee will then tender the share allocated to your Stock Fund account in accordance with your percentage designation. If you have elected to have the shares allocated to your Stock Fund account tendered at the price determined under the tender offer, the trustee will tender such shares at the closing price of Payless' common stock on April 10, 2000. WHO WILL DETERMINE THE PURCHASE PRICE THAT IS PAID IN THE TENDER OFFER? Payless will determine a single per share price that it will pay for shares properly tendered, taking into account the number of shares tendered and the prices specified by tendering stockholders. Payless will select the lowest purchase price that will allow it to purchase up to 7,547,170 shares of its common stock or, if a lesser number of shares are properly tendered, all shares that are properly tendered. Payless will then purchase all of the shares tendered at or below that final price, although Payless may not purchase all of those shares if more than 7,547,170 shares are tendered in the offer. In other words, if you select a price greater than the price that is finally determined to be paid in the tender offer, none of your shares will be purchased. All shares acquired in the offer will be acquired at the same purchase price. HOW DO I DIRECT THE TRUSTEE TO TENDER THE SHARES ALLOCATED TO MY STOCK FUND ACCOUNT? If you wish to direct the trustee to tender shares allocated to your Stock Fund account, please complete the attached designation form and return it as directed so that it is received by EquiServe no later than 5:00 p.m., New York City time, on April 7, 2000, in the enclosed envelope or via facsimile to EquiServe, as specified on the attached designation form. You must instruct the trustee, through EquiServe, to tender some percentage or all of the shares allocated to your Stock Fund account (subject to the discussion of the number of shares which you may direct, above) by following the instructions in this letter and the attached designation form. If the designation form is not properly completed or is not received by the 5:00 p.m., New York City time, April 7, 2000 deadline, none of your shares will be purchased. The only actions you are required to take to direct the trustee to tender shares allocated to your Stock Fund account are (i) specify the percentage of the shares that you wish the trustee to tender, (ii) designate the price at which the trustee should tender the shares and (iii) return the attached designation form so that it is received by EquiServe no later than 5:00 p.m., New York City time, on April 7, 2000. You do not need to complete any form other than the attached designation form. After April 10, 2000, it will be determined whether all, part, or none of your tendered shares have been purchased by Payless. If you miss the 5:00 p.m., New York City time, April 7, 2000 deadline, the trustee will not tender your shares. 4 THE DESIGNATION FORM MUST BE RECEIVED BY EQUISERVE NO LATER THAN 5:00 P.M., NEW YORK CITY TIME, ON APRIL 7, 2000. WHAT IF I HOLD SHARES OUTSIDE OF THE PLAN? If you hold shares outside of the Plan, you will receive, under separate cover, tender offer materials that can be used to tender the shares held outside the Plan. Those materials may not be used to instruct the applicable trustee to tender shares allocated to your Stock Fund account. WHAT HAPPENS IF MORE THAN 7,547,170 SHARES ARE TENDERED IN THE OFFER? If more than 7,547,170 shares are tendered, Payless (1) will first purchase all shares properly tendered, and not properly withdrawn, by any stockholder who owns fewer than 100 shares and tenders all of those shares at a purchase price at or below the price that is finally determined to be paid in the tender offer and (2) will then purchase all other shares properly tendered, and not properly withdrawn, at prices at or below the price that is finally determined to be paid in the tender offer on a pro rata basis. CAN I TAKE ADVANTAGE OF THE "ODD LOT" PRIORITY? No. While fewer than 100 shares of Payless common stock may have been allocated to your Stock Fund account, the record holder of the shares, the trustee, has significantly more than 100 shares and therefore, shares held in the Plan are not eligible to avoid proration by virtue of the "odd lot" priority. WHAT IF I HAVE QUESTIONS ABOUT THE TENDER OFFER? Contact D. F. King & Co., Inc., the information agent, for the tender offer, at (800) 848-3416 (toll-free) with any questions about the terms and conditions of the tender offer or how to tender the shares allocated to your Stock Fund account. HOW WILL THE PROCEEDS OF THE TENDER BE INVESTED? Any shares tendered by the trustee and accepted by Payless will be exchanged for cash. The cash proceeds will remain in your Plan account and will be invested in the same manner as you have directed the trustee to invest your current contributions (including any election which you make prior to March 20, 2000), as soon as administratively feasible after the funds have been received. Again, the manner in which your contributions are directed cannot be changed throughout the quiet period, beginning at 12:00 Midnight, Central time, on March 20, 2000. 5 DESIGNATION FORM DIRECTION TO THE TRUSTEE Name: - -------------------------------------------------------------------------------- Social Security Number: - -------------------------------------------------------------------------------- Designate the percentage of the shares allocated to your Stock Fund account that you direct the trustee to tender pursuant to the tender offer. (Check the appropriate box.) IF MORE THAN ONE BOX IS CHECKED, THERE IS NO VALID DESIGNATION AND THE SHARES ALLOCATED TO YOUR STOCK FUND WILL NOT BE TENDERED. 0% 20% 40% 60% 80% 100% 10% 30% 50% 70% 90%
Designate the price that you direct the trustee to offer to sell the shares allocated to your Stock Fund account to Payless.* (Check the appropriate box.) This action could result in none of the shares being purchased if the purchase price determined by Payless for the shares is less than the price checked below or if the price checked below is increased by the trustee above the purchase price determined by Payless. IF MORE THAN ONE BOX IS CHECKED, THERE IS NO VALID DESIGNATION AND THE SHARES ALLOCATED TO YOUR STOCK FUND WILL NOT BE TENDERED. [ ] $48.000 [ ] $49.000 [ ] $50.000 [ ] $51.000 [ ] $52.000 [ ] $48.125 [ ] $49.125 [ ] $50.125 [ ] $51.125 [ ] $52.125 [ ] $48.250 [ ] $49.250 [ ] $50.250 [ ] $51.250 [ ] $52.250 [ ] $48.375 [ ] $49.375 [ ] $50.375 [ ] $51.375 [ ] $52.375 [ ] $48.500 [ ] $49.500 [ ] $50.500 [ ] $51.500 [ ] $52.500 [ ] $48.625 [ ] $49.625 [ ] $50.625 [ ] $51.625 [ ] $52.625 [ ] $48.750 [ ] $49.750 [ ] $50.750 [ ] $51.750 [ ] $52.750 [ ] $48.875 [ ] $49.875 [ ] $50.875 [ ] $51.875 [ ] $52.875 [ ] $53.000
* The trustee will adjust the price you elect to the closing price of Payless's common stock on April 10, 2000, as reported on the New York Stock Exchange, if such closing price is greater than the price you designated above. Return this form to EquiServe, the depositary for the tender offer at:
- -------------------------------------------------------------------------------------------------- BY OVERNIGHT OR BY MAIL: BY HAND DELIVERY: EXPRESS MAIL - -------------------------------------------------------------------------------------------------- EquiServe Securities Transfer & Reporting Services, Inc. EquiServe Attn: Corporate Actions c/o EquiServe Attn: Corporate Actions P.O. Box 9573 100 Williams Street, Galleria 40 Capanelli Drive Boston, MA 02205-9573 New York, NY 10038 Braintree, MA 02184 - --------------------------------------------------------------------------------------------------
You may also fax this designation form to EquiServe at (781) 575-4826 The information agent for this tender offer is D. F. King & Co., Inc. All questions regarding the tender offer should be directed to D. F. King & Co., Inc. at (800) 848-3416. EX-99.A.1.I 10 LETTER TO PARTICIPANTS 1 PAYLESS SHOESOURCE, INC. MARCH 13, 2000 TO THE PARTICIPANTS IN THE PAYLESS SHOESOURCE, INC. STOCK OWNERSHIP PLAN Enclosed are materials that require immediate attention. The materials describe events that may affect your interest in the Payless ShoeSource, Inc. Stock Ownership Plan (the "Plan"). As you probably already know, Payless ShoeSource, Inc. ("Payless") has made a tender offer to acquire up to 7,547,170 shares of its outstanding common stock at a price not in excess of $53.00 nor less than $48.00 per share, net to the seller in cash, without interest. Your account in the Plan is a direct investment in Payless common stock. As a participant in the Plan, you have a right to tender your shares in the Plan pursuant to the terms and conditions of this tender offer. You will be allowed to tender up to and including the number of shares allocated to your Plan account as of 5:00 p.m., New York City time, on the closing day of the tender offer, April 10, 2000. For informational purposes only, the February 29, 2000 balance in your Plan account is listed on the label attached to the letter of transmittal. This balance does not include shares of Payless common stock purchased with your contributions to the Plan between the end of February and April 10, 2000, if any, but you will be able to tender such shares in addition to the shares listed on the letter of transmittal. If you wish to tender the shares you hold in the Plan account, please complete the attached letter of transmittal and return it to EquiServe so that it is received no later than 5:00 p.m., New York City time, on April 7, 2000, in the enclosed envelope. After April 10, 2000, it will be determined whether all, part or none of your tendered shares have been purchased by Payless. If you miss the deadline, your shares will not be purchased. Please carefully read the other materials prior to responding. Any shares tendered by you and accepted by Payless will be exchanged for cash. The cash proceeds will be sent to you as soon as administratively feasible. As you are aware, Payless contributes 15% toward the purchase price of Payless common stock purchased pursuant to this Plan. Generally, at the time that you dispose of the stock, you will recognize ordinary income equal to the amount of Payless's 15% contribution. The remainder of the gain, if any, may qualify for capital gains treatment with respect to any proceeds in excess of the total purchase price of the stock. If the sale occurs less than two years from the first date of the purchase period in which the stock was purchased or one year from the date of purchase, Payless is required to report, for W-2 tax purposes, the 15% contribution as ordinary income. However, if the sale occurs two or more years after the first date of the purchase period in which the stock was purchased or one year from the date the shares were purchased, the amount recognized as ordinary income will be limited to the gain on the sale if that amount is less than the amount of Payless' 15% contribution. For additional information with respect to the tax consequences of the Plan, including state and local taxes, you should consult with your tax counsel. IF YOU DO NOT WISH TO PARTICIPATE IN THIS OFFER, YOU DO NOT NEED TO TAKE ANY ACTION. IF YOU DO WISH TO TENDER SOME OR ALL OF THE SHARES IN YOUR PLAN ACCOUNT, THE INSTRUCTIONS ON HOW TO TENDER THOSE SHARES ARE EXPLAINED IN DETAIL IN THE ENCLOSED MATERIALS. YOU SHOULD READ AND FOLLOW THE INSTRUCTIONS IN THIS LETTER AND IN THE ENCLOSED MATERIALS CAREFULLY. 2 In addition to describing how to tender shares, the enclosed documents describe the terms and conditions of the tender offer, as well as other information relating to the tender offer and Payless. You should read these documents carefully and in their entirety. However, for your information, the following are answers to some of the questions you might have regarding the offer: WHAT IS A TENDER OFFER? A tender offer is a process through which Payless can offer to purchase shares of its common stock, and the owners of those shares can decide whether or not they want to tender their shares, and if so, at what price they would like to tender their shares within the price range Payless has established. HOW MANY SHARES CAN I TENDER FROM THE PLAN? You may tender up to all shares, including any fractional shares, allocated to your Plan account as of April 10, 2000. You may tender fractional shares only if you tender all of your shares. If you tender less than all of your shares, you will only be able to tender the nearest whole number of shares less than the calculated percentage of your shares you designate. Because the number of shares listed on the letter of transmittal does not include shares of Payless common stock purchased with your contributions to the Plan between the end of February and April 10, 2000, if any, you will be required to tender the shares in your Plan account as a percentage (in 10% increments), of the number of shares in your Plan account. WHY MUST I TENDER THE SHARES IN MY PLAN ACCOUNT BY PERCENTAGE? The number of shares listed on the letter of transmittal does not include shares of Payless common stock purchased with your contributions to the Plan between the end of February and April 10, 2000, if any. As a result, to maximize the number of shares that you may tender, you must designate the shares you wish to tender from your Plan account as a percentage (in 10% increments), of the number of shares in your Plan account. HOW DO I SPECIFY THE PRICE AT WHICH I WANT TO TENDER THE SHARES IN MY PLAN ACCOUNT? The attached letter of transmittal contains a price designation block. Check the box of the price at which you would like to tender the shares allocated to your Plan account. You must designate one of the listed prices. Alternatively, you may tender your shares at the price that is paid in the tender offer by checking the box labeled "Shares Tendered at Price Determined Under the Tender Offer." WHO WILL DETERMINE THE PURCHASE PRICE THAT IS PAID IN THE TENDER OFFER? Payless will determine a single per share price that it will pay for shares properly tendered, taking into account the number of shares properly tendered and the prices specified by tendering stockholders. Payless will select the lowest purchase price that will allow it to purchase up to 7,547,170 shares of its common stock or, if a lesser number of shares are properly tendered, all shares that are properly tendered. Payless will then purchase all of the shares tendered at or below that final price, although Payless may not purchase all of those shares if more than 7,547,170 shares are tendered in the offer. In other words, if you select a price greater than the price that is finally determined to be paid in the tender offer, none of your shares will be purchased. All shares acquired in the offer will be acquired at the same purchase price. WHAT HAPPENS IF MORE THAN 7,547,170 SHARES ARE TENDERED IN THE OFFER? If more than 7,547,170 shares are tendered, Payless (1) will first purchase all shares properly tendered, and not properly withdrawn, by any stockholder who owns fewer than 100 shares and tenders all of those shares at a purchase price at or below the price that is determined by Payless to 3 be the purchase price in the tender offer (such stockholders must complete the portion of the letter of transmittal labeled "Odd Lots") and (2) will then purchase, on a pro rata basis, all other shares properly tendered, and not properly withdrawn, at prices at or below the price that is determined by Payless to be the purchase price. CAN I TAKE ADVANTAGE OF THE "ODD LOT" PRIORITY? If you hold fewer than 100 shares in the Plan, and regardless of any shares you may hold through any other means, the shares you hold in your Plan account are eligible for odd lot priority if you tender all of such shares. You will need to check the appropriate box in the letter of transmittal. HOW DO I TENDER THE SHARES IN MY PLAN ACCOUNT? If you wish to tender shares in your Plan account, please complete the attached letter of transmittal and return it as directed so that it is received by EquiServe no later than 5:00 p.m., New York City time, on April 7, 2000, as specified on the letter of transmittal. You may only tender some percentage or all of the shares in your Plan account to Payless, through EquiServe, by following the instructions in this letter and the attached letter of transmittal. EquiServe will work with Mellon Bank to determine the number of shares represented by the percentage you have selected to tender and EquiServe will direct Mellon Bank to transfer the tendered shares to EquiServe. If the letter of transmittal is not properly completed or is not received by the deadline of 5:00 p.m., New York City time on April 7, 2000, none of your shares will be purchased. Because your shares are held in the Plan and administered by Mellon Bank, you do not need to submit a stock certificate to tender your shares. THE LETTER OF TRANSMITTAL MUST BE RECEIVED BY EQUISERVE NO LATER THAN 5:00 P.M., NEW YORK CITY TIME, ON APRIL 7, 2000. WHAT IF I HOLD SHARES OUTSIDE OF THE PLAN? If you hold shares under the Payless ShoeSource, Inc. Profit Sharing Plan or the Payless ShoeSource, Inc. Profit Sharing Plan for Puerto Rico Associates (together, the "Profit Sharing Plans"), you will have to use materials that will be separately provided to participants of those Profit Sharing Plans to tender such shares. You cannot use the enclosed materials to tender shares under the Profit Sharing Plans or use the material separately provided to participants of the Profit Sharing Plans to tender shares under this Plan. You may, however, use the enclosed materials to tender shares that you hold outside of any Payless employee plan. WHAT HAPPENS IF MY TENDERED SHARES ARE PURCHASED? Mellon Bank will surrender the shares you have tendered to Payless and you will receive a check for the proceeds as soon as practicable. WHAT HAPPENS IF MY TENDERED SHARES ARE NOT PURCHASED? Mellon Bank will continue to hold the stock for you in your Plan account. WHAT IF I HAVE QUESTIONS ABOUT THE TENDER OFFER? Contact D.F. King & Co., Inc., the Information Agent, for the tender offer, at (800) 848-3416 (toll-free) with any questions about the terms and conditions of the tender offer or how to tender the shares in your Plan account. WILL THERE BE ANY CHARGES ASSOCIATED WITH TENDERING THE SHARES IN MY PLAN ACCOUNT? Payless will pay any fees charged by Mellon Bank in connection with the tender of your shares. EX-99.A.5.B 11 PRESS RELEASE 1 EXHIBIT (a)(5)(B) For Immediate Release Contact: Timothy J. Reid (785) 295-6695 PAYLESS SHOESOURCE, INC. COMMENCES SELF-TENDER FOR 7,547,170 SHARES OR 25% OF ITS OUTSTANDING COMMON STOCK TOPEKA, Kan., March 13, 2000 -- Payless ShoeSource, Inc. (NYSE: PSS) today commenced its previously announced Dutch auction self-tender offer for up to 7,547,170 shares, or approximately 25 percent of its outstanding common stock, at prices ranging from $48 to $53 per share, or a total of $362 million to $400 million if the maximum number of shares is repurchased. The tender offer will expire at 5:00 p.m., Eastern Standard time, on Monday, April 10, 2000, unless extended. If the number of shares tendered is greater than the number sought, the company will select the lowest price within the stated range that will allow it to buy 7,547,170 shares, with purchases generally to be made on a pro rata basis for shareowners tendering at or below the purchase price. The company reserves the right, in its sole discretion, to increase the number of shares purchased subject to compliance with applicable law. This price range represents a 15 to 27 percent premium to the $41 3/4 closing price per share on March 7, 2000, the last trading day prior to announcing its intention to commence the tender offer. Steven J. Douglass, Payless Chairman and Chief Executive Officer, said, "This repurchase program clearly demonstrates that management continues to focus its capital allocation on creating value for its shareowners. We think that this transaction is the right choice for the company. We have had a very positive response from our shareowners to the announcement of the self-tender." Copies of the offer to purchase, the letter of transmittal and other tender offer documents can be obtained for free by calling the Information Agent, D.F. King & Co., Inc. at 800-848-3416. Shareowners will also be able to obtain the offer to purchase and related materials for free at the SEC's website at www.sec.gov. The Dealer Manager of the tender offer is Goldman, Sachs & Co. This press release is for informational purposes only and is not an offer to buy or the solicitation of an offer to sell any shares of the company's common stock. The solicitation of offers to buy the company's common stock are only being made pursuant to the tender offer documents described above, which the company is sending out to its shareowners. 2 2 Shareowners should read those materials carefully prior to making any decisions with respect to the tender offer because they will contain important information, including the various terms and conditions of the offer. The Board of Directors of the company has approved the tender offer but neither the company nor the Board of Directors is making any recommendation to shareowners as to whether to tender or refrain from tendering their shares or as to the purchase price or prices at which shareowners may choose to tender their shares. Shareowners must make their own decision as to whether to tender their shares and, if so, how many shares to tender and the price or prices at which such shares should be tendered. Payless ShoeSource, Inc. is North America's largest family footwear retailer. The company operates 4,462 Payless ShoeSource stores offering quality family footwear at affordable prices. In addition, customers can buy shoes over the Internet through Payless.com(SM), at http://www.payless.com. Payless also operates 220 Parade stores featuring fashionable mid-priced women's footwear. This release contains forward-looking statements relating to such matters as anticipated financial performance, share repurchase plans, consumer spending patterns, business prospects, new products, future store openings, inventories, possible strategic alternatives and similar matters. Forward-looking statements are identified by words such as "expects," "anticipates," "intends," "plans," "believes," "seeks," or variations of such words. A variety of known and unknown risks and uncertainties and other factors could cause actual results and expectations to differ materially from the anticipated results or expectations. Please refer to the company's 1998 Annual Report and the company's Form 10-K for the fiscal year ended January 30, 1999, for more information on these and other risk factors that could cause actual results to differ. The company does not undertake any obligation to release publicly any revisions to such forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. EX-99.A.5.C 12 LETTER TO STOCKHOLDERS 1 EXHIBIT (a)(5)(C) PAYLESS SHOESOURCE March 13, 2000 To Our Stockholders: Payless ShoeSource, Inc., a Delaware corporation, is offering to purchase 7,547,170 shares, or such lesser number of shares as are properly tendered, of its common stock from existing stockholders. The price paid by Payless will not be greater than $53.00 nor less than $48.00 per share, net to the seller in cash, without interest. Payless is conducting the tender offer through a procedure commonly referred to as a "Dutch auction." This procedure allows you to select the price within the $53.00 to $48.00 price range at which you are willing to sell your shares to Payless or to select the actual purchase price paid by Payless, which could result in your receipt of a price per share as low as $48.00. The actual purchase price will be determined by Payless in accordance with the terms of the tender offer. All shares purchased under the tender offer will receive the same price. A tender of shares will include a tender of the preferred stock purchase rights issued under the Stockholder Protection Rights Agreement, dated as of April 20, 1998, as amended, between Payless and UMB Bank, N.A., as Rights Agent. No separate consideration will be paid for those rights. You may tender all or only a portion of your shares upon the terms and subject to the conditions of the tender offer, including the odd lot and proration provisions. Any stockholder whose shares are properly tendered directly to EquiServe, the depositary of the tender offer, and purchased under the tender offer will receive the net purchase price in cash, without interest, as promptly as practicable after the expiration of the tender offer. Stockholders who own fewer than 100 shares should note that the tender offer represents an opportunity for them to sell their shares without reduction for any odd lot discounts. The terms and conditions of the tender offer are explained in detail in the enclosed offer to purchase and the related letter of transmittal. I encourage you to read these materials carefully before making any decision with respect to the tender offer. The instructions on how to tender shares are also explained in detail in the accompanying materials. The Board of Directors of Payless has approved the tender offer. However, neither Payless nor its Board of Directors makes any recommendation to you as to whether you should tender or refrain from tendering your shares or as to the price or prices at which you may choose to tender your shares. You must make your own decision as to whether to tender your shares and, if so, how many shares to tender and the price or prices at which your shares should be tendered. The directors and executive officers of Payless have advised the company that they do not intend to tender any shares in the tender offer. The tender offer will expire at 5:00 p.m., New York City time, on Monday, April 10, 2000, unless extended by Payless. If you have any questions regarding the tender offer or need assistance in tendering your shares, please contact D.F. King & Co., Inc., the information agent of the tender offer, at (800) 848-3416, or Goldman, Sachs & Co., the dealer manager of the tender offer, at (800) 323-5678. Sincerely, /s/ Steven J. Douglass Steven J. Douglass Chairman of the Board and Chief Executive Officer EX-99.B 13 CREDIT COMMITMENT LETTER 1 EXHIBIT (b) GOLDMAN SACHS CREDIT PARTNERS L.P. 85 BROAD STREET NEW YORK, NEW YORK 10004 PERSONAL AND CONFIDENTIAL March 10, 2000 Payless ShoeSource, Inc. 3231 E. Sixth Street Topeka, KS 66607-2207 Attention: Mr. Ullrich E. Porzig Chief Financial Officer Re: Senior Facilities Ladies and Gentlemen: We are pleased to confirm the arrangement under which Goldman Sachs Credit Partners L.P. ("GSCP") is exclusively authorized by Payless ShoeSource, Inc., a Delaware corporation (the "Company"), to act a sole Lead Arranger and sole Syndication Agent in connection with, and commits to provide the financing for, certain loans described herein, in each case on the terms and subject to the conditions set forth in this letter, the attached Annex A and the attached Annex B (together, the "Commitment Letter"). We understand that, although the structure and certain terms of the transaction have yet to be finally determined, the Company intends to consummate a recapitalization of the Company (the "Recapitalization") pursuant to which the Company will purchase and retire certain shares of its outstanding common stock for an aggregate purchase price not in excess of $400.0 million plus fees and expenses and will refinance approximately $122.0 million of certain existing indebtedness of the Company and its subsidiaries. The Company intends to establish a single credit facility to consist of up to $400.0 million under a senior secured term loan facility (the "Term Facility") and up to $200.0 million under a senior secured revolving credit facility (the "Revolving Facility", together with the Term Facility, the "Facilities"). The proceeds from the Term Facility and up to $50.0 million under the Revolving Facility are expected to be used, together with the Company's existing on-hand cash, to finance the Recapitalization and pay transaction costs. Amounts available under the Revolving Facility are also expected to be used to provide working capital and for general and other corporate purposes. GSCP is pleased to confirm its commitment to act as sole Lead Arranger to provide the Company with structuring advice in connection with the Facilities and as sole Syndication Agent to provide the Company with syndication advice in connection with the Facilities and to provide the 2 Payless ShoeSource, Inc. March 10, 2000 Page 2 Company the full $600.0 million of the Facilities, in each case on the terms and subject to the conditions contained in this Commitment Letter. Our fees for such services are set forth in a separate fee letter (the "Fee Letter") entered into by the Company and GSCP on the date hereof. GSCP's commitment is subject, in its discretion, to the following conditions: (i) there shall not have been, since the date of the most recent audited financial statements of the Company furnished by the Company to GSCP, any change in the capital stock or long-term debt of the Company and its subsidiaries, or any adverse change, in or affecting the general affairs, management, financial position, stockholders' equity, results of operations or prospects of the Company and its subsidiaries, (ii) there shall not have been any disruption or adverse change in the financial or capital markets generally, or in the market for loan syndications in particular, which in any such case under clause (i) or (ii) GSCP, in its reasonable, good faith judgment, deems material and (iii) the Facilities being assigned a credit rating by each of Moody's Investors Service, Inc. ("Moody's") and Standard & Poor's Ratings Group ("S&P"). GSCP's commitment is also subject, in its discretion, to the satisfactory negotiation, execution and delivery of appropriate loan documents relating to the Facilities, including, without limitation, a credit agreement, guaranties, pledge agreements, opinions of counsel and other related definitive documents (collectively, the "Loan Documents") to be based upon and substantially consistent with the terms set forth in this Commitment Letter. In addition, GSCP's commitment is subject to the condition that we have not become aware after the date hereof of any new or inconsistent information or other matter with respect to legal and regulatory issues relevant to the Company and its subsidiaries which we, in our judgment, deem is material and adverse. The terms of this Commitment Letter are intended as an outline of certain of the material terms of the Facilities, but do not include all of the terms, conditions, covenants, representations, warranties, default clauses and other provisions that will be contained in the Loan Documents. The Loan Documents shall include, in addition, provisions that are customary or typical for financings of this type and other provisions that GSCP may reasonably determine (after consultation with the Company) to be appropriate in the context of similar transactions of this type. GSCP intends and reserves the right to syndicate the Facilities to the Lenders (as defined in the attached Annex B). GSCP shall select the Lenders with the Company's consent, not to be unreasonably withheld. A Lender reasonably acceptable to the Company and GSCP will be identified by GSCP to act as collateral agent and administrative agent for the Lenders (the "Administrative Agent"). GSCP will lead the syndication, including determining the timing of all offers to potential Lenders, any title of agent or similar designations awarded to any Lender and the acceptance of commitments, the amounts offered and the compensation provided to each Lender from the amounts to be paid to GSCP pursuant to the terms of this Commitment Letter and the Fee Letter. GSCP will determine the final commitment allocations and will notify the Company of such determinations. To ensure an orderly and effective syndication of the Facilities, you agree that, until 180 days following the date of the consummation of the Recapitalization, you will not, and will not permit any of your affiliates to, syndicate or issue, attempt to syndicate or issue, announce or authorize the announcement of the syndication or issuance of, or engage in discussions 3 Payless ShoeSource, Inc. March 10, 2000 Page 3 concerning the syndication or issuance of, any debt facility or debt security of the Company or any of its subsidiaries (other than the Facilities and other indebtedness contemplated hereby), including any renewals or refinancings of any existing debt facility or debt security, without the prior written consent of GSCP. The Company agrees to cooperate with GSCP in connection with (i) the preparation of an information package regarding the business, operations and prospects of the Company, including, without limitation, the delivery of all information relating to the transactions contemplated hereunder prepared by or on behalf of the Company deemed reasonably necessary by GSCP to complete the syndication of the Facilities and (ii) the presentation of such information package in bank meetings and other communications with prospective Lenders in connection with the syndication of the Facilities. The Company shall be solely responsible for the contents of any such information package and presentation and acknowledges that GSCP will be using and relying upon the information contained in such information package and presentation without independent verification thereof. In addition, the Company represents and covenants that (i) all information, other than projections (the "Projections"), provided directly or indirectly by the Company to GSCP of the Lenders in connection with the transactions contemplated hereunder is and will be complete and correct in all material respects and does not and will not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements contained therein not misleading and (ii) the Projections that have been or will be made available by you or any of your representatives have been or will be prepared in good faith based upon reasonable assumptions (it being understood that the Projections are subject to significant uncertainties and contingencies, many of which are beyond the Company's control, and that no assurance can be given that the Projections will be realized). In connection with arrangements such as this, it is our firm policy to receive indemnification. The Company agrees to the provisions with respect to our indemnity and other matters set forth in Annex A which is incorporated by reference into this Commitment Letter. Please note that this Commitment Letter, the Fee Letter and any written or oral advice provided by GSCP in connection with this arrangement are exclusively for the information of the Board of Directors and senior management of the Company and may not be disclosed to any third party or circulated or referred to publicly without our prior written consent, except, after providing written notice to GSCP, pursuant to a subpoena or order issued by a court of competent jurisdiction 4 Payless ShoeSource, Inc. March 10, 2000 Page 4 or by a judicial, administrative or legislative body or committee. In addition, we hereby consent to your disclosure of such advice to your officers, directors, agents and advisors who are directly involved in the consideration of the Facilities to the extent such persons are obligated to hold such advice in confidence. If approval of the Company's stockholders is required in order to consummate the Recapitalization and reference to GSCP and this Commitment Letter is required to be made in a proxy statement of the Company relating thereto to be filed under the Federal Securities laws, GSCP will not unreasonably withhold our consent thereto so long as we have reasonably approved in advance the text of any such disclosure. As you know, GSCP may from time to time effect transactions, for its own action or the account of customers, and hold positions in loans or options on loans of the Company and other companies that may be the subject of this arrangement. In addition, Goldman Sachs & Co. is a full service securities firm and as such may from time to time effect transactions, for its own account or the account of customers, and hold positions in securities or options on securities of the Company and other companies that may be the subject of this arrangement. In addition, GSCP may employ the services of its affiliates in providing certain services hereunder and may exchange with such affiliates information concerning the Company and other companies that may be the subject of this arrangement, and such affiliates shall be entitled to the benefits afforded to GSCP hereunder. GSCP's commitment hereunder shall terminate on June 3, 2000 unless the closing of the Facilities, on the terms and subject to the conditions contained herein, shall have consummated. GSCP and the Company agree by execution hereof that GSCP's commitment and GSCP's and the Company's obligations (other than the Company's obligations with respect to confidentiality, indemnification and reimbursement of fees, costs and expenses) under the commitment letter dated December 12, 1999 among GSCP and the Company (the "Prior Commitment Letter") terminated. This Commitment Letter supersedes and replaces in its entirety the Commitment Letter dated March 7, 2000 between GSCP and the Company (the "Prior Commitment Letter") and GSCP and the Company agree by execution hereof that the Prior Commitment Letter is null and void. [Remainder of page intentionally left blank] 5 Payless ShoeSource, Inc. March 10, 2000 Page 5 Please confirm the foregoing is in accordance with your understanding by signing and returning to GSCP the enclosed copy of this Commitment Letter, together, if not previously executed and delivered, with the Fee Letter, on or before 5:00 p.m. (New York time) on March 11, 2000, whereupon this Commitment Letter and the Fee Letter shall become binding agreements between us. If not signed and returned as described in the preceding sentence by such date, this offer will terminate on such date. We look forward to working with you on this assignment. Very truly yours, GOLDMAN SACHS CREDIT PARTNERS L.P. By: /s/______________________________ Authorized Signatory ACCEPTED AS OF THE DATE ABOVE: PAYLESS SHOESOURCE, INC. By:_____________________________ Name: Title: 6 ANNEX A In the event that GSCP becomes involved in any capacity in any action, proceeding or investigation brought by or against any person, including stockholders of the Company, in connection with or as a result of either this arrangement or any matter referred to in this Commitment Letter or the Fee Letter (together, the "Letters"), the Company periodically will reimburse GSCP for its documented and reasonable legal and other expenses (including the cost of any investigation and preparation) incurred in connection therewith. The Company also will indemnify and hold GSCP harmless against any and all losses, claims, damages or liabilities to any such person in connection with or as a result of either this arrangement or any matter referred to in the Letters, except to the extent that any such loss, claim, damage or liability results from the gross negligence, willful misconduct or bad faith of GSCP in performing the services that are the subject of the Letters. If for any reason the foregoing indemnification is unavailable to GSCP or insufficient to hold it harmless, then the Company shall contribute to the amount paid or payable by GSCP as a result of such loss, claim, damage or liability in such proportion as is appropriate to reflect the relative economic interests of the Company and its stockholders on the one hand and GSCP on the other hand in the matters contemplated by the Letters as well as the relative fault of the Company and GSCP with respect to such loss, claim, damage or liability and any other relevant equitable considerations. The reimbursement, indemnity and contribution obligations of the Company under this paragraph shall be in addition to any liability which the Company may otherwise have, shall extend upon the same terms and conditions to any affiliate of GSCP and the partners, directors, agents, employees and controlling persons (if any), as the case may be, of GSCP and any such affiliate (each, an "Indemnified Party"), and shall be binding upon and inure to the benefit of any successors, assigns, heirs and personal representatives of the Company, GSCP, any such affiliate and any such person. The Company also agrees that no Indemnified Party shall have any liability to the Company or any person asserting claims on behalf of or in right of the Company in connection with or as a result of either this arrangement or any matter referred to in the Letters except to the extent that any losses, claims, damages, liabilities or expenses incurred by the Company result from the gross negligence, willful misconduct or bad faith of such Indemnified Party in performing the services that are the subject of the Letters. Any right to trial by jury with respect to any action or proceeding arising in connection with or as a result of either this arrangement or any matter referred to in the Letters is hereby waived by the parties hereto. The provisions of this Annex A shall survive any termination or completion of the arrangement provided by the Letters, and this Commitment Letter shall be governed by and construed in accordance with the laws of the State of New York without regard to principles of conflict of laws. 7 ANNEX B PAYLESS SHOESOURCE, INC. SUMMARY OF TERMS AND CONDITIONS OF THE FACILITIES This Summary of Terms and Conditions outlines certain terms of the Facilities referred to in the Commitment Letter, of which this Annex B is a part. Certain capitalized terms used herein are defined in the Commitment Letter. BORROWER: Payless ShoeSource, Inc., a Delaware corporation (the "Company"), and/or one or more wholly-owned subsidiaries of the Company acceptable to the Arranger. GUARANTORS: The Company (if the Company is not the Borrower) and all subsidiaries of the Borrower (other than any foreign subsidiaries to the extent such guaranties would result in material adverse tax consequences) shall guaranty (the "Guarantee") all obligations under the Facilities. PURPOSE/USE To finance the Recapitalization, including OF PROCEEDS: to refinance certain existing debt of the Company and its subsidiaries, and to pay transaction costs, to provide working capital and for general corporate purposes. SOLE LEAD ARRANGER AND SOLE Goldman Sachs Credit Partners L.P. (in such SYNDICATION AGENT: capacity, the "Arranger"). ADMINISTRATIVE AGENT: A Lender reasonably acceptable to the Company and GSCP (such Lender, in such capacity, the "Administrative Agent"). LENDERS: GSCP and/or other financial institutions selected by GSCP with the consent (not to be unreasonably withheld) of the Company (each a "Lender" and collectively, the "Lenders"). AMOUNT OF SENIOR FACILITIES: Up to $600 million of senior bank financing (the "Facilities") to include: (i) a $400.0 million senior term loan (the "Term Facility"); and (ii) a $200.0 million senior revolving credit facility (the "Revolving Facility"). AVAILABILITY: Term Facility - One drawing may be made under the Term Facility on the Closing Date to finance the Recapitalization, including to refinance certain existing debt, and to pay transaction costs. 8 Revolving Facility - The entire amount of the Revolving Facility will be available on the Closing Date to provide working capital and for general corporate and other purposes. Amounts available under the Revolving Facility may be borrowed, repaid and reborrowed until the fifth anniversary of the Closing Date. MATURITIES: Term Facility: 5th anniversary of the Closing Date Revolving Facility: 5th anniversary of the Closing Date CLOSING DATE: The date on or before June 3, 2000 on which the initial borrowings under the Facilities are made. AMORTIZATION: Term Facility: The Term Facility will be amortized in equal quarterly installments during the periods set forth below:
Year Following the Closing Term Date Facility Year 1 5.0% Year 2 12.5% Year 3 20.0% Year 4 27.5% Year 5 35.0%
Revolving Facility: The Revolving Facility will be fully revolving until 5 years from the Closing Date LETTERS OF CREDIT: At the Borrower's option, the entire $200 million of the Revolving Facility will be made available for the issuance of letters of credit ("Letters of Credit"). The entire amount of the Revolving Facility will be available on the Closing Date for the issuance of Letters of Credit. INTEREST RATE: All amounts outstanding under the Facilities shall bear interest from the Closing Date until the six-month anniversary of the Closing Date at the Borrower's option as follows: (i) at the reserve adjusted Eurodollar Rate plus 2.00% per annum; or (ii) at the Base Rate plus 1.00% per annum; ANNEX B-2 9 provided, however, that if the Borrower receives a senior unsecured debt rating of at least Ba1 and BB+ from each of Moody's Investors Service, Inc. ("Moody's") and Standard & Poor's Ratings Group ("S&P"), respectively, in connection with the ratings required to be delivered on or about the Closing Date, the above applicable margins for the reserve adjusted Eurodollar Rate and the Base Rate shall be reduced to 1.75% and 0.75%, respectively. After the six-month anniversary of the Closing Date, the applicable margins with respect to the interest rates for the Facilities will be subject to adjustments based on a performance pricing grid as follows:
TOTAL DEBT/EBITDA RATIO APPLICABLE MARGINS FROM TO EURODOLLAR RATE BASE RATE >1.75x 2.00% 1.00% 1.25 1.75 1.75% 0.75% 0.75 1.25 1.50% 0.50% <0.75x 1.25% 0.25%
; provided, however, that if the Borrower receives a senior unsecured debt rating of at least Ba1 and BB+ from each of Moody's and S&P, respectively, in connection with the ratings required to be delivered on or about the Closing Date, the applicable margins for the reserve adjusted Eurodollar Rate and the Base Rate shall not exceed 1.75% and 0.75%, respectively. As used herein, the term "reserve adjusted Eurodollar Rate" shall have a meaning customary and appropriate for financings of this type, and the basis for calculating accrued interest and the interest periods for loans bearing interest at the reserve adjusted Eurodollar Rate shall be customary and appropriate for financings of this type. As used herein, the term "Base Rate" shall have a meaning customary and appropriate for financings of this type, and will include the rate per annum (rounded to the nearest 1/100 of 1%) equal to the greater of (i) the Administrative Agent's prime lending rate in effect from time to time and (ii) the Federal Funds Effective Rate in effect from time to time plus 1/2 of 1%. ANNEX B-3 10 Interest on outstanding amounts following the occurrence and during the continuance of an Event of Default shall accrue at a rate equal to the rate on loans bearing interest at the rate determined by reference to the Base Rate plus an additional two percentage points (2.00%) per annum and shall be payable on demand. INTEREST PAYMENTS: Quarterly for loans bearing interest with reference to the Base Rate; on the last day of selected interest periods (which shall be one, two, three and six months) for loans bearing interest with reference to the reserve adjusted Eurodollar Rate (and at the end of every three months, in the case of interest periods of longer than three months); and upon prepayment, in each case payable in arrears and computed on the basis of, in the case of Base Rate loans, a 365/366-day year, and in all other cases, a 360-day year. FUNDING PROTECTION: Customary for transactions of this type, including breakage costs, gross-up for withholding, compensation for increased costs and compliance with capital adequacy and other regulatory restrictions. COMMITMENT FEES: Commitment fees based on the daily average unused portion of the Revolving Facility (reduced by the amount of letters of credit issued and outstanding) shall accrue from the Closing Date and shall be payable quarterly in arrears on the unused portion of the Revolving Facility at a rate per annum equal to: (i) until the six-month anniversary of the Closing Date, 0.50%; provided, however, that if the Borrower receives a senior unsecured debt rating of at least Bal and BB+ from each of Moody's and S&P, respectively, in connection with the ratings required to be delivered on or about the Closing Date, the rate per annum for such period shall be reduced to 0.35%; and (ii) after the six-month anniversary of the Closing Date, a percentage per annum based on a performance pricing grid as follows: ANNEX B-4 11
TOTAL DEBT/EBITDA RATIO COMMITMENT FEES PERCENTAGE FROM TO >1.75x 0.500% 1.25 1.75 0.350% 0.75 1.25 0.300% <0.75x 0.250%
; provided, however, that if the Borrower receives a senior unsecured debt rating of at least Bal and BB+ from each of Moody's and S&P, respectively, in connection with the ratings required to be delivered on or about the Closing Date, the above per annum commitment fee percentage shall not exceed 0.350%. LETTERS OF CREDIT FEES: The letter of credit fee shall be a percentage per annum equal to the applicable margin for Eurodollar Rate loans under the Revolving Facility, which shall be shared by all Lenders, and an additional fronting fee of a percentage per annum to be mutually agreed upon with the Administrative Agent, which shall be retained by the Lender issuing the letter of credit, in each case based upon the applicable percentage multiplied by the amount available from time to time for drawing under such letter of credit. In addition, certain customary fees assessed by the issuing Lender shall be payable. VOLUNTARY PREPAYMENTS: The Facilities may be prepaid in whole or in part without premium or penalty (provided that loans bearing interest with reference to the reserve adjusted Eurodollar Rate shall be prepayable only on the last day of the related interest period unless the Borrower pays any related "broken funding" costs). Voluntary prepayments shall be applied between the Facilities as determined by the Borrower; provided that voluntary prepayments of the Term Facility shall be applied as follows: (i) 50% of each prepayment shall be applied to the next scheduled amortization payments in order of maturity and (ii) the remaining 50% of each prepayment shall be applied on a pro rata basis to the then-remaining scheduled amortization payments. MANDATORY PREPAYMENTS: Usual and customary for a transaction of this type, including but not limited to the following: 1. Asset Sales - 100% of the Net Proceeds (hereinafter defined) from asset divestitures aggregating in excess of $10,000,000 in any fiscal year. As used herein, "Net Proceeds" shall mean, ANNEX B-5 12 with respect to any asset divestiture, all proceeds thereof net of related costs associated with (x) liquidation of inventory, (y) termination of operating leases or (z) employee severance. 2. Debt Offerings - 100% of the net proceeds in excess of $25,000,000 in any fiscal year from the issuances of debt or preferred stock securities (with exceptions to be agreed upon, including (subject to further review and approval by the Arranger, which approval shall not unreasonably be withheld) IRB debt issued by the Borrower). 3. Insurance/Condemnation Proceeds - 100% of the net proceeds from any insurance or condemnation events aggregating in excess of $10,000,000 in any fiscal year. The mandatory prepayment provisions, which are in addition to the scheduled amortization of the Term Facility, shall apply until the Borrower has received a senior unsecured debt rating of at least Baa3 and BBB- from each of Moody's and S&P, respectively. All such prepayments shall be applied without penalty or premium (except for breakage costs, if any) to repay outstanding loans under the Term Facility as follows: (i) 50% of such proceeds applied to the remaining scheduled amortization payments in the inverse order of maturity and (ii) the remaining 50% of such proceeds applied on a pro rata basis among the then-remaining scheduled amortization payments. SECURITY: Until such time as the Borrower has received a senior unsecured debt rating of at least Baa3 and BBB- from each of Moody's and S&P, respectively, the Facilities and Guarantees shall be secured by a first priority perfected security interest in all of the capital stock of the Borrower (if the Borrower is not the Company) and each of the domestic subsidiaries (direct or indirect) of the Borrower now owned or hereafter acquired or created and 65% of the capital stock of each foreign subsidiary directly owned by the Borrower or a domestic subsidiary of the Borrower, which capital stock shall not be subject to any other lien or encumbrance. All other present and future assets and properties of the Borrower and its domestic subsidiaries (including, without limitation, accounts receivable, inventory, real property, machinery, equipment, contracts, trademarks, copyright, patents, license rights and general intangibles) shall be subject to a negative pledge. ANNEX B-6 13 The foregoing security shall ratably secure the Facilities and any interest rate swap/foreign currency swap or similar agreements with a Lender or its affiliates under the Facilities entered into in the ordinary course of Borrowers' and its subsidiaries' business and not for speculative purposes. REPRESENTATIONS AND Customary and appropriate including, without WARRANTIES: limitation, due organization and authorization, execution, delivery and enforceability of the Loan Documents, financial condition, no material adverse change, title to properties, liens, litigation, payment of taxes, compliance with laws, environmental and ERISA matters, Year 2000 compliance, consents and approvals and full disclosure. AFFIRMATIVE COVENANTS: Usual and customary for a credit agreement of this type including but not limited to: financial reports, certificates, other information; notices; books, records and inspections; insurance; maintenance of corporate existence, etc.; maintenance of property; compliance with laws, payment of taxes and liabilities; compliance with ERISA; environmental laws; additional guarantors; and Year 2000 compliance. NEGATIVE COVENANTS: Usual and customary for a credit agreement of this type including but not limited to: Liens. Limitation on liens except for the Permitted Liens (to be mutually agreed upon) plus a basket of $50 million. Consolidations and Mergers. Subsidiaries may merge with and into other subsidiaries or the Borrower as long as the Borrower or the Guarantor as the case may be is the survivor and no Event of Default exists or arises from the transaction. Indebtedness. Limitation on indebtedness with usual and customary exceptions to be mutually agreed upon and exceptions for secured indebtedness in an amount to be mutually agreed upon and for subordinated indebtedness provided no default or event of default exists or would result therefrom and the Borrower demonstrates pro forma covenant compliance after giving effect thereto. Capital Expenditures. Limitation on capital expenditures equal to $165 million in the fiscal year ending February 3, 2001 and $150 million for each fiscal year thereafter, with the ability to carry forward from one fiscal year to future fiscal years the amount equal to the difference between permitted capital expenditures and actual capital expenditures for such fiscal year. This limitation shall expire when the Borrower has received a senior unsecured debt rating of at least Baa3 and BBB-from each of Moody's and S&P, respectively. ANNEX B-7 14 Asset Dispositions. Limitation on asset dispositions to be mutually agreed upon subject to a threshold of 5% of net tangible assets in the aggregate measured on a cumulative basis from the Closing Date. Sale-Leaseback Transactions. Limitation on sale-leaseback transactions subject to exclusion for one or more future transactions aggregating up to $75 million measured on a cumulative basis from the Closing Date. Limitation on Stock Repurchases. Other than the repurchase of common stock in accordance with the Recapitalization, repurchases of Borrower's common stock will be limited to $25 million in the fiscal year ending February 3, 2001 and $50 million in each following fiscal year. This limitation shall expire when the Borrower has received a senior unsecured debt rating of at least Baa3 and BBB- from each of Moody's and S&P, respectively. Subsidiary Indebtedness. Limitation on subsidiary indebtedness (excluding subordinated intercompany indebtedness among the Borrower and its domestic subsidiaries) to $35 million with exceptions for certain existing indebtedness, refinancing of existing indebtedness, and certain indebtedness of foreign subsidiaries. Advances and Investments. Limitation on advances and other investments (including investments in subsidiaries) with usual and customary exceptions to be mutually agreed upon plus a basket of $50 million for other advances and investments. Acquisitions. Permitted acquisitions will not exceed $200 million in the aggregate and must be friendly acquisitions of companies in substantially the same business as the Borrower. The Borrower must demonstrate pro forma covenant compliance giving effect to the transaction, be the survivor, and provide any information requested by the Lenders. Permitted acquisitions in excess of the basket amount will need the approval of the Requisite Lenders until such time as the Borrower has received a senior unsecured debt rating of at least Baa3 and BBB- from each of Moody's and S&P, respectively. Other. Limitations on: transactions with affiliates; ERISA; change in business; accounting changes (GAAP); use of proceeds; incurrence of contingent obligations; and restrictions affecting subsidiaries. FINANCIAL COVENANTS: Total Debt to EBITDA. Not permit the Leverage Ratio to exceed 2.00:1.00. ANNEX B-8 15 Minimum Fixed Charge Coverage. Not permit the ratio of EBITDAR to Interest Expense plus Rent Expense as measured on a rolling four quarter basis to be less than 1.75:1.00. Total Debt (including PVOL) to Total Capitalization. Commencing at the end of the first fiscal quarter which ends closest to January 2001, not permit the ratio of Total Debt plus the present value of operating leases ("PVOL") to Total Capitalization (to be defined to equal the sum of Total Debt, PVOL and shareholders' equity) to exceed 80% prior to the end of the fiscal quarter which ends closest to January, 2002 or 70% thereafter. The financial covenants will be tested at the end of each relevant fiscal quarter. EVENTS OF DEFAULT: Customary and appropriate including, without limitation, failure to make payments when due, defaults under other agreements or instruments of indebtedness, noncompliance with covenants, breaches of representations and warranties, bankruptcy, judgments in excess of specified amounts, ERISA, impairment of security interests in collateral, invalidity of guarantees, "changes of control" (to be defined in a mutually agreed upon manner). CONDITIONS PRECEDENT TO 1. Satisfactory Documentation. The INITIAL BORROWINGS: definitive documentation evidencing the Facilities shall be prepared by counsel to the Arranger and shall be in form and substance satisfactory to the Arranger, the Administrative Agent and the Lenders. 2. Security. The Administrative Agent, for the benefits of the Lenders, shall have been granted perfected first priority security interests in all assets to the extent described above under the heading "Security" in form and substance satisfactory to the Arranger and the Administrative Agent. 3. Environmental Matters. The Lenders shall have received certificates and such other information which the Arranger and the Administrative Agent may reasonably request relating to the Company and its subsidiaries in form, scope and substance reasonably satisfactory to the Arranger and the Administrative Agent concerning any environmental liabilities. 4. No Material Adverse Change. Since January 30, 1999, there shall not have been any adverse change, in or affecting the general affairs, management, financial position, shareholders' equity, results of operations or prospects of the Company and its subsidiaries, which the Arranger, in its judgment, deems material. ANNEX B-9 16 5. No Disruption of Financial and Capital Markets. There shall not have been any disruption or adverse change in the financial or capital markets generally or in the market for loan syndications in particular, which the Arranger, in its judgment, deems material. 6. Financial Statements. The Lenders shall have received the audited financial statements for the Company and its subsidiaries for the period ended January 30, 1999, the unaudited financial statements for the Company and its subsidiaries for the most recently concluded quarterly period, and the same store comparable sales flash report for the most recently concluded monthly period. The Lenders shall have received pro forma consolidated financial statements satisfactory to the Arranger and the Administrative Agent with respect to the Company for the fiscal year ended January 30, 1999 and with respect to the fiscal quarter ended September 30, 1999 (and each subsequent fiscal quarter, if any, ending at least 45 days prior to the Closing Date), reflecting the Recapitalization as of the beginning of such periods. 7. Consents and Approvals. All necessary governmental and third party approvals in connection with the Facilities, the transactions contemplated by the Facilities and otherwise referred to herein shall have been obtained and remain in effect, and all applicable waiting periods shall have expired without any action being taken by any applicable authority, and no law or regulation shall be applicable in the reasonable judgment of the Arranger that restrains, prevents or imposes materially adverse conditions upon the Recapitalization or any of the financings contemplated hereby. 8. Payments of Amounts Due. All costs, fees, expenses (including, without limitation, legal fees and expenses, title premiums, survey charges and recording taxes and fees) and other compensation contemplated hereby payable to the Arranger, the Administrative Agent or the Lenders shall have been paid to the extent due. 9. Capital Structure; Related Agreements. The corporate structure of the Company and its subsidiaries, and all organizational documents and all material agreements relating to the capitalization and corporate structure of such entities shall be reasonably satisfactory to the Arranger. 10. Customary Closing Documents. All documents required to be delivered under the definitive financing documents, including ANNEX B-10 17 customary legal opinions, corporate records and documents from public officials and officers' certificates, shall have been delivered. 11. Recapitalization Structure and Documentation. The Arranger and the Administrative Agent shall be reasonably satisfied with (i) the structure utilized to consummate the Recapitalization, (ii) the final terms and conditions of the Recapitalization, including without limitation, the price per share and number of shares to be acquired, and (iii) the proposed terms and conditions of the Recapitalization; the Arranger and the Administrative Agent shall be reasonably satisfied with all legal and tax aspects of the Recapitalization; all documentation relating to the Recapitalization, including, without limitation, the offer to purchase the Company's common stock and the retirement thereof (the "Offer to Purchase"), shall be in form and substance reasonably satisfactory to the Arranger and the Administrative Agent. 12. Consummation of the Recapitalization. The acquisition of the Company's common stock and the retirement thereof in connection with the Recapitalization shall have been consummated in accordance with the terms of the Offer to Purchase, without any waiver, amendment, supplement or other modification not consented to by the Arranger and the Administrative Agent (such consent not to be unreasonably withheld or delayed) of any term, provision or condition set forth therein, and in compliance with all applicable laws. 13. Litigation. There shall exist no action, suit, investigation, litigation or proceeding pending or threatened in any court or before any arbitrator or governmental instrumentality that (i) could be reasonably likely to have a material adverse effect on or affecting the general affairs, management, financial position, shareholders' equity or results of operations of the Company and its subsidiaries, or (ii) purports to affect the Facilities, the Recapitalization or any of the other transactions contemplated by the Facilities. 14. Margin Regulations. All loans made by the Lenders and all other loans or extensions of credit made by other parties to the Company or any of its affiliates shall be in full compliance with the Federal Reserve's Margin Regulations. 15. Solvency. The Company shall have delivered certificates and letters, in form and substance satisfactory to the Arranger and the Administrative Agent, attesting to the solvency of the ANNEX B-11 18 Company and each Guarantor after giving effect to the transactions contemplated hereby, from the Company's chief financial officer. 16. Use of Proceeds, etc. All proceeds of the initial borrowing under the Facilities shall have been used by the Borrower to finance the Recapitalization, to pay transaction costs, to provide working capital and for general corporate purposes. 17. Discharge of Existing Debt. Concurrently with the initial borrowings under the Facilities, in connection with the Recapitalization, all pre-existing indebtedness (required to be reflected on a balance sheet) of the Company and its subsidiaries (other than (i) permitted intercompany indebtedness, (ii) permitted purchase money indebtedness and capitalized leases of the Company and its subsidiaries not in excess of $5 million in aggregate, and (iii) permitted industrial revenue bond indebtedness of the Company and its subsidiaries not in excess of $40 million in the aggregate) shall have been repaid or repurchased in full, all commitments relating thereto shall have been terminated, and all liens or security interests related thereto shall have been terminated or released, in each case on terms reasonably satisfactory to the Arranger and the Administrative Agent. CONDITIONS TO ALL BORROWINGS: The conditions to all borrowings will include requirements relating to prior written notice of borrowing, the accuracy of representations and warranties, and the absence of any default (to be defined in the Loan Documents) or potential event of default (to be defined in the Loan Documents), and will otherwise be customary and appropriate for financings of this type. ASSIGNMENTS AND The Lenders may assign all, or in an amount PARTICIPATIONS: of not less than $5 million (or such lesser amount as may constitute the assigning Lender's entire commitment), any part of their respective shares of the Facilities to affiliates or one or more banks, financial institutions or other entities that are eligible assignees (to be described in the Loan Documents) which, in the case of assignments with respect to the Revolving Facility (other than the case of assignments made by or to GSCP), are acceptable to the Administrative Agent, such consent not to be unreasonably withheld, and upon such assignment, such affiliate, bank, financial institution or entity shall become a Lender for all purposes under the Loan Documents; provided, assignments made to affiliates and other Lenders shall not be subject to the above described consent or minimum assignment amount requirements. The Administrative Agent will receive a processing fee of $2,000 payable by the assignor or assignee, in connection with each assignment; provided, for any ANNEX B-12 19 assignments made to affiliates, other Lenders or made by or to GSCP, the processing fee shall be $500. The Lenders will also have the right to sell participations, subject to customary limitations on voting rights, in their respective shares of the Facilities. REQUISITE LENDERS: Lenders holding more than 50% of total commitments or exposure under the Facilities, except that (x) any amendment which would disproportionately affect the obligation of the Borrower to make payment of the loans under the Revolving Facility or the Term Facility shall not be effective without the approval of holders of more than 50% of such class of loans and (y) with respect to matters relating to the interest rates, maturity, amortization, collateral issues and the definition of Requisite Lenders, Requisite Lenders will be defined as Lenders holding 100% of total commitments or exposure of the Facilities affected thereby. TAXES, All payments are to be made free and clear RESERVE REQUIREMENTS of any taxes (other than franchise taxes and AND INDEMNITIES: taxes on overall net income), imposts, assessments, withholdings or other deductions whatsoever. Foreign Lenders shall furnish to the Administrative Agent appropriate certificates or other evidence of exemption from U.S. federal tax withholding. The Borrower will indemnify the Lenders against all increased costs of capital resulting from reserve requirements or otherwise imposed, in each case subject to customary increased costs, capital adequacy and similar provisions to the extent not taken into account in the calculation of the Base Rate or the Eurodollar Rate. INDEMNITY: Customary and appropriate provisions relating to indemnity and related matters in a form reasonably satisfactory to the Arranger, the Administrative Agent and the Lenders. GOVERNING LAW AND The Borrower and the Guarantors will submit JURISDICTION: to the non-exclusive jurisdiction and venue of the federal and state courts of the State of New York and shall waive any right to trial by jury. New York law shall govern the Loan Documents. ARRANGER'S COUNSEL: Skadden, Arps, Slate, Meagher & Flom LLP The foregoing is intended to summarize certain basic terms of the Facilities. It is not intended to be a definitive list of all of the requirements of the Lenders in connection with the Facilities. ANNEX B-13 -----END PRIVACY-ENHANCED MESSAGE-----