-----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, AM3z9e8TJRFP2eJby8Um7nVUZuVhrux1bsGbrQhDYU9JeAUA2QToqtwOEMZ/6HsD /aMNSJrOnwXyI6Stjs4jJw== 0000950134-03-009238.txt : 20030723 0000950134-03-009238.hdr.sgml : 20030723 20030616193507 ACCESSION NUMBER: 0000950134-03-009238 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20030503 FILED AS OF DATE: 20030617 FILER: 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: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-14770 FILM NUMBER: 03746441 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 10-Q 1 c77719e10vq.txt FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For The Quarterly Period Ended May 3, 2003 Commission File Number 1-14770 PAYLESS SHOESOURCE, INC. (Exact name of registrant as specified in its charter) DELAWARE 43-1813160 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 3231 SOUTHEAST SIXTH AVENUE, TOPEKA, KANSAS 66607-2207 (Address of principal executive offices) (Zip Code) (785) 233-5171 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. YES X NO ----- ------ Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). YES X NO ----- ------ Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Common Stock, $.01 par value 68,055,855 shares as of June 10, 2003 PART I - FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS PAYLESS SHOESOURCE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED) (Dollars in millions)
MAY 3, MAY 4, FEBRUARY 1, ASSETS 2003 2002 2003 - ------ -------- -------- ----------- Current Assets: Cash and cash equivalents $ 47.9 $ 116.7 $ 74.4 Restricted cash 33.0 15.5 28.5 Inventories 479.2 364.4 452.5 Current deferred income taxes 20.0 31.7 16.4 Other current assets 65.9 65.1 61.8 -------- -------- -------- Total current assets 646.0 593.4 633.6 Property and Equipment: Land 8.5 7.8 7.6 Buildings and leasehold improvements 627.9 602.4 625.4 Furniture, fixtures and equipment 505.8 474.6 490.0 Property under capital leases 4.6 7.3 4.6 -------- -------- -------- Total property and equipment 1,146.8 1,092.1 1,127.6 Accumulated depreciation and amortization (720.5) (653.8) (701.3) -------- -------- -------- Property and equipment, net 426.3 438.3 426.3 Favorable leases, net 33.1 36.0 34.3 Deferred income taxes 25.5 30.0 29.0 Other assets 27.7 27.3 27.6 -------- -------- -------- Total Assets $1,158.6 $1,125.0 $1,150.8 ======== ======== ======== LIABILITIES AND SHAREOWNERS' EQUITY - ----------------------------------- Current Liabilities: Current maturities of long-term debt $ 89.0 $ 72.6 $ 83.2 Notes payable 33.0 15.5 28.5 Accounts payable 101.6 85.8 106.4 Accrued expenses 130.0 148.5 123.7 -------- -------- -------- Total current liabilities 353.6 322.4 341.8 Long-term debt 118.7 227.0 140.7 Other liabilities 52.8 59.1 52.3 Minority interest 17.9 9.0 17.8 Total shareowners' equity 615.6 507.5 598.2 -------- -------- -------- Total Liabilities and Shareowners' Equity $1,158.6 $1,125.0 $1,150.8 ======== ======== ========
See Notes to Condensed Consolidated Financial Statements. 2 PAYLESS SHOESOURCE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF EARNINGS (UNAUDITED) (Dollars and shares in millions, except per share)
13 WEEKS ENDED --------------------------------- MAY 3, 2003 MAY 4, 2002 -------------- -------------- Net sales $ 697.7 $ 738.2 Cost of sales 493.3 517.2 Selling, general, and administrative expenses 180.1 177.9 -------------- -------------- Operating profit 24.3 43.1 Interest expense 5.0 6.0 Interest income (0.9) (0.5) -------------- -------------- Earnings before income taxes and minority interest 20.2 37.6 Provision for income taxes 7.4 14.5 -------------- -------------- Earnings before minority interest 12.8 23.1 Minority interest 1.3 0.8 -------------- -------------- Net Earnings $ 14.1 $ 23.9 ============== =============== Diluted Earnings per Share $ 0.21 $ 0.35 ============== =============== Basic Earnings per Share $ 0.21 $ 0.36 ============== =============== Diluted Weighted Average Shares Outstanding 68.1 68.4 ============== =============== Basic Weighted Average Shares Outstanding 68.0 67.2 ============== ===============
See Notes to Condensed Consolidated Financial Statements. 3 PAYLESS SHOESOURCE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED) (Dollars in millions)
13 WEEKS ENDED ---------------------------------- MAY 3, 2003 MAY 4, 2002 ----------- ----------- Operating Activities: Net earnings $ 14.1 $ 23.9 Adjustments for noncash items included in net earnings: Loss on disposal of assets 0.3 0.7 Depreciation and amortization 25.3 25.7 Amortization of unearned restricted stock 0.2 0.8 Deferred income taxes (0.1) 4.5 Minority interest (1.3) (0.8) Tax benefit of stock option exercises -- 2.6 Changes in working capital: Merchandise inventories (26.7) (24.9) Other current assets (4.0) (9.0) Accounts payable (4.8) 12.3 Accrued expenses 6.3 9.2 Other assets and liabilities, net 3.8 0.2 -------- -------- Total Operating Activities 13.1 45.2 -------- -------- Investing Activities: Capital expenditures (24.4) (23.3) Disposition of property and equipment -- 0.8 -------- -------- Total Investing Activities (24.4) (22.5) -------- -------- Financing Activities: Issuance of notes payable 4.5 6.0 Restricted cash (4.5) (6.0) Repayment of long-term debt (16.2) (11.5) Net issuances (purchases) of common stock (0.4) 10.1 Contributions by minority owners 1.8 3.2 Other financing activities (0.4) (0.1) -------- -------- Total Financing Activities (15.2) 1.7 -------- -------- Increase (Decrease) in Cash and Cash Equivalents (26.5) 24.4 Cash and Cash Equivalents, Beginning of Year 74.4 92.3 -------- -------- Cash and Cash Equivalents, End of Period $ 47.9 $ 116.7 ======== ======== Cash paid during the period: Interest $ 4.5 $ 6.6 Income Taxes 5.9 (0.1)
See Notes to Condensed Consolidated Financial Statements. 4 PAYLESS SHOESOURCE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. INTERIM RESULTS. These unaudited Condensed Consolidated Financial Statements of Payless ShoeSource, Inc. (the "Company") have been prepared in accordance with the instructions to Form 10-Q of the United States Securities and Exchange Commission and should be read in conjunction with the Notes to Consolidated Financial Statements (pages 20-25) in the Company's 2002 Annual Report. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, the unaudited Condensed Consolidated Financial Statements are fairly presented and all adjustments (consisting only of normal recurring adjustments) necessary for a fair statement of the results for the interim periods have been included; however, certain items are included in these statements based upon estimates for the entire year. The results for the three-month period ended May 3, 2003, are not necessarily indicative of the results that may be expected for the fiscal year ending January 31, 2004. NOTE 2. INVENTORIES. Merchandise inventories are valued by the retail method and are stated at the lower of cost, determined using the first-in, first-out (FIFO) basis, or market. Raw material and in-transit inventories are valued at the lower of cost using the FIFO basis, or market. Raw materials of $13.7 million and $15.5 million are included in Inventories at May 3, 2003 and February 1, 2003, respectively. There were no raw materials in Inventories at May 4, 2002. NOTE 3. INTANGIBLES. Effective February 3, 2002, the Company adopted Statement of Financial Accounting Standard ("SFAS") No. 142, "Goodwill and Other Intangible Assets." Under SFAS 142, goodwill and other intangible assets with indefinite lives are no longer subject to amortization. This Statement also provides that goodwill should not be amortized, but shall be tested for impairment annually, or more frequently if circumstances indicate potential impairment, through a comparison of fair value to its carrying amount. In the first quarter of fiscal 2002, the Company ceased amortization of goodwill and completed the first step of the required two-step goodwill impairment testing. The first step of the impairment test required the Company to compare the fair value of each reporting unit to its carrying value to determine whether there was an indication of impairment. If there had been an indication of impairment, the Company would have allocated the fair value of the reporting unit to its assets and liabilities as if the reporting unit had been acquired in a business combination. During 2002, no impairment losses were recorded under SFAS No. 142. The Company assesses the fair value of its relevant reporting units annually in the first quarter. No impairment loss was recorded during the first quarter of 2003. NOTE 4. LONG-TERM DEBT AND LINE OF CREDIT. In 2000, the Company entered into a $600 million credit facility consisting of a $400 million term loan and a line of credit of $200 million ("Credit Facility"). The Company's outstanding indebtedness on its term loan declined to $200.0 million as of May 3, 2003, from $293.3 million as of May 4, 2002. As of May 3, 2003, no amounts were drawn against the Company's $200.0 million line of credit. The availability under the line of credit has been reduced, however, by $13.4 million in outstanding letters of credit. The Company's Credit Facility is secured by a first priority security interest in all of the capital stock of the Company's domestic subsidiaries and 65 percent of the capital stock of its first-tier foreign subsidiaries. The indentures governing the Credit Facility require the Company to comply with various financial and other covenants, the most restrictive of which is the maintenance of a fixed charge coverage ratio as defined in the credit agreement. As of May 3, 2003, the Company is in compliance with all of the covenants under the Credit Facility. However, based on current expectations, the Company would not meet the required fixed charge coverage ratio at the end of the second quarter of 2003. Accordingly, the Company intends to amend its fixed charge coverage ratio requirement. NOTE 5. ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. In order to mitigate the Company's exposure to fluctuations in interest rates, the Company has entered into a series of interest rate swap agreements whereby the Company will receive interest at the three-month London Inter-Bank Offered Rate ("LIBOR") and pay a weighted average rate of 6.9%. The interest rate swaps expire in the second quarter of 2003. 5 The Company accounts for derivative instruments in accordance with Statement of Financial Accounting Standard ("SFAS") No. 133 "Accounting for Derivative Instruments and Hedging Activities." The Company's interest rate swap agreements have been designated as cash flow hedging instruments. Such instruments are those that effectively convert variable interest payments on debt instruments into fixed payments. For qualifying hedges, SFAS No. 133 allows derivative gains and losses to offset related results on hedged items in the consolidated statement of operations. As the critical terms of the Company's interest rate swap agreements match those of the related hedged obligations, the Company has concluded that there is no ineffectiveness in its hedges. Changes in the fair value of interest rate swap agreements designated as cash flow hedging instruments are reported in accumulated other comprehensive income. During the first quarter of 2003, the Company recorded an after-tax gain of $0.1 million ($0.1 million pre-tax) to other accumulated comprehensive income, representing the decline in fair value of its interest rate swap agreements. At May 3, 2003, the Company had a cumulative after-tax loss of $0.7 million ($1.1 million pre-tax) included in other accumulated comprehensive income related to its interest rate swap agreements on a notional amount of $80.0 million. The resulting liability is reflected in other current liabilities and other liabilities in the accompanying condensed consolidated balance sheet. The pre-tax loss is subsequently reclassified into interest expense as a yield adjustment in the same period in which the related interest on the floating rate debt obligations affects earnings. During the first quarter of 2003, $1.0 million of after-tax losses ($1.6 million pre-tax) included in accumulated other comprehensive income related to interest rate swap agreements was reclassified to interest expense. Over the course of the next twelve months, approximately $0.7 million of after-tax losses ($1.1 million pre-tax) in accumulated other comprehensive income related to interest rate swap agreements are expected to be reclassified into interest expense as a yield adjustment on the Company's variable-rate long-term debt. NOTE 6. RESTRUCTURING CHARGE. During the fourth quarter of 2001, the Company recorded a non-recurring charge of $70.0 million comprised of a $53.9 million restructuring charge and a $16.1 million asset impairment charge. The cash portion of the charge was $41.4 million. As part of the restructuring, the Company centralized all domestic retail operations functions in Topeka, Kansas. Four domestic division offices in Atlanta, Baltimore, Chicago, and Dallas were closed. The Company also announced its intention to close 104 under-performing stores, including 67 Parade stores and 37 Payless ShoeSource stores, as part of the restructuring. The store closings differ from closings in the normal course of business in that they have a longer remaining lease term. The remaining Parade locations are concentrated in the Northeast and selected major metropolitan areas. As of May 3, 2003, the Company has closed 95 stores and has decided to continue to operate 7 of the 104 stores originally identified for closure. The remaining two stores will be closed in 2003. The Company eliminated a total of 230 positions in conjunction with the restructuring. The table below provides a roll-forward of the $41.4 million reserve established as part of the 2001 non-recurring charge and the status of the reserve as of May 3, 2003. Costs are being charged against the reserves as incurred. Reserves are reviewed for adequacy on a periodic basis and are adjusted as appropriate based on those reviews. (Dollars in millions)
PRE-TAX 2001 CASH PAID IN ACCRUED AS OF CASH PAID ACCRUED AS OF CASH CHARGE 2001 AND 2002 ADJUSTMENTS FEBRUARY 1, 2003 IN 2003 MAY 3, 2003 ------------ ------------- ----------- ---------------- --------- ------------- Store closings (including lease terminations and employee termination costs) $ 17.6 $ (8.5) $ (8.0) $ 1.1 $ (0.2) $ 0.9 Division closings (including lease terminations and employee termination costs) 3.3 (2.7) 1.8 2.4 (0.2) 2.2 Corporate employee termination costs 8.0 (8.0) - - - - Professional fees 6.4 (8.1) 2.0 0.3 - 0.3 Inventory liquidation costs (recorded as a component of cost of sales) 4.4 (2.4) (2.0) - - - Other restructuring related costs 1.7 (3.1) 1.4 - - - ------ ------- ------ ----- ------ ----- Total $ 41.4 $ (32.8) $ (4.8) $ 3.8 $ (0.4) $ 3.4 ====== ======= ====== ===== ====== =====
In 2002, the Company recorded an additional charge of $2.0 million for professional fees and $1.4 million for relocation costs associated with implementing the restructuring that was announced during the fourth quarter of 2001. Also, in 2002, the Company decreased its reserve for store closings by $8.0 million, inventory liquidations by $2.0 million and increased its reserve for division closings by $1.8 million. 6 During 2002, in an effort to enhance global sourcing initiatives and align with international expansion strategies, the Company reorganized its global sourcing structure to focus on cost reduction initiatives from procurement of materials through distribution of product. As part of these cost reduction initiatives, the Company is now taking ownership of certain raw materials as the materials enter the production process. These raw materials are included in Inventories. NOTE 7. INCOME TAXES. The Company's effective income tax rate for the first quarter of 2003 has been reduced to 36.5 percent from 38.4 percent during the first quarter of 2002. The reduction reflects the tax impact of actions taken to restructure operations to support the increasing globalization of the Company's business. Costs associated with these actions were provided for in the restructuring charge taken in the fourth quarter of 2001 and the second quarter of 2002. NOTE 8. COMPREHENSIVE INCOME. The following table shows the computation of comprehensive income: (Dollars in millions)
13 WEEKS ENDED ---------------------------- MAY 3, 2003 MAY 4, 2002 ----------- ----------- Net Income $ 14.1 $ 23.9 Other Comprehensive Income: Change in fair value of derivatives 0.1 (0.4) Derivative losses reclassified into interest expense 1.0 1.9 Foreign currency translation adjustments 2.3 1.6 ------ ------ Total other comprehensive income 3.4 3.1 ------ ------ Total Comprehensive Income $ 17.5 $ 27.0 ====== ======
NOTE 9. EARNINGS PER SHARE. Basic earnings per share are computed by dividing net earnings by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share include the effect of conversions of stock options. NOTE 10. STOCK-BASED COMPENSATION. The Company adopted the disclosure provisions of Statement of Financial Accounting Standards ("SFAS") No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure, an amendment of FASB Statement No. 123." The Statement requires prominent disclosures in both annual and interim financial statements regarding the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The Company accounts for stock compensation awards under the intrinsic value method of Accounting Principles Board ("APB") Opinion No. 25. APB Opinion No. 25 requires compensation cost to be recognized based on the excess, if any, between the quoted market price of the stock at the date of grant and the amount an employee must pay to acquire the stock. All options awarded under all of the Company's plans are granted with an exercise price equal to the fair market value on the date of the grant. SFAS 123, "Accounting for Stock-Based Compensation," provides an alternative method of accounting for stock-based compensation, which establishes a fair value based method of accounting for employee stock options or similar equity instruments. The Company uses the Black-Scholes option pricing model to estimate the grant date fair value of its option grants. The fair value is recognized over the option vesting period. The following table presents the effect on net earnings and earnings per share had the Company adopted the fair value based method of accounting for stock-based compensation under SFAS No. 123, "Accounting for Stock-Based Compensation." (Dollars in millions, except per share amounts)
13 WEEKS ENDED --------------------------- MAY 3, 2003 MAY 4, 2002 ----------- ----------- Net earnings: As reported $ 14.1 $ 23.9 Less: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related taxes $ 1.3 $ 1.8 Pro forma $ 12.8 $ 22.1 Diluted earnings per share: As reported $ 0.21 $ 0.35 Pro forma $ 0.19 $ 0.32 Basic earnings per share: As reported $ 0.21 $ 0.36 Pro forma $ 0.19 $ 0.33
7 NOTE 11. STOCK SPLIT. The Company completed a three-for-one stock split, effected in the form of a stock dividend, to shareholders of record on March 13, 2003, payable on March 27, 2003. The Company issued approximately 44.4 million shares of common stock as a result of the stock split. All references to the number of shares and per share amounts of common stock have been restated to reflect the stock split. The Company reclassified an amount equal to the par value of the number of shares issued to common stock from retained earnings. NOTE 12. SEGMENT REPORTING. The Company and its subsidiaries are principally engaged in the operation of retail locations offering family footwear and accessories. The Company operates its business in two reportable business segments: Payless Domestic and Payless International. These segments have been determined based on internal management reporting and management responsibilities. The Payless International segment includes retail operations in Canada, South America, Central America and the Caribbean. The Company's operations in its Central and South America regions are operated as joint ventures in which the Company maintains a 60-percent ownership. Certain management costs for services performed by Payless Domestic and certain royalty fees and sourcing fees charged by Payless Domestic are allocated to the Payless International segment. These total costs and fees amounted to $4.4 million during each of the periods ended May 3, 2003, and May 4, 2002, respectively. The Payless Domestic segment includes retail operations in the United States, Guam, and Saipan. Information on the segments is as follows: (Dollars in millions)
Payless Domestic Payless International Payless Consolidated ---------------- --------------------- -------------------- Quarter ended May 3, 2003 Revenues from external customers $ 629.7 $ 68.0 $ 697.7 Operating profit 28.1 (3.8) 24.3 Total assets 962.8 195.8 1,158.6 Quarter ended May 4, 2002 Revenues from external customers $ 679.0 $ 59.2 $ 738.2 Operating profit 43.5 (0.4) 43.1 Total assets 978.6 146.4 1,125.0
NOTE 13. RECLASSIFICATIONS. Certain reclassifications have been made to prior year balances to conform to the current year presentation. NOTE 14. FOREIGN CURRENCY TRANSLATION. Local currencies are the functional currencies for all subsidiaries. Accordingly, assets and liabilities of foreign subsidiaries are translated at the rate of exchange at the balance sheet date. Adjustments from the translation process are accumulated as part of other comprehensive income and are included as a separate component of shareowners' equity. Income and expense items of these subsidiaries are translated at average rates of exchange. NOTE 15. CONTINGENCIES. On or about December 20, 2001, a First Amended Complaint was filed against the Company in the U.S. District Court for the District of Oregon, captioned Adidas America, Inc. and Adidas-Salomon AG v. Payless ShoeSource, Inc. The First Amended Complaint seeks injunctive relief and unspecified monetary damages for trademark and trade dress infringement, unfair competition, deceptive trade practices and breach of contract. The Company believes it has meritorious defenses to claims asserted in the lawsuit and has filed an answer and a motion for summary judgment which the court granted in part. An estimate of the possible loss, if any, or the range of loss cannot be made. On or about January 20, 2000, a complaint was filed against the Company in the U.S. District Court for the District of New Hampshire, captioned Howard J. Dananberg, D.P.M. v. Payless ShoeSource, Inc. The Complaint seeks injunctive relief, unspecified treble monetary damages, attorneys' fees, interest and costs for patent infringement. The Company believes it has meritorious defenses to claims asserted in the lawsuit. An estimate of the possible loss, if any, or the range of loss cannot be made. NOTE 16. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS. In December 2002, the FASB issued SFAS 148, "Accounting for Stock-Based Compensation - Transition and Disclosure" ("SFAS 148"). SFAS 148 amends SFAS 123, "Accounting for Stock-Based Compensation," and provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. SFAS 148 also amends the disclosure requirements of SFAS 123 to require prominent disclosure in annual and interim financial statements about the effects of stock-based compensation. The transition guidance and annual disclosure provisions of SFAS 148 are effective for financial statements issued for fiscal years ending after December 15, 2002. The interim disclosure provisions of this statement are effective for financial reports containing financial statements for interim periods beginning after December 15, 2002. The Company has adopted the disclosure provisions of SFAS 148. 8 ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This discussion and analysis should be read in conjunction with the Condensed Consolidated Financial Statements and Notes to the Condensed Consolidated Financial Statements included in this Form 10-Q. REVIEW OF OPERATIONS The following discussion summarizes the significant factors affecting operating results for the quarters ended May 3, 2003 (2003) and May 4, 2002 (2002). NET EARNINGS Net earnings totaled $14.1 million in the first quarter of 2003 compared with $23.9 million in the first quarter of 2002. The following table presents the components of costs and expenses, as a percent of revenues, for the first quarter of 2003 and 2002.
FIRST QUARTER ------------------ 2003 2002 ---- ---- Cost of sales 70.7% 70.1% Selling, general, and administrative expense 25.8 24.1 ---- ---- Operating profit 3.5 5.8 Interest expense, net 0.6 0.7 ---- ---- Earnings before income taxes and minority interest 2.9 5.1 Effective income tax rate* 36.5% 38.4% ==== ==== Earnings before minority interest 1.8 3.1 Minority interest 0.2 0.1 ---- ---- Net Earnings 2.0% 3.2% ==== ====
* Percent of pre-tax earnings NET SALES Net sales represent all sales during the period net of estimated returns. Same-store sales is calculated on a weekly basis. If a store is open the entire week in each of the two years being compared, its sales are included in the same-store sales calculation for that week. Relocated and remodeled stores are also included in the same-store sales calculation if they were open during the entire week in each of the two years being compared. During the first quarter of 2003 total sales decreased 5.5% compared to the first quarter of 2002, consisting of a 10.7% decrease in unit volume and a 5.8% increase in average selling prices. Footwear unit volume decreased 12.5 percent and footwear average selling prices increased 6.6 percent in the first quarter of 2003 compared to the first quarter of 2002. Sales percent decreases are as follows:
FIRST QUARTER ------------------- 2003 2002 ---- ---- Net Sales (5.5)% (3.9)% Same-Store Sales (6.2)% (6.3)%
After a positive performance in February 2003, sales were weaker than last year during the months of March and April. Sales shortfalls were concentrated in sandals and athletic footwear due in part to unseasonably cool weather and a weak economy. 9 COST OF SALES Cost of sales includes cost of merchandise sold and the Company's buying and occupancy costs. Cost of sales was $493.3 million in the 2003 first quarter, down 4.6% from $517.2 million in the 2002 first quarter. As a percentage of net retail sales, cost of sales was 70.7 percent in the first quarter of 2003, compared with 70.2 percent in the first quarter of 2002. The reduction in gross margin reflects the negative leverage of occupancy costs due to negative same-store sales. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses were $180.1 million in the first quarter of 2003, up 1.2% from $177.9 million in the first quarter of 2002. As a percentage of net retail sales, selling, general and administrative expenses were 25.8 percent during the first quarter of 2003 compared with 24.1 percent in the first quarter of 2002. The increase, as a percentage of net retail sales, during the first quarter of 2003 reflects the negative leverage of expenses due to lower sales. INTEREST EXPENSE, NET Interest expense decreased to $4.1 million in the first quarter of 2003 from $5.5 million in the first quarter of 2002. The decrease is the result of the repayment of $91.9 million of long-term debt during 2002 and the first quarter of 2003 and lower interest rates on the unhedged portion of variable rate debt during the first quarter of 2003. EFFECTIVE INCOME TAX RATE The Company's effective income tax rate decreased to 36.5 percent in the first quarter of 2003 from 38.4 percent in the first quarter of 2002. The reduction reflects the tax impact of actions taken to restructure operations to support the increasing globalization of the Company's business and to participate in jurisdictional tax incentive programs. LIQUIDITY AND CAPITAL RESOURCES CASH FLOW Cash flow from operations during the three months ended May 3, 2003 was $13.1 million. This figure represented 1.9 percent of net sales in the first quarter of 2003 compared with 6.1 percent in the first quarter of 2002. The decrease in cash flow in the first quarter of 2003 is due primarily to the decrease in net earnings and the timing of payments for inventory purchases. Internally generated funds and continued investment from the Company's joint venture partners are expected to continue to be the most important component of the Company's capital resources; however, the Company may from time to time draw on its revolving credit line to fund seasonal cash flow needs. CAPITAL EXPENDITURES Capital expenditures during the first quarter of 2003 totaled $24.4 million, including $1.8 million from the Company's joint venture partners. The Company estimates that capital expenditures for the remainder of the year will be $90.6 million, including a $5.0 million contribution from the Company's joint venture partners in Central and South America. The Company anticipates that cash flow from operations, the revolving credit line, and its joint venture partners will be sufficient to finance projected capital expenditures. 10 FINANCING ACTIVITIES As of May 3, 2003, no amounts were drawn against the Company's $200.0 million line of credit. The availability under the line of credit has been reduced, however, by $13.4 million in outstanding letters of credit. The Company's financial commitments include required principal payments on the term loan and required payments under operating leases and capital leases and certain royalty payments as of May 3, 2003 as follows: (Dollars in millions)
YEAR TERM LOAN OPERATING LEASES ROYALTIES CAPITAL LEASES OTHER ---- --------- ---------------- --------- -------------- ------- Remainder of 2003 65.9 190.0 1.3 0.6 0.3 2004 106.0 213.2 1.5 0.7 1.1 2005 28.1 172.6 1.5 0.5 -- 2006 -- 142.9 1.6 0.5 -- 2007 -- 131.1 0.3 0.5 -- Thereafter -- 211.4 -- 0.1 4.0 -------- -------- ------- ------- ------- Total $ 200.0 $1,061.2 $ 6.2 $ 2.9 $ 5.4 ======== ======== ======= ======= =======
The Company's royalty commitment consists of minimum royalty payments for the purchase of branded merchandise. The Company's term loan and line of credit comprise its Credit Facility, which is secured by a first priority security interest in all of the capital stock of the Company's domestic subsidiaries and 65 percent of the capital stock of its first-tier foreign subsidiaries. The indentures governing the Credit Facility require the Company to comply with various financial and other covenants. As of May 3, 2003, the Company is in compliance with all of the covenants under the credit facility. However, based on current expectations, at the end of the second quarter ending August 2, 2003, the Company would not meet the most restrictive of those covenants, which is the maintenance of a fixed charge coverage ratio, as defined in the credit agreement, as amended. The Company intends to amend its fixed charge coverage ratio requirement. While there can be no assurances that the Company will be successful in these efforts, the Company believes it will be able to amend the fixed charge coverage ratio requirement based on its positive cash flow being generated from operations, the Company's history of paying down borrowings faster than required and its ample coverage levels under the other covenants. In addition, the company is evaluating its capital structure. At May 3, 2003, the Company's long-term debt, including current maturities, declined to $207.7 million from $299.6 million at May 4, 2002. This reduction in debt has resulted in a significant improvement in the debt to capitalization ratio as indicated in the table below. The Company also maintains demand notes payable of $33.0 million entered into to efficiently finance its Latin American subsidiaries. The Company maintains cash balances of $33.0 million in certificates of deposit as compensating balances to collateralize the notes payable. The certificates of deposit are reflected as restricted cash in the accompanying condensed consolidated balance sheet. 11 FINANCIAL CONDITION RATIOS A summary of key financial information for the periods indicated is as follows:
MAY 3, MAY 4, FEB. 1, 2003 2002 2003 ------ ------ ------- Current Ratio 1.8 1.8 1.9 Debt-Capitalization Ratio* 28.1% 38.3% 29.7% Interest Coverage Ratio** 2.4x 1.6x 2.5x
* Debt-to-capitalization has been computed by dividing total debt by capitalization. Total debt is defined as long-term debt including current maturities, notes payable and borrowings under the revolving line of credit. Capitalization is defined as total debt and shareowners' equity. The debt-to-capitalization ratio, including the present value of future minimum rental payments under operating leases as debt and as capitalization, would be 64.6%, 69.8% and 65.4% respectively, for the periods referred to above. The reduction in the debt to capitalization ratio reflects payments made on the Company's outstanding indebtedness and an increase in equity due to the Company's earnings. ** Interest coverage ratio, which is presented for the trailing 52 weeks in each period ended above, is defined as earnings before income taxes, gross interest expense, and the interest component of rent expense, divided by gross interest expense and the interest component of rent expense. The increase in the interest coverage ratio as of the first quarter of 2003 compared to the first quarter of 2002 is primarily attributable to the $70.0 million non-recurring charge recorded during the fourth quarter of 2001 for restructuring initiatives and asset impairments included in the twelve-month period ended May 4, 2002. STORE ACTIVITY At the end of the first quarter of 2003, the Company operated 5,003 stores offering quality family footwear and accessories in 50 states, Puerto Rico, Guam, Saipan, the U.S. Virgin Islands, Canada, Chile, Costa Rica, the Dominican Republic, Ecuador, El Salvador, Guatemala, Honduras, Nicaragua, Panama, Peru, and Trinidad & Tobago. The following table presents the change in store count for the first quarters of 2003 and 2002.
FIRST QUARTER ----------------- 2003 2002 ----- ----- Beginning of quarter 4,992 4,964 Stores opened 60 61 Stores closed (49) (40) ----- ----- Ending store count 5,003 4,985 ===== =====
Included in the 2003 first quarter store openings are 7 net new stores in Central America and the Caribbean operated under a joint venture agreement. This brings total store count in this region to 128. The Company intends to open 25 to 30 additional stores in this region during the remainder of 2003. Management believes this region represents an opportunity to open a total of 150 to 200 stores. During the first quarter of 2003 the Company also opened 7 new stores in South America. This brings total store count in this region to 49. These stores are operated under a joint venture agreement. The Company intends to open 10 to 15 additional stores in this region during the remainder of 2003. The Andean region of South America could represent approximately a 300-store opportunity. 12 RESTRUCTURING During the fourth quarter of 2001, the Company recorded a non-recurring charge of $70.0 million comprised of a $53.9 million restructuring charge and a $16.1 million asset impairment charge. The cash portion of the charge was $41.4 million. As part of the restructuring, the Company centralized all domestic retail operations functions in Topeka, Kansas. Four domestic division offices in Atlanta, Baltimore, Chicago, and Dallas were closed. The Company also announced its intention to close 104 under-performing stores, including 67 Parade stores and 37 Payless ShoeSource stores, as part of the restructuring. The store closings differ from closings in the normal course of business in that they have a longer remaining lease term. The remaining Parade locations are concentrated in the Northeast and selected major metropolitan areas. As of May 3, 2003, the Company has closed 95 stores and has decided to continue to operate 7 of the 104 stores originally identified for closure. The remaining two stores will be closed in 2003. The Company eliminated a total of 230 positions in conjunction with the restructuring. The table below provides a roll-forward of the $41.4 million reserve established as part of the 2001 non-recurring charge and the status of the reserve as of May 3, 2003. Costs are being charged against the reserves as incurred. Reserves are reviewed for adequacy on a periodic basis and are adjusted as appropriate based on those reviews. (Dollars in millions)
PRE-TAX 2001 CASH PAID IN ACCRUED AS OF CASH PAID ACCRUED AS OF CASH CHARGE 2001 AND 2002 ADJUSTMENTS FEBRUARY 1, 2003 IN 2003 MAY 3, 2003 ------------ ------------- ----------- ---------------- --------- ------------- Store closings (including lease terminations and employee termination costs) $ 17.6 $ (8.5) $ (8.0) $ 1.1 $ (0.2) $ 0.9 Division closings (including lease terminations and employee termination costs) 3.3 (2.7) 1.8 2.4 (0.2) 2.2 Corporate employee termination costs 8.0 (8.0) - - - - Professional fees 6.4 (8.1) 2.0 0.3 - 0.3 Inventory liquidation costs (recorded as a component of cost of sales) 4.4 (2.4) (2.0) - - - Other restructuring related costs 1.7 (3.1) 1.4 - - - ------ ------- ------ ----- ------ ----- Total $ 41.4 $ (32.8) $ (4.8) $ 3.8 $ (0.4) $ 3.4 ====== ======= ====== ===== ====== =====
In 2002, the Company recorded an additional charge of $2.0 million for professional fees and $1.4 million for relocation costs associated with implementing the restructuring that was announced during the fourth quarter of 2001. Also, in 2002, the Company decreased its reserve for store closings by $8.0 million, inventory liquidations by $2.0 million and increased its reserve for division closings by $1.8 million. During 2002, in an effort to enhance global sourcing initiatives and align with international expansion strategies, the Company reorganized its global sourcing structure to focus on cost reduction initiatives from procurement of materials through distribution of product. As part of these cost reduction initiatives, the Company is now taking ownership of certain raw materials as the materials enter the production process. These raw materials are included in Inventories. CRITICAL ACCOUNTING POLICIES In preparing the accompanying condensed consolidated financial statements, management makes estimates and assumptions that affect the amounts reported within the financial statements. Actual results could differ from these estimates. For more information regarding the Company's critical accounting policies, estimates and judgments, see the discussion under Management's Discussion and Analysis of Financial Condition and Results of Operations in the Form 10-K for the year ended February 1, 2003. 13 ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK INTEREST RATE RISK Interest on the Company's Credit Facility is based on the London Inter-Bank Offered Rate ("LIBOR") plus a variable margin as defined in the credit agreement. Therefore, the Company's future borrowing costs may fluctuate depending upon the volatility of LIBOR. The Company currently mitigates a portion of its interest rate risk through the use of interest rate swap agreements, whereby the Company has agreed to exchange, at specific intervals, the difference between fixed and variable interest amounts calculated by reference to an agreed-upon notional amount. FOREIGN CURRENCY RISK Although the Company has international operating subsidiaries, the Company's exposure to foreign currency rate fluctuations is not significant to the financial condition or results of the Company. ITEM 4 - CONTROLS AND PROCEDURES The Company's principal executive officer and principal financial officer, with the participation of the Company's management group, have evaluated the Company's disclosure controls and procedures within 90 days of the filing date of this Quarterly Report on Form 10-Q. Based on that evaluation, these officers have concluded that the Company's disclosure controls and procedures are effective. There were no significant changes in the Company's internal controls or in other factors that could significantly affect the disclosure controls since the date such controls were evaluated. FORWARD-LOOKING STATEMENTS This report contains, and from time to time the Company may publish, forward-looking statements relating to such matters as anticipated financial performance, business prospects, technological developments, new products, future store openings, international expansion, possible strategic alternatives, new business concepts, capital expenditures and similar matters. Statements including the words "expects," "anticipates," "intends," "plans," "believes," "seeks," or variations of such words and similar expressions are forward-looking statements. The Company notes that a variety of factors could cause its actual results and experience to differ materially from the anticipated results or other expectations expressed in its forward-looking statements. The risks and uncertainties that may affect the operations, performance, development and results of the Company's business include, but are not limited to, the following: changes in consumer spending patterns; changes in consumer preferences and overall economic conditions; the impact of competition and pricing; changes in weather patterns; the financial condition of the suppliers and manufacturers from whom the Company sources its merchandise; changes in existing or potential duties, tariffs or quotas; changes in relationships between the United States and foreign countries; changes in relationships between Canada and foreign countries; economic and political instability in foreign countries or restrictive actions by the governments of foreign countries in which suppliers and manufacturers from whom the Company sources are located or in which the Company operates stores; changes in trade and/or tax laws; fluctuations in currency exchange rates; availability of suitable store locations on appropriate terms; the ability to hire, train and retain associates; general economic, business and social conditions in the countries from which the Company sources products, supplies or has or intends to open stores; the performance of our partners in joint ventures; the ability to comply with local laws in foreign countries; threats or acts of terrorism or war; and strikes, work stoppages or slowdowns by unions that play a significant role in the manufacture, distribution or sale of product. In addition, severe acute respiratory syndrome (SARS) or other illnesses could cause a disruption in the Company's supply chain or consumer purchasing patterns. All subsequent written and oral forward-looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by these cautionary statements. 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. 14 PART II - OTHER INFORMATION ITEM 1 - LEGAL PROCEEDINGS Other than as described below, there are no material pending legal proceedings other than ordinary, routine litigation incidental to the business to which the Company is a party or of which any of its property is subject. On or about December 20, 2001, a First Amended Complaint was filed against the Company in the U.S. District Court for the District of Oregon, captioned Adidas America, Inc. and Adidas-Salomon AG v. Payless ShoeSource, Inc. The First Amended Complaint seeks injunctive relief and unspecified monetary damages for trademark and trade dress infringement, unfair competition, deceptive trade practices and breach of contract. The Company believes it has meritorious defenses to claims asserted in the lawsuit and has filed an answer and a motion for summary judgment which the court granted in part. An estimate of the possible loss, if any, or the range of loss cannot be made. On or about January 20, 2000, a complaint was filed against the Company in the U.S. District Court for the District of New Hampshire, captioned Howard J. Dananberg, D.P.M. v. Payless ShoeSource, Inc. The Complaint seeks injunctive relief, unspecified treble monetary damages, attorneys' fees, interest and costs for patent infringement. The Company believes it has meritorious defenses to claims asserted in the lawsuit. An estimate of the possible loss, if any, or the range of loss cannot be made. ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS (a) The annual meeting of shareowners of the Registrant was held on May 22, 2003. (b) At the annual meeting of shareowners of the Registrant held on May 22, 2003, action was taken with respect to the election of one director of the Registrant: 55,764,093 shares were voted for Mylle H. Mangum while authority was withheld with respect to 7,268,694 shares. Other directors whose term of office continued after the meeting include: Steven J. Douglass, Duane L. Cantrell, Howard R. Fricke, Daniel Boggan Jr., Michael E. Murphy, and Robert C. Wheeler. (c) Shareowners ratified the appointment of Deloitte & Touche LLP as the Company's independent public accountants: 58,368,622 votes in favor, 4,609,032 votes against and 55,133 votes abstained. ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: NUMBER DESCRIPTION ------ ----------- 11.1 Computation of Net Earnings Per Share* 99.1 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of the Chairman of the Board and Chief Executive Officer* 99.2 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of the Senior Vice President, Chief Financial Officer and Treasurer* * Filed herewith (b) Reports on Form 8-K On February 28, 2003, the registrant filed a Current Report on Form 8-K furnishing under Item 12 its Press Release, dated February 28, 2003, announcing fourth quarter results. On May 14, 2003, the registrant filed a Current Report on Form 8-K furnishing under Item 9 its Press Release, dated May 14, 2003, announcing first quarter results. 15 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PAYLESS SHOESOURCE, INC. Date: June 16, 2003 By: /s/ Steven J. Douglass ------------------------------- Steven J. Douglass Chairman of the Board and Chief Executive Officer Date: June 16, 2003 By: /s/ Ullrich E. Porzig ------------------------------- Ullrich E. Porzig Senior Vice President Chief Financial Officer and Treasurer 16 CERTIFICATION I, Steven J. Douglass, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Payless ShoeSource, Inc., a Delaware corporation; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: June 16, 2003 /s/ Steven J. Douglass ------------------------------------- Steven J. Douglass Chairman of the Board and Chief Executive Officer 17 CERTIFICATION I, Ullrich E. Porzig, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Payless ShoeSource, Inc., a Delaware corporation; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: June 16, 2003 /s/ Ullrich E. Porzig ------------------------------------- Ullrich E. Porzig Senior Vice President, Chief Financial Officer and Treasurer 18 EX-11.1 3 c77719exv11w1.txt COMPUTATION OF NET EARNINGS PER SHARE . . . Exhibit 11.1 PAYLESS SHOESOURCE, INC. COMPUTATION OF NET EARNINGS PER SHARE
May 3, May 4, (Thousands, except per share) 2003 2002 ------- ------- Basic Computation: - ------------------ Net earnings $14,091 $23,933 Weighted average common shares outstanding 67,986 67,241 ------- ------- Basic earnings per share $ 0.21 $ 0.36 ======= ======= Diluted Computation: - -------------------- Net earnings $14,091 $23,933 Weighted average common shares outstanding 67,986 67,241 ------- ------- Net effect of dilutive stock options based on the treasury stock method 96 1,164 ------- ------- Outstanding shares for diluted earnings per share 68,082 68,405 ======= ======= Diluted earnings per share $ 0.21 $ 0.35 ======= =======
Note: Basic earnings per share are computed by dividing net earnings by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share include the effect of conversions of options. 19 EX-99.1 4 c77719exv99w1.txt CERTIFICATION PURSUANT TO SECTION 906 EXHIBIT 99.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Payless ShoeSource, Inc. (the "Company") on Form 10-Q for the period ending May 3, 2003, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Steven J. Douglass, Chairman of the Board and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: June 16, 2003 /s/ Steven J. Douglass ------------------------------------- Steven J. Douglass Chairman of the Board and Chief Executive Officer 20 EX-99.2 5 c77719exv99w2.txt CERTIFICATION PURSUANT TO SECTION 906 EXHIBIT 99.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Payless ShoeSource, Inc. (the "Company") on Form 10-Q for the period ending May 3, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Ullrich E. Porzig, Senior Vice President - Chief Financial Officer and Treasurer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: June 16, 2003 /s/ Ullrich E. Porzig ------------------------------------- Ullrich E. Porzig Senior Vice President, Chief Financial Officer and Treasurer 21 -----END PRIVACY-ENHANCED MESSAGE-----