<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10/A
AMENDMENT NO. 2
GENERAL FORM FOR REGISTRATION OF SECURITIES
PURSUANT TO SECTION 12(B) OR (G) OF
THE SECURITIES EXCHANGE ACT OF 1934
----------------
PAYLESS SHOESOURCE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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MISSOURI 48-0674097
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
3231 E. 6TH STREET
TOPEKA, KANSAS 66607-2207
(ADDRESS OF PRINCIPAL EXECUTIVE (ZIP CODE)
OFFICES)
(913) 233-5171
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
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Securities to be registered pursuant to Section 12(b) of the Act:
<TABLE>
<CAPTION>
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH
TO BE SO REGISTERED EACH CLASS IS TO BE REGISTERED
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<S> <C>
Common Stock, par value $.01 per share The New York Stock Exchange, Inc.
Preferred Stock Purchase Rights The New York Stock Exchange, Inc.
</TABLE>
Securities to be registered pursuant to Section 12(g) of the Act:
None
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<PAGE>
PAYLESS SHOESOURCE, INC.
CROSS-REFERENCE SHEET BETWEEN INFORMATION STATEMENT
AND ITEMS OF FORM 10
<TABLE>
<CAPTION>
ITEM LOCATION IN INFORMATION STATEMENT
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<S> <C>
1. Business................................. Summary; Risk Factors; Management's
Discussion and Analysis of Results of
Operations and Liquidity and Capital
Resources; Business; The Distribution;
Consolidated Financial Statements
2. Financial Information.................... Summary; Risk Factors; Selected Historical
Financial Information; Pro Forma
Capitalization; Unaudited Pro Forma
Consolidated Financial Statements;
Management's Discussion and Analysis of
Results of Operations and Liquidity and
Capital Resources; Consolidated Financial
Statements
3. Properties............................... Business
4. Security Ownership of Certain Beneficial
Owners and Management.................... Beneficial Ownership of Management;
Security Ownership of Certain Beneficial
Owners
5. Directors and Executive Officers......... Management
6. Executive Compensation................... Executive Compensation; Beneficial
Ownership of Management; Security
Ownership of Certain Beneficial Owners
7. Certain Relationships and Related Summary; Transactions Between the Company
Transactions............................... and May; The Distribution
8. Legal Proceedings........................ Business
9. Market Price of and Dividends on the
Registrant's Common Equity and Related
Stockholder Matters...................... Summary; Risk Factors; Beneficial Ownership
of Management; Security Ownership of
Certain Beneficial Owners; Description of
Capital Stock
10. Recent Sales of Unregistered Securities.. None
11. Description of Registrant's Securities to
be Registered............................ Risk Factors; Description of Capital Stock;
Purposes and Effects of Certain Provisions
of the Charter, the By-Laws and the Rights
Agreement
12. Indemnification of Directors and
Officers................................... Management
13. Financial Statements and Supplementary Summary; Management's Discussion and
Data....................................... Analysis of Results of Operations and
Liquidity and Capital Resources;
Consolidated Financial Statements
14. Disagreement with Accountants on
Accounting and Financial Disclosure...... None
15. Financial Statements and Exhibits
</TABLE>
(a) Financial Statements--See Index to Combined Financial Statements
(b) Exhibits:
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<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
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<C> <S> <C>
2.1 Distribution Agreement, dated as of April 2, 1996, between
The May Department Stores Company ("May") and the Regis-
trant.*
3.1 Amended and Restated Articles of Incorporation of the Reg-
istrant.*
3.2 Amended and Restated Bylaws of the Registrant.*
4.1 Rights Agreement, dated as of April 2, 1996, between the
Registrant and The Bank of New York, as Rights Agent.*
10.1 Tax Sharing Agreement, dated as of April 2, 1996, between
May and the Registrant.*
10.2 Sublease, dated as of April 2, 1996, between May and the
Registrant.*
10.3 Form of Multicurrency Credit Agreement, dated as of
, 1996 among the Registrant, several financial
institutions and Bank of America National Trust and Sav-
ings Association.**
10.4 Administrative Services Agreement, dated as of April 2,
1996, between May and the Registrant.*
10.5 Payless ShoeSource, Inc. 1996 Stock Incentive Plan.**
10.6 Payless ShoeSource, Inc. Spin-Off Stock Plan.**
10.7 Payless ShoeSource, Inc. Spin-Off Cash Plan.**
10.8 Payless ShoeSource, Inc. Restricted Stock Plan for Non-
Management Directors.**
10.9 Form of Employment Agreement between the Registrant and
certain executives of the Registrant.**
10.10 Payless ShoeSource, Inc. Supplementary Retirement Plan.**
10.11 Payless ShoeSource, Inc. Profit Sharing Plan.**
10.12 Payless ShoeSource, Inc. Deferred Compensation Plan.**
10.13 Payless ShoeSource, Inc. Executive Incentive Compensation
Plan for Payless Executives.**
10.14 Form of Management Severance Agreement.**
10.15 Form of Indemnification Agreement.**
21.1 Subsidiaries of the Registrant.**
</TABLE>
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*Filed herewith.
**Previously filed.
II-1
<PAGE>
SIGNATURE
PURSUANT TO THE REQUIREMENTS OF SECTION 12 OF THE SECURITIES EXCHANGE ACT OF
1934, THE REGISTRANT HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED
ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
Payless ShoeSource, Inc.
/s/ Ullrich E. Porzig
By: _________________________________
Name: Ullrich E. Porzig
Title: Chief Financial Officer
Date: April 15, 1996
II-2
<PAGE>
[LOGO -- PAYLESS SHOESOURCE]
THE MAY DEPARTMENT STORES COMPANY
611 OLIVE STREET
ST. LOUIS, MISSOURI 63101
April 15, 1996
Dear Fellow Shareowners:
I am pleased to announce that the Board of Directors of The May Department
Stores Company has authorized a distribution by May of the shares of common
stock of Payless ShoeSource, Inc. to owners of May's common stock. Payless is
the largest footwear retailer in the United States, with over $2.3 billion in
sales in 1995. Payless sold over 200 million pairs of shoes in 1995,
representing one out of every five pairs sold in the United States. As of
February 3, 1996, Payless operated 4,549 self-service, affordably priced family
shoe stores, of which 773 include Payless Kids expansions. Its stores are
located in 49 states, the District of Columbia, Puerto Rico and the United
States Virgin Islands.
Your board of directors believes that the distribution will enable May and
Payless to concentrate on their respective businesses and, as a result, will
enable the market to reflect properly the performance of each company. In
addition, as an independent company with its own publicly traded stock, Payless
will be better able to attract, retain and motivate its associates by offering
economic incentives and rewards tied more directly to Payless' performance.
If you are a shareowner of record of May common stock at the close of
business on April 25, 1996, you will receive .16 share of Payless common stock
for every share of May common stock you own (and a cash payment for any
fractional share of Payless common stock you are entitled to receive). No
action is required on your part to receive your distribution. The distribution
will be effective on May 4, 1996. You will receive your Payless stock
certificate in a separate mailing shortly after May 8, 1996. After the
distribution, May will own no shares of Payless common stock.
Payless' common stock has been approved for listing and will be traded on the
New York Stock Exchange under the symbol "PSS."
As discussed in more detail in the accompanying Information Statement, May
has received an opinion of counsel to the effect that you will not recognize
gain or loss by reason of the distribution (except for cash received for
fractional shares, if any). In addition, the aggregate basis of your May common
stock and of your Payless common stock (including the fractional shares, if
any) will be the same as the aggregate basis in your May common stock before
the distribution, and will be allocated in proportion to the fair market value
of each. We will send you additional information with your June 1996, dividend
to help you allocate your tax basis between your May common stock and your
Payless common stock.
The Information Statement, which is being distributed to all owners of May
common stock in connection with the distribution, describes the transaction in
detail and contains important information about Payless, including financial
statements and other financial information.
Very truly yours,
LOGO
David C. Farrell
Chairman of the Board and
Chief Executive Officer
<PAGE>
PHOTOS
1. Photo of Payless ShoeSource store with a Payless Kids expansion in a mall
setting.
2. Photo of exterior of typical free standing Payless ShoeSource Store.
<PAGE>
Payless ShoeSource, Inc.
3231 East Sixth Street
Topeka, Kansas 66607
April 15, 1996
Dear Fellow Shareowner:
I am very pleased that soon you will be a new shareowner of Payless
ShoeSource, Inc.
Your company is starting out from a very strong base of more than 4,500
stores nationwide. We believe we are the most profitable footwear retailer in
the United States. We have enjoyed double-digit five year compound annualized
sales growth and participate in the discount and value-priced shoe market
segment. We believe this has been the fastest growing segment of the footwear
industry.
Payless ShoeSource is led by a team of experienced management executives who
have an average of 19 years of retail industry experience, and are highly
incentivized to improve share price performance. Moreover, as an independent
New York Stock Exchange listed company, the value of Payless can be better
recognized by the market.
Payless ShoeSource has made significant investments in the quality of its
operations, setting industry standards in distribution, sourcing and systems.
We count on these core competencies to be our building blocks for the future.
Our management team is committed to increasing shareowner value by
increasing sales and profits in existing locations, combined with selective
openings of profitable new stores.
We are excited about our future and look forward to having you as a
shareowner in our company.
Very truly yours,
LOGO
Steven J. Douglass
Chairman and
Chief Executive Officer
<PAGE>
THE MAY DEPARTMENT STORES COMPANY
FREQUENTLY ASKED QUESTIONS
ABOUT THE
DISTRIBUTION OF COMMON STOCK OF
PAYLESS SHOESOURCE, INC.
1. WHAT WILL I RECEIVE AS A RESULT OF THE PAYLESS DISTRIBUTION?
May shareowners of record on April 25, 1996 will automatically receive a
distribution of .16 share of Payless ShoeSource, Inc. common stock for each
share of May common stock they own. For example, if you own 100 shares of May
common stock on April 25, 1996, you will receive 16 shares of Payless common
stock.
2. WHAT WILL HAPPEN IF MY PAYLESS STOCK DISTRIBUTION YIELDS BOTH WHOLE SHARES
AND A FRACTION OF A SHARE?
Your Payless fractional share will be aggregated with other fractional
shares and the Bank of New York (our distribution agent) will sell shares
equal to the aggregate of all of the fractional shares on the open market. The
Bank of New York will then mail you a check for your part of the net sale
proceeds.
3. WHEN WILL I RECEIVE MY PAYLESS SHARES?
If you hold your May shares in your own name or in May's Dividend
Reinvestment Plan, your Payless stock certificate will be mailed to you on or
about May 8, 1996. You should allow several days for the mailing to reach you.
4. WHAT IF I HOLD MY MAY SHARES THROUGH MY STOCKBROKER, BANK OR OTHER NOMINEE?
If you hold your May shares through your stockbroker, bank or some other
nominee, you are not a shareowner of record of those shares. Your receipt of
Payless stock depends on your arrangements with the nominee that holds your
May shares for you. You should check with your stockbroker, bank or other
nominee.
5. IF I PARTICIPATE IN THE MAY PROFIT SHARING PLAN, HOW WILL THE PAYLESS
SHARES BE HANDLED IN MY ACCOUNT?
The trustee of the May Profit Sharing Plan holds all of the May common stock
held for your account in the May Stock Fund of the May Profit Sharing Plan. As
a shareowner, the trustee will receive shares of Payless common stock in the
distribution. It then will convert those Payless shares into additional May
shares by selling the Payless shares after the distribution and using the
proceeds to purchase more May common stock for the May Stock Fund in the May
Profit Sharing Plan.
6. IF I PARTICIPATE IN THE PAYLESS PROFIT SHARING PLAN, HOW WILL THE PAYLESS
SHARES BE HANDLED IN MY ACCOUNT?
The trustee of the Payless Profit Sharing Plan holds all of the May common
stock held for your account in the May Stock Fund of the Payless Profit
Sharing Plan. As a shareowner, the trustee will receive shares of Payless
common stock in the distribution. It then will transfer the Payless shares to
your Payless stock account in the Payless Profit Sharing Plan.
7. HOW MUCH IS A SHARE OF PAYLESS COMMON STOCK WORTH?
Payless stock has been approved for listing and will be traded on the New
York Stock Exchange under the symbol "PSS." Trades in Payless common stock,
and the prices at which the stock trades, will be reported on the New York
Stock Exchange Composite Tape.
<PAGE>
8. HOW WILL THE DISTRIBUTION AFFECT THE MARKET PRICE OF MY MAY COMMON STOCK?
The first day that May stock will be traded in the market without the right
to the distribution (the "ex-distribution" date) will be May 9, 1996. That
morning, the market price of May common stock will decrease. The decrease
should be roughly equivalent to .16 times the value of one share of Payless
common stock. For example, if the Payless stock price just before the
distribution were $20 per share, it would be expected that the May stock price
would decrease by about $3.20 (the approximate market value of .16 of a share
of Payless stock). Together, the market value of your May shares and the
Payless shares that you receive in the distribution should add up to
approximately the price for your May shares just before the ex-distribution
date, subject to market factors.
9. WHAT IF I WANT TO BUY OR SELL SHARES OF MAY OR PAYLESS COMMON STOCK?
You should consult with your own financial advisors, such as your
stockbroker, bank or other advisor. Neither May nor Payless will make
recommendations about buying, holding or selling May stock or Payless common
stock.
10. HOW WILL THE DISTRIBUTION AFFECT THE DIVIDENDS I CURRENTLY RECEIVE ON MY
MAY SHARES?
The distribution has no effect on the May dividend. Payless does not expect
to pay dividends initially. As with any company, the declaration and payment
of dividends in the future are subject to the discretion of the respective
boards of directors of May and Payless and will depend on various factors.
11. DO I HAVE TO PAY TAXES ON THE PAYLESS SHARES I RECEIVE?
As discussed in more detail in the attached Information Statement, May has
received an opinion of counsel that the May shareowners will not recognize a
taxable gain or loss when receiving whole shares of Payless common stock
pursuant to the distribution. If you receive cash in lieu of fractional
shares, you will recognize gain or loss equal to the difference between such
cash received and the amount of tax basis allocable to such fractional shares.
In addition, you may have to pay taxes if you sell your Payless shares. If you
have any questions, you should consult your own tax advisor regarding your tax
treatment.
12. HOW WILL I BE ABLE TO DETERMINE MY TAX BASIS IN MY NEW SHARES OF PAYLESS
COMMON STOCK? WILL MY TAX BASIS IN MY MAY SHARES BE AFFECTED BY THE
DISTRIBUTION?
Generally, the basis in your current May stock (your "old" tax basis) should
be divided up and allocated proportionally to your May stock and to the
Payless common stock you receive in the distribution. May will send you
additional information with your June 1996, dividend to help you allocate your
tax basis between your May common stock and your Payless common stock.
13. WHO SHOULD I CALL FOR MORE INFORMATION?
Please call The Bank of New York, Shareowner Services at 800-524-4458.
<PAGE>
INFORMATION STATEMENT
LOGO
COMMON STOCK
(PAR VALUE $.01 PER SHARE)
----------------
This Information Statement is being furnished by The May Department Stores
Company ("May") in connection with the distribution (the "Distribution") by
May to owners of record of May common stock on April 25, 1996 (the "Record
Date"), of .16 share of common stock, par value $.01 per share (including the
associated preferred stock purchase rights, the "Common Stock"), of its wholly
owned subsidiary, Payless ShoeSource, Inc. (the "Company"), for every one
share of May common stock owned on the Record Date. Following the
Distribution, May will own no shares of Common Stock. The Distribution will be
effective on May 4, 1996 (the "Distribution Date"). Certificates representing
the shares of Common Stock will be mailed to shareowners on or about May 8,
1996.
No consideration will be paid by May shareowners for the shares of Common
Stock. There is no current public trading market for the Common Stock,
although it is expected that a "when-issued" trading market will develop on or
about the Record Date. The Common Stock has been approved for listing, subject
to official notice of issuance, on the New York Stock Exchange under the
symbol "PSS."
IN REVIEWING THIS INFORMATION STATEMENT, YOU SHOULD CAREFULLY CONSIDER THE
MATTERS DESCRIBED UNDER THE CAPTION "RISK FACTORS" ON PAGE 13.
----------------
NO VOTE OF SHAREOWNERS IS REQUIRED IN CONNECTION WITH THE
DISTRIBUTION. NO PROXIES ARE BEING SOLICITED AND YOU ARE NOT
REQUESTED TO TAKE ANY ACTION WITH RESPECT TO YOUR
SHARES.
----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS INFORMATION STATEMENT. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
----------------
THE DATE OF THIS INFORMATION STATEMENT IS APRIL 15, 1996.
<PAGE>
References herein to "dollar" and "$" are to United States dollars, and the
terms "United States" and "U.S." mean the United States of America, its
states, its territories, its possessions and all areas subject to its
jurisdiction.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Additional Information............ 3
Summary........................... 4
Introduction...................... 13
Risk Factors...................... 13
Selected Historical Financial
Information...................... 15
Pro Forma Capitalization.......... 17
Unaudited Pro Forma Consolidated
Financial Statements............. 18
Management's Discussion and
Analysis of Results of
Operations and Liquidity and
Capital Resources................ 21
Business.......................... 25
Financing......................... 31
Management........................ 32
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Executive Compensation............. 37
Beneficial Ownership of Management. 41
Security Ownership of Certain
Beneficial Owners................. 42
Transactions Between the Company
and May........................... 42
Description of Capital Stock....... 44
Purposes and Effects of Certain
Provisions of the Charter, the
Bylaws and the Rights Agreement... 45
Comparison of Rights of Shareowners
of May and the Company............ 52
The Distribution................... 56
Independent Public Accountants..... 59
Index to Consolidated Financial
Statements........................ F-1
</TABLE>
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form 10 (as the same may be amended
or supplemented from time to time, the "Registration Statement") under the
Securities Exchange Act of 1934, as amended (the "Exchange Act") with respect
to the Common Stock to be received by May shareowners in the Distribution.
This Information Statement does not contain all of the information set forth
in the Registration Statement and the exhibits and schedules thereto, to which
reference is hereby made.
The Registration Statement and the exhibits thereto filed by the Company
with the Commission may be inspected and copied at the public reference
facilities of the Commission at Room 1024, 450 Fifth Street, N.W., Washington,
D.C. 20549, as well as at the Regional Offices of the Commission at Northwest
Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661
and 7 World Trade Center, Suite 1300, New York, New York 10048. Copies of this
material should also be available on-line through EDGAR and can be obtained by
mail from the Public Reference Branch of the Commission at 450 Fifth Street,
N.W., Washington, D.C. 20549 at prescribed rates.
Following the Distribution, the Company will be required to comply with the
reporting requirements of the Exchange Act and will file annual, quarterly and
other reports with the Commission. The Company will also be subject to the
proxy solicitation requirements of the Exchange Act and will furnish audited
financial statements to its shareowners in connection with its annual
shareowners meeting.
3
<PAGE>
SUMMARY
The following summary is qualified in its entirety by the more detailed
information and consolidated financial statements and related notes thereto
appearing elsewhere in this Information Statement.
THE COMPANY
Payless ShoeSource, Inc. (the "Company") is the largest footwear retailer in
the United States, with over $2.3 billion in sales in 1995. The Company sold
over 200 million pairs of shoes in 1995, representing one out of every five
pairs sold in the United States. The Company's share of the estimated $33
billion United States footwear market was 6.4% in 1995 and has grown
consistently over the past two decades. The Company is led by a team of
experienced management executives who have an average of 19 years of retail
industry experience.
The Company operated, as of February 3, 1996, 4,549 self-service, affordably
priced, family shoe stores, of which 773 include Payless Kids expansions. The
Company's stores are located in 49 states, the District of Columbia, Puerto
Rico and the United States Virgin Islands. The Company's stores average 3,000
square feet and carry approximately 11,000 pairs of shoes. The stores offer
more than 1,000 shoe styles at prices that average $11.00.
The Company has broad customer appeal, providing a complete assortment of
affordably priced, quality footwear for women, men and children from all age
groups, and from households with incomes that represent 85% of the United
States population. The Company has significant market penetration with its
target customer, women aged 18-64. In fact, over 40% of its targeted customers,
regardless of household income, purchased at least one pair of shoes from the
Company last year. In addition to shoes, the stores offer accessories,
including handbags and hosiery.
Management believes the Company is the most profitable footwear retailer in
the United States. However, 1995 results were negatively impacted by a
difficult retail environment (as evidenced by most specialty apparel and
footwear chains experiencing store-for-store declines), the devaluation of the
peso contributing to a 22% store-for-store decline in the Company's Mexican
border stores, and the integration of over 500 store locations acquired from
Kobacker, increasing the Company's fixed costs while causing some transfer
sales from existing stores to new stores opened nearby. The Company has
achieved a compound annual sales growth rate of 11.3% over the last five years
and consistent cash flow. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND LIQUIDITY AND CAPITAL RESOURCES--Review of Financial
Condition--Cash Flow."
During 1995, management identified steps to increase store profitability. As
a result of this analysis, during the fourth quarter of 1995, in connection
with the Distribution, the Company committed to close or relocate approximately
450 unprofitable stores during 1996. A one-time pretax special and nonrecurring
charge of $71.8 million associated with these store closings or relocations and
a plan to reduce central office overhead by means of census reduction and
expense control programs was recorded in 1995. The pro forma impact on 1995
results, had these stores been closed or relocated at the beginning of 1995,
would have been a $5.5 million increase in earnings before income taxes.
Furthermore, the Company estimates that the effect of transfer sales from the
450 closed stores would have improved 1995 earnings before income taxes by an
additional $9.9 million. For a discussion of the assumptions used to determine
the pro forma impact on 1995 results, see "UNAUDITED PRO FORMA CONSOLIDATED
FINANCIAL STATEMENTS."
The Company's objective is to increase sales and profits through increased
store-for-store sales in existing locations combined with selective openings of
profitable new stores. Management intends to achieve this objective through the
following strategic initiatives:
. build on merchandising strengths (women's dress shoes, children's,
sandals) while accelerating new or revitalized strategies of
comfort, wide widths and leather;
. continue to capitalize on long-standing relationships with vendors
and factories to provide the best assortment and value to the
customer while maintaining strong margins;
4
<PAGE>
. increase the selling productivity of the front portions of all
stores and maximize the strength of urban store locations through
more focused merchandising;
. leverage competitive advantage in distribution to increase sales
(build on the Company's ability to quickly respond to validated
fashion trends while capitalizing on its sophisticated physical
distribution system to optimize sales replenishment);
. increase market share by capturing the sales of low priced
footwear retailers and discount mass-merchandisers that have gone
out of business or closed stores in recent months (the Company is
strongly positioned to capture market share due to the convenient
nationwide network of stores in all types of locations (malls,
shopping centers, central business districts and free-standing
stores));
. identify productive sites for new stores in existing and new
markets; and
. drive down operating costs through cost control programs and the
leveraging of technology.
In addition, the Company believes that, as an independent company with its
own publicly traded stock, it will be able to establish equity-based incentive
compensation arrangements which will more selectively attract, retain and
motivate its associates by offering benefits tied directly to the associate's
efforts to improve the Company's performance.
The Company believes that these initiatives will lead to improved operating
results, however, there can be no assurance that such improvement will occur.
See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
LIQUIDITY AND CAPITAL RESOURCES." Furthermore, the Company believes there is
opportunity for continued profitable expansion of its business in the United
States.
The May Department Stores Company ("May") currently owns all of the
outstanding shares of common stock, par value $.01 per share, of the Company
(together with the associated preferred stock purchase rights, the "Common
Stock"). Following the consummation of the pro rata distribution to the owners
of May common stock of all of the outstanding shares of Common Stock (the
"Distribution"), May will own no shares of Common Stock, and the Company will
operate as an independent, publicly owned corporation. See "TRANSACTIONS
BETWEEN THE COMPANY AND MAY" and "THE DISTRIBUTION."
The principal executive offices of the Company are located at 3231 E. 6th
Street, Topeka, Kansas 66607-2207, and its telephone number is (913) 233-5171.
THE DISTRIBUTION
Distributing Company............ The May Department Stores Company. Immedi-
ately after the Distribution, May will own no
shares of Common Stock, and the Company will
operate as an independent, publicly owned
corporation.
Common Stock to be Distributed..
Approximately 39.9 million shares, based upon
the number of shares of common stock of May
expected to be outstanding on April 25, 1996
(the "Record Date").
Distribution Ratio.............. .16 share of Common Stock for every one share
of May common stock (16 shares of Common
Stock for every 100 shares of May common
stock) held by May common shareowners of rec-
ord on the Record Date.
Trading Market and Symbol....... The Common Stock has been approved for list-
ing, subject to official notice of issuance,
on the New York Stock Exchange, Inc. ("NYSE")
under the symbol "PSS."
Record Date.....................
Close of business on April 25, 1996.
5
<PAGE>
Distribution Date...............
May 4, 1996. The Distribution Agent (as de-
fined below) will mail share certificates
commencing on or about May 8, 1996. See "THE
DISTRIBUTION--Manner of Effecting the Distri-
bution."
Distribution Agent.............. The Bank of New York.
Fractional Share Interests...... No certificates representing fractional share
interests will be issued. Owners of May com-
mon stock entitled to receive less than a
full share of Common Stock will receive cash
in lieu of such fractional share interest.
See "THE DISTRIBUTION--Manner of Effecting
the Distribution."
Dividend Policy................. The Company currently does not intend to pay
cash dividends on the Common Stock. See "RISK
FACTORS--Dividend Policy."
Reasons for the Distribution.... To permit each of May and the Company to
adopt strategies and pursue objectives appro-
priate to its specific retail segment and to
permit the Company to structure incentive and
benefit programs to reflect the Company's
performance in order to better attract, re-
tain and motivate its associates.
Tax Consequences................
May has received an opinion of counsel to the
effect that, among other things, receipt of
the Common Stock will be tax-free for Federal
income tax purposes to the shareowners of May
(except to the extent cash is received for
fractional share interests of Common Stock),
and May will not recognize income, gain or
loss as a result of the Distribution. See
"THE DISTRIBUTION--Federal Income Tax Conse-
quences of the Distribution."
Relationship with May after the
Distribution.................... As a result of the Distribution, the Company
will cease to be a subsidiary of or otherwise
affiliated with May and will thereafter oper-
ate as an independent, publicly held company.
However, May and the Company have entered
into certain agreements providing for (i) the
orderly separation of May and the Company and
the making of the Distribution, (ii) the pro-
vision by May of certain interim services to
the Company following the Distribution, (iii)
the ongoing relationship between May and the
Company with respect to lease arrangements
for certain store locations and (iv) the al-
location of certain tax and other liabili-
ties. Mr. Thomas A. Hays, who has been the
Deputy Chairman of May since 1993 and a di-
rector of May since 1983, will serve on the
Company's board of directors after the Dis-
tribution. Mr. Hays has announced his retire-
ment as Deputy Chairman and as a director of
May, effective April 30, 1996. See "TRANSAC-
TIONS BETWEEN THE COMPANY AND MAY" and "MAN-
AGEMENT--Directors."
Certain Considerations.......... Shareowners should carefully consider the
matters discussed under the section entitled
"RISK FACTORS" in this Information Statement.
6
<PAGE>
Comparison of Rights of
Shareowners of May and the
Company.........................
The rights of the shareowners of Common Stock
will be governed by the corporate laws of the
State of Missouri rather than the State of
New York (which is currently the jurisdiction
of incorporation of May), the Company's
Amended and Restated Articles of Incorpora-
tion and Amended and Restated Bylaws. The
corporate laws of the State of Missouri ap-
plicable to the Company differ in certain re-
spects from the corporate laws of the State
of New York applicable to May, including with
respect to amendments to the articles of in-
corporation and bylaws, shareowner action
without a meeting, issuance to officers, di-
rectors and employees of rights or options to
purchase shares, loans to directors, the lim-
itation on directors' personal liability, in-
spection of the shareowner list and certain
anti-takeover statutes. In addition, the
rights of shareowners of the Company differ
from the rights of shareowners of May with
respect to certain matters, including, among
others, removal of directors and the calling
of special shareowners meetings. For a sum-
mary of these differences, see "COMPARISON OF
RIGHTS OF SHAREOWNERS OF MAY AND THE COMPA-
NY."
7
<PAGE>
PAYLESS SHOESOURCE, INC. AND SUBSIDIARIES
SUMMARY SELECTED HISTORICAL FINANCIAL INFORMATION
The following table sets forth summary selected historical financial
information for the Company. The historical financial information presented
below reflects periods during which the Company did not operate as an
independent company, and, accordingly, certain assumptions were made in
preparing such financial information. Therefore, such information may not
necessarily reflect the consolidated results of operations or financial
position that would have existed if the Company had been an independent company
during the periods shown or of the Company's future performance as an
independent company. The financial information set forth below should be read
in conjunction with the Company's Consolidated Financial Statements and the
Notes thereto contained elsewhere in this Information Statement. See
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND LIQUIDITY
AND CAPITAL RESOURCES." Earnings per share data are presented on a pro forma
basis only. See "UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA."
<TABLE>
<CAPTION>
FISCAL YEAR(1)
-----------------------------------------------
1995 1994 1993 1992 1991
-------- -------- -------- -------- --------
(MILLIONS, EXCEPT EARNINGS PER SHARE)
<S> <C> <C> <C> <C> <C>
STATEMENT OF EARNINGS DATA:
Net retail sales............... $2,330.3 $2,116.4 $1,966.5 $1,787.8 $1,547.5
Cost of sales.................. 1,688.7 1,489.8 1,366.1 1,223.9 1,056.5
Selling, general and
administrative expenses....... 479.9 408.4 378.7 351.6 310.7
Interest expense, net.......... 1.0 1.1 0.9 0.8 1.3
Special and nonrecurring items. 71.8(2) -- -- -- --
-------- -------- -------- -------- --------
Total cost of sales and
expenses...................... 2,241.4 1,899.3 1,745.7 1,576.3 1,368.5
-------- -------- -------- -------- --------
Earnings before income taxes... 88.9 217.1 220.8 211.5 179.0
Provision for income taxes..... 34.9 85.6 88.0 80.4 68.2
-------- -------- -------- -------- --------
Net earnings................... $ 54.0(2) $ 131.5 $ 132.8 $ 131.1 $ 110.8
======== ======== ======== ======== ========
Pro forma earnings per share... $ 2.43(3)
========
</TABLE>
- --------
(1) The Company's fiscal year ends on the Saturday closest to January 31.
Fiscal year 1995 includes 53 weeks.
(2) During the 1995 fourth quarter, in connection with the Distribution, the
Company committed to close or relocate approximately 450 unprofitable
stores during 1996. In addition, the Company committed to restructure its
central office and other personnel. The 1995 net earnings, excluding
special and nonrecurring items, are $97.5. The pro forma impact on 1995
results, had these stores been closed or relocated at the beginning of
1995, would have been a $5.5 increase in earnings before income taxes.
Furthermore, the Company estimates that the effect of transfer sales from
the 450 closed stores would have improved 1995 earnings before income taxes
by an additional $9.9. For a discussion of the assumptions used to
determine the pro forma impact on 1995 results, see "UNAUDITED PRO FORMA
CONSOLIDATED FINANCIAL STATEMENTS."
(3) Represents pro forma earnings per share as computed in the Pro Forma
Consolidated Statement of Earnings. See "UNAUDITED PRO FORMA CONSOLIDATED
FINANCIAL STATEMENTS."
8
<PAGE>
<TABLE>
<CAPTION>
FISCAL YEAR(1)
--------------------------------------------
1995 1994 1993 1992 1991
-------- -------- ------ ------ ------
(DOLLARS IN MILLIONS, EXCEPT SALES PER
SQUARE FOOT)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital.................. $ 232.0 $ 242.8 $253.5 $206.1 $191.7
Property and equipment, net...... $ 560.0 $ 590.6 $433.9 $383.9 $343.5
Total assets..................... $1,014.3 $1,019.8 $840.8 $732.7 $692.7
Total debt....................... $ 11.5 $ 13.1 $ 14.5 $ 16.1 $ 16.9
May equity investment............ $ 752.9 $ 793.9 $661.0 $571.1 $530.9
OTHER FINANCIAL DATA:
Net retail sales growth.......... 10.1% 7.6% 10.0% 15.5% 13.3%
Earnings before interest, income
taxes, depreciation and
amortization (EBITDA) (2)....... $ 185.2(3) $ 295.2 $288.7 $245.2 $226.1
Stores opened.................... 276 756 322 348 399
Stores closed.................... 162 100 113 73 71
Number of stores (at period end). 4,549 4,435 3,779 3,570 3,295
Sales per square foot............ $ 154 $ 161 $ 165 $ 161 $ 152
Capital expenditures............. $ 95.4 $ 255.2 $139.8 $119.3 $145.6
Present value of operating
leases.......................... $ 885.5 $ 952.1 $779.9 $688.1 $554.0
</TABLE>
- --------
(1) The Company's fiscal year ends on the Saturday closest to January 31.
Fiscal year 1995 includes 53 weeks.
(2) EBITDA should not be considered in isolation or as a substitute for
measures of performance or cash generation prepared in accordance with
generally accepted accounting principles. See the Company's Consolidated
Financial Statements and the Notes thereto, contained elsewhere in this
Information Statement.
(3) 1995 EBITDA, excluding special and nonrecurring items, is $257.0.
9
<PAGE>
PAYLESS SHOESOURCE, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA
The Company has no operating history as an independent company. The
historical consolidated financial statements reflect periods during which the
Company did not operate as an independent company, and, accordingly, certain
assumptions were made in preparing such financial statements. Therefore, such
historical consolidated financial statements may not necessarily reflect the
consolidated results of operations or financial position that would have
existed had the Company been an independent company.
The underlying assumptions that result in the pro forma adjustments are: (1)
with respect to the Pro Forma Consolidated Balance Sheet, (a) the Distribution
occurred on February 3, 1996 and (b) the store closings or relocations
resulting in the special and nonrecurring charge happened on February 3, 1996,
and (2) with respect to the Pro Forma Consolidated Statement of Earnings, (a)
the Distribution occurred on January 29, 1995 and (b) the store closings or
relocations resulting in the special and nonrecurring charge happened on
January 29, 1995.
The pro forma consolidated financial statements should be read in conjunction
with the Company's Consolidated Financial Statements and the Notes thereto
contained elsewhere in this Information Statement. The pro forma consolidated
financial information is presented for informational purposes only and may not
necessarily reflect the future results of operations or financial position of
the Company or what the results of operations or financial position would have
been had the Company's business been operated as an independent company during
such period.
PRO FORMA CONSOLIDATED STATEMENT OF EARNINGS
(UNAUDITED)
<TABLE>
<CAPTION>
YEAR ENDED FEBRUARY 3, 1996
---------------------------------------
PRO FORMA PRO
HISTORICAL(1) ADJUSTMENTS(2) FORMA
------------- -------------- --------
(MILLIONS, EXCEPT EARNINGS PER SHARE)
<S> <C> <C> <C>
NET RETAIL SALES...................... $2,330.3 $(127.6)(a) $2,202.7
-------- ------- --------
Cost of sales......................... 1,688.7 (109.4)(a) 1,579.3
Selling, general and administrative
expenses............................. 479.9 (23.6)(a)
6.1 (b) 462.4
Interest expense, net................. 1.0 -- 1.0
Special and nonrecurring items........ 71.8(4) (71.8)(c) --
-------- ------- --------
Total cost of sales and expenses...... 2,241.4 (198.7) 2,042.7
-------- ------- --------
Earnings before income taxes.......... 88.9 71.1 160.0
Provision for income taxes............ 34.9 28.0 (d) 62.9
-------- ------- --------
NET EARNINGS(3)....................... $ 54.0(4) $ 43.1 $ 97.1(5)
======== ======= ========
Pro forma earnings per share.......... $ 2.43
========
Outstanding shares of Common Stock.... 39.9(e)
========
</TABLE>
- --------
(1) See the Company's Consolidated Financial Statements and Notes thereto,
contained elsewhere in this Information Statement.
(2) See accompanying NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA.
(3) The Company is unaware of any increases in costs related to the purchase of
merchandise due to the termination of its relationship with May.
Incremental costs that will be incurred because the Company is an
independent company have been reflected in the pro forma adjustments above.
See accompanying NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA.
(4) During the 1995 fourth quarter, in connection with the Distribution, the
Company committed to close or relocate approximately 450 unprofitable
stores during 1996. In addition, the Company committed to restructure its
central office and other personnel. The 1995 net earnings, excluding
special and nonrecurring items, are $97.5. The pro forma impact on 1995
results, had these stores been closed or relocated at the beginning of
1995, would have been a $5.5 increase in earnings before income taxes. For
a discussion of the assumptions used to determine the pro forma impact on
1995 results, see "UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS."
(5) The Company estimates that the effect of transfer sales from the 450 closed
stores would have improved 1995 earnings before income taxes by an
additional $9.9, which would result in net earnings of $103.2.
10
<PAGE>
PAYLESS SHOESOURCE, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
FEBRUARY 3, 1996
--------------------------------------
PRO FORMA PRO
HISTORICAL(1) ADJUSTMENTS(2) FORMA
------------- -------------- --------
(MILLIONS)
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and marketable securities........ $ 4.6 $ $ 4.6
Accounts receivable, net.............. 4.4 4.4
Merchandise inventories............... 398.0 398.0
Other current assets.................. 43.9 43.9
--------- ------- --------
Total Current Assets................ 450.9 450.9
Property and Equipment:
Land.................................. 6.5 6.5
Buildings and leasehold improvements.. 564.6 564.6
Furniture, fixtures and equipment..... 278.7 278.7
Property under capital leases......... 18.7 18.7
--------- ------- --------
Total property and equipment.......... 868.5 868.5
Accumulated depreciation and
amortization......................... (308.5) (308.5)
--------- ------- --------
Property and equipment, net........... 560.0 560.0
Goodwill................................ 2.9 2.9
Other Assets............................ 0.5 0.5
--------- ------- --------
Total Assets........................ $ 1,014.3 $ -- $1,014.3
========= ======= ========
LIABILITIES AND EQUITY
Current Liabilities:
Current maturities of capital lease
obligations.......................... $ 1.2 $ $ 1.2
Accounts payable...................... 65.0 65.0
Accrued expenses...................... 152.7 152.7
--------- ------- --------
Total Current Liabilities........... 218.9 218.9
Capital Lease Obligations............... 10.3 10.3
Deferred Income Taxes................... 8.9 8.9
Other Liabilities....................... 23.3 23.3
Equity:
May equity investment................. 752.9 (752.9)(a) --
Shareowners' equity................... -- 752.9 (a) 752.9
--------- ------- --------
Total Liabilities and Equity........ $ 1,014.3 $ -- $1,014.3
========= ======= ========
</TABLE>
- --------
(1) See the Company's Consolidated Financial Statements and Notes thereto,
contained elsewhere in this Information Statement.
(2) See accompanying NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA.
11
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA
PRO FORMA STATEMENT OF EARNINGS
The pro forma adjustments to the accompanying historical consolidated
statement of earnings for the year ended February 3, 1996, are described below:
(a) To reflect the impact on sales, cost of sales, and selling, general and
administrative expenses of closing or relocating approximately 450
unprofitable stores as of the first day of fiscal 1995. The pro forma
impact on 1995 results, had these stores been closed or relocated at the
beginning of 1995, would have been a $5.5 increase in earnings before
income taxes. The pro forma impact was determined using the actual results
of operations for these stores. Furthermore, the Company estimates that the
effect of transfer sales from the 450 closed stores would have improved
1995 earnings before income taxes by an additional $9.9, which would result
in net earnings of $103.2.
(b) To reflect the estimated aggregate cost of $7.2 which would have been
incurred by the Company as an independent company, based on estimates by
the management of the Company and May, and the $1.1 decrease of profit
sharing expense under the Payless Profit Sharing Plan versus the costs
incurred under the May Profit Sharing and Retirement Plans. The $7.2
consists primarily of planned expense for payroll and outsourced services
required to administer the tax, treasury, risk management and insurance,
legal, external reporting and benefits administration functions. In
addition, other components include increased insurance costs and fees
associated with the credit facility. The pro forma decrease in profit
sharing expense of the Payless Profit Sharing Plan is based on Company
stand-alone results whereas under the May Profit Sharing Plan, the Payless
profit sharing was based on May consolidated results.
(c) To reflect the assumption that special and nonrecurring items took place on
the first day of fiscal 1995.
(d) To reflect revised income tax provision associated with the pro forma
adjustments described above at an assumed combined state and Federal income
tax rate of 39.3%.
(e) The number of outstanding shares represents the 1995 weighted average
outstanding shares of May common stock and an assumed distribution ratio of
.16 share of Common Stock for each share of May common stock, plus .125
shares of Common Stock to be issued to Company associates in accordance
with the Spin-Off Stock Plan. See "EXECUTIVE COMPENSATION--Spin-Off Stock
Plan and Spin-Off Cash Plan."
PRO FORMA BALANCE SHEET
The pro forma adjustments to the accompanying historical consolidated balance
sheet at February 3, 1996, are described below:
(a) To reflect the elimination of May's equity investment resulting from the
Distribution.
12
<PAGE>
INTRODUCTION
On April 15, 1996, the board of directors of May declared a distribution,
payable to the owners of record of May common stock, at the close of business
on the Record Date, of .16 share of Common Stock of the Company for every
share of May common stock (16 shares of Common Stock for every 100 shares of
May common stock) outstanding on the Record Date.
Shareowners of May with inquiries relating to the Distribution should
contact the office of the Corporate Treasurer at The May Department Stores
Company, 611 Olive Street, St. Louis, Missouri, 63101-1799. May's telephone
number is (314) 342-6300. After the Distribution Date, shareowners of the
Company with inquiries relating to the Distribution or their investment in the
Company should contact the office of the Chief Financial Officer at the
Company, 3231 E. 6th Street, Topeka, Kansas 66607-2207. The Company's
telephone number is (913) 233-5171.
RISK FACTORS
UNAVAILABILITY OF MAY'S FINANCIAL AND OTHER RESOURCES
Prior to the consummation of the Distribution, the Company has been operated
as a wholly owned subsidiary of May. Following consummation of the
Distribution, it will no longer be able to rely on May for financial support
or benefit from its relationships with May to obtain credit or receive
favorable terms for the purchase or sale of certain goods and services. Except
as described under "TRANSACTIONS BETWEEN THE COMPANY AND MAY," following
consummation of the Distribution the Company will be responsible for obtaining
its own sources of financing and for its own corporate administrative services
such as tax, treasury, risk management and insurance, accounting, legal,
research and development, information systems, and human resources. See
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND LIQUIDITY
AND CAPITAL RESOURCES--Review of Financial Condition--Cash Flow."
RISKS OF FOREIGN MANUFACTURING
The Company contracts for the manufacture of its merchandise with
independent third parties in the United States and 13 foreign countries.
Factories in the People's Republic of China ("China") have been a source of
approximately 80% of the Company's merchandise.
Risks inherent in foreign manufacturing (i.e., manufacturing outside the
United States) include economic and political instability, transportation
delays and interruptions, restrictive actions by foreign governments, the laws
and policies of the United States affecting importation of goods, including
duties, quotas and taxes, trade and foreign tax laws and fluctuations in
currency exchange rates. While the Company has not historically experienced
material adverse effects from these risks, there is no assurance that in the
future these risks will not result in increased costs and delays or disruption
in product deliveries that could cause loss of revenue and damage to customer
relationships.
China currently enjoys "most favored nation" ("MFN") status under United
States tariff laws, which provides the most favorable category of United
States import duties. China's MFN status is annually reviewed by Congress.
Extension of this status is subject to political uncertainties. The loss of
MFN status for China would likely result in substantially increased costs to
the Company in the purchase of merchandise from China until the Company could
arrange to shift its merchandise requirements to alternative manufacturers in
other countries. The Company believes, however, that its competitors in the
footwear industry would be similarly affected.
COMPETITION
The Company operates in a highly competitive retail market competing
primarily with national and regional discount mass-merchandisers, as well as
with other self-service discount shoe stores and off-price outlet stores.
Competition is based on product selection and quality, availability, price,
store location, customer service and efficient promotional activities. The
Company has successfully operated in its markets with each of these segments
of retailing for many years and has continued to capture increased market
share by offering a wider selection of fashionable styles and compelling
prices in conveniently located stores; however, the Company is facing
increased competition from certain national discount mass-merchandisers.
13
<PAGE>
ABSENCE OF PRIOR TRADING MARKET FOR THE COMMON STOCK
There has not been any established public trading for the Common Stock,
although it is expected that a "when-issued" trading market may develop on or
about the Record Date. The Common Stock has been approved for listing on the
NYSE, subject to official notice of issuance, under the symbol "PSS." There
can be no assurance as to the prices at which the Common Stock will trade
before or after the Distribution Date. In particular, the market price for the
Common Stock may be somewhat volatile immediately following the Distribution
because, among other reasons, (i) the shares of Common Stock currently held by
May will be distributed to nearly 43,000 owners of record, some of whom may
not choose to retain such shares, (ii) the shares of Common Stock distributed
to The May Department Stores Company Profit Sharing Plan in the Distribution
will be sold over time and the proceeds reinvested in May common stock, and
(iii) shares of Common Stock will be sold by The Bank of New York, as
distribution agent, to eliminate fractional share interests. See "SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS" and "THE DISTRIBUTION--Manner of
Effecting the Distribution." Prices for shares of Common Stock will be
determined in the marketplace and may be influenced by many factors, including
the depth and liquidity of the market for the shares, investor perception of
the Company, changes in economic conditions in the retail industry and general
economic and market conditions. In addition, the stock market often
experiences significant price fluctuations that are unrelated to the operating
performance of the specific companies whose stock is traded. Market
fluctuations, as well as economic conditions, may adversely affect the market
price of the shares of Common Stock. See "THE DISTRIBUTION--Listing and
Trading of the Shares of Common Stock."
POSSIBLE ANTI-TAKEOVER EFFECTS OF CERTAIN CHARTER AND BYLAW PROVISIONS AND
OTHER MATTERS
Certain provisions of the Company's Amended and Restated Articles of
Incorporation (the "Payless Charter") and Amended and Restated Bylaws (the
"Payless Bylaws") including provisions classifying the board of directors,
governing business transactions with certain shareowners, restricting the
calling of special shareowner meetings and requiring advance notice for
shareowner proposals and certain provisions of the General and Business
Corporation Law of Missouri (the "GBCL") could discourage potential
acquisition proposals and could delay or prevent a change in control of the
Company. In addition, the Rights (as defined herein) could have similar anti-
takeover effects. Such charter and bylaw provisions and the Rights could
diminish the opportunities for a shareowner to participate in certain tender
offers, including tender offers at prices above the then current market value
of the Common Stock and may also inhibit fluctuations in the market price of
the Common Stock that could result from takeover attempts. See "PURPOSES AND
EFFECTS OF CERTAIN PROVISIONS OF THE CHARTER, THE BYLAWS AND THE RIGHTS
AGREEMENT." In addition, the Company's board of directors, without further
shareowner approval, may issue preferred stock that could have the effect of
delaying, deterring or preventing a change in control of the Company. The
issuance of preferred stock could also adversely affect the voting power of
the owners of the Common Stock, including the loss of voting control to
others. The Company has no present plans to issue any preferred stock. See
"DESCRIPTION OF CAPITAL STOCK--Preferred Stock." In connection with the
Distribution, the Company has agreed to indemnify May for certain taxes
resulting from the failure of the Distribution (or certain related
transactions) to qualify as tax-free transactions if such failure is
attributable to certain actions by, or relating to, the Company, including
certain change of control transactions involving the Company and certain
dispositions of the Company's assets occurring prior to the second anniversary
of the Distribution Date. See "TRANSACTIONS BETWEEN THE COMPANY AND MAY--Tax
Sharing Agreement." It is anticipated that the Credit Agreement (as defined
herein) will include a covenant prohibiting a change in control of the
Company. See "FINANCING." These agreements may have the effect of discouraging
or preventing an acquisition of the Company, which may in turn depress the
market price for the shares of Common Stock.
DIVIDEND POLICY
The Company anticipates that future earnings will be used principally to
support operations and to finance new store openings, store expansions and
remodelings and, thus, the Company does not intend to pay cash dividends on
the Common Stock in the near future. The payment of cash dividends in the
future will be at the discretion of the Company's board of directors. The
declaration of dividends and the amount thereof will depend on a number of
factors, including the Company's financial condition, capital requirements,
funds from operations, future business prospects and such other factors as the
board of directors of the Company may deem relevant. In addition, the Credit
Agreement will contain restrictions on the Company's ability to make payments
and distributions, including dividends on the Common Stock. See "FINANCING."
14
<PAGE>
PAYLESS SHOESOURCE, INC. AND SUBSIDIARIES
SELECTED HISTORICAL FINANCIAL INFORMATION
The following table sets forth selected historical financial information for
the Company. The historical financial information presented below reflects
periods during which the Company did not operate as an independent company,
and, accordingly, certain assumptions were made in preparing such financial
information. Therefore, such information may not necessarily reflect the
consolidated results of operations or financial position that would have
existed if the Company had been an independent company during the periods
shown or of the Company's future performance as an independent company. The
financial information set forth below should be read in conjunction with the
Company's Consolidated Financial Statements and the Notes thereto contained
elsewhere in this Information Statement. See "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF RESULTS OF OPERATIONS AND LIQUIDITY AND CAPITAL RESOURCES."
Earnings per share data are presented on a pro forma basis only. See
"UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS."
<TABLE>
<CAPTION>
FISCAL YEAR(1)
-----------------------------------------------
1995 1994 1993 1992 1991
-------- -------- -------- -------- --------
(MILLIONS, EXCEPT EARNINGS PER SHARE)
<S> <C> <C> <C> <C> <C>
STATEMENT OF EARNINGS DATA:
Net retail sales............... $2,330.3 $2,116.4 $1,966.5 $1,787.8 $1,547.5
Cost of sales.................. 1,688.7 1,489.8 1,366.1 1,223.9 1,056.5
Selling, general and
administrative expenses....... 479.9 408.4 378.7 351.6 310.7
Interest expense, net.......... 1.0 1.1 0.9 0.8 1.3
Special and nonrecurring items. 71.8(2) -- -- -- --
-------- -------- -------- -------- --------
Total cost of sales and
expenses...................... 2,241.4 1,899.3 1,745.7 1,576.3 1,368.5
-------- -------- -------- -------- --------
Earnings before income taxes... 88.9 217.1 220.8 211.5 179.0
Provision for income taxes..... 34.9 85.6 88.0 80.4 68.2
-------- -------- -------- -------- --------
Net earnings................... $ 54.0(2) $ 131.5 $ 132.8 $ 131.1 $ 110.8
======== ======== ======== ======== ========
Pro forma earnings per share... $ 2.43(3)
========
</TABLE>
- --------
(1) The Company's fiscal year ends on the Saturday closest to January 31.
Fiscal year 1995 includes 53 weeks.
(2) During the 1995 fourth quarter, in connection with the Distribution, the
Company committed to close or relocate approximately 450 unprofitable
stores during 1996. In addition, the Company committed to restructure its
central office and other personnel. The 1995 net earnings, excluding
special and nonrecurring items, are $97.5. The pro forma impact on 1995
results, had these stores been closed or relocated at the beginning of
1995, would have been a $5.5 increase in earnings before income taxes.
Furthermore, the Company estimates that the effect of transfer sales from
the 450 closed stores would have improved 1995 earnings before income
taxes by an additional $9.9. For a discussion of the assumptions used to
determine the pro forma impact on 1995 results, see "UNAUDITED PRO FORMA
CONSOLIDATED FINANCIAL STATEMENTS."
(3) Represents pro forma earnings per share as computed in the Pro Forma
Consolidated Statement of Earnings. See "UNAUDITED PRO FORMA CONSOLIDATED
FINANCIAL STATEMENTS."
15
<PAGE>
<TABLE>
<CAPTION>
FISCAL YEAR(1)
--------------------------------------------
1995 1994 1993 1992 1991
-------- -------- ------ ------ ------
(DOLLARS IN MILLIONS, EXCEPT SALES PER
SQUARE FOOT)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital.................. $ 232.0 $ 242.8 $253.5 $206.1 $191.7
Property and equipment, net...... $ 560.0 $ 590.6 $433.9 $383.9 $343.5
Total assets..................... $1,014.3 $1,019.8 $840.8 $732.7 $692.7
Total debt....................... $ 11.5 $ 13.1 $ 14.5 $ 16.1 $ 16.9
May equity investment............ $ 752.9 $ 793.9 $661.0 $571.1 $530.9
OTHER FINANCIAL DATA:
Net retail sales growth.......... 10.1% 7.6% 10.0% 15.5% 13.3%
Earnings before interest, income
taxes, depreciation and
amortization (EBITDA)(2)........ $ 185.2(3) $ 295.2 $288.7 $245.2 $226.1
Stores opened.................... 276 756 322 348 399
Stores closed.................... 162 100 113 73 71
Number of stores (at period end). 4,549 4,435 3,779 3,570 3,295
Sales per square foot............ $ 154 $ 161 $ 165 $ 161 $ 152
Capital expenditures............. $ 95.4 $ 255.2 $139.8 $119.3 $145.6
Present value of operating
leases.......................... $ 885.5 $ 952.1 $779.9 $688.1 $554.0
</TABLE>
- --------
(1) The Company's fiscal year ends on the Saturday closest to January 31.
Fiscal year 1995 includes 53 weeks.
(2) EBITDA should not be considered in isolation or as a substitute for
measures of performance or cash generation prepared in accordance with
generally accepted accounting principles. See the Company's Consolidated
Financial Statements and the Notes thereto, contained elsewhere in this
Information Statement.
(3) 1995 EBITDA, excluding special and nonrecurring items, is $257.0.
16
<PAGE>
PRO FORMA CAPITALIZATION
The following table sets forth the consolidated capitalization, the pro
forma adjustments and the pro forma consolidated capitalization of the Company
as if the distribution took place on February 3, 1996. The pro forma
information may not reflect the capitalization of the Company in the future or
as it would have been had the Company been an independent company as of
February 3, 1996. Assumptions regarding the number of shares of Common Stock
may not reflect the actual numbers at the Distribution Date.
<TABLE>
<CAPTION>
FEBRUARY 3, PRO FORMA PRO FORMA
1996(1) ADJUSTMENTS(1) AS ADJUSTED
----------- -------------- -----------
(MILLIONS)
<S> <C> <C> <C>
Current maturities of capital lease
obligations............................ $ 1.2 $ $ 1.2
Long-term capital lease obligations..... 10.3 10.3
Equity:
May equity investment................. 752.9 (752.9)
Shareowners' Investment:
Common Stock, $0.01 par value,
authorized 120.0 shares, outstanding
39.9 shares.......................... 0.4 0.4
Preferred Stock, $0.01 par value,
authorized 25.0 shares, no outstanding
shares.................................
Contributed capital and retained
earnings............................... 752.5 752.5
------ ------- ------
Total Equity........................ 752.9 752.9
Total capitalization................ $764.4 $ -- $764.4
====== ======= ======
Debt-to-capitalization ratio(2)......... 1% 1%
</TABLE>
- --------
(1) This table should be read in conjunction with the Company's Consolidated
Financial Statements and the Notes thereto and the Unaudited Pro Forma
Consolidated Financial Statements and the Notes thereto, contained
elsewhere in this Information Statement.
(2) Debt-to-capitalization has been computed by dividing total debt, which
includes current maturities and long-term capital lease obligations by
capitalization, which includes current maturities and long-term capital
lease obligations, and noncurrent deferred taxes of $8.9. The debt-to-
capitalization ratio, including the present value of future minimum rental
payments under operating leases as debt and as capitalization, is 54% as
of February 3, 1996 and pro forma as adjusted, respectively.
17
<PAGE>
PAYLESS SHOESOURCE, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
The Company has no operating history as an independent company. The
historical consolidated financial statements reflect periods during which the
Company did not operate as an independent company, and, accordingly, certain
assumptions were made in preparing such financial statements. Therefore, such
historical consolidated financial statements may not necessarily reflect the
consolidated results of operations or financial position that would have
existed had the Company been an independent company.
The underlying assumptions that result in the pro forma adjustments are: (1)
with respect to the Pro Forma Consolidated Balance Sheet, (a) the Distribution
occurred on February 3, 1996 and (b) the store closings or relocations
resulting in the special and nonrecurring charge happened on February 3, 1996,
and (2) with respect to the Pro Forma Consolidated Statement of Earnings, (a)
the Distribution occurred on January 29, 1995 and (b) the store closings or
relocations resulting in the special and nonrecurring charge happened on
January 29, 1995.
The pro forma consolidated financial statements should be read in
conjunction with the Company's Consolidated Financial Statements and the Notes
thereto contained elsewhere in this Information Statement. The pro forma
consolidated financial information is presented for informational purposes
only and may not necessarily reflect the future results of operations or
financial position of the Company or what the results of operations or
financial position would have been had the Company's business been operated as
an independent company during such period.
PRO FORMA CONSOLIDATED STATEMENT OF EARNINGS
(UNAUDITED)
<TABLE>
<CAPTION>
YEAR ENDED FEBRUARY 3, 1996
---------------------------------------
PRO FORMA PRO
HISTORICAL(1) ADJUSTMENTS(2) FORMA
------------- -------------- --------
(MILLIONS, EXCEPT EARNINGS PER SHARE)
<S> <C> <C> <C>
NET RETAIL SALES...................... $2,330.3 $(127.6)(a) $2,202.7
-------- ------- --------
Cost of sales......................... 1,688.7 (109.4)(a) 1,579.3
Selling, general and administrative
expenses............................. 479.9 (23.6)(a)
6.1 (b) 462.4
Interest expense, net................. 1.0 -- 1.0
Special and nonrecurring items........ 71.8(4) (71.8)(c) --
-------- ------- --------
Total cost of sales and expenses...... 2,241.4 (198.7) 2,042.7
-------- ------- --------
Earnings before income taxes.......... 88.9 71.1 160.0
Provision for income taxes............ 34.9 28.0 (d) 62.9
-------- ------- --------
NET EARNINGS(3)....................... $ 54.0(4) $ 43.1 $ 97.1(5)
======== ======= ========
Pro forma earnings per share.......... $ 2.43
========
Outstanding shares of Common Stock.... 39.9(e)
========
</TABLE>
- --------
(1) See the Company's Consolidated Financial Statements and Notes thereto,
contained elsewhere in this Information Statement.
(2) See accompanying NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL
STATEMENTS.
(3) The Company is unaware of any increases in costs related to the purchase
of merchandise due to the termination of its relationship with May.
Incremental costs that will be incurred because the Company is an
independent company have been reflected in the pro forma adjustments
above. See accompanying NOTES TO UNAUDITED PRO FORMA CONSOLIDATED
FINANCIAL DATA.
(4) During the 1995 fourth quarter, in connection with the Distribution, the
Company committed to close or relocate approximately 450 unprofitable
stores during 1996. In addition, the Company committed to restructure its
central office and other personnel. The 1995 net earnings, excluding
special and nonrecurring items, are $97.5. The pro forma impact on 1995
results, had these stores been closed or relocated at the beginning of
1995, would have been a $5.5 increase in earnings before income taxes.
(5) The Company estimates that the effect of transfer sales from the 450
closed stores would have improved 1995 earnings before income taxes by an
additional $9.9, which would result in net earnings of $103.2.
18
<PAGE>
PAYLESS SHOESOURCE, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
FEBRUARY 3, 1996
--------------------------------------
PRO FORMA PRO
HISTORICAL(1) ADJUSTMENTS(2) FORMA
------------- -------------- --------
(MILLIONS)
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and marketable securities........ $ 4.6 $ $ 4.6
Accounts receivable, net.............. 4.4 4.4
Merchandise inventories............... 398.0 398.0
Other current assets.................. 43.9 43.9
-------- ------- --------
Total Current Assets................ 450.9 450.9
Property and Equipment:
Land.................................. 6.5 6.5
Buildings and leasehold improvements.. 564.6 564.6
Furniture, fixtures and equipment..... 278.7 278.7
Property under capital leases......... 18.7 18.7
-------- ------- --------
Total property and equipment.......... 868.5 868.5
Accumulated depreciation and
amortization......................... (308.5) (308.5)
-------- ------- --------
Property and equipment, net........... 560.0 560.0
Goodwill................................ 2.9 2.9
Other Assets............................ 0.5 0.5
-------- ------- --------
Total Assets........................ $1,014.3 $ -- $1,014.3
======== ======= ========
LIABILITIES AND EQUITY
Current Liabilities:
Current maturities of capital lease
obligations.......................... $ 1.2 $ 1.2
Accounts payable...................... 65.0 65.0
Accrued expenses...................... 152.7 152.7
-------- ------- --------
Total Current Liabilities........... 218.9 218.9
Capital Lease Obligations............... 10.3 10.3
Deferred Income Taxes................... 8.9 8.9
Other Liabilities....................... 23.3 23.3
Equity:
May equity investment................. 752.9 (752.9)(a) --
Shareowners' equity................... -- 752.9 (a) 752.9
-------- ------- --------
Total Liabilities and Equity........ $1,014.3 $ -- $1,014.3
======== ======= ========
</TABLE>
- --------
(1) See the Company's Consolidated Financial Statements and Notes thereto,
contained elsewhere in this Information Statement.
(2) See accompanying NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL
STATEMENTS.
19
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
PRO FORMA STATEMENT OF EARNINGS
The pro forma adjustments to the accompanying historical consolidated
statement of earnings for the year ended February 3, 1996, are described
below:
(a) To reflect the impact on sales, cost of sales, and selling, general and
administrative expenses of closing or relocating approximately 450
unprofitable stores as of the first day of fiscal 1995. The pro forma
impact on 1995 results, had these stores been closed or relocated at the
beginning of 1995, would have been a $5.5 increase in earnings before
income taxes. The pro forma impact was determined using the actual results
of operations for these stores. Furthermore, the Company estimates that
the effect of transfer sales from the 450 closed stores would have
improved 1995 earnings before income taxes by an additional $9.9, which
would result in net earnings of $103.2.
(b) To reflect the estimated aggregate cost of $7.2 which would have been
incurred by the Company as an independent company, based on estimates by
the management of the Company and May, and the $1.1 decrease of profit
sharing expense under the Payless Profit Sharing Plan versus the costs
incurred under the May Profit Sharing and Retirement Plans. The $7.2
consists primarily of planned expense for payroll and outsourced services
required to administer the tax, treasury, risk management and insurance,
legal, external reporting and benefits administration functions. In
addition, other components include increased insurance costs and fees
associated with the credit facility. The pro forma decrease in profit
sharing expense of the Payless Profit Sharing Plan is based on Company
stand-alone results whereas under the May Profit Sharing Plan, the Payless
profit sharing was based on May consolidated results.
(c) To reflect the assumption that special and nonrecurring items took place
on the first day of fiscal 1995.
(d) To reflect revised income tax provision associated with the pro forma
adjustments described above at an assumed combined state and Federal
income tax rate of 39.3%.
(e) The number of outstanding shares represents the 1995 weighted average
outstanding shares of May common stock and an assumed distribution ratio
of .16 share of Common Stock for each share of May common stock, plus .125
shares of Common Stock to be issued to Company associates in accordance
with the Spin-off Stock Plan. See "EXECUTIVE COMPENSATION--Spin-Off Stock
Plan and Spin-Off Cash Plan."
PRO FORMA BALANCE SHEET
The pro forma adjustments to the accompanying historical consolidated
balance sheet at February 3, 1996, are described below:
(a) To reflect the elimination of May's equity investment resulting from the
Distribution.
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND LIQUIDITY AND CAPITAL RESOURCES
This discussion should be read in conjunction with the Company's
Consolidated Financial Statements and Notes thereto contained elsewhere in
this Information Statement. Since the Company was a wholly owned subsidiary of
May during the periods presented, the financial statements may not necessarily
reflect the consolidated results of operations or financial position of the
Company had it been an independent, public company during those periods. All
dollar amounts herein are stated in millions, except where expressly stated in
billions and except shoe price information.
GENERAL
The Company is the largest footwear retailer in the United States, with over
$2.3 billion in sales in 1995. The Company sold over 200 million pairs of
shoes in 1995, representing one out of every five pairs sold in the United
States. The Company's share of the estimated $33 billion United States
footwear market was 6.4% in 1995, and has grown consistently over the past two
decades. The Company is led by a team of experienced management executives who
have an average of 19 years of retail industry experience.
The Company operated, as of February 3, 1996, 4,549 self-service, affordably
priced, family shoe stores, of which 773 include Payless Kids expansions. The
Company's stores are located in 49 states, the District of Columbia, Puerto
Rico and the United States Virgin Islands. The Company's stores average 3,000
square feet and carry approximately 11,000 pairs of shoes. The stores offer
more than 1,000 shoe styles at prices that average $11.00.
During recent years, the Company has grown sales by means of an aggressive
store opening program, which included acquisitions. The five year compounded
annual sales growth rate for the period ended February 3, 1996 was 11.3%.
During 1995, management focused on store profitability as well as continued
net retail sales growth. The Company opened 114 net new stores, adding 329,000
square feet of retail space. In addition, the Payless Kids expansion program
continued by expanding 138 stores by a total of 133,000 square feet. As
announced January 17, 1996, the Company will close or relocate approximately
450 unprofitable stores during 1996. In addition, the Company committed to
restructure its central office and other personnel. The Company recorded a
one-time pretax special and nonrecurring charge of $71.8. The pro forma impact
on 1995 results, had these stores been closed or relocated at the beginning of
1995, would have been a $5.5 increase in earnings before income taxes.
Furthermore, the Company estimates that the effect of transfer sales from the
450 closed stores would have improved 1995 earnings before income taxes by an
additional $9.9. For a discussion of the assumptions used to determine the pro
forma impact on 1995 results, see "UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL
STATEMENTS."
In 1994, the Company opened 656 net new stores, adding 2.6 million square
feet of retail space. During the year, the Company purchased 550 store
locations from The Kobacker Company and The Shoe Works, Inc. (collectively,
"Kobacker") in 29 states and the District of Columbia. The Company remodeled
and reopened 416 of these stores in the 1994 fourth quarter, all under the
Payless ShoeSource name. In addition, 354 locations were expanded by an
average of 1,000 square feet to include additional selling space for the
Payless Kids format.
In 1996, the Company anticipates adding approximately 240 new stores, with
more than 720,000 square feet of retail space. Approximately 10% of these new
stores are planned to include adjacent Payless Kids expansions. The Company's
total capital expenditures in 1996 are estimated to be $114, including $61 to
open new stores, $24 to remodel existing stores and $29 to make other required
capital improvements. Management anticipates that cash flow from operations
and borrowings under the Company's credit facility will be sufficient to
finance, among other things, its projected capital expenditures.
21
<PAGE>
REVIEW OF OPERATIONS
Net earnings, including the impact of the special and nonrecurring items,
were $54.0 in 1995. Net earnings, excluding the impact of the special and
nonrecurring charge, totaled $97.5 in 1995 compared with $131.5 in 1994 and
$132.8 in 1993. Total Company return on revenues, was 2.3% in 1995 compared
with 6.2% in 1994 and 6.8% in 1993. The 1995 return on revenues, excluding the
special and nonrecurring items, was 4.2%.
Results for the past three years were as follows:
<TABLE>
<CAPTION>
1995(1) 1994(1) 1993(1)
----------------- -------------- --------------
% OF % OF % OF
$ SALES $ SALES $ SALES
-------- ----- -------- ----- -------- -----
<S> <C> <C> <C> <C> <C> <C>
NET RETAIL SALES............ $2,330.3 100.0 $2,116.4 100.0 $1,966.5 100.0
Cost of sales............... 1,688.7 72.5 1,489.8 70.4 1,366.1 69.5
Selling, general and
administrative expenses.... 479.9 20.6 408.4 19.3 378.7 19.3
Interest expense, net....... 1.0 -- 1.1 -- 0.9 --
Special and nonrecurring
items...................... 71.8(2) 3.1 -- -- -- --
-------- ----- -------- ----- -------- -----
Earnings before income
taxes...................... 88.9 3.8 217.1 10.3 220.8 11.2
Provision for income
taxes(3)................... 34.9 39.3 85.6 39.4 88.0 39.8
-------- ----- -------- ----- -------- -----
NET EARNINGS................ $ 54.0(2) 2.3% $ 131.5 6.2% $ 132.8 6.8%
======== ===== ======== ===== ======== =====
</TABLE>
- --------
(1) The Company's fiscal year ends on the Saturday closest to January 31.
Fiscal year 1995 includes 53 weeks.
(2) During the 1995 fourth quarter, in connection with the Distribution, the
Company committed to close or relocate approximately 450 unprofitable
stores during 1996. In addition, the Company committed to restructure its
central office and other personnel. See "--Special and Nonrecurring
Items," below. The 1995 net earnings, excluding these special and
nonrecurring items, are $97.5. The pro forma impact on 1995 results, had
these stores been closed or relocated at the beginning of 1995, would have
been a $5.5 increase in earnings before income taxes. Furthermore, the
Company estimates that the effect of transfer sales from the 450 closed
stores would have improved 1995 earnings before income taxes by an
additional $9.9. For a discussion of the assumptions used to determine the
pro forma impact on 1995 results, see "UNAUDITED PRO FORMA CONSOLIDATED
FINANCIAL STATEMENTS."
(3) Percent of sales column represents effective income tax rate.
Net Retail Sales. Net retail sales, on a 52-week basis, increases
(decreases) for 1995 and 1994 were as follows:
<TABLE>
<CAPTION>
1995 VS. 1994 1994 VS. 1993
--------------------------- ------------------------------------------
STORE-FOR- STORE-FOR-
TOTAL STORE(1) TOTAL STORE(1)
----- --------- ----- ---------
<S> <C> <C> <C>
8.8% (3.7)% 7.6% (0.2)%
</TABLE>
- --------
(1) Store-for-store sales represent sales of those stores open during both
years.
The 1995 store-for-store decrease reflects an overall sluggish retail
environment, combined with transfer sales (the sales lost by existing Payless
stores to new Payless stores that opened in or near an existing trade area),
estimated to be $9, that resulted from the acquisition of locations from
Kobacker, and a sales decline in the Company's Mexican border stores,
estimated to be $17, caused by the devaluation of the peso. Based on industry
sources, the Company believes it outperformed its competition in 1995 and
increased its share of the footwear market. The Company is addressing transfer
sales through closing unprofitable stores located near other Company stores.
It is expected that those closings will result in a transfer of sales to
nearby stores at a higher profit flow-through. The value of the peso appears
to have stabilized based on recent exchange rates as well as improved store-
for-store performance in Mexican border markets.
22
<PAGE>
Total sales increases for 1994 include the results of 656 net new stores,
partially offset by a 0.2% store-for-store sales decrease.
Cost of Sales. Cost of sales includes cost of merchandise sold and buying
and occupancy costs. Cost of sales was $1,688.7 in 1995 compared with $1,489.8
in 1994, a 13.4% increase. As a percent of net retail sales, cost of sales was
72.5% in 1995 compared with 70.4% in 1994. The drop in store-for-store sales
caused an increase in the occupancy cost as a percent of sales. The Company
also took additional markdowns to maintain current inventories.
Cost of sales was $1,489.8 in 1994 compared with $1,366.1 in 1993, a 9.1%
increase. As a percent of net retail sales, cost of sales was 70.4% in 1994
compared with 69.5% in 1993. The 1994 percent increase was primarily due to
increased occupancy, rent and depreciation expense rates resulting from a
decrease in store-for-store sales and from the expenses associated with
opening the Kobacker locations.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $479.9 in 1995 compared with $408.4 in 1994, a
17.5% increase. The increase of 17.5% was due principally to a 15.1% increase
in the average number of stores. As a percent of net retail sales, selling,
general and administrative expenses were 20.6% compared to 19.3% in 1994,
resulting from a 3.7% decline in store-for-store sales coupled with relatively
fixed store staffing costs.
Selling, general and administrative expenses were $408.4 in 1994 compared
with $378.7 in 1993, a 7.8% increase. The increase was due to an 8.5% increase
in the average number of stores. As a percent of net retail sales, selling,
general and administrative expenses remained flat in spite of a 0.2% decrease
in store-for-store sales.
Interest Expense. Interest expense is primarily related to capitalized lease
obligations.
Special and Nonrecurring Items. During the 1995 fourth quarter, in
connection with the Distribution, the Company committed to close or relocate
approximately 450 unprofitable stores during 1996. In addition, the Company
implemented a plan to reduce central office overhead by means of census
reduction and expense control programs. A one-time pretax special and
nonrecurring charge of $71.8 was recorded for these initiatives. The major
components of the charge include a $29.9 noncash write-off of leasehold
improvements, fixtures and equipment, $3.7 attributable to employee severance
costs and $38.2 for other store closing costs. Substantially all store
closings are expected to take place by the end of the 1996. The Company
anticipates most of the cash outflows to occur by the end of 1996, with the
remainder in 1997. The pro forma impact on 1995 results, had the stores been
closed or relocated at the beginning of 1995, would have been a $5.5 increase
in earnings before income taxes. Furthermore, the Company estimates that the
effect of transfer sales from the 450 closed stores would have improved 1995
earnings before income taxes by an additional $9.9. For a discussion of the
assumptions used to determine the pro forma impact on 1995 results, see
"UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS."
Income Taxes. The effective income tax rates were 39.3%, 39.4% and 39.8% in
1995, 1994 and 1993, respectively.
The decrease in the 1994 effective income tax rate to 39.4% from 39.8% in
1993 relates to an increase in wages eligible for the Federal Targeted Jobs
Tax Credit.
Impact of Inflation. Historically, the Company's sales growth and earnings
have not been materially impacted by inflation. The shoe industry experienced
no inflation in 1995 and over the last three years the inflation rate has
averaged less than one-half of 1%.
23
<PAGE>
REVIEW OF FINANCIAL CONDITION
Cash Flow.
Sources and (uses) of cash flows are summarized below:
<TABLE>
<CAPTION>
1995 1994 1993
------ ------- -------
<S> <C> <C> <C>
Operating activities................................. $159.3 $ 234.1 $ 167.9
Investing activities................................. (64.7) (235.0) (116.8)
Financing activities................................. (1.6) (1.4) (1.7)
------ ------- -------
Increase (decrease) in cash before transactions with
May................................................. 93.0 (2.3) 49.4
Net transactions with May............................ (95.0) 1.4 (42.9)
------ ------- -------
Increase (decrease) in cash.......................... $ (2.0) $ (0.9) $ 6.5
====== ======= =======
</TABLE>
Cash flow from earnings, before special and nonrecurring charges, plus
depreciation/amortization was $192.9 in 1995. This was 8.3% of net sales in
1995 compared with 9.9% in 1994 and 10.2% in 1993. The Company's cash flow
tends to be fairly consistent from quarter to quarter.
The 1994 investing activities include $126.6 related to the acquisition and
remodeling of the Kobacker locations.
Financing Activities. Historically, cash collected by the Company in excess
of store operating needs was transferred to May on a daily basis and all the
Company's cash requirements were funded by May through a non-interest bearing
intercompany account. The debt and investment levels prior to the Distribution
may not be indicative of debt and investment levels had the Company operated
as an independent company during these periods.
The Company has received commitments with respect to a $200 multicurrency
revolving credit facility with Bank of America National Trust and Savings
Association ("BofA") as agent. Interest on outstanding balances under the
credit facility will accrue on a variable rate basis based on, at the
Company's option, LIBOR or the reference rate announced by BofA from time to
time. The credit facility will be available for working capital needs and
capital expenditures. See "FINANCING."
Management believes that its cash flow from operations, together with
borrowings under the credit facility, will provide it with sufficient
resources to meet its working capital needs and to finance its projected
capital expenditures.
Financial Condition Ratios. The debt-to-capitalization ratio was 1%, 2% and
2% at the end of each of 1995, 1994 and 1993, respectively. For purposes of
the debt-to-capitalization ratio, total debt is defined as current maturities
and long-term capital lease obligations. Capitalization is defined as current
maturities and long-term capital lease obligations, noncurrent deferred taxes
and May equity investment. The debt-to-capitalization ratio, including the
present value of future minimum rental payments under operating leases as debt
and as capitalization, was 54%, 55% and 55% in 1995, 1994 and 1993,
respectively. The 1995 debt-to-capitalization ratio, after reducing the
capitalized value of leases to reflect the closing or relocating of
approximately 450 unprofitable stores, would be 53%.
Fixed charge coverage was 2.0x, 3.6x and 4.1x in 1995, 1994 and 1993,
respectively. Fixed charges are defined as gross interest expense and the
interest component of rent expense. Fixed charge earnings represent earnings
before income taxes plus fixed charges. In 1995, the decrease in coverage
resulted principally from the decrease in earnings before income taxes. The
1995 fixed charge coverage, excluding special and nonrecurring items, was
2.8x. In 1994, the decline in coverage resulted from the rent expense, and
therefore, the interest component of rent expense, growing at a faster rate
than fixed charge earnings.
24
<PAGE>
Capital Expenditures. The Company emphasizes return on net assets and
internal rate of return as the principal operating measures in evaluating
investments in new stores and remodels, and elimination of unproductive space.
In 1995, the Company's capital expenditures totaled $95.4, $49.1 for new
stores, $27.9 for remodels of existing stores and $18.4 for other necessary
improvements.
In 1994, the Company's capital expenditures, excluding the acquisition of
Kobacker locations, totaled $128.6, including $92.0 for new stores, $26.0 for
remodels of existing stores and $10.6 for other necessary improvements.
In 1996, the Company's capital expenditures are estimated to be $114,
including $61 to open new stores, $24 to remodel existing stores and $29 to
make other necessary improvements. Management anticipates that cash flow from
operations and borrowings under the Company's credit facility will be
sufficient to finance, among other things, its projected capital expenditures.
BUSINESS
OVERVIEW
The Company is the largest footwear retailer in the United States, with over
$2.3 billion in sales in 1995. The Company sold over 200 million pairs of
shoes in 1995, representing one out of every five pairs sold in the United
States. The Company's share of the estimated $33 billion United States
footwear market was 6.4% in 1995 and has grown consistently over the past two
decades. The Company is led by a team of experienced management executives who
have an average of 19 years of retail industry experience.
The Company operated, as of February 3, 1996, 4,549 self-service, affordably
priced, family shoe stores, of which 773 include Payless Kids expansions. The
Company's stores are located in 49 states, the District of Columbia, Puerto
Rico and the United States Virgin Islands. The Company's stores average 3,000
square feet and carry approximately 11,000 pairs of shoes. The stores offer
more than 1,000 shoe styles at prices that average $11.00.
The Company has broad customer appeal, providing a complete assortment of
affordably priced, quality footwear for women, men and children from all age
groups, and from households with incomes that represent 85% of the United
States population. The Company has significant market penetration with its
target customer, women aged 18-64. In fact, over 40% of its targeted
customers, regardless of household income, purchased at least one pair of
shoes from the Company last year. In addition to shoes, the stores offer
accessories, including handbags and hosiery.
Management believes the Company is the most profitable footwear retailer in
the United States. However, 1995 results were negatively impacted by a
difficult retail environment (as evidenced by most specialty apparel and
footwear chains experiencing store-for-store declines), the devaluation of the
peso, contributing to a 22% store-for-store decline in the Company's Mexican
border stores, and the integration of over 500 store locations acquired from
Kobacker, increasing the Company's fixed costs while causing some transfer
sales from existing stores to new stores opened nearby. The Company has
achieved a compound annual sales growth rate of 11.3% over the last five years
and consistent cash flow. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND LIQUIDITY AND CAPITAL RESOURCES--Review of Financial
Condition--Cash Flow."
During 1995, management identified steps to increase store profitability. As
a result of this analysis, during the fourth quarter of 1995, in connection
with the Distribution, the Company committed to close or relocate
approximately 450 unprofitable stores during 1996. A one-time pretax special
and nonrecurring charge of $71.8 million associated with these store closings
or relocations and a plan to reduce central office overhead by means of census
reduction and expense control programs was recorded in 1995. The pro forma
impact on 1995 results, had these stores been closed or relocated at the
beginning of 1995, would have been a $5.5 million increase in earnings before
income taxes. Furthermore, the Company estimates that the effect of transfer
sales from the 450 closed stores would have improved 1995 earnings before
income taxes by an additional $9.9 million. For a discussion of the
assumptions used to determine the pro forma impact on 1995 results, see
"UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS."
25
<PAGE>
The Company's objective is to increase sales and profits through increased
store-for-store sales in existing locations combined with selective openings
of profitable new stores. Management intends to achieve this objective through
the following strategic initiatives:
. Build on merchandising strengths (women's dress shoes, children's,
sandals) while accelerating new or revitalized strategies of comfort,
wide widths and leather. See "--Merchandising."
. Continue to capitalize on long-standing relationships with vendors and
factories to provide the best assortment and value to the customer while
maintaining strong margins. See "--Product Sources."
. Increase the selling productivity of the front portions of all stores and
maximize the strength of urban store locations through more focused
merchandising. See "--Merchandising" and "--Stores."
. Leverage competitive advantage in distribution to increase sales (build
on the Company's ability to quickly respond to validated fashion trends
while capitalizing on its sophisticated physical distribution system to
optimize sales replenishment). See "--Merchandising" and "--Merchandise
Distribution."
. Increase market share by capturing the sales of low priced footwear
retailers and discount mass-merchandisers that have gone out of business
or closed stores in recent months (the Company is strongly positioned to
capture market share due to the convenient nationwide network of stores
in all types of locations (malls, shopping centers, central business
districts and free-standing stores)). See "--Stores," "--Expansion
Strategy" and "--Competition."
. Identify productive sites for new stores in existing and new markets. See
"--Expansion Strategy."
. Drive down operating costs through cost control programs and the
leveraging of technology. See
"--Stores."
In addition, the Company believes that, as an independent company with its
own publicly traded stock, it will be able to establish equity-based incentive
compensation arrangements which will more selectively attract, retain and
motivate its associates by offering benefits tied directly to the associates'
efforts to improve the Company's performance.
The Company believes that these initiatives will lead to improved operating
results, however, there can be no assurance that such improvement will occur.
See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
LIQUIDITY AND CAPITAL RESOURCES." Furthermore, the Company believes there is
opportunity for continued profitable expansion of its business in the United
States.
INDUSTRY
The retail footwear industry can be divided into high, moderate and value-
priced segments, and is dominated by the Company and national discount mass-
merchandisers in the value-priced segment. The high priced segment is
controlled by department stores. The moderate priced segment, which is
dominated by specialty shoe chains and mass merchants, is declining, in part
due to improved product quality in the value priced segment and price
competition from the high priced segment.
Based on industry data, the United States footwear market is estimated to be
$33 billion and 1 billion pairs, and has stayed relatively flat over the past
several years. The value-priced segment as a percent of the total pairs has
more than doubled over the past 15 years. Industry data suggests that the
quality offered in the value priced segment has improved significantly over
the last 15 years, causing the doubling of this segment's share of the market.
MERCHANDISING
The Company offers a broad assortment of fashionable footwear to meet every
need of its customers. This breadth of assortment allows the Company to
provide basic, seasonal and fashion shoes in dress, casual, athletic and
workboot categories. Shoes are constructed in leather, canvas and manmade
materials. Styling is updated
26
<PAGE>
regularly to keep pace with proven fashion trends. The Company purchases
product to appeal specifically to various segments of the population.
Particular focus is placed on identifying highly desirable product selection
to meet the specific needs of urban and ethnic market segments. The Company
also carries handbags, hosiery, polish and other accessories.
The merchandising effort is led by the President and three general
merchandise managers with an average of 24 years of retail experience. They
direct teams of buyers, planners and distributors that interact with vendors,
agents, factory owners and representatives of the Company's Payless ShoeSource
International office to design, select, produce, inspect and distribute
footwear and accessories for the Company. The Company's experienced buying
organization, combined with its strong relationship with its vendors, enables
it to be on the forefront of capitalizing on proven fashion trends.
STORES
The Company's highly recognizable yellow and orange signing package appears
in a variety of retail formats including strip centers, regional and super-
regional shopping malls, junior centers, central business districts and free-
standing locations. The store appearance remains very consistent from location
to location attesting to the flexibility of the Company's store design. The
Company is focusing on improving the fixturing and product presentation in the
front portion of its stores, using new selling fixtures and eliminating
unproductive space. The Company believes this will improve sales productivity,
although there can be no assurance as to any such improvement. Stores average
approximately 3,000 square feet and carry approximately 11,000 pairs of shoes.
The stores offer more than 1,000 shoe styles at prices that average $11.00.
The Company continually evaluates its cost control programs in order to drive
down operating costs. The Company takes advantage of new developments in
technology to improve productivity at the store level.
The Company's stores operate successfully in rural, suburban and urban
environments providing convenient locations and broad appeal to customers in
every setting. The Company operates stores profitably in trade areas with
populations as small as 20,000 people.
The 10 states with the largest concentrations of the Company's stores are
identified below.
<TABLE>
<CAPTION>
PAYLESS
STATE STORES KIDS
----- ------ -------
<S> <C> <C>
California............... 727 183
Texas.................... 388 65
New York................. 305 49
Florida.................. 289 44
Illinois................. 234 23
Pennsylvania............. 214 44
Ohio..................... 212 56
Michigan................. 172 30
Washington............... 115 27
New Jersey............... 112 21
Other.................... 1,781 231
----- ---
Total.................... 4,549 773
===== ===
</TABLE>
Of the 4,549 locations, 773 have been expanded by an average of 1,000 square
feet to include additional selling space for the Payless Kids format. These
stores are located throughout the country. Wider aisles, child-friendly
seating and an entertainment center enhance the shopping experience for
families.
Substantially all of the Company's stores are leased. The leases typically
have a primary term of 10 years, with one or two five-year renewal options.
Leases usually require payment of base rent, applicable real estate taxes,
common area expenses and, in some cases, percentage rent based on the store's
sales volume.
27
<PAGE>
The Company's stores are highly automated with an electronic point of sale
register and a back office computer that not only records transactions from
the register, but also serves many other store supporting functions including
price look up, accumulation of associate hours worked and communications with
the Company's headquarters in Topeka, Kansas. Store associates receive regular
weekly communications from the Company's headquarters explaining promotional
and display requirements.
The Company's retail operations are directed centrally by a senior officer
and a small support staff. The retail operations organization is subdivided
into six divisions headquartered in the cities of Atlanta, Baltimore, Chicago,
Dallas, Denver and Los Angeles. Divisions are directed by a vice president,
two to four operations managers and a small support staff.
Each store has a manager and approximately five associates. The stores are
organized into districts. District supervisors report to the division offices
and have full financial responsibility for the stores in their district.
Division offices also have loss prevention and inventory control functions.
Human resources and merchandising support are provided from the Company's
headquarters.
MARKETING
The Company's marketing efforts are multi-dimensional, including nationally
broadcast television advertising, national magazine advertisements, local
market radio and newspaper inserts in support of major promotional periods. In
addition to media support, the Company has in-store promotional materials,
including posters, signs and point of sale items. The Company's promotional
message emphasizes not only the affordable prices to which its customers have
grown accustomed, but also quality, fashion, selection, comfort, wide widths
and a full range of sizes for the entire family.
The Company's marketing staff is augmented by a full-service advertising
concern that provides creative services, media purchase and consumer research.
PRODUCT SOURCES
The Company utilizes a network of vendors and factories in 13 foreign
countries and the United States to procure its products which are manufactured
to meet the Company's demanding specifications and standards. The strength of
the Company's relationships with vendors and factories, some dating back over
40 years, has allowed the Company to adapt quickly its sourcing strategies to
reflect changing political and economic environments. On several occasions
over the past years, many of the Company's vendors and factory owners have
played significant roles in developing production in new factories and in new
countries without compromising production capacity or product quality.
Factories in China are a source of approximately 80% of the Company's
merchandise. See "RISK FACTORS--Risks of Foreign Manufacturing." The Company
does not purchase "seconds" or "overruns" and does not own any manufacturing
facilities. The Company's vendors are required to carry liability insurance
and are responsible for financial damages associated with copyright and
product liability. The Company closely integrates its merchandise purchasing
requirements with various manufacturers through its sourcing organization
which has offices in Topeka, Kansas, and in Taiwan, China, Indonesia and
Brazil.
On a worldwide basis, approximately two-thirds of the Company's merchandise
is acquired through a network of third-party vendors. Payless ShoeSource
International, the Company's Taipei, Taiwan based subsidiary, arranges
directly with factories the design, selection, production management,
inspection and distribution of approximately one-third of the shoes acquired
for the Company, providing a meaningful cost advantage.
28
<PAGE>
QUALITY ASSURANCE
The Company's quality assurance organization sets standards and
specifications for product performance and appearance. It communicates those
standards and specifications through its copyrighted quality assurance manual.
The Company stands behind the quality of the shoes it sells to its customers
by permitting return of merchandise purchased with proper documentation.
The quality assurance organization also provides technical design support
for the Company's direct purchasing function. It is responsible for review and
approval of vendor and factory technical design, performing worldwide
laboratory testing of materials and components and for performing in-factory
product inspections to ensure that materials and factory production techniques
are consistent with Company specifications. The Company locates its field
inspection personnel close to the factories and freight consolidation
facilities it uses throughout the world.
PRODUCTION MANAGEMENT
The production management organization manages an aggressive and ongoing
process to qualify and approve new factories, while continually assessing
existing factory service and quality of performance. New factories must meet
minimum standards required for quality of shoe production and minimum capacity
requirements. They must also agree to the Company's production control
processes and certify that neither they nor their suppliers use forced or
child labor. Factory performance must continually improve or run the risk of
being removed from the list of approved factories. The production management
organization utilizes a unique, internally developed production control
process by which the Company is electronically linked to its factories and
vendors. By utilizing this process, production management is able to assure
the Company of on-time deliveries, with the minimum lead time and without
incurring unnecessary costs.
The Company believes that maintaining strong factory relationships,
improving key factory performance factors and improving factory profitability
is critical to long-term sourcing stability. Its manufacturing services group,
based in Asia, provides direction and leadership to key factories in the areas
of overall productivity improvement and lead time reduction.
MERCHANDISE DISTRIBUTION
The Company believes that its state-of-the-art distribution system is a
major competitive advantage. The Company's merchandise distribution teams are
able to track shoes by the pair from order placement through the sale to the
customer by the use of sophisticated systems, including perpetual inventory,
product planning and retail price management systems. These systems are
maintained by experienced information systems executives and enhanced
regularly to improve the product distribution process. Distribution analysts
regularly compare sales by size and inventory by size and style, down to the
individual shoe level when necessary, to maintain the highest availability of
product within the Company's stores.
The Company operates a single 765,000 square foot distribution center in
Topeka, Kansas, capable of replenishing sales by style, color and size. This
facility operates seven days-a-week and has sufficient capacity to support
more than 5,000 stores with current technology. Management believes this is
one of the most highly-automated and cost-efficient distribution facilities in
the industry. Stores receive product at least once a week, maintaining a
constant flow of fresh and replenished merchandise.
EXPANSION STRATEGY
The Company anticipates adding 240 new stores in 1996. As a result of these
store openings, the Company anticipates having approximately 4,340 stores
operating at the end of fiscal 1996. Approximately 10% of these new stores are
planned to include adjacent Payless Kids' expansions. In the five year period
commencing in 1997, the Company anticipates opening approximately 500 net new
stores in new and existing markets. Each new store investment decision is
based on a careful review of market potential, the ability to achieve a
targeted
29
<PAGE>
return on net assets and internal rate of return criteria. As the Company
expands into smaller markets, it is anticipated that the opening of lower
volume stores will reduce sales per square foot. However, the Company expects
these stores to generate positive cash flow at these lower volumes and
increase the Company's overall profitability. See "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF RESULTS OF OPERATIONS AND LIQUIDITY AND CAPITAL RESOURCES--CAPITAL
EXPENDITURES." The Company believes that there is opportunity for continued
profitable expansion of its business in the United States. There is no
assurance, however, that the Company will achieve its expansion strategy.
In 1997, the Company's capital expenditures are estimated to be $107
million. Both 1996 and 1997 capital expenditures will be financed through
operating cash flows and the credit facility. No additional closings are
anticipated for 1996. For the five year period commencing 1997, the Company
anticipates opening 250 stores and closing 150 stores in each of those years
as a result of normal changes in retail trade areas and expiring leases.
COMPETITION
The Company operates in a highly competitive retail market competing
primarily with national and regional discount mass-merchandisers, as well as
with other self-service discount shoe stores and off-price outlet stores.
Competition is based on product selection and quality, availability, price,
store location, customer service and efficient promotional activities. The
Company has successfully operated in its markets with each of these segments
of retailing for many years and has continued to capture increased market
share by offering a wider selection of fashionable styles and compelling
prices in conveniently located stores; however, the Company is facing
increased competition from certain national discount mass-merchandisers.
The competitive landscape continues to change. Within the past two years,
several direct self-service competitors have ceased to operate or closed
significant numbers of stores. Direct mall competitors and regional discount
mass-merchandisers have had to reorganize and restructure, providing the
Company continued opportunities to increase revenues. The diversity of store
types (stores in strip centers, regional and super-regional shopping malls,
junior centers, free-standing locations and central business districts) and a
broad geographic base allow the Company to take advantage of these changes and
continue to grow.
EMPLOYEES
The Company currently employs approximately 24,000 associates, of whom
approximately 13,000 are full-time and 11,000 part-time. The part-time
associates are primarily store sales/customer service personnel. Approximately
650 of the Company's distribution center associates are covered by collective
bargaining agreements. The Company considers its union and non-union employee
relations to be good.
The Company is led by a team of senior management executives who have an
average of 19 years of retail industry experience, including an average of
nine years with the Company.
LITIGATION
The Company is a party to a number of legal proceedings that arose in the
ordinary course of business. While the outcome of these legal proceedings
cannot be predicted with certainty, management does not expect these matters
to have a material adverse effect on the business, operations or financial
position of the Company.
TRADEMARKS
The Company owns, in connection with footwear, all rights to "Payless,"
"Payless ShoeSource" and "Payless Kids," each of which is used as a trademark
in connection with various merchandise or as a service mark. The Company owns
all rights to the distinctive yellow and orange logo used in its signage and
advertising. In the United States, the Company has registered 45 key marks and
owns over 50 common law marks under which it markets private label
merchandise. In its on-going effort to protect its intellectual property, the
Company has registered its "Payless ShoeSource" and "Payless Kids" marks
extensively abroad and is actively pursuing registration abroad of its other
trademarks. All of the Company's registered trademarks may be renewed
indefinitely. In addition, all common law marks are of indefinite duration
provided they continue to be used.
30
<PAGE>
EFFECT OF COMPLIANCE WITH ENVIRONMENTAL LAWS
Compliance with Federal, state and local laws regulating the discharge of
materials into the environment or otherwise relating to the protection of the
environment has not had, and is not expected to have, a material effect on
capital expenditures, earnings or the competitive position of the Company. The
Company is not aware of any such laws with which it is not in material
compliance.
FINANCING
The Company has received commitments from Bank of America National Trust and
Savings Association ("BofA") and certain other financial institutions
(collectively, the "Banks"), pursuant to which the Banks, subject to certain
terms and conditions, have agreed to provide to the Company an unsecured
multicurrency revolving credit facility in an aggregate amount not to exceed
$200 million (the "Facility"). The Facility provides for revolving loans to be
made to, and letters of credit to be issued for the account of, the Company
for general corporate purposes. The Company and BofA are currently negotiating
the terms and conditions of the Credit Agreement which will govern the terms
of the Facility (the "Credit Agreement"). A copy of the form of the Credit
Agreement currently under negotiation is filed as an exhibit to the
Registration Statement of which this Information Statement is a part. Based
upon discussions to date, the Company anticipates that the Credit Agreement
will include the terms and conditions described below.
Borrowings under the Credit Agreement will bear interest, at the Company's
option, (i) at BofA's Base Rate in effect from time to time or (ii) subject to
certain limitations, at LIBOR for the applicable interest period, plus, in the
case of borrowings bearing interest based on LIBOR, a margin of between .40%
and .75%, depending upon the Company's consolidated fixed charge coverage
ratio at certain specified times. Fees shall accrue on a quarterly basis with
respect to the undrawn amount of all outstanding letters of credit under the
Facility at a per annum rate equal to the margin applicable to LIBOR
borrowings for the applicable fiscal quarter. In addition, the Company will
pay a fee on the unutilized portion of the Banks' commitments under the Credit
Agreement ranging from .150% to .225% per annum depending upon the Company's
consolidated fixed charge coverage ratio at certain specified times.
Subject to the terms and conditions to be set forth in the Credit Agreement,
the loans made and the letters of credit issued pursuant to the Credit
Agreement may be borrowed, repaid and reborrowed from time to time until the
date five years after the date of the Credit Agreement (the "Maturity Date")
subject to the satisfaction of certain conditions on the date of any borrowing
or issuance, including (i) the accuracy of representations and warranties of
the Company contained in the Credit Agreement, (ii) the absence of a default
under the Credit Agreement and (iii) the absence of any material adverse
change in the operations, business, properties or financial condition of the
Company and its subsidiaries taken as a whole since February 3, 1996. The
loans are payable in full on the Maturity Date. Borrowings under the Credit
Agreement may be prepaid in whole or in part at any time without premium or
penalty.
The Credit Agreement will require the Company to meet certain financial
covenants, including a minimum fixed charge coverage ratio, a maximum debt to
capitalization ratio and a minimum level of tangible net worth. The Credit
Agreement will also contain covenants which, among other things, will limit or
restrict the ability of the Company and its subsidiaries to (i) incur
indebtedness (including contingent obligations) or allow to exist or grant
liens in respect of their assets, (ii) sell their respective assets or enter
into certain acquisition transactions, (iii) make payments and distributions
(including dividends on the Common Stock), (iv) enter into certain
transactions with their respective affiliates, (v) make loans and investments
and (vi) permit a change of control. In addition to the foregoing, the
Company's obligations under the Credit Agreement are required to be guaranteed
by Payless ShoeSource Merchandising, Inc., Payless ShoeSource Distribution,
Inc. and Payless ShoeSource Worldwide, Inc. and each other domestic subsidiary
of the Company, the total assets of which constitute 5% or more of the total
consolidated assets of the Company and its subsidiaries.
31
<PAGE>
In connection with the Credit Agreement, the Company has agreed to pay BofA
an arrangement fee and an annual agency fee. The Company has also agreed to
pay the out-of-pocket costs and expenses (including reasonable fees and
expenses of counsel) of (i) the Agent in connection with the preparation,
execution, delivery, administration, amendment or waiver of any provisions of
the Credit Agreement and the related credit documents and (ii) the Agent and
each Bank in connection with the enforcement of any of their rights and
remedies under the Credit Agreement and related credit documents. In addition,
the Company has agreed to indemnify the Agent and the Banks against any
losses, claims, damages, liabilities and expenses caused by or arising out of
or in connection with the Credit Agreement and the related credit documents.
MANAGEMENT
DIRECTORS
The Payless Charter and the Payless Bylaws provide that the Company's board
of directors may have no less than three and no more than 15 members, as
determined from time to time by the board, each to hold office for a term of
three years and until his or her successor shall have been elected and
qualified, with the terms staggered so that approximately one-third of the
directors will stand for election in any one year. The Company anticipates
that as of the Distribution Date the board of directors will consist of six
persons, each of whom will be elected for a term expiring at the annual
meeting of shareowners indicated below and until his successor is elected and
qualified. The following table sets forth information concerning the persons
who will serve as directors.
<TABLE>
<CAPTION>
TERM EXPIRES AT
NAME AGE ANNUAL MEETING IN
---- --- -----------------
<S> <C> <C>
Steven J. Douglass.................................. 46 1999
Howard R. Fricke.................................... 60 1999
Thomas A. Hays...................................... 63 1998
Richard A. Jolosky.................................. 61 1997
Michael E. Murphy................................... 59 1998
Robert L. Stark..................................... 63 1997
</TABLE>
Steven J. Douglass will become the Chairman of the Board and Chief Executive
Officer of the Company as of the Distribution Date. Mr. Douglass has been
Chairman and Chief Executive Officer of the Company since April, 1995. He
joined the Company in 1993 and served as Senior Vice President/Director of
Retail Operations from 1993 to January, 1995 and as Executive Vice
President/Director of Retail Operations from January, 1995 to April, 1995.
Prior to his association with the Company, Mr. Douglass held several positions
at divisions of May, serving as Chairman of May Company, Ohio (1990-1993) and
Senior Vice President and Chief Financial Officer of J.W. Robinsons (1986-
1990). He also held positions in May's corporate office from 1976 to 1986,
including Senior Vice President of Planning and Reporting (1982-1986) and Vice
President of Planning (1980-1982). Prior to joining May in 1976, Mr. Douglass
was employed by the J.L. Hudson division of Dayton Hudson, as Director of
Store Operations (1975), Manager--Financial Analysis (1974-1975) and Manager--
General Accounting (1972-1974).
Howard R. Fricke has been the Chairman of the Board, President and Chief
Executive Officer of The Security Benefit Group of Companies since 1988.
Between 1974 and 1988, Mr. Fricke served as Senior Vice President of Horace
Mann Insurance Companies, President and Chief Executive Officer of Commercial
Credit Company's insurance subsidiaries, and Chairman and Chief Executive
Officer of Anchor National Life Insurance Company and its affiliate, Anchor
National Financial Services, Incorporated. Before 1974, Mr. Fricke was
employed in various capacities by Horace Mann Insurance Company, Franklin Life
Insurance Company and State Farm Insurance.
Thomas A. Hays has been the Deputy Chairman of May since 1993 and has
announced his retirement as Deputy Chairman and as a director of May effective
April 30, 1996. Mr. Hays joined May in 1969 in the finance
and operations areas. From 1972 to 1984, he served as Chairman, President or
Chief Executive Officer of several operating divisions of May. Mr. Hays was
named Vice Chairman of May in 1982 and President in 1985. He was elected to
May's board of directors in 1983. Mr. Hays is also a director of May,
Mercantile Bancorporation and Union Electric Company.
32
<PAGE>
Richard A. Jolosky has been President of the Company since January, 1996. He
initially joined the Company in September 1982, serving as Executive Vice
President--Merchandising (1982-1984) and then as President (1985-1988). Prior
to rejoining the Company in 1996, Mr. Jolosky was President and Chief
Executive Officer of Silverman Jewelry Company (1995-1996), Chief Executive
Officer of the Richard Allen Company (1992-1995), a consultant for Northern
Automotive Company, and President and Chief Executive Officer of J & T Shoe
Company (1988). Before joining the Company initially, he was employed as
Senior Vice President and General Merchandise Manager of Jefferson Ward (1981-
1982) and Vice President and General Merchandise Manager for Wal-Mart (1978-
1981). Mr. Jolosky also held several positions at the Meier & Frank division
of May, including General Merchandise Manager (1975-1978), Divisional
Merchandise Manager (1968-1975) and Buyer (1965-1968). Mr. Jolosky began his
career at Gimbel's Milwaukee, serving as Buyer, (1961-1965) and as Assistant
Buyer (1960-1961).
Michael E. Murphy has been the Vice Chairman and Chief Administrative
Officer of Sara Lee Corporation since 1994. He joined Sara Lee in 1979,
serving as Executive Vice President and Chief Financial and Administrative
Officer from 1979 to 1993 and as Vice Chairman and Chief Financial and
Administrative Officer from 1993 to 1994. He became a director of Sara Lee in
1979. Prior to joining Sara Lee, Mr. Murphy was employed by Ryder System, Inc.
(1974-1979) as Group Vice President--Finance and later as Executive Vice
President--Finance, by Hanes Corporation (1969-1974) in various positions,
including Vice President--Knitwear Administration and by General Foods'
Maxwell House Division (1962-1969). Mr. Murphy is a member of the Advisory
Board of the J.L. Kellogg Graduate School of Management of Northwestern
University, a member of the Chicago Committee of the Chicago Council on
Foreign Relations and a director of the National Association of Manufacturers,
Northwestern Memorial Corporation (university hospitals) and Chicago's Lyric
Opera. Mr. Murphy is also on the board of directors of GATX Corporation.
Robert L. Stark became Dean of The Regents Center at the University of
Kansas in 1993, after retiring from Hallmark Cards, Inc. Prior to his becoming
dean, Mr. Stark was employed by Hallmark Cards, Inc. for 35 years in several
capacities, including: Executive Vice President, President of the Personal
Communication Group, Group Vice President, President of Hallmark, Canada and a
member of the board of directors. He is also on the board of directors of
Redman Industries, Inc., Mercantile Bancorporation, Century Products and
Packerware Corporation.
COMMITTEES OF THE BOARD OF DIRECTORS
The board of directors will have two committees: an Audit and Finance
Committee and a Compensation and Nominating Committee.
The functions of the Audit and Finance Committee include making
recommendations to the board of directors as to the selection of the firm of
independent public accountants and auditors to examine the books and accounts
of the Company for each fiscal year, the proposed engagement arrangements for
the independent public accountants and auditors for each fiscal year, and the
advisability of having the independent public accountants and auditors make
specified studies and reports regarding auditing matters, accounting
procedures, tax or other matters. The Audit and Finance Committee will also
review the results of the audit for each fiscal year, such accounting policies
of the Company as are deemed appropriate for review by the Committee, the
coordination between the independent public accountants and auditors and the
Company's internal auditing group, the scope and procedures of the Company's
internal audit work and the quality and composition of the Company's internal
audit staff. The Audit and Finance Committee will also be responsible for
reviewing and making recommendations to the board of directors with respect to
the following matters: (a) the financial policies of the Company, debt
ratings, short-term versus long-term debt positions, debt-to-capitalization
ratios, fixed charge coverage, working capital and bank lines, dividend
policy, the long-range financial plans of the Company, the Company's capital
expenditure program including rate of return standards and evaluation methods,
specific debt and/or equity placement activities, external financial
relationships (with investment bankers, commercial bankers, insurance
companies, etc.), financial public relations and communication programs,
profit sharing plan investments, financial aspects of proposed acquisitions
and/or divestitures, and the Company's insurance and risk management program.
The members of the Audit and Finance Committee will be Messrs. Hays, Murphy
and Stark, each of whom will be an independent director as required by the
rules of the NYSE.
33
<PAGE>
The functions of the Compensation and Nominating Committee include
considering and recommending to the board of directors and Company management
the overall compensation programs of the Company, reviewing and approving the
compensation payable to the senior management personnel of the Company and
reviewing and monitoring the executive development efforts of the Company to
assure development of a pool of management and executive personnel adequate
for orderly management succession. The Committee will also review significant
changes in employee benefits plans and stock related plans; serve as the
"Committee" under the Company's profit sharing plan, 1996 Stock Incentive
Plan, executive incentive compensation plan for corporate executives,
supplementary retirement plan, long-term disability plan and deferred
compensation plan; and identify and recommend to the board candidates for
directors, members of committees of the board of directors and the successor
to the chief executive. The members of the Compensation and Nominating
Committee will be Messrs. Hays, Fricke and Murphy, each of whom is a
"disinterested person" within the meaning of Rule 16b-3 under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and an "outside
director" within the meaning of Section 162(m) of the Internal Revenue Code
(the "Code").
The board of directors of the Company may, from time to time, establish
certain other committees to facilitate its work.
COMPENSATION OF DIRECTORS
Management directors will not be entitled to additional compensation by
reason of their directorship or attendance at meetings of the board of
directors of the Company or any committee thereof or at meetings of the
shareowners. Non-management directors will receive 1,000 shares of Common
Stock upon joining the board. Non-management directors also will be paid an
annual fee of $35,000, payable in Common Stock. All such shares of stock are
subject to restrictions on transferability and to forfeiture. For 1996, the
number of shares to be paid as the annual fee will be determined based upon
the average of the high and low trading prices of the Common Stock on the NYSE
for each of the first thirty trading days on which trading in the Common Stock
on the NYSE occurs. Beginning in 1997, the number of shares will be determined
based upon the arithmetic average closing prices of the shares on the date of
the annual meeting. Non-management directors also will be paid $1,000 in cash
per meeting for attending more than twelve meetings (board and committee) in a
year.
EXECUTIVE OFFICERS
The following table sets forth certain information about the persons who
will be executive officers of the Company as of the Distribution Date. Each
such person will have been elected to the indicated office with the Company on
or prior to the Distribution Date and will serve at the pleasure of the board
of directors of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Steven J.
Douglass 46 Chairman of the Board and Chief Executive Officer
Richard A.
Jolosky 61 President
Ullrich E.
Porzig 50 Senior Vice President and Chief Financial Officer
Bryan P.
Collins 42 Senior Vice President--General Merchandise Manager--Women's
Gerald F.
Kelly 48 Senior Vice President--Logistics/Information Services
Duane L.
Cantrell 40 Senior Vice President--Retail Operations
Thomas L.
Rinehart 41 Senior Vice President--General Merchandise Manager--Men's
Michael S.
Wilkes 42 Senior Vice President--General Merchandise Manager--Children's
Jed L. Nor-
den 45 Senior Vice President--Human Resources
Harris
Mustafa 42 Senior Vice President--Merchandise Distribution
Stephen
Farley 41 Senior Vice President--Marketing
Curtis H.
Barlow 47 Senior Vice President--Real Estate/Construction
</TABLE>
Steven J. Douglass. See "MANAGEMENT--Directors."
Richard A. Jolosky. See "MANAGEMENT--Directors."
34
<PAGE>
Ullrich E. Porzig has been the Company's Senior Vice President and Chief
Financial Officer since he rejoined the Company in February, 1996. He served
the Company in that same capacity from 1986 to 1988. Between 1993 and 1996,
Mr. Porzig was Senior Vice President--Finance and Chief Financial Officer and
Treasurer of Petro Stopping Centers L.P. From 1982 to 1993, he was employed by
May in various capacities including Senior Vice President--Finance of Foley's
(1988-1993), Senior Vice President and Chief Financial Officer of Meier &
Frank (1985-1986) and Vice President--Planning & Analysis of May (1982-1985).
In addition, he was employed by the Diamond's division of Dayton Hudson as
Vice President and Controller (1980-1982), by the J.L. Hudson division of
Dayton Hudson as Assistant Controller (1978-1980), Director--Credit (1977-
1978), Director--Internal Audit (1976-1977) and Director--Profit
Analysis/Capital Planning (1973-1976), and by Ford Motor Company as Analyst--
Systems Planning/Operations Research (1969-1973).
Bryan P. Collins has been the Company's Senior Vice President and General
Merchandise Manager--Women's since January, 1994. He also served the Company
as Senior Vice President--Women's Seasonal/Leisure (July, 1991-January, 1994),
Vice President--Merchandise Administration (March, 1991 until July, 1991),
Vice President/Division Merchandise Manager--Athletics (1983-1985), Buyer--
Children's (1980-1983), Buyer--Athletics (1978-1980), Assistant Buyer--Men's
(1977-1978), and Assistant Buyer--Canvas (1976-1977). Mr. Collins commenced
his employment with the Company in 1975 in the distribution area. Before
rejoining the Company in 1991, Mr. Collins was employed by Topline Imports as
President (1989-1991), Executive Vice President (1987-1989) and Marketing
Manager (1985-1987).
Gerald F. Kelly has been the Company's Senior Vice President--
Logistics/Information Services since February, 1996. He has also served the
Company as Senior Vice President--Information Services and Chief Financial
Officer (1990-1996) and Senior Vice President--Information Services (1986-
1990). Prior to joining the Company, Mr. Kelly was employed by Wilson Sporting
Goods as Vice President--Management Services (1984-1986) and by James H.
Lowery & Associates as Vice President (1983-1984). He was a principal with
Arthur Young & Company from 1982 to 1983, and prior to that he was a Managing
Partner at Professional Computer Resources (1980-1982).
Duane L. Cantrell has been the Company's Senior Vice President--Retail
Operations since May, 1995. He has also served the Company as Senior Vice
President--Merchandise Distribution and Planning (1993-1995), Senior Vice
President--Merchandise Distribution (1990-1993), Vice President--Distribution
(1989-1990), Vice President--Divisional Merchandise Manager--Women's Casuals
(1985-1989), Buyer--Women's Casuals (1984-1985), Director--Profit
Planning/Analysis (1983-1984), Director--Merchandise Planning/Budget (1982-
1983) and Manager--Merchandise Control (February, 1982-August, 1982). Between
1978 and 1982, Mr. Cantrell served in positions of increasing responsibility
within the Company.
Thomas L. Rinehart has been the Company's Senior Vice President--General
Merchandise Manager-- Men's since December, 1992. Before joining the Company,
he was employed by The Custom Shop as President (1992), by Club International
as President (1991-1992) and by Burdines, a division of Federated Department
Stores, as Vice President--General Merchandise Manager (1976-1991).
Michael S. Wilkes has been the Company's Senior Vice President--General
Merchandise Manager--Children's since January, 1994. He has also served the
Company as Senior Vice President--General Merchandise Manager--Women's
Dress/Casual (1990-1994), Senior Vice President--General Merchandise Manager--
Children's (1990), Vice President--General Merchandise Manager--Children's
(1989-1990), Vice President--Divisional Merchandise Manager--Women's Casuals
(1989) and Buyer--Children's (1986-1988). Before joining the Company, Mr.
Wilkes was employed by Gold Circle, a division of Federated Department Stores,
as Senior Buyer--Ladies Sportswear (1982-1986) and by Richman Gordman as
Buyer--Children's and Men's (1975-1982).
Jed L. Norden has been the Company's Senior Vice President--Human Resources
since July, 1985. He also served May as Vice President--Executive Development
(1984-1985). Prior to joining May, Mr. Norden was employed by Ingersoll-Rand,
as General Manager--Personnel and Facilities (1982-1984), Manager--Engineered
35
<PAGE>
Pump Group (1978-1982), Manager--Corporate Personnel (1977-1978), Corporate
Manager--Organization Development (1976-1977), Manager--Corporate Recruiting
(1975-1976), and Manager--Employee Relations Automatic Production Systems
Division (1973-1975).
Harris Mustafa has been the Company's Senior Vice President--Merchandise
Distribution since May, 1995. He has also served the Company as Vice
President--Financial Planning/Purchasing (1990-1995), Assistant Controller
(1989-1990), Director--Store Finance (1989), Director--Seasonal
Planning/Analysis (1987-1989) and Assistant Controller (1987). Before joining
the Company, Mr. Mustafa was employed by the Target division of Dayton Hudson
as Manager--Audit (1983-1987), Senior Financial Analyst (1981-1983), Internal
Auditor (1979-1981), Assistant Merchandise Controller (1978-1979) and
Assistant Buyer (1977-1978).
Stephen Farley has been the Company's Senior Vice President--Marketing since
July, 1994. He has also served the Company as Vice President--Marketing (1993-
1994) and as Vice President--Advertising (1992-1993). Prior to joining the
Company, Mr. Farley was employed by Earl Palmer Brown as Executive Vice
President of Client Services (1989-1992), by Pizza Hut, Inc. as Senior
Director (1987-1989), by Saatchi and Saatchi as Management Supervisor (1983-
1987), and by N.W. Ayer, Inc. as Account Executive (1980-1983).
Curtis H. Barlow has been the Company's Senior Vice President--Real
Estate/Construction since December, 1993. Prior to joining the Company, Mr.
Barlow was employed by The Vons Companies, Inc. as Senior Vice President--Real
Estate (1992-1993), and by Wal-Mart Stores, Inc. as Vice President--Real
Estate (1986-1992) and Director--Real Estate (1984-1986). Between 1977 and
1984, Mr. Barlow served in other positions of increasing responsibility within
the Wal-Mart organization.
INDEMNIFICATION OF OFFICERS AND DIRECTORS
The Payless Charter provides that any director or officer of the Company who
is made a party to any action, suit or proceeding in connection with services
to the Company or its subsidiaries will be indemnified against expenses,
judgments, fines and amounts paid in settlement to the maximum extent
permitted by Missouri law. In addition, the Payless Charter authorizes the
Company to purchase officer and director liability insurance and to create a
trust fund, grant a security interest or use other means, including
contractual arrangements, to ensure the payment of amounts owed pursuant to
the Company's indemnification obligation.
Section 351.355(1) of the GBCL provides that a corporation may indemnify a
director, officer, employee or agent of the corporation in any action, suit or
proceeding other than an action by or in the right of the corporation, against
expenses (including attorney's fees), judgments, fines and settlement amounts
actually and reasonably incurred by him in connection with such action, suit
or proceeding if he acted in good faith and in a manner he reasonably believed
to be in or not opposed to the best interests of the corporation and, with
respect to any criminal action, had no reasonable cause to believe his conduct
was unlawful. Section 351.355(2) provides that the corporation may indemnify
any such person in any action or suit by or in the right of the corporation
against expenses (including attorneys' fees) and settlement amounts actually
and reasonably incurred by him in connection with the defense or settlement of
the action or suit if he acted in good faith and in a manner he reasonably
believed to be in or not opposed to the best interests of the corporation,
except that he may not be indemnified in respect of any matter in which he has
been adjudged liable for negligence or misconduct in the performance of his
duty to the corporation, unless authorized by the court. Section 351.355(3)
provides that a corporation shall indemnify any such person against expenses
(including attorneys' fees) actually and reasonably incurred by him in
connection with the action, suit or proceeding if he has been successful in
the defense of such action, suit or proceeding and if such action, suit or
proceeding is one for which the corporation may indemnify him under Section
351.355(1) or (2). Section 351.355(7) provides that a corporation shall have
the power to give any further indemnity to any such person, in addition to the
indemnity otherwise authorized under Section 351.355, provided such further
indemnity is either (i) authorized, directed or provided for in the articles
of incorporation of the corporation or any duly adopted amendment thereof or
(ii) is authorized, directed or provided for in any bylaw or agreement of the
corporation which has been adopted by a vote of the shareowners of the
corporation, provided that no such indemnity shall indemnify any person from
or on account of such person's conduct which was finally adjudged to have been
knowingly fraudulent, deliberately dishonest or willful.
36
<PAGE>
The Company expects to enter into indemnification agreements with each
director and certain executive officers of the Company providing, among other
things, for the indemnities described above. Similar indemnification
agreements may be entered into from time to time with additional officers of
the Company.
The Company expects to have in place a policy of insurance under which the
directors and officers of the Company are insured, subject to the limits of
the policy, against certain losses, as defined in the policy, arising from
claims made against such directors and officers by reason of any wrongful
acts, as defined in the policy, in their respective capacities as directors or
officers.
EXECUTIVE COMPENSATION
The following table summarizes compensation expected to be paid to the
Company's Chief Executive Officer and the five other most highly compensated
executive officers (the "named executive officers") for services to be
rendered in all capacities in fiscal year 1996.
SUMMARY COMPENSATION TABLE (1)
<TABLE>
<CAPTION>
ANNUAL
COMPENSATION LONG-TERM COMPENSATION
------------------ --------------------------------
AWARDS PAYOUTS
---------- ----------
NAME & RESTRICTED LONG TERM ALL OTHER
PRINCIPAL STOCK STOCK INCENTIVE COMPENSATION
POSITION YEAR SALARY(2) BONUS(3) AWARDS(4) OPTIONS PAYOUTS(8) (9)
--------- ---- --------- -------- ---------- ------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Steven J. Douglass 1996 $587,500 $120,000 -- 33,125(5) $128,400 $6,523
Chairman of the Board 62,500(6)
and Chief Executive 12,500(7)
Officer
Richard A. Jolosky 1996 $450,000 $ 90,000 -- 62,500(6) $ 96,300 $5,678
President 12,500(7)
Duane L. Cantrell 1996 $292,481 $ 58,995 -- 7,437(5) $ 62,591 $4,706
Senior Vice President-- 5,000(6)
Retail Operations 2,500(7)
Bryan P. Collins 1996 $289,916 $ 58,478 -- 7,437(5) $ 62,042 $4,694
Senior Vice President-- 5,000(6)
General Merchandise 2,500(7)
Manager
Jed L. Norden 1996 $266,825 $ 53,820 -- 7,500(5) $ 57,101 $4,552
Senior Vice President-- 5,000(6)
Human Resources 2,500(7)
Ullrich E. Porzig 1996 $266,825 $ 53,820 -- 5,000(6) $ 57,101 $4,552
Senior Vice President-- 2,500(7)
Chief Financial Officer
</TABLE>
- --------
(1) The Summary Compensation Table does not reflect certain noncash
compensation made available to the named executive officers for the fiscal
year because the aggregate amounts of such compensation are below the
required disclosure thresholds.
(2) The table reflects annualized amounts expected to be paid to the named
executive officers or deferred by the named executive officers during
fiscal 1996. Annual salary changes for each of the named executive
officers and for all salaried associates normally occur on May 1 of each
year.
(3) "Bonus" reflects the annual portion of the bonus payable under the
Company's Executive Incentive Compensation Plan for Payless Executives,
assuming performance at the "target" level. See
37
<PAGE>
"--Performance Based Bonus Plans." The bonuses will be paid or deferred
under the Company's Deferred Compensation Plan, which provides that all
deferrals will be distributed to participants in lump sum cash payments
immediately following a change in control of the Company (as defined in the
plan).
(4) It is expected that on or about the Distribution Date the following
restricted stock awards will be made to the named executive officers under
the Company's Spin-Off Stock Plan: Mr. Douglass--22,500 shares, Mr.
Jolosky--16,875 shares, Mr. Cantrell--7,125 shares, Mr. Collins--7,063
shares, Mr. Norden--6,500 shares and Mr. Porzig--6,500 shares. As of the
date of the award, the value of such restricted stock will be equal to the
market price of the Common Stock on such date multiplied by the number of
shares granted to the named executive officer. See "--Spin-Off Stock Plan
and Spin-Off Cash Plan."
(5) It is expected that on or about the Distribution Date options to acquire
the number of shares of Common Stock listed above will be granted under
the 1996 Stock Incentive Plan in exchange for options to acquire May
common stock previously granted to the executive. See "--1996 Stock
Incentive Plan" for a discussion of the terms and conditions of these
options.
(6) It is expected that on or about the Distribution Date options to acquire
the number of shares of Common Stock listed above will be granted under
the 1996 Stock Incentive Plan. These options will have a term of 10 years
and 25% of the options will become exercisable on each of the first
through fourth anniversaries of the Distribution Date. These options will
have an exercise price equal to the average of the high and low trading
prices of the Common Stock on the NYSE for each of the first 30 days on
which trading in the Common Stock occurs.
(7) It is expected that shortly after the Distribution Date options to acquire
the number of shares of Common Stock listed above will be granted under
the 1996 Stock Incentive Plan. These options will have a term of 10 years
and 25% of the options will become exercisable on each of the first
through fourth anniversaries of the grant date. The options will have an
exercise price equal to the market price of the Common Stock on the date
the options are granted.
(8) "Long-Term Incentive Payouts" represent the long-term portion of the bonus
payable under the Executive Incentive Compensation Plan for Payless
Executives, assuming performance at the "target" level and a stock price
adjustment based on a 7% stock price increase. The bonuses will be paid or
deferred under the Company's Deferred Compensation Plan. See note 3,
above, and "--Performance Based Bonus Plans."
(9) "All Other Compensation" represents the Company's estimated contribution
to the named executive officer's account in the Company's Profit Sharing
Plan.
PERFORMANCE BASED BONUS PLANS
The Company has two performance based bonus plans that cover approximately
400 associates. Each plan links a major portion of each associate's potential
total pay to the associate's performance and to the Company's performance.
Executive Incentive Compensation Plan for Payless Executives. The Executive
Incentive Compensation Plan for Payless Executives will apply to 12
associates, including the named executive officers. Participants will be
eligible to receive annual cash awards (for individual fiscal years) and long-
term cash awards (for three-year long-term performance periods; long-term
performance periods will be phased in following the Distribution, so that the
initial long-term performance period will cover fiscal 1996, the second long-
term performance period will cover 1996-7 and long-term performance periods
after that will cover three fiscal years). These awards will be based upon
attaining earnings per share and return on net assets (RONA) performance
standards relating to the Company as a whole and also based on the performance
of the Common Stock price over the long-term performance periods. In addition,
awards are expected to be subject to an automatic upward or downward
adjustment to reflect the Company's performance as compared to the performance
of a group of competitors. The plan will be administered by the Compensation
and Nominating Committee of the board of directors (the "Committee"). The
performance standards are expected to be set by the Committee at the beginning
of the measurement periods and are expected to be measured by the Committee
after the close of the measurement
38
<PAGE>
periods. The maximum annual award payable under the plan's formula will be 30%
of the executive's base salary and the maximum long-term award payable under
the plan's formula will be 45% of the executive's average base salary over the
long-term performance period. The awards for the named executive officers may
also be adjusted downward on a discretionary basis by the Committee.
Performance Incentive Plan. The Company's Performance Incentive Plan applies
to over 388 associates of the Company and its subsidiaries. Participants may
receive annual cash awards based upon attaining certain measures of
performance tailored to the participant's job. Performance standards are set
at the beginning of the fiscal year and measured after the close of the fiscal
year. The maximum annual award payable under the plan's formula ranges from 5%
to 50% of the associate's base salary.
1996 STOCK INCENTIVE PLAN
No associates of the Company will be eligible to receive options under any
May stock option plan for fiscal 1996 or any future year. Prior to the
Distribution Date, May, as sole shareowner of the Company, will approve the
1996 Stock Incentive Plan. Under the plan, the Company may issue stock
options, restricted stock, performance restricted stock, stock appreciation
rights and performance units.
Executives who have stock options from May that are exercisable before the
Distribution Date may elect to waive all of their rights under those May
options, in which case the Company will grant the executive an option for 1.25
shares of Common Stock for each share of May common stock that is subject to a
May option that the executive waives. In addition, May options that become
exercisable after the Distribution Date will lapse. However, the Company will
grant executives an option for 1.25 shares of Common Stock for each share of
May common stock that is subject to a May option that lapses. Each of these
new Company options will have a term of 10 years, and 50% of the options will
become exercisable on each of the first and second anniversaries of the
Distribution Date. These options will have an exercise price equal to the
average of the high and low trading prices of the Common Stock on the NYSE for
each of the first 30 days on which trading in the Common Stock occurs.
SPIN-OFF STOCK PLAN AND SPIN-OFF CASH PLAN
The Company will have a Spin-off Stock Plan under which approximately
375,000 shares of restricted Common Stock will be issued to approximately 130
associates on or about the Distribution Date. Under the plan, associates will
be granted shares of restricted stock, and generally they must remain employed
by the Company through the vesting dates in order for the forfeiture
restrictions to lapse. Restrictions lapse on one-third of the shares covered
by the grants on each of the Distribution Date, the first anniversary of the
Distribution Date and the second anniversary of the Distribution Date. The
plan provides that, in the event of a change in control (as defined in the
plan), the restrictions will lapse on all remaining shares.
The Company will have a Spin-off Cash Plan under which approximately 600
associates are eligible to receive cash payments of amounts ranging from 10%
to 37.5% of their base salary. Generally, associates must remain employed by
the Company through the payment dates in order to be entitled to payment. One-
half of the cash payments will be made on each of the first and second
anniversaries of the Distribution Date. The plan provides that, in the event
of a change in control (as defined in the plan), the cash payments will be
accelerated.
EMPLOYMENT AGREEMENTS, TERMINATION OF EMPLOYMENT AND CHANGE IN CONTROL
AGREEMENTS
Each of the named executive officers is a party to an employment agreement
with the Company. The employment agreements will expire on or before April 30,
2000. The agreements provide for an annual salary at the annual rates shown in
the table, with increases subject to the discretion of the board of directors
of the Company. Prior to the Distribution, the Company will enter into
severance agreements with each of the named executive officers. The agreements
provide that the executive is entitled to benefits if (i) a "change in
control" of the Company occurs and (ii) during the 180 days following such
change in control, the executive determines
39
<PAGE>
in good faith that, as a result of the change in control, he is unable to
execute his duties effectively. Following that 180 day period, employment must
be actually or constructively terminated other than for cause or disability
during the term of the agreement for benefits to be payable. Under the
severance agreements, a change in control would include any of the following
events: (i) any "person," as defined in the Exchange Act, acquires 50% or more
of the Company's voting securities; (ii) a majority of the Company's directors
are replaced during a three-year period; or (iii) shareowners approve certain
mergers, or a liquidation, or sale of all or substantially all of the
Company's assets.
The severance agreements provide a lump sum payment equal to three times the
sum of (i) base salary at termination or, if greater, base salary immediately
prior to the change in control plus (ii) target bonus with maximum share price
adjustment for the year in which the change in control occurs. Assuming there
had been a change in control prior to the date hereof and that every named
executive officer's employment had terminated as a result of that change in
control, then, based on the estimated amounts set forth in the Summary
Compensation Table, the named executive officers would receive an aggregate of
approximately $9.8 million. Each agreement also provides 36 months of
continued medical and life insurance benefits and, if the terminated executive
is within five years of his or her eligibility date, eligibility in the
Company's post-retirement life and medical insurance benefits. The agreements
with officers who are subject to Section 16(b) of the Exchange Act provide for
a cash payment in cancellation of stock options. The agreement with the
Chairman and Chief Executive Officer provides a "tax gross-up" payment to
ensure that the above mentioned payments are not subject to net reduction due
to imposition of excise taxes which are payable under Section 4999 of the
Code. The agreement with the President provides for 50% of such payment. The
Company established a trust which would be funded upon a potential change in
control to provide the benefits under the severance agreements and which
would, upon an actual change in control, become irrevocable.
PROFIT SHARING PLAN
As of April 1, 1996, Company associates became covered by a new profit
sharing plan (the "Payless Profit Sharing Plan"). Prior thereto, Company
associates were covered by The May Department Stores Company Profit Sharing
Plan (the "May Plan"). On April 1, 1996, substantially all of the associates'
balances in the May Plan, including amounts invested in May common stock, were
transferred to the Payless Profit Sharing Plan. Because shares of Common Stock
will be distributed in connection with the Distribution to the trustee of the
Payless Profit Sharing Plan on shares of May common stock held for the Company
associates' accounts, it is anticipated that approximately 132,000 shares of
Common Stock will be owned by the Payless Profit Sharing Plan for the accounts
of Company associates as of the Distribution Date.
Benefits under the Payless Profit Sharing Plan are related to the Company's
performance each year and to the value of the Common Stock. Generally, the
Company expects to contribute 2.5% of its pretax net profits to the Payless
Profit Sharing Plan each year. Associates will be able to voluntarily
contribute to the Payless Profit Sharing Plan on both a before-tax and after-
tax basis. Associates will be able to direct that the Company's contribution
to their accounts and/or their voluntary contributions be invested in a
Company Common Stock fund, or one of several other funds.
RETIREMENT PLAN AND SUPPLEMENTARY RETIREMENT PLAN
The Company will not have a pension retirement plan. However, Company
associates who are covered by the May Retirement Plan as of the Distribution
will continue to vest in the benefits earned under that plan. Benefits accrued
through the Distribution Date (expressed as a single life annuity payable
beginning at age 65) will be "frozen" and paid out in the future.
The Company has a supplementary retirement plan (the "Supplementary Plan")
covering, generally, associates who, at one time, have compensation in a
calendar year equal to at least twice the amount of "wages" then subject to
the payment of old age, survivor and disability insurance Social Security
taxes. Under the Supplementary Plan, covered associates will become entitled
to a single life annuity retirement benefit equal to (i) 2% of the average of
the highest three out of the last five fiscal years of final annual salary and
bonuses (reported as Salary, Bonus and Long-Term Incentive Payouts in the
Summary Compensation Table) multiplied
40
<PAGE>
by their years of service, up to a maximum of 25 years, (ii) reduced by
primary Social Security benefits, by Company-provided benefits provided under
the Payless Profit Sharing Plan and by Company-provided benefits under plans
operated by May which may be payable to the associate, and, if appropriate, by
amounts to reflect early retirement. The minimum benefit under the
Supplementary Plan is the amount of Company-provided benefits which would have
been payable under the Payless Profit Sharing Plan, including benefits which
would have been transferred from the May Profit Sharing Plan, and under the
May Retirement Plan, determined without regard to any statutory limits, less
the amount of Company-provided benefits actually payable under those plans.
The Supplementary Plan provides that, in the event of a change in control
(as defined in the plan), vesting will be accelerated in limited circumstances
and benefits will not be forfeitable. The Company will establish a trust which
will be funded upon a potential change in control to provide accrued benefits
under the Supplementary Plan and which will, upon an actual change in control,
become irrevocable.
The following table shows the estimated aggregate annual benefits payable
upon retirement at normal retirement age (65) (assuming a retirement in 1996)
for persons in specified compensation and years of service classifications
covered by the Company's Profit Sharing Plan and, if eligible, the
Supplementary Plan. The named executive officers are expected to have, as of
the end of 1996, the following years of service, respectively: Mr. Douglass,
20 years; Mr. Jolosky, 19 years; Mr. Cantrell, 18 years; Mr. Collins, 14
years; Mr. Norden, 12 years; and Mr. Porzig, 11 years.
<TABLE>
<CAPTION>
AVERAGE YEARS OF SERVICE
ANNUAL -----------------------------------------------------------------------------
EARNINGS 20 25 30 35
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
$ 500,000 $188,893 $236,116 $236,116 $236,116
$ 600,000 $226,671 $283,339 $283,339 $283,339
$ 700,000 $264,450 $330,563 $330,563 $330,563
$ 800,000 $302,229 $377,786 $377,786 $377,786
$ 900,000 $340,007 $425,009 $425,009 $425,009
$1,000,000 $377,786 $472,323 $472,232 $472,232
</TABLE>
BENEFICIAL OWNERSHIP OF MANAGEMENT
The following table sets forth information with respect to the shares of
Common Stock which are expected to be beneficially owned by each director and
named executive officer of the Company and by all directors and officers of
the Company as a group as of the Distribution Date based on their respective
holdings of May common stock as of April 4, 1996 and shares of restricted
Common Stock expected to be granted on or about the Distribution Date. See
"MANAGEMENT--Compensation of Directors" and "EXECUTIVE COMPENSATION." Based
upon such data, no director or executive officer will beneficially own, as of
the Distribution Date, more than 5% of the shares of the Common Stock
outstanding at such date.
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF
NAME BENEFICIAL OWNERSHIP PERCENTAGE
---- -------------------- ----------
<S> <C> <C>
Steven J. Douglass........................ 25,593 *
Richard A. Jolosky........................ 16,875 *
Duane L. Cantrell......................... 8,141 *
Bryan P. Collins.......................... 7,207 *
Jed L. Norden............................. 6,500 *
Ullrich E. Porzig......................... 8,088 *
Howard R. Fricke.......................... 2,750 *
Thomas A. Hays............................ 40,856 *
Michael E. Murphy......................... 2,750 *
Robert L. Stark........................... 2,846 *
All directors and executive officers
as a group (16 persons).................. 155,317 *
</TABLE>
- --------
*Less than 1%
41
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The only shareowner of the Company prior to the Distribution Date is May.
After the Distribution Date, May will own no shares of Common Stock.
Based on information which has been obtained from May's records and a review
of statements filed with the Securities and Exchange Commission pursuant to
Section 13(g) of the Exchange Act with respect to May common stock and
received by May prior to April 4, 1996, no person known to May will be the
beneficial owner of more than 5% of the Common Stock upon completion of the
Distribution other than as set forth below:
<TABLE>
<CAPTION>
NUMBER OF
SHARES OF COMMON
STOCK AS OF THE PERCENT OF CLASS
DISTRIBUTION AS OF THE
NAME AND ADDRESS DATE DISTRIBUTION DATE
---------------- ---------------- -----------------
<S> <C> <C>
Oppenheimer Group, Inc. 2,144,503 5.4%
Oppenheimer Tower
World Financial Center
New York, New York 10281
</TABLE>
The May Plan provides for an investment fund which is invested in shares of
May common stock (the "May Common Stock Fund"). As of the Record Date, the
trust under the May Plan is expected to own approximately 11 million shares of
May common stock (4.4% of the outstanding shares of May common stock). As a
result of the Distribution, the May Plan trust will own approximately 4.4% of
the outstanding Common Stock on the Distribution Date. The terms of the May
Plan require that the May Common Stock Fund be invested solely in shares of
May common stock and sufficient cash for liquidity. Common Stock distributed
to the May Common Stock Fund and owned by the trust following the Distribution
will be systematically liquidated by the trustee, after which time the May
Plan trust will own no shares of the Common Stock.
The Payless Profit Sharing Plan provides for an investment fund which is
invested in shares of May common stock (the "Payless Profit Sharing Plan May
Common Stock Fund"). As of the Record Date, the trust under the Payless Profit
Sharing Plan is expected to own approximately 132,000 shares of May common
stock (less than 1% of the shares of May common stock outstanding) in the
Payless Profit Sharing Plan May Common Stock Fund. As a result of the
Distribution, the Payless Profit Sharing Plan trust will own Common Stock.
Under the terms of the Payless Profit Sharing Plan, those shares will be
transferred to accounts of the Company's associates in an investment fund
which is to be invested in Common Stock. Thereafter, those shares will be
subject to the terms of the Payless Profit Sharing Plan.
TRANSACTIONS BETWEEN THE COMPANY AND MAY
The Company and May have entered into a number of agreements for the purpose
of defining the ongoing relationship between them. These agreements have been
developed in connection with the repositioning of the Company by May and
therefore are not the result of arm's-length negotiation between independent
parties. Additional or modified agreements, arrangements and transactions may
be entered into by the Company, May and May's subsidiaries after completion of
the Distribution. Any such future agreements, arrangements and transactions
will be determined through negotiations on an arm's-length basis between the
Company and May or May's subsidiaries, as the case may be.
In the past, May has provided certain services to the Company, including
employee benefit design, insurance, legal, taxes, import and treasury
services. The Company intends to perform or secure these services
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independently in the future. However, for a limited period of time, May may
continue to provide certain corporate services until such independent
arrangements can be completed. The following is a summary of certain past,
present and anticipated future agreements, arrangements and transactions
between the Company and May.
DISTRIBUTION AGREEMENT
The Distribution Agreement sets forth the principal corporate transactions
required to effect the Distribution, the conditions to the Distribution and
certain other agreements governing matters following the Distribution.
Pursuant to the Distribution Agreement, the Company and May have agreed to
indemnify each other against certain liabilities. The Company has agreed to
assume and to pay, perform and discharge all obligations, liabilities and
losses arising out of or relating to the Company's business, whether such
obligations, liabilities or losses arise before, on or after the Distribution
Date. The Company will indemnify May from and against any and all liabilities
and obligations in respect to (a) all contracts, agreements, undertakings,
notes, letters of credit, bonds, guarantees, warranties, indemnities, accounts
payable, purchase orders, leases, licenses, liens, mortgages, restrictions and
covenants, (b) all employee or employment related obligations and liabilities,
including, without limitation, amounts due to Company employees under any
employment contract, arrangement or other employee agreement, benefit plan or
payroll practice, (c) all environment conditions and responsibilities and (d)
all actions, including those relating to damage or injury to person, property,
business or reputation.
Each of the Company and May have agreed to indemnify the other against any
and all losses arising out of or due to any claim that the information
provided by them and included in this Information Statement or the
Registration Statement is false and misleading with respect to any material
fact or omits to state any material fact required to be stated in such
documents or necessary in order to make the statements in such documents not
misleading or any failure to perform or violation of any provision of the
Distribution Agreement.
Pursuant to the terms of the Distribution Agreement, and except as otherwise
provided in the Distribution Agreement or any other agreement between the
parties, May and the Company release each other from and against any claim
they may have against each other or their respective executives which relates
to events, actions or omissions taken or occurring on or prior to the
Distribution Date.
The Distribution Agreement also includes procedures for notice and payment
of indemnification claims and provides that the indemnifying party may assume
the defense of a claim or suit brought by a third party.
SUBLEASE
From time to time, beginning in 1982, May entered into leases with third
parties for approximately 360 of the Company's store locations. The Company
and May have entered into a sublease agreement (the "Sublease") which defines
the ongoing relationship between them with respect to those store locations
and as many as 11 additional locations that May may be obligated to lease
during 1996.
The Sublease provides that the Company may continue to operate stores at
these locations, subject to certain obligations, including, without
limitation, the obligations to pay rent, taxes and other charges, carry
insurance and maintain the premises. The Company will be permitted to sub-
sublet individual locations for all or part of the existing term of the
applicable underlying lease, but any such sub-sublet will not release the
Company from its obligations under the Sublease. The Company will indemnify
May against certain liabilities, including those arising out of (i) any injury
to, or death of, any person or loss or damage to property on any of the leased
premises, (ii) any breach by the Company of provisions of the Sublease or
related documents, (iii) nonpayment of rent, (iv) the performance of any labor
or services or the furnishing of any materials or other property with respect
to any of the leased premises, or (v) any claim, proceeding or contest in
connection with a condemnation or other taking of any of the leased premises.
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The Sublease also provides that the Company can request that May exercise
the next exercisable option to renew or extend the term of certain underlying
leases for one or more store locations. May will exercise the option under
certain conditions, including that the request was timely received, the
Company is not in default under the underlying lease or the Sublease, the
Company is operating a store at the location and certifies that it expects to
continue to do so, the Company satisfies certain financial tests and the
exercise of the option will not extend the term of the underlying lease beyond
May 1, 2006.
TAX SHARING AGREEMENT
Through the Distribution Date, the results of operations of the Company and
its domestic subsidiaries that are at least 80% owned by the Company (the
"Company Group") will be included in May's consolidated Federal income tax
returns ("May Consolidated Federal Returns"). In connection with the
Distribution, May and the Company have entered into a Tax Sharing Agreement
(the "Tax Sharing Agreement") that provides, among other things, for the
allocation between May and the Company of Federal, state, local and foreign
tax liabilities for all periods through the Distribution Date. Generally, the
Company will be responsible for the portion of any deficiencies of May
assessed with respect to all periods up to and including the Distribution Date
that give rise to a tax benefit to the Company in a post-Distribution period.
The Company will also be responsible for all income taxes imposed on the
Company Group during the taxable period or portion thereof beginning on
February 4, 1996 and ending on or before the Distribution Date. Furthermore,
the Tax Sharing Agreement provides that if the Distribution fails to qualify
as a tax-free distribution as a result of any event occurring prior to the
second anniversary of the Distribution Date that results from the breach of
certain covenants made by the Company in the Tax Sharing Agreement or involves
either the stock or assets (or any combination thereof) of any member of the
Company Group, then the Company must indemnify and hold May harmless, on an
after-tax basis, from any tax liability imposed upon it in connection with the
Distribution. The Tax Sharing Agreement also prohibits the Company from
entering into certain transactions or disposing of substantially all of its
assets prior to the second anniversary of the Distribution Date in the absence
of a prior opinion of independent tax counsel or receipt of a private letter
ruling from the Internal Revenue Service (the "Service") that such transaction
or disposition will not cause the Distribution to be a taxable transaction.
ADMINISTRATIVE SERVICES AGREEMENT
May and the Company have entered into an Administrative Services Agreement
pursuant to which May, in exchange for fees specified in the Administrative
Services Agreement, will provide certain administrative services with respect
to all demands for damages made against the Company or for which the Company
is an indemnitor and which are based on workers' compensation, general
liability or automobile liability for incidents occurring prior to April 1,
1996. The Administrative Services Agreement will remain in effect until the
earlier of March 31, 2016 or the settling of the last open claim covered by
the agreement. The Administrative Services Agreement provides that the Company
is liable for expenses related to such claims and provides that the Company
will indemnify and hold harmless May for any action, proceeding or
investigation related to May's performance of services under the agreement.
DESCRIPTION OF CAPITAL STOCK
AUTHORIZED CAPITAL STOCK
Prior to the Distribution Date, the Company intends to file the Payless
Charter with the Secretary of State of the State of Missouri, and the board of
directors of the Company intends to adopt the Payless Bylaws. Under the
Payless Charter, the total number of shares of all classes of stock that the
Company has authority to issue is 145,000,000, of which 120,000,000 are shares
of Common Stock, par value $.01 per share, and 25,000,000 are shares of
preferred stock, par value $.01 per share (the "Preferred Stock"). No shares
of Preferred Stock will be issued in connection with the Distribution,
although 430,000 shares of Series A Junior Participating Preferred Stock will
be reserved for issuance in connection with the Rights Agreement (as defined
below). Based
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on the number of shares of May common stock outstanding at April 4, 1996,
approximately 39.9 million shares of Common Stock constituting approximately
33% of the authorized Common Stock, will be issued to shareowners of May.
COMMON STOCK
The owners of Common Stock will be entitled to one vote for each share on
all matters voted on by shareowners, including the election of directors, and
the owners of such shares will possess all voting power, except as otherwise
required by law or provided in any resolution adopted by the board of
directors of the Company with respect to any series of Preferred Stock. The
Common Stock will not have cumulative voting rights. It is currently expected
that the first annual meeting of shareowners of the Company following the
Distribution will be held in May, 1997. Subject to any preferential or other
rights of any outstanding series of Preferred Stock that may be designated by
the board of directors of the Company, the owners of Common Stock will be
entitled to such dividends as may be declared from time to time by the board
of directors of the Company from funds available therefor. See "CERTAIN
CONSIDERATIONS--Dividend Policy." In the event of liquidation, dissolution or
winding up of the Company, owners of Common Stock will be entitled to receive
pro rata all assets of the Company available for distribution to such owners
remaining after payment of liabilities and liquidation preference of any
outstanding Preferred Stock. Owners of Common Stock have no rights to convert
their Common Stock into any other securities and there are no redemption or
sinking fund provisions with respect to such shares. All of the outstanding
shares of Common Stock are fully paid and nonassessable, and the shares of
Common Stock to be distributed in connection with the Distribution will be
fully paid and nonassessable. Additional shares of Common Stock may be issued
without shareowner approval, other than such approval as may be required by
applicable stock exchange rules.
PREFERRED STOCK
The board of directors of the Company will be authorized to provide for the
issuance of shares of Preferred Stock, in one or more classes or series, and
to fix for each such class or series such voting powers, designations,
preferences and relative, participating, optional and other special rights,
and such qualifications, limitations or restrictions thereon, as are stated in
the resolutions adopted by the board of directors of the Company providing for
the issuance of such class or series and as are permitted by the GBCL. The
Company has no present plans to issue any of the Preferred Stock. See
"PURPOSES AND EFFECTS OF CERTAIN PROVISIONS OF THE CHARTER, THE BYLAWS AND THE
RIGHTS AGREEMENT--Preferred Stock."
NO PREEMPTIVE RIGHTS
No owner of any stock of the Company of any class authorized at the
Distribution Date will then have any preemptive right to subscribe to any
securities of the Company of any kind or class.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is The Bank of New
York.
PURPOSES AND EFFECTS OF CERTAIN PROVISIONS OF
THE CHARTER, THE BYLAWS AND THE RIGHTS AGREEMENT
GENERAL
The Payless Charter, the Payless Bylaws and the Rights Agreement entered
into between the Company and The Bank of New York, as Rights Agent (the
"Rights Agreement"), contain certain provisions that could make more difficult
the acquisition of control of the Company by means of a tender offer, open
market purchases, a proxy contest or otherwise. Set forth below is a
description of such provisions in the Payless Charter, the Payless Bylaws and
the Rights Agreement. Such description is intended as a summary only and is
qualified in its
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entirety by reference to the Payless Charter, the Payless Bylaws and the
Rights Agreement, which are included as exhibits to the Registration Statement
of which this Information Statement forms a part.
Classified Board of Directors; Removal of Directors. The Payless Charter
provides that the number of directors shall be not less than three nor more
than 15, with the exact number of directors to be determined from time to time
by a majority of the entire board of directors. The directors shall be divided
into three classes, as nearly equal in number as is reasonably possible,
serving staggered three-year terms so that directors' initial terms will
expire at the annual meeting of the Company's shareowners held in 1997, 1998
and 1999, respectively. Starting with the 1997 annual meeting of the Company's
shareowners, one class of directors will be elected each year for a three-year
term. See "MANAGEMENT--Directors."
The Company believes that a classified board of directors will help to
assure the continuity and stability of the Company's board of directors and
the Company's business strategies and policies as determined by the board of
directors of the Company, since a majority of the directors at any given time
will have had prior experience as directors of the Company. The Company
believes that this in turn will permit the board to represent more effectively
the interests of shareowners.
With a classified board of directors, at least two annual meetings of
shareowners, instead of one, will generally be required to effect a change in
a majority of the members of the board of directors. As a result, the
classification of the board of directors of the Company may discourage proxy
contests for the election of directors, unsolicited tender offers or purchases
of a substantial block of the Common Stock because it could prevent an
acquiror from obtaining control of the board of directors of the Company in a
relatively short period of time. In addition, pursuant to the Payless Charter,
a director may be removed only for cause and only by the affirmative vote of
owners of two-thirds of the outstanding shares of Common Stock entitled to
vote thereon. As a result, a classified board of directors delays shareowners
who do not agree with the policies of the board of directors from replacing
directors, unless they can demonstrate that the directors should be removed
for cause and obtain the requisite vote. Such a delay may help ensure that the
board of directors of the Company, if confronted with a proxy contest or an
unsolicited proposal for an extraordinary corporate transaction, will have
sufficient time to review the proposal and appropriate alternatives to the
proposal and to act in what it believes is the best interest of the Company's
shareowners.
Filling Vacancies on the Board. The Payless Charter provides that vacancies
on the board of directors may be filled only by a majority of the board of
directors then in office, even if less than a quorum or by the sole remaining
director. Accordingly, the board of directors could temporarily prevent any
shareowner from obtaining majority representation on the board of directors by
enlarging the board of directors and filling the new directorships with its
own nominees.
Special Meetings; Limitations on Shareowner Action by Written Consent. The
Payless Charter provides that shareowner action can be taken only at an annual
or special meeting of shareowners. The Payless Charter provides that special
meetings of shareowners may be called only by the board of directors, the
Chairman of the board of directors, or the President. Shareowners are not
permitted to call a special meeting or to require that the board of directors
call a special meeting of shareowners. Moreover, the business permitted to be
conducted at any special meeting of shareowners is limited to the purpose or
purposes specified in the written notice of such meeting.
Pursuant to the GBCL and the Payless Bylaws, any action by written consent
of shareowners in lieu of a meeting must be unanimous. The provision of the
GBCL and the Bylaws requiring unanimity for shareowner action by written
consent gives all the shareowners of the Company entitled to vote on a
proposed action the opportunity to participate in such action and will prevent
the owners of a majority of the voting power of the Company from using the
written consent procedure to take shareowner action. Moreover, a shareowner
cannot force shareowner consideration of a proposal over the opposition of the
board of directors, the Chairman of the board of directors or the President by
calling a special meeting of the shareowners.
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Business Combination Provision. In addition to any affirmative vote required
by the GBCL or otherwise, the Payless Charter requires the approval of a
majority of the outstanding shares of Voting Stock of the Company (as defined
therein), excluding Voting Stock held by any Interested Shareholder (defined
generally as the beneficial owner of 20% or more of the Voting Stock of the
Company), or any Affiliate (as defined therein) or Associate (as defined
therein) of such Interested Shareholder, as a condition of certain "Business
Combination" (as defined therein) transactions with or for the benefit of an
Interested Shareholder, unless (i) certain price criteria are satisfied, or
(ii) the Business Combination transaction was approved by the board of
directors of the Company prior to such Interested Shareholder's Stock
Acquisition Date (as defined therein), or the purchase of stock made by such
Interested Shareholder on such Interested Shareholder's Stock Acquisition Date
had been approved by the board of directors of the Company prior to such
Interested Shareholder's Stock Acquisition Date, or (iii) the Business
Combination had been approved by a majority of the outstanding Voting Stock
not beneficially owned by such Interested Shareholder or any Affiliate or
Associate of such Interested Shareholder no earlier than five years after such
Interested Shareholder's Stock Acquisition Date. The price criteria under the
Payless Charter relate to the minimum value to be paid to the owners of Common
Stock.
Amendment of Certain Charter and Bylaw Provisions. The Payless Charter
provides that the Payless Bylaws may only be amended by a vote of two-thirds
of the entire board of directors. The Payless Charter provides that any
proposal to amend, repeal or adopt any provision of the Payless Charter must
be approved by the affirmative vote of the owners of not less than a majority
of the outstanding shares of stock of the Company entitled to vote thereon,
unless such proposal is not recommended by the affirmative vote of a majority
of the entire board of directors, in which case the affirmative vote of at
least two-thirds of the outstanding shares of the Company is required.
Advance Notice Provisions for Shareowner Proposals and Shareowner
Nominations. The Payless Bylaws establish an advance notice procedure with
regard to business to be brought before an annual or special meeting of
shareowners of the Company (the "Business Procedure") and with regard to the
nomination, other than by or at the direction of the board of directors, of
candidates for election as directors (the "Nomination Procedure").
The Business Procedure provides that at an annual or special meeting only
such business may be conducted as has been specified in the notice of meeting,
brought before the meeting by or at the direction of the board of directors,
otherwise properly brought before the meeting by or at the direction of the
board of directors, or by a shareowner who has given timely written notice to
the Company's corporate secretary (the "Secretary") of such shareowner's
intention to bring such business before the meeting. The Nomination Procedure
provides that only persons who are nominated by or at the direction of the
board of directors, by a nominating committee or person appointed by the board
of directors, or by a shareowner who has given timely written notice to the
Secretary prior to the meeting at which directors are to be elected, will be
eligible for election as directors. Under the Business Procedure or the
Nomination Procedure, to be timely, notice must be delivered to or mailed and
received at the principal executive offices of the Company not less than 75
days nor more than 90 days prior to the meeting; provided, however, that in
the event that less than 90 days' notice or prior public disclosure of the
date of the meeting is given or made to shareowners, notice by the shareowner
to be timely must be so received not later than the close of business on the
15th day following the day on which such notice of the date of the meeting was
mailed or such public disclosure was made, whichever was first.
Under the Nomination Procedure, a shareowner's notice to the Company
proposing to nominate a person for election as a director must contain certain
information (i) about each proposed nominee, including, without limitation,
(a) the name, age, business address and residence address of the nominee, (b)
the principal occupation or employment of the nominee, (c) the class and
number of shares of Common Stock which are beneficially owned by the nominee
and (d) any other information relating to the nominee that is required to be
disclosed in solicitations of proxies for election of directors pursuant to
the Regulation 14A under the Exchange Act and (ii) about the shareowner
proposing to nominate such person, including, without limitation, (a) the name
and record address of the shareowner and (b) the class and number of shares of
Common Stock which are beneficially owned by the shareowner. Under the
Business Procedure, a shareowner's notice relating to the conduct of business
other than the nomination of directors at an annual meeting must contain
certain information about such business and about the proposing shareowner
including, without limitation, (a) a brief description of the business desired
to be brought before the meeting and the reasons for conducting such business
at the meeting,
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(b) the name and record address of the proposing shareowner, (c) the class and
number of shares of Common Stock owned by the proposing shareowner and (d) a
description of any material interest of the shareowner in such business. If
the chairman of the meeting determines that a person was not nominated in
accordance with the Nomination Procedure, such person will not be eligible for
election as a director and such nomination shall be disregarded. If such
chairman determines that business was not properly brought before such meeting
in accordance with the Business Procedure, such business will not be
transacted at such meeting.
By requiring advance notice of nominations by shareowners, the Nomination
Procedure will afford the board of directors a meaningful opportunity to
consider the qualifications of the proposed nominees and, to the extent deemed
necessary or desirable by the board of directors, to inform shareowners about
such qualifications. By requiring advance notice of proposed business, the
Business Procedure will provide a more orderly procedure for conducting annual
meetings of shareowners and, to the extent deemed necessary or desirable by
the board of directors, will provide the board of directors with a meaningful
opportunity to inform shareowners, prior to such meeting, of any business
proposed to be conducted at such meeting, together with any recommendation of
the board of directors' position as to action to be taken with respect to such
business, so as to enable shareowners better to determine whether they desire
to attend such a meeting or grant a proxy to the board of directors as to the
disposition of any such business. Although the Payless Bylaws do not give the
board of directors any power to approve or disapprove shareowner nominations
for the election of directors or proposals for action, they may have the
effect of precluding a contest for the election of directors or the
consideration of shareowner proposals if the proper procedures are not
followed, and of discouraging or deterring a third party from conducting a
solicitation of proxies to elect its own slate of directors or to approve its
proposal without regard to whether consideration of such nominees or proposals
might be harmful or beneficial to the Company and its shareowners.
PREFERRED STOCK
The Payless Charter authorizes the board of directors of the Company to
establish one or more classes or series of Preferred Stock and to determine,
with respect to any class or series of Preferred Stock such voting powers,
designations, preferences and relative, participating, optional and other
special rights, and such qualifications, limitations or restrictions thereon,
as are stated in the resolutions adopted by the board of directors of the
Company providing for the issuance of such series and as are permitted by the
GBCL.
The Company believes that the availability of the Preferred Stock will
provide the Company with increased flexibility in structuring possible future
financings and acquisitions and in meeting other corporate needs that might
arise. Having such authorized shares available for issuance will allow the
Company to issue shares of Preferred Stock without the expense and delay of a
special shareowners meeting. The authorized shares of Preferred Stock, as well
as shares of Common Stock, will be available for issuance without further
action by the Company's shareowners, unless such action is required by
applicable law or the rules of any stock exchange on which the Company's
securities may be listed. Although the board of directors of the Company has
no intention at the present time of doing so, it would have the power (subject
to applicable law) to issue a series of Preferred Stock that could, depending
on the terms of such series, impede the completion of a merger, tender offer
or other takeover attempt. For instance, subject to applicable law, such
series of Preferred Stock might impede a business combination by including
class voting rights that would enable the holder to block such a transaction.
The board of directors will make any determination to issue such shares based
on its judgment as to the best interests of the Company and its shareowners.
The board of directors, in so acting, could issue Preferred Stock having terms
which could discourage an acquisition attempt or other transaction that some,
or a majority, of the shareowners might believe to be in their best interests
or in which shareowners might receive a premium for their stock over the then
market price of such stock. See "--Rights Agreement."
CONTROL SHARE ACQUISITION STATUTE
Under the control share acquisition statute of the GBCL, a potential
acquiror must notify the target corporation that it has acquired or proposes
to acquire capital stock of the target corporation which would cause the
acquiror to move into one of several defined ranges of voting power (20% to
33%, 33% to 50%, 50% to 100%). Without the approval of a majority of the
outstanding shares not owned by the acquiror, officers or employee-directors,
the control shares do not receive voting rights.
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RIGHTS AGREEMENT
In connection with its decision to make the Distribution, May decided that
the Company should have a shareowner rights plan and the Company would
distribute one associated right ("Right") with each share of Common Stock
distributed. Accordingly, as of April 2, 1996 the Company adopted the
shareowner rights plan described below, entered into the Rights Agreement and
distributed to May one Right for each outstanding share of Common Stock that
May owned prior to the Distribution Date. Each share of Common Stock being
distributed by May will carry with it an associated Right which is evidenced
by the certificate representing the share. Each Right entitles the registered
owner to purchase from the Company one one-hundredth of a share of Series A
Junior Participating Preferred Stock, par value $.01 per share (the "Series A
Preferred Stock"), at a purchase price of $80 per one one-hundredth of a
share, subject to adjustment. The following description of the Rights is a
summary of the material terms thereof. A copy of the Rights Agreement (the
"Rights Agreement"), between the Company and The Bank of New York, as Rights
Agent, is filed as an exhibit to the Registration Statement of which this
Information Statement forms a part.
Immediately following the Distribution Date, the Rights will be attached to
all outstanding shares of Common Stock and will be represented by the
certificates representing such shares until a Rights Distribution Date occurs.
No separate certificates evidencing the Rights (the "Rights Certificates")
will be distributed prior to the Rights Distribution Date. The Rights will
separate from the Common Stock and a "Rights Distribution Date" will occur
upon the earlier of (i) 10 business days following a public announcement that
a person or group of affiliated or associated persons (an "Acquiring Person")
has acquired, or obtained the right to acquire, beneficial ownership of 20% or
more of the outstanding shares of Common Stock (the "Stock Acquisition Date"),
or (ii) 10 business days (or such later date as the board of directors shall
determine) following the commencement of a tender or exchange offer that would
result in a person or group beneficially owning 20% or more of such
outstanding shares of Common Stock (the "Tender Offer Date") or (iii) 10
business days following the declaration by the board of directors that a
person has become an "Adverse Person" upon a determination that such person
has become the beneficial owner of a substantial amount of Common Stock (but
in no event less than 15% of the outstanding Common Stock) and that such
beneficial ownership is intended to cause the Company to repurchase such
Common Stock or to take action intended to provide such person with short-term
financial gain under circumstances as where the board of directors determines
that the best long-term interests of the Company would not be served or is
causing, or is reasonably likely to cause, a material adverse impact on the
business or prospects of the Company.
Until the Rights Distribution Date, (i) the Rights will be evidenced by the
Common Stock certificates and will be transferred with and only with such
Common Stock certificates, (ii) the Common Stock certificates will contain a
notation incorporating the Rights Agreement by reference, and (iii) the
surrender for transfer of any certificates for Common Stock outstanding will
also constitute the transfer of the Rights associated with the Common Stock
represented by such certificates. Pursuant to the Rights Agreement, the
Company reserves the right to require prior to the occurrence of a Triggering
Event (as defined below) that, upon any exercise of Rights, a number of Rights
be exercised so that only whole shares of Series A Preferred Stock will be
issued (or fractions that are integral multiples of one one-hundredth of a
share).
The Rights are not exercisable until the Rights Distribution Date and will
expire at the close of business on April 30, 2006, or such later date as the
board of directors establishes under certain circumstances, unless earlier
redeemed by the Company as described below.
As soon as practicable after the Rights Distribution Date, Rights
Certificates will be mailed to owners of record of the Common Stock as of the
close of business on the Rights Distribution Date and, thereafter, the
separate Rights Certificates alone will represent the Rights. Except as
otherwise determined by the board of directors, only shares of Common Stock
outstanding prior to the Rights Distribution Date will be issued with Rights.
Each share of Series A Preferred Stock purchased upon exercise of the Rights
will be entitled to a minimum preferential quarterly dividend payment equal to
the greater of (i) $1.00 per share, and (ii) 100 times the dividend, if any,
declared per share of Common Stock. In the event of liquidation, the owners of
the Series A Preferred
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Stock will be entitled to a minimum preferential liquidation payment equal to
$10 per share, plus an amount equal to accrued and unpaid dividends and
distributions to the date of such payment. Each share of Series A Preferred
Stock will have 100 votes and will vote together with the Common Stock. In the
event of any merger, consolidation or other transaction in which shares of
Common Stock are exchanged, each share of Series A Preferred Stock will be
entitled to receive 100 times the amount per share of Common Stock received in
such merger, consolidation or other transaction. These rights are protected by
customary antidilution provisions. The shares of Series A Preferred Stock
will, if issued, be junior to any other series of Preferred Stock which may be
authorized and issued by the Company, unless the terms of any such other
series provide otherwise. Because of the nature of the Series A Preferred
Stock's dividend, liquidation and voting rights, the value of one one-
hundredth of a share of Series A Preferred Stock purchasable upon the exercise
of each Right should approximate the value of one share of Common Stock.
In the event that (i) any Person becomes the beneficial owner of 20% or more
of the then outstanding shares of Common Stock (unless such acquisition is
made pursuant to a tender or exchange offer for all outstanding shares of the
Company, upon terms and conditions determined by a majority of the Continuing
Directors (as defined below) to be in the best interest of the Company and its
shareowners (a "Qualifying Offer")) or (ii) the board of directors declares a
person to be an Adverse Person, each owner of a Right (other than an Acquiring
Person or an Adverse Person, certain related parties and transferees) will
thereafter have the right to receive, upon exercise, Common Stock (or, in
certain circumstances, cash, property or other securities of the Company),
having a value equal to two times the exercise price of the Right. For
example, at an exercise price of $50 per Right, each Right not owned by an
Acquiring Person, an Adverse Person or by certain related parties or
transferees following the event set forth above would entitle its owner to
purchase $100 worth of Common Stock (or other consideration, as noted above)
for $50. Assuming that the Common Stock had a per share market price of $10 at
such time, the owner of each valid Right would be entitled to purchase 10
shares of Common Stock for $50. The Rights are not exercisable following the
occurrence of any of the events described above until such time as the Rights
are no longer redeemable by the Company as described below. Notwithstanding
any of the foregoing, following the occurrence of any of the events set forth
in this paragraph, all Rights that are, or (under certain circumstances
specified in the Rights Agreement) were, beneficially owned by any Acquiring
Person or Adverse Person or by certain related parties or transferees will be
null and void.
In the event that at any time following the Stock Acquisition Date, (i) the
Company is acquired in a merger or business combination transaction in which
the Company is not the surviving corporation (other than a merger consummated
pursuant to a Qualifying Offer); (ii) the Company is the surviving corporation
in a consolidation or pursuant to which all or part of the outstanding shares
of Common Stock are changed or exchanged for stock or other securities of any
other person or cash or any other property; or (iii) more than 50% of the
combined assets, cash flow or earning power is sold or transferred (in each
case other than certain consolidations with, mergers with and into, or sales
of assets or earning power by or to subsidiaries of the Company as specified
in the Rights Agreement), each owner of a Right (except Rights which have
previously been voided as set forth above) shall thereafter have the right to
receive, upon exercise thereof, common stock of the acquiring company having a
value equal to two times the exercise price of the Right. The events described
in this paragraph and in the preceding paragraph are referred to as the
"Triggering Events."
In order to prevent dilution, the Purchase Price payable, the number and
kind of shares covered by each Right and the number of Rights outstanding are
subject to adjustment from time to time (i) in the event of a stock dividend
on, or a subdivision, combination or reclassification of, the Series A
Preferred Stock, (ii) if owners of Series A Preferred Stock are granted
certain rights or warrants to subscribe for Series A Preferred Stock or
securities convertible into Series A Preferred Stock at less than the current
market price of the Series A Preferred Stock, or (iii) upon the distribution
to holders of the Series A Preferred Stock of evidences of indebtedness, cash
(excluding regular quarterly cash dividends), assets (other than dividends
payable in Series A Preferred Stock) or subscription rights or warrants (other
than those referred in (ii) immediately above).
With certain exceptions, no adjustments in the Purchase Price will be
required until cumulative adjustments amount to at least 1% of the Purchase
Price. No fractional shares of Series A Preferred Stock are required to be
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issued (other than fractions which are integral multiples of one one-hundredth
of a share of Series A Preferred Stock) and, in lieu thereof, the Company may
make an adjustment in cash based on the market price of the Series A Preferred
Stock on the trading day prior to the date of exercise.
At any time until 10 business days following the Stock Acquisition Date, the
Company may redeem the Rights in whole, but not in part, at a price of $.01
per Right (payable in cash, shares of Common Stock or other consideration
deemed appropriate by the board of directors). The Company may not redeem the
Rights if the board of directors has previously determined a person to be an
Adverse Person. Immediately upon the action of the board of directors ordering
redemption of the Rights, the Rights will terminate and the only right of the
owners of Rights will be to receive the $.01 redemption price.
For purposes of the Rights Agreement, the term "Continuing Director" means
any member of the board of directors of the Company who was a member of the
board on the Distribution Date, and any person who is subsequently elected to
the board if such person is recommended or approved by a majority of the
Continuing Directors, but shall not include an Acquiring Person, an Adverse
Person or an affiliate or associate of an Acquiring Person, or Adverse Person
or any representative of the foregoing entities.
Until a Right is exercised, the owner thereof, as such, will have no rights
as a shareowner of the Company, including, without limitation, the right to
vote or to receive dividends.
Any of the provisions of the Rights Agreement may be amended by the board of
directors of the Company prior to the Rights Distribution Date, other than the
redemption price and the number of one-hundredths of a share of Series A
Preferred Stock for which a right is exercisable, and the Purchase Price may
not be reduced. After the Rights Distribution Date, the provisions of the
Rights Agreement may be amended by the board in order to cure any ambiguity,
to make changes which do not adversely affect the interests of owner of Rights
(excluding the interests of any Acquiring Person or Adverse Person) or to
shorten or lengthen any time period under the Rights Agreement, except that no
amendment to adjust the time period governing redemption may be made at such
time as the Rights are not redeemable. The Final Expiration Date (as defined
in the Rights Agreement) may be extended and the Purchase Price may be
increased at any time prior to a Stock Acquisition Date, a Tender Offer Date
or upon the determination of the board of directors that a person has become
an Adverse Person.
The Rights have certain anti-takeover effects. They may reduce or eliminate
(i) "two-tiered" or other partial offers which do not offer fair value for all
of the Common Stock; (ii) the accumulation by a third party of 20% or more of
the Common Stock in open-market or private purchases in order to influence or
control the business and affairs of the Company without paying an appropriate
premium for a controlling position in the Company; and (iii) the accumulation
of shares of Common Stock by third parties in market transactions for the
primary purpose of attempting to cause the Company to be sold. In addition,
the Rights will cause substantial dilution to a person or group that attempts
to acquire the Company in a manner defined as a Triggering Event unless the
offer is conditioned on a substantial number of Rights being acquired. The
Rights should not, however, affect any prospective offeror willing to make an
offer for all outstanding shares of Common Stock and other voting securities
at a price and on terms which are in the best interests of the Company and its
shareowners as determined by the board of directors or affect any prospective
offeror willing to negotiate with the board of directors because as part of
any negotiated transaction the Rights would either be redeemed or otherwise
made inapplicable to the transaction. The Rights should not interfere with any
merger or other business combination approved by the board of directors since
the board of directors may, at its option, at any time until ten business days
following a Stock Acquisition Date, redeem all, but not less than all, of the
then outstanding Rights at the $.01 redemption price.
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COMPARISON OF RIGHTS OF SHAREOWNERS OF MAY AND THE COMPANY
The following is a summary of certain of the material differences between
the rights of shareowners of May and the rights of shareowners of the Company.
The rights of the shareowners of Common Stock will be governed by the
corporate laws of the State of Missouri rather than the State of New York
(which is currently the jurisdiction of incorporation of May), the Payless
Charter and the Payless Bylaws. The rights of the shareowners of May common
stock will be governed by the corporate laws of the State of New York, the
Restated Certificate of Incorporation of May (the "May Charter") and the
Bylaws of May (the "May Bylaws"). The following discussion is intended only to
highlight certain material differences between the rights of shareowners of
May and the rights of shareowners of the Company. This discussion does not
purport to constitute a detailed comparison of the provisions of the New York
Business Corporation Law (the "NYBCL") with the GBCL or of the charters or the
bylaws of the two companies.
AMENDMENTS TO ARTICLES OF INCORPORATION
May. Under the NYBCL, an amendment or change to the certificate of
incorporation must be authorized by a vote of the board of directors, followed
by a vote of the owners of a majority of all outstanding shares entitled to
vote thereon at a meeting of shareowners (except in certain limited
circumstances), unless the certificate provides for a higher vote. When an
amendment of the certificate would affect certain substantial rights of the
holders of a class of stock, the NYBCL provides that the enactment of the
amendment requires the approval of a majority of the outstanding shares of the
affected class voting as a separate class in addition to a majority of all
outstanding voting shares. If only one or more series of any class, but not
the entire class, are adversely affected by a proposed amendment, then only
the holders of each series whose rights would be adversely affected shall be
entitled to participate in the vote as a separate class.
Payless. Under the GBCL, amendments to a corporation's articles of
incorporation need not be approved by the board of directors but may be
submitted for approval of not less than a majority of outstanding shares
entitled to vote thereon; provided, however, that an amendment which provides
that Missouri's control share acquisition statute (as discussed below), does
not apply to "control share acquisitions" of shares of a corporation may only
be adopted by the vote of two-thirds of all outstanding shares entitled to
vote upon such amendment. The Payless Charter provides that any charter
amendment which is not approved by the affirmative vote of a majority of the
entire board of directors must be approved by the affirmative vote of at least
two-thirds of the outstanding shares of Common Stock.
AMENDMENTS TO BYLAWS
May. Under the NYBCL, bylaws may be adopted, amended or repealed by a
majority vote of all shareowners entitled to vote in the election of
directors. When provided either by the certificate of incorporation or by a
bylaw adopted by the shareowners, the board of directors may also adopt, amend
or repeal bylaws but any bylaw adopted by the board may be amended or repealed
by the shareowners. The May Bylaws provide that the Bylaws may be amended or
added to by a vote of two-thirds of all the directors of May.
Payless. Under the GBCL, the bylaws of a corporation may be made, altered,
amended or repealed by the shareowners, unless and to the extent that such
power may be vested in the board of directors by the articles of
incorporation. The Payless Charter provides that only the board of directors
is authorized to adopt new Bylaws or to make, amend, alter or rescind the
Bylaws of the Company, and a vote of two-thirds of the entire board of
directors constitutes the act of the board.
ELECTION OF DIRECTORS; REMOVAL OF DIRECTORS
May. Under the NYBCL, cumulative voting in the election of directors is only
available if specifically provided for in the certificate of incorporation.
The May Charter does not provide for cumulative voting in the election of
directors. The May Charter provides that the number of directors will be not
less than three nor more than 21 with the exact number to be fixed by the
Bylaws. The May Bylaws fix the number of directors at 13. The May Charter also
provides for a classified board of directors. Under the NYBCL, any or all
directors may be removed for cause by a vote of the shareowners and if the
certificate of incorporation or the bylaws so provide
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a director may be removed without cause by shareowner vote. Neither the May
Charter nor the May Bylaws provides for removal without cause.
Payless. Under the GBCL, cumulative voting is required for the election of
directors unless the articles of incorporation or the bylaws provide
otherwise. The Payless Charter eliminates cumulative voting rights. The
Payless Charter provides that the number of directors will be not less than
three nor more than 15, with the exact number to be determined by a majority
of the entire board of directors. Payless anticipates that as of the
Distribution Date the board will consist of six persons. The Payless Charter
also provides for a classified board of directors. Under the GBCL, unless the
articles of incorporation or the bylaws provide otherwise, any or all
directors may be removed, with or without cause, by a vote of the owners of at
least a majority of the voting power of the shares then entitled to vote at an
election of directors. The Payless Charter provides that the directors of the
Company may be removed only for cause and only by the affirmative vote of two-
thirds of the outstanding shares of the Company.
NEWLY CREATED DIRECTORSHIPS AND VACANCIES
May. Under the NYBCL, newly created directorships and vacancies occurring
for any reason other than removal without cause may be filled by a vote of the
board of directors, unless the corporation's certificate of incorporation or
bylaws require that the shareowners fill such newly created directorships or
vacancies. Unless the certificate of incorporation or a bylaw adopted by the
shareowners provides otherwise, vacancies occurring in the board of directors
through removal of directors without cause may only be filled by a vote of
shareowners. Neither the May Charter nor the May Bylaws provides for removal
of directors without cause.
Payless. Under the GBCL, vacancies on the board of directors may be filled
by the board of directors, unless the articles of incorporation or bylaws
provide otherwise. The GBCL does not contain a provision similar to that in
New York providing that a vacancy occurring through the removal of directors
without cause may only be filled by a shareowner vote.
APPROVAL OF CERTAIN BUSINESS TRANSACTIONS
May. The NYBCL provides that unless a greater vote is provided for in the
certificate of incorporation, the affirmative vote of two-thirds of all
outstanding shares entitled to vote thereon is required to effect a merger, a
consolidation, a share exchange or the sale, lease or disposition of all or
substantially all of a corporation's assets. The May Charter does not provide
for a greater supermajority vote. The NYBCL also provides that notwithstanding
any provision in the certificate of incorporation, the owners of shares of a
class or series are entitled to vote as a class if a proposed merger or
consolidation contains any provision which, if contained in an amendment to
the certificate of incorporation, would entitle the owner of shares of such
class or series to vote as a class thereon; in such a case, in addition to the
required two-thirds vote of all outstanding shares, the merger or
consolidation must be authorized by a vote of the owners of a majority of all
outstanding shares of each such class or series. Notwithstanding shareowner
approval, the board may abandon the proposed sale, lease, exchange or other
disposition without further action by the shareowners, subject to the rights,
if any, of third parties under any contract relating thereto.
Payless. For mergers, consolidations and transactions involving a sale,
lease or exchange or other disposition of all or substantially all of a
corporation's assets, the GBCL requires the affirmative vote of at least two-
thirds of the outstanding shares entitled to vote thereon. The GBCL permits a
corporation to require a greater vote in either its articles of incorporation
or its bylaws. Neither the Payless Charter nor the Payless Bylaws provides for
a greater supermajority vote. The GBCL has a class vote provision for mergers
and consolidations similar to the New York requirement described above.
SPECIAL MEETINGS
May. Under the NYBCL, special meetings of shareowners may be called by the
board of directors and by such other person or persons authorized to do so by
the corporation's certificate of incorporation or bylaws. The May Bylaws
provide that only the board of directors may call special shareowner meetings.
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Payless. The GBCL contains a provision similar to that in the NYBCL. The
Payless Bylaws provide that special meetings may be called at any time by the
board of directors, the Chairman of the board of directors or the President of
the Company.
SHAREOWNERS' ACTION WITHOUT A MEETING
May. The NYBCL provides that shareowners may take any action without a
meeting by written consent only if such consent is signed by the owners of all
outstanding shares entitled to vote thereon, unless a lesser number is
provided in the certificate of incorporation. The May Charter does not provide
otherwise.
Payless. The GBCL also requires unanimous written consent for shareowner
action without a meeting. However, unlike the NYBCL, the articles of
incorporation may not provide otherwise.
PREEMPTIVE RIGHTS OF SHAREOWNERS
May. Unless the certificate of incorporation provides otherwise, the NYBCL
provides for preemptive rights where an issuance of securities would adversely
affect the dividend or voting rights of owners of equity shares. In addition,
unless otherwise provided in the certificate of incorporation, the NYBCL
provides that shares issued in certain transactions, such as mergers or
consolidations or offerings for consideration other than cash, shall not be
subject to preemptive rights. The May Charter eliminates preemptive rights.
Payless. The GBCL provides preemptive rights to shareowners to acquire
additional shares of a corporation unless such rights are limited or denied in
the articles of incorporation. The Payless Charter eliminates preemptive
rights.
ISSUANCE OF RIGHTS OR OPTIONS TO PURCHASE SHARES TO DIRECTORS, OFFICERS AND
EMPLOYEES
May. The NYBCL requires the affirmative vote of a majority of the shares
entitled to vote in order to issue to officers, directors or employees rights
or options to purchase stock.
Payless. The GBCL does not require shareowner approval of such transactions.
Payless is subject to the rules of the NYSE which require shareowner approval
of Payless' option plans and grants thereunder in certain instances.
LOANS TO DIRECTORS
May. Under the NYBCL, any loan made by the corporation to any director must
be authorized by a vote of the shareowners. For purposes of this
authorization, the shares held by the director who would be the borrower are
not entitled to vote.
Payless. The GBCL does not include such a provision.
LIMITATIONS ON DIRECTORS' LIABILITY
May. The NYBCL permits a corporation to limit or eliminate a director's
personal liability to the corporation or the owners of its capital stock for
breach of duty. This limitation is generally unavailable for acts or omissions
by a director which were (i) in bad faith, (ii) involved intentional
misconduct or a knowing violation of law or (iii) involved a financial profit
or other advantage to which such director was not legally entitled. The NYBCL
also prohibits limitations on director liability for acts or omissions which
resulted in a violation of a statute prohibiting certain dividend
declarations, certain payments to shareowners after dissolution and particular
types of loans. The May Charter does not include a provision eliminating the
directors' personal liability.
Payless. The GBCL does not contain similar express provisions that permit a
corporation to eliminate or limit the personal liability of a corporation's
directors to the corporation and its shareowners for monetary damages for such
directors' breach of their fiduciary duty.
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INSPECTION OF SHAREOWNER LIST
May. With respect to the inspection of the shareowner list, the NYBCL
provides a right of inspection on at least five days' written demand (i) to
any person who shall have been a shareowner for at least six months
immediately preceding the demand or (ii) any person owning, or authorized in
writing by, at least five percent (5%) of any class of outstanding shares.
Payless. The GBCL provides that each shareowner may have access to the books
of the company and under such regulations as may be prescribed by the bylaws.
ANTI-TAKEOVER STATUTES
May. The NYBCL prohibits any "business combination" (as defined therein)
between a "resident domestic corporation" and an "interested shareowner" for
five years after the date that the interested shareowner became an interested
shareowner unless prior to that date the board of directors of the domestic
corporation approved the business combination or the transaction that resulted
in the interested shareowner becoming an interested shareowner. After five
years, such a business combination is permitted only if (i) it is approved by
a majority of the shares not owned by, or by an affiliate of, the interested
shareowner or (ii) certain statutory fair price requirements are met. A
"resident domestic corporation" is defined as any corporation that (i) is
incorporated in New York, and (ii) has its principal executive offices and
significant business operations in New York or has a least 250 or 25% of its
employees in New York (including employees of its 80% subsidiaries), and (iii)
has at least 10% of its stock beneficially owned by New York residents. An
"interested shareowner" is any person who beneficially owns, directly or
indirectly, 20% or more of the outstanding voting stock of the corporation.
The NYBCL does not contain a control share acquisition provision similar to
that provided under the GBCL.
Payless. The GBCL includes provisions governing "business combinations"
similar to the ones contained in the NYBCL. The only significant difference
relates to the definition of a "resident domestic corporation." Under the
GBCL, a "resident domestic corporation" is defined as any corporation that has
(i) 100 or more shareowners; (ii) its principal place of business, its
principal office, or substantial assets within Missouri; and (iii) either (a)
more than ten percent (10%) of its shareowners resident in Missouri; (b) more
than ten percent (10%) of its shares owned by Missouri residents; or (c)
10,000 shareowners resident in Missouri. The Payless Charter includes
provisions regulating "business combinations" with "interested shareowners"
which are substantially identical to those contained in the GBCL.
The GBCL also contains a "control share acquisition statute" which provides
that an "acquiring person" who after any acquisition of shares of a publicly
traded corporation has the voting power, when added to all shares of the same
corporation previously owned or controlled by the acquiring person, to
exercise or direct the exercise of: (i) 20% but less than 33 1/3%, (ii) 33
1/3% or more but less than a majority or (iii) a majority, of the voting power
of outstanding stock of such corporation, must obtain shareowner approval for
the purchase of the "control shares." The statute prohibits an acquiring
person from voting its shares unless certain disclosure requirements are met
and the retention or restoration of voting rights are approved by both: (i) a
majority of the outstanding voting stock, and (ii) a majority of the
outstanding voting stock after exclusion of "interested shares." "Interested
shares" are defined as shares owned by the acquiring person, by directors who
are also employees, and by officers of the corporation. Shareowners are given
dissenters' rights with respect to the vote on control share acquisitions and
may demand payment of the fair value of their shares.
A number of acquisitions of shares are deemed not to constitute control
share acquisitions, including good faith gifts, transfers pursuant to wills,
purchases pursuant to an issuance by the corporation, mergers involving the
corporation which satisfy the other requirements of the GBCL, transactions
with a person who owned a majority of the voting power of the corporation
within the prior year or purchases from a person who has previously satisfied
the provisions of the control share acquisition statute so long as the
transaction does not result
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in the purchasing party having voting power after the purchase in one of the
percentage ranges beyond the range for which the selling party previously
satisfied the provisions of the statute. Additionally, a corporation may
exempt itself from application of the statute by an amendment to its articles
of incorporation or bylaws expressly electing not to be covered by the
statute. Neither Payless' Charter nor its Bylaws include such an election.
ANTI-GREENMAIL PROVISION
May. The NYBCL provides that no domestic corporation may purchase more than
ten percent (10%) of its stock from a shareowner who has held the shares for
less than two years at any price which is higher than the market price unless
such transaction is approved by both the corporation's board of directors and
a majority of the shares entitled to vote or the corporation offers to
purchase shares from all the owners on the same terms.
Payless. The GBCL does not include a similar provision.
THE DISTRIBUTION
REASONS FOR THE DISTRIBUTION
May is engaged primarily in the department store business. The Company is
engaged in the self-service, affordably priced, family shoe business. The
board of directors and management of May believe that today's business
environment requires management to focus on a single retail segment. In recent
years, May has undertaken a program to strengthen its competitive position in
its core department store business by concentrating May's management and
financial resources on the department store business. Over the years, May has
implemented several strategic elements of this plan, including (i) increasing
its internal investments in the department store business, (ii) acquiring
other department store businesses and department store assets and (iii)
disposing of many of its other lines of business, including its shopping
center business, its catalog showroom business and its discount department
store business. In addition, May believes that the Company must implement a
more effective incentive and benefit program designed to better attract,
retain and motivate its associates by offering economic rewards tied more
directly to the performance of the Company than the incentive arrangements
that are currently in effect.
Currently, May's outstanding common stock is widely held and publicly
traded. Each of May's shareowners owns less than 5% of May's outstanding
common stock, except for the Oppenheimer Group, Inc., which owns or controls
approximately 5.4% of the outstanding May common stock. Consequently, the
value of May's equity is determined in the public market, based on the
performance of May, as a whole. Since May is engaged primarily in the
department store business, the value of May's equity primarily reflects the
market's view of the performance of May's department store business and does
not adequately reflect the performance of the Company.
Distributing the shares of Common Stock to the shareowners of May will
permit the creation of (i) a separate profit sharing plan that will be funded
based on the Company's performance and offer associates the opportunity to
invest in Common Stock and (ii) a separate stock incentive plan under which
--stock options may be granted (permitting the Company's executives to buy
Common Stock),
--shares of restricted Common Stock of the Company may be issued to the
Company's senior executives, and
--performance units may be credited to the accounts of the Company's senior
executives,
all of which will provide employees of the Company and its subsidiaries with
equity incentives directly linked to the performance of the Company and its
stock, rather than to the performance of May's department store business with
which they are not involved. These incentive plans will help the Company to
better attract, retain and motivate its management.
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MANNER OF EFFECTING THE DISTRIBUTION
The general terms and conditions relating to the Distribution have been set
forth in the Distribution Agreement. May will effect the Distribution on the
Distribution Date by providing for the delivery of the shares of Common Stock
to the Distribution Agent for distribution to the owners of record of May
common stock on the Record Date. The Distribution will be made on the basis of
.16 share of Common Stock for every share of May common stock (16 shares of
Common Stock for each 100 shares of May common stock) outstanding on the
Record Date. The actual total number of shares of Common Stock to be
distributed will depend on the number of shares of May common stock
outstanding on the Record Date. The shares of Common Stock will be fully paid
and nonassessable, and the owners thereof will not be entitled to preemptive
rights. See "DESCRIPTION OF CAPITAL STOCK." The Distribution will be effective
on May 4, 1996. Certificates representing the shares of Common Stock will be
mailed to May shareowners on or about May 8, 1996.
No certificates or scrip representing fractional shares of Common Stock will
be issued to May shareowners as part of the Distribution. The Distribution
Agent will aggregate fractional shares into whole shares and sell them in the
open market at then prevailing prices on behalf of owners who otherwise would
be entitled to receive fractional share interests, and such persons will
receive instead a cash payment in the amount of their pro rata share of the
total proceeds, net of selling expenses. See "THE DISTRIBUTION--Federal Income
Tax Consequences of the Distribution." Such sales are expected to be made as
soon as practicable after the Record Date. NONE OF MAY, THE COMPANY OR THE
DISTRIBUTION AGENT WILL GUARANTEE ANY MINIMUM SALE PRICE FOR THE SHARES OF
COMMON STOCK, AND NO INTEREST WILL BE PAID ON THE PROCEEDS.
After the Distribution, owners of May common stock will continue to own
their shares of May common stock and, if such shareowners were shareowners of
record on the Record Date, they will have also received shares of Common
Stock. No owner of May common stock will be required to pay any cash or other
consideration for the shares of Common Stock received in the Distribution or
to surrender or exchange shares of May common stock in order to receive shares
of Common Stock. The Distribution will not affect the number of, or the Rights
attached to, outstanding shares of May common stock.
After the Distribution, May will own no shares of Common Stock and the
Company will operate as an independent, publicly owned corporation.
FEDERAL INCOME TAX CONSEQUENCES OF THE DISTRIBUTION
May has received a tax opinion from its counsel, Skadden, Arps, Slate,
Meagher & Flom, concluding that the Distribution will qualify as a tax-free
transaction under Section 355 of the Code. Such opinion, however, is not
binding on the Service or a court. Accordingly, there can be no assurance that
the Service will not challenge such conclusion or that a court will not
sustain such challenge.
CONSEQUENCES OF QUALIFICATION AS A TAX-FREE DISTRIBUTION. The following is a
summary of the material Federal income tax consequences of the Distribution
assuming that it qualifies as a tax-free transaction:
(1) Pursuant to Section 355 of the Code, May shareowners will not
recognize any income, gain or loss upon the receipt of the shares of Common
Stock (except in connection with cash received in lieu of fractional
shares) pursuant to the Distribution. A May shareowner who receives cash in
lieu of fractional shares as a result of the sale of such shares by the
Distribution Agent will be treated as if such fractional shares have been
received by the May shareowner as part of the Distribution and then sold by
such shareowner. Accordingly, such shareowner will recognize gain or loss
equal to the difference between the amount of cash so received and the
amount of tax basis allocable (as described below) to such fractional
shares. Such gain or loss will be capital gain or loss, provided that such
fractional shares would have been held by such shareowner as a capital
asset at the time of the Distribution.
(2) A May shareowner's tax basis for the May common stock with respect to
which shares of Common Stock are received will be apportioned between such
May shares and such shares of Common Stock (including any fractional
shares) in proportion to the fair market values of each on the date the
shares of
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Common Stock are distributed to the May shareowners. Such allocation must
be calculated separately for each block of May shares (shares purchased at
the same time and at the same cost) with respect to which the shares of
Common Stock are received. The holding period for the shares of Common
Stock received in the Distribution will include the period during which
such May shares were held (provided that such May shares were held as a
capital asset at the time of the Distribution).
(3) Neither May nor the Company will recognize any income, gain or loss
as a result of the Distribution.
Treasury regulations governing Section 355 of the Code require that each May
shareowner who receives shares of Common Stock pursuant to the Distribution
attach a statement to the Federal income tax return that will be filed by the
shareowner for the taxable year in which such shareowner receives the shares in
the Distribution, which statement shows the applicability of Section 355 of the
Code to the Distribution. May will provide each May shareowner with information
necessary to comply with this requirement.
CONSEQUENCES OF FAILURE TO QUALIFY AS A TAX-FREE DISTRIBUTION. May does not
intend to seek a ruling from the Service as to the Federal income tax treatment
of the Distribution. Rather, as stated above, May has received an opinion from
its counsel, Skadden, Arps, Slate, Meagher & Flom, that the Distribution will
qualify as a tax-free transaction under Section 355 of the Code. If the Service
were to challenge such treatment successfully and a court were ultimately to
hold that the Distribution failed to qualify as a tax-free transaction under
Section 355 of the Code, the following Federal income tax consequences would
result:
Each May shareowner would be considered to have received a taxable dividend
includable in income in an amount equal to the fair market value on the
Distribution Date of the shares received in the Distribution plus the amount of
any cash received in lieu of fractional shares. In general, if certain
conditions are met, any amount received by a corporate owner of May common
stock that is treated as a dividend would be eligible for the dividends-
received deduction.
In addition, a shareowner's basis in the shares of Common Stock received in
the Distribution would equal the fair market value of the shares on the date
the shares of Common Stock are distributed to the May shareowner, and the
shareowner's holding period for the shares will begin on the date after the
date of the Distribution. In such event, a May shareowner's basis and holding
period for the May common stock would not be affected by the Distribution.
If the Distribution is considered a taxable transaction, May would recognize
gain, but not loss, in the amount equal to the difference between the fair
market value of the shares of Common Stock distributed and May's basis in the
shares. Pursuant to the Tax Sharing Agreement, if the Distribution fails to
qualify as a tax-free distribution under certain circumstances for which the
Company is responsible, the Company is obligated to indemnify and hold May
harmless, on an after-tax basis, from any tax liability imposed upon it in
connection with the Distribution, which liability would be material to the
Company. See "TRANSACTIONS BETWEEN THE COMPANY AND MAY--Tax Sharing Agreement."
ALL SHAREOWNERS SHOULD CONSULT THEIR TAX ADVISORS AS TO THE PARTICULAR TAX
CONSEQUENCES OF THE DISTRIBUTION TO THEM, INCLUDING THE APPLICABILITY AND
EFFECT OF STATE, LOCAL AND FOREIGN TAX LAWS.
LISTING AND TRADING OF THE SHARES OF COMMON STOCK
The Common Stock has been approved for listing on the NYSE, subject to
official notice of issuance, under the symbol "PSS." The Company expects that
initially it will have approximately 43,000 owners of record of the shares of
Common Stock, based on the number of shareowners of record of May on April 4,
1996.
A "when-issued" trading market is expected to develop shortly before the
Record Date. The term "when-issued" means that shares can be traded prior to
the time certificates are actually available or issued. Prices at which the
shares of Common Stock may trade on a "when-issued" basis or after the
Distribution cannot be predicted. See "CERTAIN CONSIDERATIONS--Absence of Prior
Trading Market for the Common Stock."
58
<PAGE>
The shares of Common Stock distributed to May shareowners will be freely
transferable, except for shares received by persons who may be deemed to be
"affiliates" of the Company under the Securities Act of 1933, as amended (the
"Securities Act"). Persons who may be deemed to be affiliates of the Company
after the Distribution generally include individuals or entities that control,
are controlled by, or are under common control with, the Company and may
include the directors and principal executive officers of the Company as well
as any principal shareowner of the Company. Persons who are affiliates of the
Company will be permitted to sell their shares of Common Stock only pursuant
to an effective registration statement under the Securities Act or an
exemption from the registration requirements of the Securities Act, such as
the exemption afforded by Rule 144 thereunder.
INDEPENDENT PUBLIC ACCOUNTANTS
The board of directors of the Company expects to appoint Arthur Andersen LLP
as the Company's independent public accountants to audit the Company's
financial statements for the fiscal year 1996. Arthur Andersen LLP has served
as May's independent public accountants throughout the periods covered by the
financial statements included in this Information Statement.
59
<PAGE>
PAYLESS SHOESOURCE, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Public Accountants................................... F-2
Consolidated Statement of Earnings for the Fiscal Years 1995, 1994 and
1993...................................................................... F-3
Consolidated Balance Sheet as of February 3, 1996 and January 28, 1995..... F-4
Consolidated Statement of Cash Flows for the Fiscal Years 1995, 1994 and
1993...................................................................... F-5
Notes to Consolidated Financial Statements................................. F-6
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareowners of
The May Department Stores Company:
We have audited the accompanying consolidated balance sheet of Payless
ShoeSource, Inc. (a Missouri corporation) and subsidiaries as of February 3,
1996, and January 28, 1995, and the related consolidated statements of
earnings and cash flows for each of the three fiscal years in the period ended
February 3, 1996. These financial statements are the responsibility of the
company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Payless ShoeSource, Inc.
and subsidiaries as of February 3, 1996, and January 28, 1995, and the results
of their operations and their cash flows for each of the three fiscal years in
the period ended February 3, 1996, in conformity with generally accepted
accounting principles.
Arthur Andersen LLP
Kansas City, Missouri
February 19, 1996
F-2
<PAGE>
PAYLESS SHOESOURCE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF EARNINGS
<TABLE>
<CAPTION>
1995* 1994 1993
-------- -------- --------
(MILLIONS)
<S> <C> <C> <C>
NET RETAIL SALES..................................... $2,330.3 $2,116.4 $1,966.5
-------- -------- --------
Cost of sales........................................ 1,688.7 1,489.8 1,366.1
Selling, general and administrative expenses......... 479.9 408.4 378.7
Interest expense, net................................ 1.0 1.1 0.9
Special and nonrecurring items....................... 71.8 -- --
-------- -------- --------
Total cost of sales and expenses..................... 2,241.4 1,899.3 1,745.7
-------- -------- --------
Earnings before income taxes......................... 88.9 217.1 220.8
Provision for income taxes........................... 34.9 85.6 88.0
-------- -------- --------
NET EARNINGS......................................... $ 54.0 $ 131.5 $ 132.8
======== ======== ========
</TABLE>
- --------
*1995 contains 53 weeks.
See the Notes to Consolidated Financial Statements.
F-3
<PAGE>
PAYLESS SHOESOURCE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
FEBRUARY 3, JANUARY 28,
1996 1995
----------- -----------
(MILLIONS)
<S> <C> <C>
ASSETS
Current Assets:
Cash.................................................. $ 4.6 $ 6.6
Accounts receivable, net.............................. 4.4 4.6
Merchandise inventories............................... 398.0 393.9
Other current assets.................................. 43.9 20.4
-------- --------
Total Current Assets.................................... 450.9 425.5
Property and Equipment:
Land.................................................. 6.5 7.7
Buildings and leasehold improvements.................. 564.6 550.2
Furniture, fixtures and equipment..................... 278.7 271.0
Property under capital leases......................... 18.7 20.9
-------- --------
Total property and equipment.......................... 868.5 849.8
Accumulated depreciation and amortization............. (308.5) (259.2)
-------- --------
Property and equipment, net........................... 560.0 590.6
Goodwill................................................ 2.9 2.9
Other Assets............................................ 0.5 0.8
-------- --------
Total Assets............................................ $1,014.3 $1,019.8
======== ========
LIABILITIES AND EQUITY
Current Liabilities:
Current maturities of capital lease obligations....... $ 1.2 $ 1.5
Accounts payable...................................... 65.0 101.5
Accrued expenses...................................... 152.7 79.7
-------- --------
Total Current Liabilities............................... 218.9 182.7
Capital Lease Obligations............................... 10.3 11.6
Deferred Income Taxes................................... 8.9 9.2
Other Liabilities....................................... 23.3 22.4
Equity:
May equity investment................................. 752.9 793.9
-------- --------
Total Liabilities and Equity............................ $1,014.3 $1,019.8
======== ========
</TABLE>
See the Notes to Consolidated Financial Statements.
F-4
<PAGE>
PAYLESS SHOESOURCE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
1995 1994 1993
----- ------ ------
(MILLIONS)
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net earnings............................................. $54.0 $131.5 $132.8
Adjustments for noncash items included in earnings:
Depreciation and amortization.......................... 95.3 77.0 67.0
Deferred income taxes (noncurrent)..................... (0.3) 11.7 (1.4)
Special and nonrecurring charges....................... 71.8 -- --
Tax benefit on special and nonrecurring charges........ (28.2) -- --
Accounts receivable, net................................. 0.2 (0.6) (1.3)
Merchandise inventories.................................. (4.1) (20.4) (58.1)
Other current assets..................................... 4.7 (6.9) 0.5
Accounts payable......................................... (36.5) 11.1 25.5
Accrued expenses......................................... 1.2 26.4 (7.6)
Other assets and liabilities, net........................ 1.2 4.3 10.5
----- ------ ------
Total Operating Activities............................... 159.3 234.1 167.9
----- ------ ------
INVESTING ACTIVITIES:
Capital expenditures..................................... (95.4) (255.2) (139.8)
Disposition of property and equipment.................... 30.7 21.5 23.0
Other.................................................... -- (1.3) --
----- ------ ------
Total Investing Activities............................... (64.7) (235.0) (116.8)
----- ------ ------
FINANCING ACTIVITIES
Repayment of capital lease obligations................... (1.6) (1.4) (1.7)
Net transactions with May................................ (95.0) 1.4 (42.9)
----- ------ ------
Total Financing Activities............................... (96.6) -- (44.6)
----- ------ ------
INCREASE (DECREASE) IN CASH ............................. (2.0) (0.9) 6.5
CASH, BEGINNING OF YEAR.................................. 6.6 7.5 1.0
----- ------ ------
CASH, END OF YEAR........................................ $ 4.6 $ 6.6 $ 7.5
===== ====== ======
Cash paid during the year:
Interest............................................... $ 1.0 $ 1.2 $ 1.2
Income taxes........................................... -- -- --
</TABLE>
See the Notes to Consolidated Financial Statements.
F-5
<PAGE>
PAYLESS SHOESOURCE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.
Description of Business and Basis of Presentation. Payless ShoeSource, Inc.
("Company"), a Missouri corporation, was founded in 1956. The Company is the
largest footwear retailer in the United States. The Company operated as of
February 3, 1996, 4,549 self-service, affordably priced, family shoe stores,
of which 773 include Payless Kids expansions. The Company's stores are located
in 49 states, the District of Columbia, Puerto Rico and the United States
Virgin Islands. The Company utilizes a network of vendors and factories in 13
foreign countries and the United States to source its products which are
manufactured to meet the Company's demanding specifications and standards.
Factories in the People's Republic of China have been a source of
approximately 80% of the Company's merchandise.
On January 17, 1996, May announced that it anticipates distributing the
Company's outstanding shares of common stock (the "Common Stock") to
shareowners of May common stock (the "Distribution"). Upon consummation of the
Distribution, the Company will become independent of May. The consolidated
financial statements include the accounts of the Company and all wholly owned
subsidiaries.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts. While the financial statements
reflect all available information and management's judgement and estimates of
current conditions and circumstances, prepared with the assistance of
specialists within and outside the Company, actual results could differ from
those estimates. All dollar amounts in these notes are stated in millions,
unless otherwise noted.
Fiscal Year. The Company's fiscal year ends on the Saturday closest to
January 31. Fiscal year 1995 ended on February 3, 1996 and included 53 weeks.
Fiscal years 1994 and 1993 ended on January 28, 1995, and January 29, 1994,
respectively, and both included 52 weeks. References to years in these
financial statements and notes relate to fiscal years rather than calendar
years.
Net Retail Sales. Net retail sales (sales) represent the sales of all stores
operated during the period, are net of returns and exclude sales tax.
Cost of Sales. Cost of sales includes the cost of merchandise sold and
buying and occupancy costs.
Advertising Costs. Advertising costs are expensed at the time the
advertising takes place. Included in selling, general and administrative
expenses were advertising and sales promotion costs of $60.6, $53.4, and $46.3
in 1995, 1994 and 1993, respectively. Other current assets included $0.6 and
$0.6 in 1995 and 1994, respectively, for prepaid advertising and sales
promotion costs.
Income Taxes. The Company is included in a consolidated tax return filed by
May for Federal tax purposes. Income taxes as shown in the consolidated
statement of earnings represent the provision calculated on a separate return
basis. Effective with the beginning of 1993, the Company adopted Statement of
Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes."
The cumulative effect of adopting SFAS No. 109 was insignificant and,
therefore, no adjustments were reflected in the financial statements. SFAS No.
109 requires income taxes to be accounted for using a balance sheet approach
known as the liability method. The liability method accounts for deferred
income taxes by applying statutory tax rates in effect at the date of the
balance sheet to differences between the book and tax basis of assets and
liabilities. Adjustments to deferred taxes resulting from statutory rate
changes flow through the tax provision in the year of the change.
Accounts Receivable. Sales are made for cash or third party credit and
therefore no customer trade receivables exist. Accounts receivable represents
amounts due for damage claims, wholesale of shoes to liquidators, and sublease
rentals. Accounts receivable is shown net of a collectibility allowance of
$0.7 and $0.5, in 1995 and 1994, respectively.
F-6
<PAGE>
PAYLESS SHOESOURCE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Merchandise Inventories. Merchandise inventories are valued by the retail
method and are stated on the lower of cost or market basis.
Property and Equipment. Property and equipment are recorded at cost.
Property and equipment are depreciated on a straight-line basis over their
estimated useful lives. Investments in properties under capital leases and
leasehold improvements are amortized over the shorter of their useful lives or
their related lease terms.
Goodwill. Goodwill represents the excess of cost over the fair value of net
tangible assets at the dates of acquisition. Substantially all amounts are
amortized using the straight-line method over a 40-year period. Goodwill is
presented net of accumulated amortization of $1.7 and $1.6 in 1995 and 1994,
respectively.
Derivatives Policy. The Company's policy is to use financial derivatives
only to reduce risk in conjunction with specific business transactions. Gains
and losses related to hedges of firm commitments or anticipated transactions
are deferred and recognized in operating results or included in balance sheet
amounts when the transaction occurs. The effect of these activities is not
material to the Company's financial condition or results of operation.
2. RELATIONSHIP WITH PARENT.
May has provided services to the Company, including legal, benefit
administration, risk management and insurance, income and payroll tax
management and treasury services. These financial statements include specific
charges from May for legal and risk management and insurance services based
upon utilization and are representative of May's actual cost. These charges
were $4.2, $3.6 and $3.1 in fiscal years 1995, 1994 and 1993, respectively.
These costs could have been different had the Company operated as an
independent company during these periods.
May has allocated common expenses to the Company on an incremental basis. As
such, these financial statements do not include general corporate overhead
allocations for benefit administration, income and payroll tax management and
treasury services. The Company believes that the incremental allocation
approach is reasonable, however these financial statements may not be
indicative of the cost structure had the Company operated as an independent
company during these periods.
Historically, cash collected by the Company in excess of store operating
needs was transferred to May on a daily basis and all of the Company's cash
requirements were funded by May. The cumulative net impact of these cash
transfers and other intercompany transactions have historically been recorded
as an intercompany payable to May. Intercompany transactions include amounts
paid by May for Federal, state and local income taxes, payroll taxes and
worker's compensation and general liability claims. Accordingly, these
financial statements may not be indicative of the debt or investment structure
and related interest expense or income that might have resulted had the
Company operated as an independent company.
All intercompany debt owed to May was contributed to May equity investment
as of February 3, 1996, and therefore, has been deemed to be part of the May
equity investment in all periods presented. No interest expense has been
charged to the Company relating to the intercompany debt balances since May
does not carry any debt that is specifically related to the Company.
The Company will continue to use May to process and settle the worker's
compensation and general liability claims incurred prior to the Distribution
in accordance with various agreements. The charges for these services will
approximate May's cost of providing the services.
3. SPECIAL AND NONRECURRING ITEMS.
During the 1995 fourth quarter, in connection with the Distribution, the
Company committed to close or relocate approximately 450 unprofitable stores.
In addition, the Company implemented a plan to reduce central office overhead
by means of census reduction. A pretax special and nonrecurring charge of
$71.8 was recorded for these initiatives.
F-7
<PAGE>
PAYLESS SHOESOURCE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The special and nonrecurring charge is comprised of the following:
<TABLE>
<CAPTION>
NON-
CASH CASH TOTAL
----- ----- -----
<S> <C> <C> <C>
Property and equipment write-off and other store closing
costs....................................................... $38.2 $29.9 $68.1
Employee severance costs..................................... 3.7 -- 3.7
----- ----- -----
Total...................................................... $41.9 $29.9 $71.8
===== ===== =====
</TABLE>
The noncash expenses represent the write-off of leasehold improvements,
fixtures and equipment upon store closing or relocation. Management
anticipates that the special and nonrecurring items will be completed in one
year.
In March 1995, Statement of Financial Accounting Standards (SFAS) No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed Of," was issued. This statement requires that long-lived assets
and certain identifiable intangibles to be held and used or disposed of by an
entity be reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. The
statement is effective for fiscal years beginning after December 15, 1995;
however, May, and therefore the Company, adopted this statement in 1995. There
is no impact to the Company in addition to the amounts reflected in the
special and nonrecurring items. The value of the long-lived assets included in
the special and nonrecurring items was estimated using fair value less cost to
sell. The write-off is predominately book value related to assets to be
abandoned.
In connection with the Distribution, the Company has a Spin-off Stock Plan
and a Spin-off Cash Plan. Under these retention programs, the Company will pay
out up to 375,000 shares of restricted stock with no exercise price and cash
payments of amounts ranging from 10% to 37.5% of associates' base salaries.
These retention incentives are contingent upon continued employment for up to
two years subsequent to the Distribution Date. The expense related to these
incentives will be expensed as earned during the retention period. Estimates
of these expenses (unaudited) by fiscal year are as follows:
<TABLE>
<S> <C>
1996............................... $10.4
1997............................... 4.1
1998............................... 0.7
</TABLE>
4. MAY EQUITY INVESTMENT.
The following analyzes May's investment in the Company for the fiscal years
presented:
<TABLE>
<CAPTION>
1995 1994 1993
------ ------ ------
<S> <C> <C> <C>
Balance at beginning of the fiscal year................. $793.9 $661.0 $571.1
Net earnings............................................ 54.0 131.5 132.8
Intercompany transactions with May:
Net cash transfers (to) from May for:
Operating activities................................ (168.9) (242.8) (175.6)
Capital expenditures, net........................... 64.7 233.7 116.8
Increase (decrease) cash balances................... (2.0) (0.9) 6.5
Repayment of capital lease obligations.............. 1.6 1.4 1.7
Other............................................... -- 1.3 --
------ ------ ------
Net cash transfers.................................. (104.6) (7.3) (50.6)
Intercompany allocations.............................. 9.6 8.7 7.7
------ ------ ------
Net intercompany transactions with May.................. (95.0) 1.4 (42.9)
------ ------ ------
Balance at end of fiscal year........................... $752.9 $793.9 $661.0
====== ====== ======
</TABLE>
F-8
<PAGE>
PAYLESS SHOESOURCE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
May equity investment includes the original investment in the Company and
the net intercompany payable from the Company reflecting transactions
described in Note 2. Intercompany allocations represent costs for specific
services discussed in Note 2, profit sharing expense discussed in Note 5 and
pension costs discussed in Note 6.
5. PROFIT SHARING.
Associates of the Company participated in The May Department Stores Company
Profit Sharing Plan ("May Plan"), a qualified profit sharing plan which covers
substantially all associates who are paid for 1,000 hours or more in a year
and have attained age 21. The May Plan is a defined contribution plan which
provides for discretionary matching allocations at a variable matching rate
generally based upon changes in May's annual earnings per share, as defined in
the May Plan. During the period when Company associates were covered under the
May Plan, May allocated employer contribution expense to the Company based
upon its associate contributions and an estimate of the annual variable match
rate. The Company's expense under the May Plan was $1.8, $2.3 and $2.3 in
1995, 1994 and 1993, respectively.
6. PENSION.
Associates of the Company participated in The May Department Stores Company
Retirement Plan ("May Retirement Plan") covering substantially all associates
who are paid for 1,000 hours or more in a year and have attained age 21. The
May Retirement Plan is noncontributory and provides benefits based upon years
of service and pay during employment. Pension expense was charged to the
Company by May based upon the Company's actuarially determined portion of
service costs. The expense charged to the Company was $3.6, $2.8 and $2.3 in
1995, 1994 and 1993, respectively.
Company associates who were covered by the May Retirement Plan prior to the
Distribution Date will continue to vest in the benefits earned under that
plan. Benefits accrued through the Distribution Date will be "frozen" and paid
out in the future.
7. TAXES.
The provision for income taxes and related percent of pretax earnings for
the last three years were as follows:
<TABLE>
<CAPTION>
1995 1994 1993
------------ ---------- ----------
$ % $ % $ %
----- ----- ----- ---- ----- ----
<S> <C> <C> <C> <C> <C> <C>
Current Provision:
Federal................................ $50.7 $62.6 $64.1
State and local........................ 11.0 15.1 15.8
----- ----- ----- ---- ----- ----
Taxes currently payable................ 61.7 69.4% 77.7 35.8% 79.9 36.2%
Deferred Provision:
Federal................................ (22.0) 6.5 6.6
State and local........................ (4.8) 1.4 1.5
----- ----- ----- ---- ----- ----
Deferred taxes......................... (26.8) (30.1)% 7.9 3.6% 8.1 3.6%
----- ----- ----- ---- ----- ----
Total Provision...................... $34.9 39.3% $85.6 39.4% $88.0 39.8%
===== ===== ===== ==== ===== ====
</TABLE>
The reconciliation between the statutory Federal income tax rate and the
effective income tax rate for the last three years follows:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Statutory Federal income tax rate............................. 35.0% 35.0% 35.0%
State and local income taxes.................................. 7.0 7.6 7.8
Federal tax benefit of state and local income taxes........... (2.5) (2.6) (2.7)
Other, net.................................................... (0.2) (0.6) (0.3)
---- ---- ----
Effective income tax rate..................................... 39.3% 39.4% 39.8%
==== ==== ====
</TABLE>
F-9
<PAGE>
PAYLESS SHOESOURCE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Major components of deferred tax assets and (liabilities) were as follows:
<TABLE>
<CAPTION>
FEBRUARY 3, JANUARY 28,
1996 1995
----------- -----------
<S> <C> <C>
Accrued expenses and reserves........................... $40.3 $13.4
Depreciation/amortization and basis differences......... (14.5) (14.5)
Other deferred income tax liabilities, net.............. 5.1 5.1
----- -----
Net deferred income taxes............................... 30.9 4.0
Net current deferred income tax assets.................. 39.8 13.2
----- -----
Noncurrent deferred income taxes........................ $(8.9) $(9.2)
===== =====
</TABLE>
Net current deferred income tax assets are included in other current assets
in the accompanying balance sheet. Taxes other than income taxes consisted of:
<TABLE>
<CAPTION>
1995 1994 1993
----- ----- -----
<S> <C> <C> <C>
Payroll...................................................... $31.4 $27.4 $24.7
Real estate and personal property............................ 31.2 26.2 22.7
----- ----- -----
Total...................................................... $62.6 $53.6 $47.4
===== ===== =====
</TABLE>
8. OTHER CURRENT ASSETS.
In addition to net current deferred income tax assets, other current assets
consisted of prepaid expenses and supply inventories.
9. ACCRUED EXPENSES.
Components of accrued expenses included:
<TABLE>
<CAPTION>
FEBRUARY 3, JANUARY 28,
1996 1995
----------- -----------
<S> <C> <C>
Special and nonrecurring charges........................ $ 68.4 $ --
Insurance costs......................................... 29.0 24.0
Taxes other than income................................. 19.8 14.2
Construction costs...................................... 11.2 18.5
Interest and rent expense............................... 9.3 5.6
Salaries, wages and employee benefits................... 4.8 5.2
Accrued escalating rent (current portion)............... 3.0 2.9
Advertising expenses.................................... 1.7 1.9
Other operating expenses................................ 5.5 7.4
------ -----
Total................................................. $152.7 $79.7
====== =====
</TABLE>
10. LEASE OBLIGATIONS.
The Company leases substantially all of its stores.
Rental expense for the Company's operating leases consisted of:
<TABLE>
<CAPTION>
1995 1994 1993
------ ------ ------
<S> <C> <C> <C>
Minimum rentals........................................... $221.3 $184.7 $161.4
Contingent rentals based on sales......................... 3.0 4.2 4.9
------ ------ ------
Real property rentals..................................... 224.3 188.9 166.3
Equipment rentals......................................... 0.7 0.6 0.7
------ ------ ------
Total................................................... $225.0 $189.5 $167.0
====== ====== ======
</TABLE>
F-10
<PAGE>
PAYLESS SHOESOURCE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company has certain lease agreements that include escalating rents over
the lease term. Cumulative expense recognized on the straight-line basis in
excess of cumulative payments is $26.3, and is included in accrued expenses
and other liabilities.
Future minimum lease payments at February 3, 1996, were as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES TOTAL
------- --------- --------
<S> <C> <C> <C>
1996................................................ $ 2.4 $ 214.5 $ 216.9
1997................................................ 2.4 195.0 197.4
1998................................................ 2.4 176.9 179.3
1999................................................ 2.4 158.5 160.9
2000................................................ 1.5 136.8 138.3
After 2001.......................................... 6.9 337.2 344.1
----- -------- --------
Minimum lease payments.............................. 18.0 $1,218.9 $1,236.9
----- -------- --------
Less imputed interest component..................... 6.5
-----
Present value of net minimum lease payments of which
$1.2 is included in current liabilities............ $11.5
=====
</TABLE>
The present value of operating leases was $885.5 at February 3, 1996.
Property under capital leases is summarized as follows:
<TABLE>
<CAPTION>
FEBRUARY 3, JANUARY 28,
1996 1995
----------- -----------
<S> <C> <C>
Cost.................................................... $18.7 $20.9
Accumulated amortization................................ (11.7) (12.8)
----- -----
Total................................................... $ 7.0 $ 8.1
===== =====
</TABLE>
11. QUARTERLY RESULTS (UNAUDITED).
Summarized quarterly data for 1995 and 1994 is as follows:
<TABLE>
<CAPTION>
1995
--------
QUARTER FIRST SECOND THIRD FOURTH YEAR
------- ------ ------ ------ ------ --------
<S> <C> <C> <C> <C> <C>
Net Retail Sales................... $569.6 $622.7 $586.4 $551.6 $2,330.3
------ ------ ------ ------ --------
Cost of Sales...................... $403.6 $445.7 $421.9 $417.5 $1,688.7
------ ------ ------ ------ --------
Net Earnings (Loss)................ $ 26.5 $ 34.2 $ 25.7 $(32.4)(1) $ 54.0(1)
====== ====== ====== ====== ========
</TABLE>
- --------
(1) Net earnings, excluding special and nonrecurring items, are $11.1 and
$97.5, respectively.
<TABLE>
<CAPTION>
1994
--------
QUARTER FIRST SECOND THIRD FOURTH YEAR
------- ------ ------ ------ ------ --------
<S> <C> <C> <C> <C> <C>
Net Retail Sales.......................... $516.7 $544.6 $540.1 $515.0 $2,116.4
------ ------ ------ ------ --------
Cost of Sales............................. $356.5 $381.6 $376.2 $375.5 $1,489.8
------ ------ ------ ------ --------
Net Earnings.............................. $ 34.4 $ 37.3 $ 34.5 $ 25.3 $ 131.5
====== ====== ====== ====== ========
</TABLE>
F-11
<PAGE>
Map showing store locations by state at fiscal 95 year end.
<PAGE>
[Payless Shoe Source LOGO]
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE
------- ----------- ----
<C> <S> <C>
2.1 Distribution Agreement, dated as of April 2, 1996, between
The May Department Stores Company ("May") and the Regis-
trant.*
3.1 Amended and Restated Articles of Incorporation of the Regis-
trant.*
3.2 Amended and Restated Bylaws of the Registrant.*
4.1 Rights Agreement, dated as of April 2, 1996, between the Reg-
istrant and The Bank of New York, as Rights Agent.*
10.1 Tax Sharing Agreement, dated as of April 2, 1996, between May
and the Registrant.*
10.2 Sublease, dated as of April 2, 1996, between May and the Reg-
istrant.*
10.3 Form of Multicurrency Credit Agreement, dated as of
, 1996 among the Registrant, several financial in-
stitutions and Bank of America National Trust and Savings
Association.**
10.4 Administrative Services Agreement, dated as of April 2, 1996,
between May and the Registrant.*
10.5 Payless ShoeSource, Inc. 1996 Stock Incentive Plan.**
10.6 Payless ShoeSource, Inc. Spin-Off Stock Plan.**
10.7 Payless ShoeSource, Inc. Spin-Off Cash Plan.**
10.8 Payless ShoeSource, Inc. Restricted Stock Plan for Non-Man-
agement Directors.**
10.9 Form of Employment Agreement between the Registrant and cer-
tain executives of the Registrant.**
10.10 Payless ShoeSource, Inc. Supplementary Retirement Plan.**
10.11 Payless ShoeSource, Inc. Profit Sharing Plan.**
10.12 Payless ShoeSource, Inc. Deferred Compensation Plan.**
10.13 Payless ShoeSource, Inc. Executive Incentive Compensation
Plan for Payless Executives.**
10.14 Form of Management Severance Agreement.**
10.15 Form of Indemnification Agreement.**
21.1 Subsidiaries of the Registrant.**
</TABLE>
- --------
* Filed herewith.
**Previously filed.
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
EXHIBIT VOLUME
AMENDMENT NO. 2
TO
FORM 10/A
OF
PAYLESS SHOESOURCE, INC.
----------------
VOLUME I OF I
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
DISTRIBUTION AGREEMENT
Distribution Agreement (the "Agreement"), dated as of April 2, 1996, by and
between THE MAY DEPARTMENT STORES COMPANY ("May") and PAYLESS SHOESOURCE, INC.
("Payless").
RECITALS
WHEREAS, Payless is presently a wholly-owned subsidiary of May; and
WHEREAS, May has determined that it is in the best interest of May, Payless
and the shareowners of May to distribute to the holders of May common stock all
of the outstanding shares of Payless common stock (the "Distribution"); and
WHEREAS, it is the intention of May that, following the Distribution, May
shall own no shares of Payless common stock; and
WHEREAS, in connection with the Distribution, May and Payless have entered
or will enter into the Tax Sharing Agreement, the Sublease, the Administrative
Services Agreement and certain other agreements (collectively, the "Ancillary
Agreements"); and
WHEREAS, the Parties have determined that it is necessary and desirable to
set forth certain understandings and agreements in connection with the
Distribution;
NOW THEREFORE, in consideration of the foregoing premises and the mutual
agreements, provisions and covenants contained in this Agreement, the Parties
hereby agree as follows:
DEFINITIONS
As used herein, the following terms have the following meanings:
ACTION means any claim, suit, action, litigation, arbitration, inquiry,
subpoena, discovery request, proceeding, investigation, dispute, violation or
citation (or any threat of any of the foregoing), whenever, however and wherever
initiated, however, whenever and wherever arising, and however denominated.
AFFILIATE means, with respect to any entity, another entity directly or
indirectly controlling, controlled by or under common control with such entity.
BUSINESS means the Payless Group together with the business, assets,
liabilities, operations, occupancies and employee benefit and other plans of the
Payless Group.
1
<PAGE>
COMMISSION means the Securities and Exchange Commission.
DISTRIBUTION AGENT has the meaning ascribed to it in the Form 10.
DISTRIBUTION DATE means the business day as of which the Distribution shall
be effective, as determined by the board of directors of May.
EXCHANGE ACT means the Securities Exchange Act of 1934, as amended.
EXECUTIVES means current and former directors, officers and employees,
including any current and former in-house professionals (such as architects,
engineers, accountants, lawyers, risk management and insurance executives, tax
advisors, pension or other plan administrators, and similar and dissimilar
professionals).
FORM 10 means the Registration Statement on Form 10 filed by Payless with
the Commission to effect the registration of the Payless common stock pursuant
to the Exchange Act, as such registration statement may be amended from time to
time.
INFORMATION STATEMENT means the information statement to be sent to each
holder of May common stock in connection with the Distribution.
LOSSES means any and all losses, liabilities, claims, damages (including
exemplary and punitive damages), judgments, awards, fines, penalties,
obligations, payments, costs and expenses, including, without limitation, the
costs and expenses of any and all Actions, demands, assessments, judgments,
settlements, and compromises relating thereto and reasonable attorney fees
(including in-house counsel costs) and other legal expenses in connection
therewith.
MAY GROUP means May and its Affiliates other than the Payless Group.
PARTIES means May and Payless, and Party means May or Payless as the
context requires.
PAYLESS GROUP means Payless and its direct and indirect subsidiaries as of
the Distribution Date.
RECORD DATE means the date in 1996 determined by May's board of directors
as the record date for determining the shareowners of May entitled to receive
Payless common stock in connection with the Distribution.
Capitalized terms used herein which are not defined herein shall have the
same meaning as in the Form 10.
2
<PAGE>
ARTICLE I
THE DISTRIBUTION
Section 1.1. May and Payless shall prepare, and May shall mail to the
holders of May common stock as of the Record Date, the Information Statement
which shall set forth appropriate disclosure concerning Payless, the
Distribution and any other appropriate matters. May and Payless shall also
prepare, and Payless shall file with the Commission, the Form 10 which shall
include or incorporate by reference the Information Statement. May and Payless
shall use reasonable efforts to cause the Form 10 to become effective under the
Exchange Act; provided, however, that nothing contained in this Agreement shall
create an obligation for May to complete the Distribution, it being understood
that May, in its sole discretion, will decide if and when the Distribution shall
occur.
Section 1.2. May and Payless shall cooperate in preparing, filing with the
Commission and causing to become effective any registration statements or
amendments thereto that are appropriate to reflect the establishment of or
amendments to any Payless employee benefit and other plans described in the Form
10.
Section 1.3. May and Payless shall take all such action as may be
necessary or appropriate under the securities or blue sky laws of states or
other political subdivisions of the United States in connection with the
transactions contemplated by this Agreement.
Section 1.4. Payless shall prepare, file and pursue an application to
permit the listing of the Payless common stock on the New York Stock Exchange.
Section 1.5. May's board of directors may, in its discretion, establish
the Record Date and the Distribution Date and any appropriate procedures in
connection with the Distribution. In no event shall the Distribution occur
unless the following conditions shall, unless waived by May, have been
satisfied:
(a) all necessary regulatory approvals shall have been received;
(b) the Form 10 shall have become effective under the Exchange Act;
(c) Payless' board of directors shall have been elected by May, as
sole shareowner of Payless, and the Payless Certificate and Payless By-Laws
shall be in effect;
(d) May's board of directors shall have formally approved the
Distribution and shall not have abandoned, deferred or modified the Distribution
at any time prior to the Record Date;
(e) May shall have received an opinion of counsel acceptable to it
with respect to the federal income tax consequences of the Distribution;
3
<PAGE>
(f) there shall have been no adverse change in the financial
condition of either May or Payless from the date hereof; and
(g) there shall have been no adverse change in market conditions from
the date hereof.
Section 1.6. On the Distribution Date or as soon thereafter as
practicable, subject to the conditions set forth in this Agreement, May shall
deliver to the Distribution Agent a certificate or certificates representing all
of the then outstanding shares of Payless held by May, endorsed in blank, and
shall instruct the Distribution Agent to distribute to each holder of record of
May common stock on the Record Date a certificate or certificates representing
such holder of record's allotted share(s) of Payless common stock as determined
by May's board of directors. Payless agrees to provide all certificates for
shares of Payless common stock that the Distribution Agent shall require in
order to effect the Distribution.
Section 1.7. No certificates or scrips representing any fractional shares
of Payless common stock will be issued to May common stock shareowners as part
of the Distribution. In lieu of receiving fractional shares, each holder of May
common stock who would otherwise be entitled to receive a fractional share of
Payless common stock pursuant to the Distribution will receive cash for such
fractional share as provided in the Form 10. Payless and May agree that May
shall instruct the Distribution Agent to determine the number of whole shares
and fractional shares of Payless common stock allocable to each holder of record
of May common stock as of the Record Date, to aggregate all such fractional
shares into whole shares and to sell the whole shares thereby obtained in the
open market at then prevailing prices on behalf of holders who otherwise would
be entitled to receive fractional share interests and to distribute to each such
holder such holder's ratable share of the net proceeds of such sale.
Section 1.8. The fees and expenses of the Distribution Agent shall be paid
by May.
ARTICLE II
ASSUMPTION, INDEMNITY AND RELEASE
Section 2.1.
(a) COMPREHENSIVE OBLIGATIONS, CLAIMS AND LIABILITIES. Payless, on its
behalf and on behalf of the Payless Group, does hereby assume and agree to pay,
perform and discharge all obligations, liabilities and Losses in any way arising
out of or relating to the Business (whether known or unknown, absolute,
contingent or otherwise, matured or not matured, accrued or unaccrued, of
whatever nature and whenever arising and regardless of when discovered, and
including contingent liabilities and obligations as have accrued or will accrue
to the May Group relating to the past, present or future Business), or to acts
or events occurring or conditions existing with respect to the Business, whether
before, on or
4
<PAGE>
after the Distribution Date, including without limitation (a) all contracts,
agreements, commitments, undertakings, notes, letters of credit, bonds,
guarantees, warranties, indemnities, accounts payable, purchase orders, leases,
licenses, liens, mortgages, restrictions and covenants, (b) all employee or
employment related obligations and liabilities, (c) all environmental conditions
and responsibilities (including without limitation hazardous and toxic waste and
material), and (d) all Actions, including those relating to damage or injury to
person, property, business or reputation (all of the foregoing collectively the
"Assumed Liabilities"); PROVIDED, HOWEVER, that the Assumed Liabilities do not
include the obligations of May pursuant, and subject to the provisions of, the
Ancillary Agreements. The Assumed Liabilities include, but are in no way
limited by, the obligations and liabilities of the Payless Group set forth in
the Form 10. The Payless Group's obligations with respect to the Assumed
Liabilities shall be unconditional and primary and shall be without regard to,
and shall not be offset or limited by, any reserves that are or may have been
recorded on the books of the May Group or the Payless Group.
(b) INDEMNITIES AGAINST ASSUMED LIABILITIES. The Payless Group shall
jointly and severally indemnify, protect, defend and hold harmless the May Group
and each of its successors, assigns, officers, directors, employees and benefit
plans, including ERISA plans (each, an "Indemnified Person" and, where the
context so requires, an "Indemnified May Person") from and against any and all
Assumed Liabilities, regardless of any negligence of the Indemnified Party that
might have given rise or contributed thereto, and shall reimburse to such
Indemnified Person all costs reasonably incurred by such Indemnified Person on
account of the Assumed Liabilities. The obligations of Payless and the Payless
Group pursuant hereto shall in no way be limited or be deemed modified by reason
of the May Group administering certain of those claims pursuant to the
Administrative Services Agreement entered into between Payless and May.
(c) EMPLOYEE OBLIGATIONS AND INDEMNITIES. Without limiting Section 2.1(a)
or (b), the Payless Group jointly and severally agrees to pay all amounts due to
its employees under any employment contract, arrangement or other employment
agreement, payroll practice or employee benefit plan and to make no changes or
amendments to any employee benefit plan after the date of the Distribution which
would diminish the vested interest of any employee with respect to such benefit
plan. Further, the Payless Group jointly and severally agrees to indemnify,
protect, defend and hold harmless the May Group against all Actions by employees
with respect to amounts due to Payless Group employees under any employment
contract, arrangement or other employee agreement, benefit plan or payroll
practice.
Section 2.2. SECURITIES INDEMNITY.
(a) By Payless. Payless shall indemnify, protect, defend and hold harmless
each Indemnified May Person (and shall reimburse such Indemnified May Person for
all costs and expenses reasonably incurred) with respect to any and all Losses
of such Indemnified May Person arising out of or due to, directly or indirectly,
any claim that the information provided by the Payless Group and included in the
Information Statement or the Form 10,
5
<PAGE>
is false and misleading with respect to any material fact or omits to state any
material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading or any failure to perform or violation of any provision of this
Agreement by the Payless Group.
(b) By May. May shall indemnify, protect, defend and hold harmless the
Payless Group and each of its successors, assigns, officers, directors,
employees and benefit plans, including ERISA plans (each, an "Indemnified
Person" and, where the context so requires, an "Indemnified Payless Person")
(and shall reimburse such Indemnified Payless Person for all costs and expenses
reasonably incurred) with respect to any and all Losses of such Indemnified
Payless Person arising out of or due to, directly or indirectly, any claim that
the information provided by the May Group and included in the Information
Statement or the Form 10, is false and misleading with respect to any material
fact or omits to state any material fact required to be stated therein or
necessary in order to make the statements therein, in light of the circumstances
under which they were made, not misleading or any failure to perform or
violation of any provision of this Agreement by the May Group; PROVIDED,
HOWEVER, that under no circumstance shall May be required to indemnify any
Indemnified Payless Person where the information at issue (or the data from
which such information was derived) was supplied to the May Group by the Payless
Group or an Indemnified Payless Person.
Section 2.3. PROCEDURES.
(a) In order for an Indemnified Person to be entitled to the benefits of
Section 2.1(b), Section 2.1(c) or Section 2.2 with respect to a claim by a third
party ("Third Party Claim"), such Indemnified Person shall notify the indemnitor
promptly after receipt by such Indemnified Person of notice of the Third Party
Claim; PROVIDED, HOWEVER, that failure to give such notification shall not
affect the indemnification provided hereunder except to the extent that the
indemnitor shall have been actually prejudiced as a result of such failure.
Thereafter, the Indemnified Person shall deliver to the indemnitor promptly
after the Indemnified Person's receipt thereof, copies of all notices and
documents (including court papers) received by the Indemnified Person with
respect to the Third Party Claim.
(b) If a Third Party Claim is made against an Indemnified Person, the
indemnitor shall defend and shall have the right to compromise, at its own
expense, the Third Party Claim. The Indemnified Person will cooperate, at the
expense of the indemnitor in connection with such defense. Such cooperation
shall include the retention and, upon the indemnitor's request, the provision to
the indemnitor of records, compilations and information which are, in the
indemnitor's reasonable opinion, relevant to such Third Party Claim, access to
premises and making employees available on a mutually convenient basis to be
interviewed, to testify and to provide additional information and explanation of
any material provided. The Indemnified Person shall have the right, at its own
expense, to participate in the defense of a Third Party Claim. In no event
shall an Indemnified Person compromise a Third Party Claim without the
reasonable consent of the indemnitor. The indemnitor shall not, without the
reasonable consent of the Indemnified Person,
6
<PAGE>
compromise, or refuse to compromise, a Third Party Claim which seeks or provides
for equitable relief or otherwise affects the operations or the contingent
liabilities of the Indemnified Person.
Section 2.4. ANCILLARY AGREEMENTS. Nothing in this Agreement shall be
construed to limit in any way the terms of any Ancillary Agreement.
Section 2.5. INTENT. By way of amplification and not limitation, the
intent of the Parties, as between themselves, is that, subject to the Ancillary
Agreements and the releases and waivers contained in Section 2.6 of this
Agreement, (a) the Payless Group and the May Group shall be considered as if
they had never been Affiliates, (b) all actions, by whomsoever taken or omitted,
relating to the Business on or prior to the Distribution Date shall be deemed
taken or omitted by the Payless Group, and (c) the Payless Group shall
indemnify, protect, defend and hold harmless the May Group from all liabilities
relating to the Business accruing before, on or after the Distribution Date.
Section 2.6. RELEASE AND WAIVER.
(a) By the May Group. May, on its behalf and on behalf of the May Group,
does hereby waive irrevocably in favor of, release, remise, acquit, forever
discharge, and shall forever be barred from asserting against, the Payless Group
and the Payless Executives all, of all and from all Actions and Losses that the
May Group may have or claims to have against the Payless Group or the Payless
Executives, for events, acts or omissions occurring or taken on or prior to the
Distribution Date, including, without limitation, errors, omissions,
malpractice, breach of fiduciary duty, ultra vires acts and other similar or
dissimilar acts or omissions which have been, could be or might be asserted by
the May Group against the Payless Group or any Payless Executives for acts or
omissions in the conduct of affairs for, or advice or counsel to, the May Group
on or prior to the Distribution Date. Nothing contained in this Section 2.6(a)
shall apply to, or limit the scope of, Section 2.1 or Section 2.2(a) hereof.
(b) By the Payless Group. Payless, on its behalf and on behalf of the
Payless Group, does hereby waive irrevocably in favor of, release, remise,
acquit, forever discharge, and shall forever be barred from asserting against,
the May Group and the May Executives all, of all and from all Actions and Losses
that the Payless Group may have or claims to have against the May Group or the
May Executives, for events, acts or omissions occurring or taken on or prior to
the Distribution Date, including, without limitation, errors, omissions,
malpractice, breach of fiduciary duty, ultra vires acts and other similar or
dissimilar acts or omissions which have been, could be or might be asserted by
the Payless Group against the May Group or any May Executives for acts or
omissions in the conduct of affairs for, or advice or counsel to, the Payless
Group on or prior to the Distribution Date. Nothing contained in this Section
2.6(b) shall apply to, or limit the scope of, Section 2.2(b) hereof.
7
<PAGE>
ARTICLE III
MISCELLANEOUS
Section 3.1. DIFFERING FACTS. It is understood and agreed by and between
Payless and May that the facts and assumptions in respect of which this
Agreement is made may hereafter prove to be other than or different from the
facts and assumptions now known or made by either of them, or believed by either
of them to be true. Each of Payless and May expressly accepts and assumes the
risk of the facts and assumptions proving to be different, and each of them
agrees that all the terms and conditions of this Agreement shall be in all
respects effective and not subject to termination or rescission by any such
difference in facts or assumptions.
Section 3.2. DUE INQUIRY. Each of Payless and May represents and
warrants to the other that it (a) has made due and diligent inquiry into the
facts and matters which are the subject matter of this Agreement; (b) fully
understands the legal effect of this Agreement; and (c) is duly authorized and
empowered to execute, deliver and perform this Agreement according to its terms
and conditions.
Section 3.3. NON-RECOURSE. May makes no (and specifically disclaims all)
representations and warranties whatsoever, including without limitation that
there are any rights or interests associated with the Business or the Assumed
Liabilities. The Payless Group shall have no recourse whatsoever, and hereby
waives all recourse, against the May Group in connection with, arising from or
relating to the Business or the Assumed Liabilities.
Section 3.4. GOVERNING LAW; SUBMISSION TO JURISDICTION; INJUNCTION. This
Agreement shall be deemed an agreement and contract made under the laws of the
State of Delaware and all matters arising under, growing out of, or in
connection with this Agreement shall, for all purposes, be governed
substantively and, to the extent the courts specified below must or may follow
State procedural laws, procedurally, including periods for limitations of
actions, by, and construed in accordance with, the laws of the State of
Delaware, without giving effect to such State's conflict of laws rules or
principles.
The Parties agree that any legal action or proceeding between them arising
under, growing out of, or in connection with this Agreement shall be brought
only in, and tried by the United States District Court for the Eastern District
of Missouri or, absent subject matter jurisdiction by such Federal Court, in the
Circuit Court of the State of Missouri for the City of St. Louis.
Each Party (and each person or entity who is bound or benefitted by this
Agreement) irrevocably (a) submits itself to the personal jurisdiction of such
courts (but only for any action or proceeding in connection with this Agreement
and not for any other purpose whatsoever) and, if and only if, it is not present
or does not have an agent for service of process in the territorial jurisdiction
of such courts, consents to the service of process outside
8
<PAGE>
the territorial jurisdiction of such courts in any such action or proceeding in
connection with the Agreement by mailing copies thereof by (i) certified or
registered, return receipt requested United States mail, postage prepaid, if
mailed to a United States of America address or (ii) internationally recognized
private mail carrier (with evidence of delivery or attempted delivery), if
mailed to an address outside the United States of America, all charges billed to
or paid by sender, in each case to the recipient's last known address, (b)
agrees that it will not attempt to deny or defeat such personal jurisdiction by
motion or other request for leave from any such court, and (c) agrees that it
will not bring any action in whole or in part arising under, growing out of, or
in connection with this Agreement or any of the transactions contemplated by
this Agreement in any court other than a court of the United States sitting in
and for the Eastern District of Missouri or, absent subject matter jurisdiction
by such Federal Court, in the Circuit Court of the State of Missouri for the
City of St. Louis.
The Parties agree that irreparable damage would occur in the event that any
of the provisions of this Agreement were not performed in accordance with their
specific terms or were otherwise breached. It is accordingly agreed that the
Parties shall be entitled to an injunction or injunctions to prevent breaches of
this Agreement and to enforce specifically the terms and provisions of this
Agreement in the courts and as provided above in this section, such injunctive
relief being in addition to any other remedy to which such Party is entitled at
law or in equity.
Section 3.5. THIRD PARTY BENEFICIARIES. Except for each Indemnified
Person and the Payless and May Executives, all of which are intended
beneficiaries of the provisions of this Agreement referring to them, neither
this Agreement nor any provision hereof shall inure to the benefit of any person
or entity other than the Payless Group and the May Group.
Section 3.6. SEVERABILITY. The provisions of this Agreement shall be
severable if any of the provisions herein (including any provisions within a
single section, paragraph or sentence) are held by a court of competent
jurisdiction to be invalid, void or otherwise unenforceable, and the remaining
provisions shall remain enforceable to the fullest extent permitted by law. To
the extent feasible, any provision held invalid, void or unenforceable shall be
reformed so as to make it valid and enforceable and to reflect as nearly as
possible the intent of the Parties (including that set forth in Section 2.5
hereof).
Section 3.7. ENTIRETY OF AGREEMENT. This Agreement constitutes the entire
understanding of the Parties with respect to the subject matter hereof,
superseding all negotiations, prior discussions and prior agreements and
understandings relating to such subject matter. This Agreement does not govern
the Ancillary Agreements.
Section 3.8. AMENDMENT AND WAIVER. This Agreement may not be altered or
amended except by an instrument in writing executed by the Party or Parties to
be charged with such amendment. No term or provision of this Agreement shall
be deemed waived and no breach excused, unless such waiver or consent is in
writing and signed by the Party
9
<PAGE>
claimed to have waived or consented. No waiver shall constitute a continuing
waiver, and no waiver of a provision shall be deemed or construed to constitute
a waiver of any other provision whether similar or not.
Section 3.9. ASSIGNMENT/DELEGATION. Neither Party hereto may assign its
rights or delegate any of its duties under this Agreement without the prior
written consent of the other Party. This Agreement shall be binding upon, and
shall inure to the benefit of, the Parties hereto and their respective
successors and permitted assigns.
Section 3.10. NOTICES. All notices and other communications hereunder
shall be in writing and delivered by hand, by facsimile, by United States Postal
Service, postage prepaid, registered or certified mail (return receipt
requested) or by reputable overnight courier service (charges paid by sender,
next business day delivery and delivery verification requested) and shall be
deemed given (a) when delivered by hand, (b) when transmitted by facsimile (with
either (i) receipt confirmed or (ii) hard copy deposited within one business day
of such transmission with a reputable overnight courier service as above
provided), (c) three business days after mailing if mailed through the United
States Postal Service as above provided, or (d) one business day after
depositing with a reputable overnight courier service as above provided, in each
case addressed to the Parties as follows:
(a) if to May:
The May Department Stores Company
611 Olive Street
St. Louis, Missouri 63101
Attention: General Counsel
Facsimile: (314) 342-6384
(b) if to Payless:
Payless ShoeSource, Inc.
3231 East 6th Street
Topeka, Kansas 66607
Attention: Chairman
Facsimile: (913) 295-6804
subject to the right of each Party to designate a different address in the
United States and/or addressee by notice similarly given at least 15 days before
the effectiveness of such new designation.
10
<PAGE>
IN WITNESS WHEREOF, this Distribution Agreement has been signed by the duly
authorized officers of each of the Parties hereto as of the date first written
above.
<TABLE>
<CAPTION>
<S> <C>
THE MAY DEPARTMENT STORES COMPANY PAYLESS SHOESOURCE, INC.
By: /s/Louis J. Garr, Jr. By: /s/Richard A. Brickson
------------------------------------------ --------------------------------------------------
Title: Executive Vice President & General Counsel Title: Vice President & Secretary
------------------------------------------ ---------------------------------------------
Attest by: /s/Susan Traylor Bittick Attest by: /s/Steven M. Weinstein
------------------------------------- ------------------------------------------
Assistant Secretary Assistant Secretary
SEAL SEAL
</TABLE>
11
<PAGE>
Exhibit 3.1
AMENDED AND RESTATED ARTICLES OF INCORPORATION
OF
PAYLESS SHOESOURCE, INC.
Pursuant to the provisions of Section 351.106 of the Missouri General
and Business Corporation Law (the "GBCL"), the undersigned Corporation,
originally incorporated under the name Volume Distributors, Inc. on October 30,
1961, pursuant to a resolution adopted by its sole shareholder as of April 30,
1996, hereby executes its Amended and Restated Articles of Incorporation:
"FIRST -- The name of the corporation is Payless ShoeSource, Inc.
(the "Corporation").
"SECOND -- The Corporation's registered agent shall be CT Corporation
System at 314 North Broadway, St. Louis, Missouri, 63102.
"THIRD --
A. Classes and Number of Shares. The aggregate number of shares
that the Corporation shall have authority to issue is one hundred forty-five
million (145,000,000), consisting of one hundred twenty million (120,000,000)
shares of common stock, par value $.01 per share (the "Common Stock"), and
twenty-five million (25,000,000) shares of preferred stock, par value $.01 per
share (the "Preferred Stock").
B. Preemptive Rights. All preemptive rights are hereby denied, so
that none of the Common Stock, the Preferred Stock or any other security or
securities of the Corporation shall carry with it, and no holder or owner of any
Common Stock, Preferred Stock or any other security or securities of the
Corporation shall have, any preferential or preemptive right to acquire any
additional shares of Common Stock, Preferred Stock or any other security or
securities of the Corporation.
C. Cumulative Voting. All cumulative voting rights are hereby
denied, so that none of the Common Stock, the Preferred Stock or any other
security or securities of the Corporation shall carry with it, and no holder or
owner of any Common Stock, Preferred Stock or any other security of the
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Corporation shall have any right to vote cumulatively in the election of
directors or for any other purpose.
D. Preferred Stock. Shares of the Preferred Stock of the Corporation
may be issued from time to time in one or more classes or series, each of which
class or series shall have such distinctive designation or title as shall be
fixed by the Board of Directors of the Corporation (the "Board of Directors")
prior to the issuance of any shares thereof. Each such class or series of
Preferred Stock shall have such voting powers, full or limited, or no voting
powers, and such preferences and relative, participating, optional or other
special rights and such qualifications, limitations or restrictions thereof, as
shall be stated in such resolution or resolutions providing for the issue of
such class or series of Preferred Stock as may be adopted from time to time by
the Board of Directors prior to the issuance of any shares thereof pursuant to
the authority hereby expressly vested in it, all in accordance with the
requirements of the GBCL.
" FOURTH --
A. Number and Classification. The business and affairs of the
Corporation shall be managed by or under the direction of the Board of
Directors, consisting of not less than 3 nor more than 15 directors, the exact
number of directors to be determined from time to time by resolution adopted by
the affirmative vote of a majority of the entire Board of Directors. Any
changes in the number of directors shall be reported to the Secretary of State
of Missouri within thirty calendar days of such change, if required by the GBCL.
The Board of Directors shall be and is divided into three classes, designated
Class I, Class II and Class III. Each class shall consist, as nearly as may be
possible, of one-third of the total number of directors constituting the entire
Board of Directors, with the term of office of the directors of one class
expiring each year. Each director shall serve for a term ending on the date of
the third annual meeting following the annual meeting at which such director was
elected; provided, however, the directors elected to Class I as of May 4, 1996
shall serve for a term ending on the date of the annual meeting next following
the end of the calendar year 1996, the directors elected to Class II as of May
4, 1996 shall serve for a term ending on the date of the annual meeting next
following the end of the calendar year 1997, and the directors elected to Class
III as of May 4, 1996 shall serve for a term ending on the date of the annual
meeting next following the end of the calendar year 1998. Each director shall
hold office until the annual meeting for the year in which his term expires and
until such director's successor shall be elected and qualified, subject,
however, to such
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director's earlier death, resignation, disqualification or removal from office.
In the event of any change in the authorized number of directors, the Board of
Directors shall apportion any newly created directorships among, or reduce the
number of directorships in, such class or classes as shall, so far as possible,
equalize the number of directors in each class. Notwithstanding the foregoing,
whenever the holders of any one or more classes or series of Preferred Stock
issued by the Corporation shall have the right, voting separately by class or
series to elect directors at an annual or special meeting of shareholders, the
election, term of office, filling of vacancies and other features of such
directorships shall be governed by the terms of these Articles of Incorporation
or the resolution or resolutions adopted by the Board of Directors pursuant to
Article THIRD applicable thereto, and such directors so elected shall not be
divided into classes pursuant to this Article FOURTH unless expressly provided
by such terms.
B. Vacancies. Any vacancy in the Board of Directors resulting from
any increase in the number of directors and any other vacancy occurring in the
Board of Directors may be filled by the Board of Directors acting by a majority
of the directors then in office, although less than a quorum, or by the sole
remaining director, and any director so elected to fill a vacancy shall hold
office until the next election of directors by shareholders of the Corporation.
In no event shall a decrease in the number of directors shorten the term of any
incumbent director.
C. Removal of Directors. Subject to the rights, if any, of the
holders of shares of Preferred Stock then outstanding, at a meeting called
expressly for that purpose, any or all of the directors of the Corporation, may
be removed from the office at any time, but only for cause and only by the
affirmative vote of the holders of sixty-six and two-thirds percent (66-2/3%) of
the outstanding securities of the Corporation then entitled to vote generally in
the election of directors, considered for purposes of this Article FOURTH as one
class. Whenever the holders of the shares of any class are entitled to elect
one or more directors by the provisions of these Articles of Incorporation, the
provisions of this Article FOURTH shall apply in respect of the removal of a
director or directors so elected, to the vote of the holders of the outstanding
shares of that class and not to the vote of the holders of the outstanding
shares as a whole.
"FIFTH -- Elections of directors at an annual or special meeting of
shareholders shall be by written ballot unless the Bylaws of the Corporation
shall otherwise provide.
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"SIXTH -- The Corporation shall have perpetual existence.
"SEVENTH -- The purpose of the Corporation is to engage in any lawful
act or activity for which corporations may be organized under the GBCL.
"EIGHTH -- The Bylaws of the Corporation may be amended, altered,
changed or rescinded only by a vote of sixty-six and two-thirds percent (66
2/3%) of the entire Board of Directors.
"NINTH -- Special meetings of the shareholders of the Corporation for
any purpose or purposes may be called at any time by the Board of Directors, the
Chairman of the Board of Directors or the President. Special meetings of
shareholders of the Corporation may not be called by any other person or
persons.
"TENTH --
A. In addition to any affirmative vote required by the GBCL or these
Articles of Incorporation or the Bylaws of the Corporation, and except as
otherwise expressly provided in Section B of this Article TENTH, approval of any
Business Combination (as hereinafter defined) with an Interested Shareholder
shall require the affirmative vote of not less than a majority of the votes
entitled to be cast by the holders of all outstanding shares of Voting Stock (as
hereinafter defined) entitled to vote at a meeting of shareholders called for
such purpose, voting together as a single class, excluding Voting Stock
beneficially owned by any Interested Shareholder (as hereinafter defined) or any
Affiliate (as hereinafter defined) or Associate (as hereinafter defined) of such
Interested Shareholder. Such affirmative vote shall be required notwithstanding
the fact that no vote may be required, or that a lesser percentage or separate
class vote may be specified, by the GBCL or in any agreement with any national
securities exchange or otherwise.
B. The provisions of Section A of this Article TENTH shall not be
applicable to any Business Combination involving an Interested Shareholder or an
Affiliate or Associate of an Interested Shareholder, and such Business
Combination shall require only such affirmative vote, if any, as is required by
law, any other provision of the Articles of Incorporation of the Corporation,
the Bylaws of the Corporation or otherwise, if:
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1. The Business Combination shall have been approved by the Board of
Directors of the Corporation prior to such Interested Shareholder's Stock
Acquisition Date (as hereinafter defined), or the purchase of stock made by
such Interested Shareholder on such Interested Shareholder's Stock Acquisition
Date had been approved by the Board of Directors of the Corporation prior to
such Interested Shareholder's Stock Acquisition Date; or
2. The Business Combination shall have been approved by the
affirmative vote of the holders of a majority of the outstanding Voting Stock
not beneficially owned by such Interested Shareholder or any Affiliate or
Associate of such Interested Shareholder at a meeting called for such purpose no
earlier than five years after such Interested Shareholder's Stock Acquisition
Date; or
3. All of the following conditions shall have been satisfied with
respect to the Business Combination:
(a) The aggregate amount of the cash and the Market Value (as
hereinafter defined) as of the Consummation Date (as hereinafter defined) of
consideration other than cash to be received per share by holders of outstanding
shares of Common Stock of the Corporation in such Business Combination is at
least equal to the higher of the following:
(1) The highest per share price paid by such Interested
Shareholder at a time when he was the Beneficial Owner (as hereinafter
defined), directly or indirectly, of five percent or more of the
outstanding Voting Stock of the Corporation, for any shares of Common Stock
of the same class or series acquired by it within the five-year period
immediately prior to the Announcement Date (as hereinafter defined) with
respect to such Business Combination, or within the five-year period
immediately prior to, or in, the transaction in which such Interested
Shareholder became an Interested Shareholder, whichever is higher; plus, in
either case, interest compounded annually from the earliest date on which
such highest per share acquisition price was paid through the Consummation
Date at the rate for one-year United States treasury obligations from time
to time in effect; less the aggregate amount of any cash dividends paid,
and the Market Value of any dividends paid other than in cash, per share of
Common Stock since such earliest date, up to the amount of such interest;
and
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(2) The Market Value per share of Common Stock on the
Announcement Date with respect to such Business Combination or on such
Interested Shareholder's Stock Acquisition Date, whichever is higher; plus
interest compounded annually from such date through the Consummation Date
at the rate for one-year United States treasury obligations from time to
time in effect; less the aggregate amount of any cash dividends paid, and
the Market Value of any dividends paid other than in cash, per share of
Common Stock since such date, up to the amount of such interest;
(b) The aggregate amount of the cash and the Market Value as of the
Consummation Date of consideration other than cash to be received per share by
holders of outstanding shares of any class or series of stock, other than Common
Stock, of the Corporation is at least equal to the highest of the following,
whether or not such Interested Shareholder has previously acquired any shares of
such class or series of stock:
(1) The highest per share price paid by such Interested
Shareholder at a time when he was the Beneficial Owner, directly or
indirectly, of five percent or more of the outstanding Voting Stock of the
Corporation, for any shares of such class or series of stock acquired by
him within the five-year period immediately prior to the Announcement Date
with respect to such Business Combination, or within the five-year period
immediately prior to, or in, the transaction in which such Interested
Shareholder became an Interested Shareholder, whichever is higher; plus, in
either case, interest compounded annually from the earliest date on which
such highest per share acquisition price was paid through the Consummation
Date at the rate for one-year United States treasury obligations from time
to time in effect; less the aggregate amount of any cash dividends paid,
and the Market Value of any dividends paid other than in cash, per share of
such class or series of stock since such earliest date, up to the amount of
such interest;
(2) The highest preferential amount per share to which the
holders of shares of such class or series of stock are entitled in the
event of any voluntary liquidation, dissolution or winding up of the
Corporation, plus the aggregate amount of any dividends declared or due as
to which such holders are entitled
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prior to payment of dividends on some other class or series of stock,
unless the aggregate amount of such dividends is included in such
preferential amount; and
(3) The Market Value per share of such class or series of stock
on the Announcement Date with respect to such Business Combination or on
such Interested Shareholder's Stock Acquisition Date, whichever is higher;
plus interest compounded annually from such date through the Consummation
Date at the rate for one-year United States treasury obligations from time
to time in effect; less the aggregate amount of any cash dividends paid,
and the Market Value of any dividends paid other than in cash, per share of
such class or series of stock since such date, up to the amount of such
interest;
(c) The consideration to be received by holders of a particular class
or series of outstanding stock, including Common Stock, of the Corporation in
such Business Combination is in cash or in the same form as the Interested
Shareholder has used to acquire the largest number of shares of such class or
series of stock previously acquired by it, and such consideration shall be
distributed promptly;
(d) The holders of all outstanding shares of stock of the Corporation
not beneficially owned by such Interested Shareholder immediately prior to the
Consummation Date are entitled to receive in such Business Combination cash or
other consideration for such shares in compliance with paragraphs (a), (b) and
(c) of this Section;
(e) After such Interested Shareholder's Stock Acquisition Date and
prior to the Consummation Date with respect to such Business Combination, such
Interested Shareholder has not become the Beneficial Owner of any additional
shares of Voting Stock of the Corporation except (i) as part of the transaction
which resulted in such Interested Shareholder becoming an Interested
Shareholder, (ii) by virtue of proportionate stock splits, stock dividends or
other distributions of stock in respect of stock not constituting a Business
Combination under Paragraph (1)(e) of Section C of this Article TENTH, (iii)
through a Business Combination meeting all of the conditions of this Section B,
or (iv) through purchase by such Interested Shareholder at any price which, if
such price had been paid in an otherwise permissible Business Combination the
Announcement Date and Consummation Date of which were the date of such purchase,
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would have satisfied the requirements of paragraphs (a), (b), and (c) of this
Section.
C. For purposes of this Article TENTH:
1. The term "Business Combination" shall mean:
(a) Any merger or consolidation of the Corporation or any subsidiary
of the Corporation with an Interested Shareholder or any other corporation,
whether or not itself an Interested Shareholder of the Corporation, which is, or
after such merger or consolidation would be, an Affiliate or Associate of such
Interested Shareholder;
(b) Any sale, lease, exchange, mortgage, pledge, transfer or other
disposition, in one transaction or a series of transactions to or with an
Interested Shareholder or any Affiliate or Associate of such Interested
Shareholder, of assets of the Corporation or any subsidiary of the Corporation
having an aggregate Market Value equal to ten percent or more of the aggregate
Market Value of all the assets, determined on a consolidated basis, of the
Corporation, having an aggregate Market Value equal to ten percent or more of
the aggregate Market Value of all the outstanding stock of the Corporation, or
representing ten percent or more of the earning power or net income, determined
on a consolidated basis, of the Corporation;
(c) The issuance or transfer by the Corporation or any subsidiary of
the Corporation, in one transaction or a series of transactions, of any stock of
the Corporation or any subsidiary of the Corporation which has an aggregate
Market Value equal to five percent or more of the aggregate Market Value of all
the outstanding stock of the Corporation to an Interested Shareholder or any
Affiliate or Associate of such Interested Shareholder except pursuant to the
exercise of warrants or rights to purchase stock offered, or a dividend or
distribution paid or made, pro rata to all shareholders of the Corporation;
(d) The adoption of any plan or proposal for the liquidation or
dissolution of the Corporation proposed by, or pursuant to any agreement,
arrangement or understanding, whether or not in writing, with an Interested
Shareholder or any Affiliate or Associate of such Interested Shareholder;
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(e) Any reclassification of securities, including, without limitation,
any stock split, stock dividend, or other distributions of stock in respect of
stock, or any reverse stock split, or recapitalization of the Corporation, or
any merger or consolidation of the Corporation with any subsidiary of the
Corporation, or any other transaction, whether or not with or into or otherwise
involving an Interested Shareholder, proposed by, or pursuant to any agreement,
arrangement or understanding, whether or not in writing, with such Interested
Shareholder or any Affiliate or Associate of such Interested Shareholder, which
has the effect, directly or indirectly, of increasing the proportionate share of
the outstanding shares of any class or series of Voting Stock or securities
convertible into Voting Stock of the Corporation or any subsidiary of the
Corporation which is directly or indirectly owned by such Interested Shareholder
or any Affiliate or Associate of such Interested Shareholder, except as a result
of immaterial changes due to fractional share adjustments; or
(f) Any receipt by an Interested Shareholder or any Affiliate or
Associate of such Interested Shareholder of the benefit, directly or indirectly,
except proportionately as a shareholder of the Corporation, of any loans,
advances, guarantees, pledges or other financial assistance or any tax credits
or other tax advantages provided by or through the Corporation.
2. The term "Voting Stock" shall mean all shares of capital stock of
the Corporation entitled to vote generally in the election of directors.
3. The term "person" shall mean any individual, firm, company or
other entity and shall include any group comprised of any person and any other
person with whom such person or any Affiliate or Associate of such person has
any agreement, arrangement or understanding, directly or indirectly, for the
purpose of acquiring, holding, voting or disposing of capital stock.
4. The term "Interested Shareholder" shall mean any person who:
(a) Is the Beneficial Owner, directly or indirectly, of twenty percent
(20%) or more of the outstanding Voting Stock of the Corporation; or
(b) Is an Affiliate or Associate of the Corporation and at any time
within the five-year period immediately prior to the date in question was the
Beneficial Owner, directly or indirectly, of twenty percent (20%) or more
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of the then outstanding Voting Stock of the Corporation; provided that, for the
purpose of determining whether a person is an Interested Shareholder, the number
of shares of Voting Stock of the Corporation deemed to be outstanding shall
include shares deemed to be beneficially owned by the person but shall not
include any other unissued shares of Voting Stock of the Corporation which may
be issuable pursuant to any agreement, arrangement or understanding, or upon
exercise of conversion rights, warrants or options, or otherwise.
(c) Interested Shareholders shall not include the Corporation, any
subsidiary, any profit-sharing, employee stock ownership or other employee
benefit plan of the Corporation or any subsidiary or any trustee of or fiduciary
with respect to any such plan when acting in such capacity, which as of the date
hereof is the Beneficial Owner of Common Stock representing more than twenty
percent (20%) of the votes entitled to be cast by holders of all of the shares
of Voting Stock outstanding on the date hereof.
5. The term "Beneficial Owner" of any capital stock means a person
who:
(a) Individually or with or through any of its Affiliates or
Associates, beneficially owns such stock, directly or indirectly; or
(b) Individually or with or through any of its Affiliates or
Associates, has the right to acquire such stock, whether such right is
exercisable immediately or only after the passage of time, pursuant to any
agreement, arrangement or understanding, whether or not in writing, or upon the
exercise of conversion rights, exchange rights, warrants or options, or
otherwise; provided, however, that a person shall not be deemed the Beneficial
Owner of stock tendered pursuant to a tender or exchange offer made by such
person or any of such person's Affiliates or Associates until such tendered
stock is accepted for purchase or exchange; or the right to vote such stock
pursuant to any agreement, arrangement or understanding, whether or not in
writing; provided, however, that a person shall not be deemed the Beneficial
Owner of any stock under this item if the agreement, arrangement or
understanding to vote such stock arises solely from a revocable proxy or consent
given in response to a proxy or consent solicitation made in accordance with the
applicable rules and regulations under the Securities Exchange Act of 1934 (the
"Exchange Act") and is not then reportable on a Schedule 13D under the Exchange
Act, or any comparable or successor report; or
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(c) Has any agreement, arrangement or understanding, whether or not in
writing, for the purpose of acquiring, holding, voting, except voting pursuant
to a revocable proxy or consent as described in paragraph (b) of this
subsection, or disposing of such stock with any other person that beneficially
owns or whose Affiliates or Associates beneficially own, directly or indirectly,
such stock.
6. The term "Affiliate" shall mean a person that directly or
indirectly through one or more intermediaries, controls, or is controlled by, or
is under common control with, a specified person.
7. The term "Associate," when used to indicate a relationship with
any person, means any corporation or organization of which such person is an
officer or partner or is, directly or indirectly, the Beneficial Owner of ten
percent or more of any class of Voting Stock, any trust or other estate in which
such person has a substantial beneficial interest or as to which such person
serves as trustee or in a similar fiduciary capacity, and any relative or spouse
of such person, or any relative of such spouse, who has the same home as such
person.
8. The term "Consummation Date," with respect to any Business
Combination, means the date of consummation of such Business Combination, or, in
the case of a Business Combination as to which a shareholder vote is taken, the
later of the business day prior to the vote or 20 days prior to the date of
consummation of such Business Combination;
9. The term "control," including the terms "controlling,"
"controlled by" and "under common control with," shall mean the possession,
directly or indirectly, of the power to direct or cause the direction of the
management and policies of a person, whether through the ownership of voting
stock, by contract, or otherwise. A person's beneficial ownership of ten
percent or more of a corporation's outstanding Voting Stock shall create a
presumption that such person has control of such corporation. Notwithstanding
the foregoing, a person shall not be deemed to have control of a corporation if
such person holds Voting Stock, in good faith and not for the purpose of
circumventing this Section, as an agent, bank, broker, nominee, custodian or
trustee for one or more Beneficial Owners who do not individually or as a group
have control of such corporation.
10. The term "stock" means:
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(a) Any stock or similar security, any certificate of interest, any
participation in any profit sharing agreement, any voting trust certificate, or
any certificate of deposit for stock; and
(b) Any security convertible, with or without consideration, into
stock, or any warrant, call or other option or privilege of buying stock without
being bound to do so, or any other security carrying any right to acquire,
subscribe to or purchase stock;
11. The term "Stock Acquisition Date," with respect to any person and
the Corporation, means the date that such person first becomes an Interested
Shareholder of the Corporation.
12. The term "Market Value" means:
(a) In the case of stock, the highest closing sale price during the
thirty-day period immediately preceding the date in question of a share of such
stock on the composite tape for New York Stock Exchange listed stocks, or, if
such stock is not quoted on such composite tape or if such stock is not listed
on such exchange, on the principal United States securities exchange registered
under the Exchange Act on which such stock is listed, or, if such stock is not
listed on any such exchange, the highest closing bid quotation with respect to a
share of such stock during the thirty-day period preceding the date in question
on the National Association of Securities Dealers, Inc., Automated Quotations
System or any system then in use, or if no such quotations are available, the
fair market value on the date in question of a share of such stock as determined
by the Board of Directors of the Corporation in good faith; and
(b) In the case of property other than cash or stock, the fair market
value of such property on the date in question as determined by the Board of
Directors of the Corporation in good faith.
13. In the event of any Business Combination in which the Corporation
survives, the phrase "consideration other than cash to be received" as used in
Paragraphs (3)(a) and (3)(b) of Section B of this Article TENTH shall include
the shares of Common Stock and/or the shares of any other class or series of
capital stock retained by the holders of such shares.
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14. The term "Announcement Date" when used in reference to any
Business Combination, means the date of the first public announcement of the
final, definitive proposal for such Business Combination.
D. The fact that any Business Combination complies with the
provisions of Section B of this Article TENTH shall not be construed to impose
any fiduciary duty, obligation or responsibility on the Board of Directors, or
any member thereof, to approve such Business Combination or recommend its
adoption or approval to the shareholders of the Corporation, nor shall such
compliance limit, prohibit or otherwise restrict in any manner the Board of
Directors, or any member thereof, with respect to evaluations of or actions and
responses taken with respect to such Business Combination.
"ELEVENTH --
A. Indemnification of Officers, Directors and Others. The
Corporation shall indemnify to the fullest extent authorized or permitted by law
(as now or hereafter in effect) any person made, or threatened to be made, a
party to or otherwise involved in any action or proceeding (whether civil or
criminal or otherwise) by reason of the fact that he, his testator or intestate,
is or was a director or officer of the Corporation or by reason of the fact that
such director or officer, at the request of the Corporation, is or was serving
any other corporation, partnership, joint venture, trust, employee benefit plan
or other enterprise, in any capacity. Nothing contained herein shall affect any
rights to indemnification to which employees other than directors and officers
may be entitled by law. No amendment or repeal of this Article ELEVENTH shall
apply to or have any effect on any right to indemnification provided hereunder
with respect to any acts or omissions occurring prior to such amendment or
repeal.
B. Insurance, Indemnification Agreements and Other Matters. The
Corporation may purchase and maintain insurance on behalf of any person who is
or was a director, officer, employee or agent of the Corporation, or is serving
at the request of the Corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust, employee benefit plan or
other enterprise against any liability asserted against him and incurred by him
in any such capacity, or arising out of his status as such, whether or not the
Corporation would have the power to indemnify him against such liability under
the provisions of the law. The Corporation may create a trust fund, grant a
security interest and/or use other means (including, without limitation, letters
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of credit, surety bonds and/or other similar arrangements), as well as enter
into contracts providing for indemnification to the fullest extent authorized or
permitted by law and including as part thereof any or all of the foregoing, to
ensure the payment of such sums as may become necessary to effect full
indemnification.
C. Nonexclusivity. The rights to indemnification conferred in this
Article ELEVENTH shall not be exclusive of any other right which any person may
have or hereafter acquire under any statute, these Articles of Incorporation of
the Corporation, or the Bylaws or any agreement, vote of shareholders or
directors or otherwise.
"TWELFTH -- The Corporation reserves the right at any time and from
time to time to make, amend, alter, change or rescind any provision contained in
these Articles of Incorporation, in the manner now or hereafter prescribed by
statute, and all rights conferred upon shareholders herein are granted subject
to this reservation.
"THIRTEENTH -- Notwithstanding the fact that a lesser percentage may
be specified by the GBCL, these Articles of Incorporation or the Bylaws of the
Corporation, any proposal to amend, repeal or adopt any provision of these
Articles of Incorporation shall require the affirmative vote of the holders of
not less than a majority of the outstanding shares of stock of the Corporation
entitled to vote thereon, provided, however, any proposal to amend, repeal or
adopt any provision of these Articles of Incorporation which is not recommended
by the affirmative vote of a majority of the entire Board of Directors shall
require the affirmative vote of the holders of not less than sixty-six and two-
thirds percent (66-2/3%) of the outstanding shares of stock of the Corporation
entitled to vote thereon.
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Exhibit 3.2
AMENDED AND RESTATED BYLAWS
OF
PAYLESS SHOESOURCE, INC.
ARTICLE I
OFFICES
-------
Section 1. The registered office of the Corporation shall be in the
City of St. Louis, State of Missouri, or at such other place within the State of
Missouri as the Board of Directors may at any time and from time to time
designate.
Section 2. The Corporation may also have offices at such other places
both within and without the State of Missouri as the Board of Directors may from
time to time determine or the business of the Corporation may require.
ARTICLE II
MEETINGS OF SHAREHOLDERS
------------------------
Section 1. All meetings of the shareholders shall be held either
within or without the State of Missouri as shall be designated from time to time
by the Board of Directors and stated in the notice of the meeting or in a duly
executed waiver of notice thereof.
Section 2. The annual meeting of shareholders shall be held at such
place within or without the State of Missouri, at such hour and on such date,
not earlier than May 1 and not later than July 10 in each year as the Board of
Directors may specify in the call of such meeting, at which such meeting the
shareholders shall elect by a plurality vote a Board of Directors, and transact
such other business as may properly be brought before the meeting.
Section 3. Except as otherwise required by law, written notice of the
annual meeting stating the place, date and hour of the meeting shall be given by
mail, postage prepaid, not less than ten or more than seventy days before the
<PAGE>
date of the meeting, to each shareholder entitled to vote at such meeting at
such address as shall appear on the books of the Corporation.
Section 4. The Secretary of the Corporation shall prepare and make,
at least ten days before every meeting of shareholders, a complete list of the
shareholders entitled to vote at the meeting, arranged in alphabetical order,
and showing the address of each shareholder and the number of shares registered
in the name of each shareholder. Such list shall be open to the examination of
any shareholder, for any purpose germane to the meeting, during ordinary
business hours, for a period of at least ten days prior to the meeting, either
at a place within the city where the meeting is to be held, which place shall be
specified in the notice of the meeting, or, if not so specified, at the place
where the meeting is to be held. The list shall also be produced and kept at
the time and place of the meeting during the whole time thereof, and may be
inspected by any shareholder who is present.
Section 5. Special meetings of the shareholders, for any purpose or
purposes, may be called by the Board of Directors, the Chairman of the Board of
Directors, or the President. Special meetings of shareholders may not be called
by any other person or persons. The business transacted at a special meeting of
shareholders shall be confined to the purpose or purposes specified in the
notice therefor.
Section 6. Except as otherwise required by law, written notice of a
special meeting stating the place, date and hour of the meeting and the purpose
or purposes for which the meeting is called, shall be given by mail, postage
prepaid, not less than ten nor more than seventy days before the date of the
meeting, to each shareholder entitled to vote at such meeting at such address as
shall appear on the books of the Corporation.
Section 7. The holders of a majority of the stock issued and
outstanding and entitled to vote at any meeting, present in person or
represented by proxy, shall constitute a quorum at all meetings of the
shareholders for the transaction of business except as otherwise provided by law
or by the Articles of Incorporation. If, however, such quorum shall not be
present or represented at any meeting of the shareholders, the shareholders
entitled to vote thereat, present in person or represented by proxy even though
less than a quorum, shall have power to adjourn the meeting from time to time,
without notice other than announcement at the meeting, until a quorum shall be
present or represented.
2
<PAGE>
At such adjourned meeting at which a quorum shall be present or represented, any
business may be transacted which might have been transacted at the meeting as
originally called. If the adjournment is for more than thirty days, or if after
the adjournment a new record date is fixed for the adjourned meeting, a notice
of the adjourned meeting shall be given to each shareholder of record entitled
to vote at the meeting.
Section 8. When a quorum is present at any meeting, the vote of the
holders of a majority of the stock having voting power present in person or
represented by proxy shall decide any question brought before such meeting,
unless the question is one upon which by express provision of law or the
Articles of Incorporation, a different vote is required, in which case such
express provision shall govern and control the decision of such question.
Section 9. Except as otherwise provided by the Articles of
Incorporation, each shareholder of record shall at every meeting of the
shareholders be entitled to one vote for each share of capital stock of the
Corporation entitled to vote thereat held by such shareholder. Such votes may
be cast in person or by proxy, but no proxy shall be voted on or after three
years from its date, unless the proxy provides for a longer period. The Board
of Directors shall prescribe the rules and regulations for voting at all
meetings of the shareholders; provided, however, the vote for the election of
directors, and upon the direction of the presiding officer of the meeting, the
vote on any other question before the meeting, shall be by written ballot.
Section 10. Except as otherwise provided by the Articles of
Incorporation, any action required or permitted to be taken at any annual or
special meeting of shareholders may be taken without a meeting of the
shareholders only if consents in writing, setting forth the action so taken, are
signed by all of the shareholders entitled to vote with respect to the subject
matter thereof.
Section 11. To be properly brought before the annual or any special
shareholders' meeting, business must be either (a) specified in the notice of
meeting (or any supplement thereto) given by or at the direction of the Board of
Directors, (b) otherwise properly brought before the meeting by or at the
direction of the Board of Directors, or (c) otherwise properly brought before
the meeting by a shareholder. In addition to any other applicable requirements,
for business to be properly brought before the annual or any special
shareholders' meeting by a shareholder, the shareholder must have given timely
notice thereof in writing to the secretary of the Corporation. To be timely, a
shareholder's
3
<PAGE>
notice must be delivered to or mailed and received at the principal executive
offices of the Corporation not less than 75 days nor more than 90 days prior to
the meeting; provided, however, that in the event that less than 90 days' notice
or prior public disclosure of the date of the meeting is given or made to
shareholders, notice by the shareholder to be timely must be so received not
later than the close of business on the 15th day following the day on which such
notice of the date of the meeting was mailed or such public disclosure was made,
whichever first occurs. Such shareholder's notice to the Secretary shall set
forth as to each matter the shareholder proposes to bring before the meeting (i)
a brief description of the business desired to be brought before the meeting and
the reasons for conducting such business at the meeting, (ii) the name and
record address of the shareholder proposing such business, (iii) the class and
number of shares of common stock of the Corporation which are beneficially owned
by the shareholder and (iv) any material interest of the shareholder in such
business.
Notwithstanding anything in these Bylaws to the contrary, no business
shall be conducted at the annual or any special meeting except in accordance
with the procedures set forth in this Section 11, provided, however, that
nothing in this Section 11 shall be deemed to preclude discussion by any
shareholder of any business properly brought before the meeting.
The chairman of the meeting shall, if the facts warrant, determine and
declare to the meeting that business was not properly brought before the meeting
in accordance with the provisions of this Section 11, and if he should so
determine and declare, any such business not properly brought before the meeting
shall not be transacted.
Section 12. Except as provided in Section 3 of Article III, only
persons who are nominated in accordance with the following procedures shall be
eligible for election as directors. Nominations of persons for election to the
Board of Directors of the Corporation at the annual meeting may be made at the
meeting by or at the direction of the Board of Directors, by any nominating
committee or person appointed by the Board of Directors or by any shareholder of
the Corporation entitled to vote for the election of directors at the meeting
who complies with the notice procedures set forth in this Section 12. Such
nominations, other than those made by or at the direction of the Board of
Directors, shall be made pursuant to timely notice in writing to the secretary
of the Corporation. To be timely, a shareholder's notice must be delivered to
or mailed and received at the principal executive offices of the Corporation not
less
4
<PAGE>
than 75 days nor more than 90 days prior to the meeting; provided, however, that
in the event that less than 90 days' notice or prior public disclosure of the
date of the meeting is given or made to shareholders, notice by the shareholder
to be timely must be so received not later than the close of business on the
15th day following the day on which such notice of the date of the meeting was
mailed or such public disclosure was made, which first occurs. Such
shareholder's notice to the secretary shall set forth (a) as to each person whom
the shareholder proposes to nominate for election or re-election as a director,
(i) the name, age, business address and residence of the person, (ii) the
principal occupation or employment of the person, (iii) the class and number of
shares of common stock of the Corporation which are beneficially owned by the
person, and (iv) any other information relating to the person that is required
to be disclosed in solicitations for proxies for election of directors pursuant
to Regulation 14A under the Securities Exchange Act of 1934, as amended; and (b)
as to the shareholder giving the notice (i) the name and record address of the
shareholder and (ii) the class and number of shares of common stock of the
Corporation which are beneficially owned by the shareholder. Such notice shall
be accompanied by the executed consent of each nominee to serve as a director if
so elected. The Corporation may require any proposed nominee to furnish such
other information as may reasonably be required by the Corporation to determine
the eligibility of such proposed nominee to serve as a director of the
Corporation.
The chairman of the meeting shall, if the facts warrant, determine and
declare to the meeting that a nomination was not made in accordance with the
foregoing procedure, and if he should so determine and declare, the defective
nomination shall be disregarded.
ARTICLE III
DIRECTORS
---------
Section 1. Except as otherwise required by law or the Articles of
Incorporation, the business and affairs of the Corporation shall be managed by
or under the direction of the Board of Directors.
Section 2. The number of directors of the Corporation shall be fixed
in the manner provided in the Articles of Incorporation. Except as otherwise
provided in Section 3 of this Article III, the directors of the Corporation
shall be elected by the shareholders of the Corporation, and at each such
election the
5
<PAGE>
nominees receiving the greatest number of votes, up to the number of directors
then to be elected, shall be the persons then elected.
Section 3. Except as otherwise required by the Articles of
Incorporation, any vacancy in the Board of Directors resulting from any increase
in the number of directors and any other vacancy occurring in the Board of
Directors may be filled by the Board of Directors acting by a majority of the
directors then in office, although less than a quorum, or by the sole remaining
director, and any director so elected to fill a vacancy shall hold office until
such director's successor is duly elected and qualified (subject, however, to
such director's earlier death, resignation, disqualification or removal from
office) for a term that shall coincide with the term of the class to which such
director shall have been elected. In no event shall a decrease in the number of
directors shorten the term of any incumbent director.
Section 4. The Board of Directors may hold its meetings, both regular
and special, and cause the books of the Corporation to be kept, either within or
without the State of Missouri at such place or places as they may from time to
time determine.
Section 5. Subject to Section 8 of this Article III there shall be an
annual meeting of the Board of Directors on the day of the annual meeting of
shareholders in each year or as soon thereafter as convenient, such annual
meeting to be at such place and time (and, if applicable, on such date) as the
Chairman of the Board or the Chief Executive Officer shall designate by written
notice to the directors, and regular meetings shall be held on such dates and at
such times and places either as the directors shall by resolution provide or as
the Chairman of the Board or the Chief Executive Officer shall designate by
written notice to the directors. Except as above provided, no notice of said
annual meeting or such regular meetings of the Board of Directors need be given.
Section 6. Special meetings of the Board of Directors may be called
by the Chairman of the Board, the Chief Executive Officer, the President, the
Secretary or the Treasurer and shall be called by one of the foregoing officers
on the written request of a majority of the entire Board of Directors specifying
the object or objects of such special meeting. In the event that one of the
foregoing officers shall fail to call a meeting within two days after receipt of
such request, such meeting may be called in like manner by the directors making
such request. Notice of each special meeting shall be deposited in the regular
or overnight mail, sent by telecopy, telegram or delivered by hand to each
director
6
<PAGE>
not later than the day preceding the date of such meeting, or on such shorter
notice as the person or persons calling such meeting may deem necessary or
appropriate in the circumstances.
Section 7. At all meetings of the Board of Directors a majority of
the entire Board of Directors in office at the time shall constitute a quorum
for the transaction of business and the act of a majority of the directors
present at any meeting at which there is a quorum shall be the act of the Board
of Directors, except as may be otherwise specifically provided by law, the
Articles of Incorporation or by these Bylaws. If a quorum, shall not be present
at any meeting of the Board of Directors, the directors present thereat may
adjourn the meeting from time to time, without notice other than announcement at
the meeting, until a quorum shall be present.
Section 8. Except as otherwise required by the Articles of
Incorporation or these Bylaws, any action required or permitted to be taken by
the Board of Directors at any meeting of the Board of Directors or of any
committee thereof may be taken without a meeting, if all members of the Board or
committee, as the case may be, consent thereto in writing, and the writing or
writings are filed with the minutes of proceedings of the Board of Directors or
committee.
Section 9. Any one or more members of the Board of Directors, or any
committee designated by the Board of Directors, may participate in a meeting of
the Board of Directors or such committee by means of a conference telephone or
similar communications equipment by means of which all persons participating in
the meeting can hear each other at the same time. Participation in a meeting
pursuant to this Section 9 shall constitute presence in person at such meeting.
Section 10. The Board of Directors may, by resolution passed by a
majority of the entire Board, designate one or more committees, each committee
to consist of two or more of the directors of the Corporation. The Board may
designate one or more directors as alternate members of any committee, who may
replace any absent or disqualified member at any meeting of the committee. Any
such committee, to the extent allowed by law and as provided in the resolution,
shall have and may exercise all of the powers and authority of the Board of
Directors in the management of the business and affairs of the Corporation, and
may authorize the seal of the Corporation to be affixed to all papers which may
require it. Such committee or committees shall have such name or
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<PAGE>
names as may be determined from time to time by resolution adopted by the Board
of Directors.
Section 11. Each committee of the Board shall keep regular minutes of
its meetings and report the same to the Board of Directors when required.
Section 12. Directors and members of committees may receive such
compensation for their services, and such reimbursement of expenses, as the
Board of Directors may from time to time determine. Nothing herein contained
shall be construed to preclude any director from serving the Corporation in any
other capacity and receiving compensation therefor.
Section 13. No contract or transaction between the Corporation and
one or more of its directors or officers, or between the Corporation and any
other corporation, partnership, association, or other organization in which one
or more of its directors or officers are directors or officers, or have a
financial interest, shall be void or voidable solely for this reason, or solely
because the director or officer is present at or participates in the meeting of
the Board of Directors or committee thereof which authorizes the contract or
transaction, or solely because his or their votes are counted for such purpose
if (a) the material facts as to his or their relationship or interest and as to
the contract or transaction are disclosed or are known to the Board of Directors
or the committee in good faith authorizes the contract or transaction by the
affirmative votes of a majority of the disinterested directors, even though the
disinterested directors be less than a quorum; or (b) the material facts as to
his or their relationship or interest and as to the contract or transaction are
disclosed or are known to the shareholders entitled to vote thereon, and the
contract or transaction is specifically approved in good faith by vote of the
shareholders; or (c) the contract or transaction is fair as to the Corporation
as of the time it is authorized, approved or ratified, by the Board of
Directors, a committee thereof or the shareholders. Common or interested
directors may be counted in determining the presence of a quorum at a meeting of
the Board of Directors or of a committee which authorizes the contract or
transaction.
Section 14. As used in these Bylaws generally, the term "entire Board
of Directors" means the total number of directors which the Corporation would
have if there were no vacancies.
8
<PAGE>
ARTICLE IV
NOTICES
-------
Section 1. Whenever written notice is required by law, the Articles
of Incorporation or these Bylaws, to be given to any director, committee member
or shareholder, such requirement shall not be construed to mean personal notice,
but such notice may be given in writing, by mail addressed to such director,
committee member or shareholder, at his address as it appears on the records of
the Corporation, with postage thereon prepaid and such notice shall be deemed to
be given at the time when the same shall be deposited in the United States mail.
Written notice may also be given personally or by telecopy, telegram, telex or
cable or by overnight mail. An affidavit of the Secretary or an Assistant
Secretary or of the transfer agent of the Corporation that the notice has been
given shall, in the absence of fraud, be prima facie evidence of the facts
stated therein.
Section 2. Whenever any notice is required by law, the Articles of
Incorporation or these Bylaws, to be given to any director, committee member or
shareholder, a waiver thereof in writing, signed by the person or persons
entitled to said notice, whether before or after the time stated therein, shall
be deemed equivalent thereto.
ARTICLE V
OFFICERS
--------
Section 1. The officers of the Corporation shall be elected by the
Board of Directors and shall consist of the Chairman of the Board, a President,
one or more Vice Presidents, a Secretary, and a Treasurer, and such other
officers, including, without limitation, one or more Executive Vice Presidents,
one or more Senior Vice Presidents, one or more Assistant Secretaries and one or
more Assistant Treasurers, as the Board of Directors may deem necessary and
proper. Any two or more of such offices, exempting the office of President and
Secretary, may be held by the same person, but no officer shall execute,
acknowledge, or verify any instrument on behalf of the Corporation in more than
one capacity.
9
<PAGE>
Section 2. The Board of Directors, at its first meeting held after
each annual meeting of shareholders, shall elect the officers of the
Corporation, who shall be subject to the control of the Board of Directors and
shall have such duties in the management of the Corporation as may be provided
by appropriate resolution of the Board of Directors and/or provided in these
Bylaws.
Section 3. The Board of Directors may determine or provide the method
of determining the compensation of all officers.
Section 4. The officers of the Corporation shall hold office until
their successors are chosen and qualify, or until their earlier resignation or
removal. Any officer elected or appointed by the Board of Directors may be
removed at any time by the Board of Directors. Any vacancy occurring in any
office of the Corporation shall be filled by the Board of Directors.
Section 5. Each officer of the Corporation shall be subject to the
control of the Board of Directors and shall have such duties in the management
of the Corporation as may be provided by appropriate resolution of the Board of
Directors and/or provided in these Bylaws.
Section 6. Powers of attorney, proxies, waivers of notice of meeting,
consents and other instruments relating to securities owned by the corporation
may be executed in the name of and on behalf of the Corporation by the President
or any Vice President and any such officer may, in the name of and on behalf of
the Corporation, take all such action as any such officer may deem advisable to
vote in person or by proxy at any meeting of security holders of any corporation
in which the Corporation may own securities and at any such meeting shall
possess and may exercise any and all rights and power incident to the ownership
of such securities and which, as the owner thereof, the Corporation might have
exercised and possessed if present. The Board of Directors may, by resolution,
from time to time confer like powers upon any other person or persons.
Section 7. Any officer, if required by the Board of Directors, shall
give bond in such sum and with such security as the Board of Directors may
require for the faithful performance of duties.
Section 8. In the case of the absence of any officer of the
Corporation, or for any other reason that the Board may deem sufficient, the
Board of
10
<PAGE>
Directors may delegate the powers or duties of such officer to any other officer
or to any other director, or to any other person for the time being.
ARTICLE VI
CERTIFICATES OF STOCK
---------------------
Section 1. Every holder of stock in the Corporation shall be entitled
to have a certificate signed in the name of the Corporation by the Chairman of
the Board, the President or a Vice-President and the Treasurer or an Assistant
Treasurer, or the Secretary or an Assistant Secretary. Such certificate shall
certify the number of shares owned by such holder in the Corporation.
Section 2. Where a certificate is countersigned by (i) a transfer
agent other than the Corporation or its employee, or (ii) a registrar other than
the Corporation or its employee, any other signature on the certificate may be a
facsimile. In case any officer, transfer agent or registrar who has signed or
whose facsimile signature has been placed upon a certificate shall have ceased
to be such officer, transfer agent or registrar before such certificate is
issued, it may be issued by the Corporation with the same effect as if he were
such officer, transfer agent or registrar at the date of issue.
Section 3. The Board of Directors may direct a new certificate or
certificates to be issued in place of any certificate or certificates
theretofore issued by the Corporation alleged to have been lost, stolen or
destroyed, upon the making of an affidavit of that fact by the person claiming
the certificate of stock to be lost, stolen or destroyed. When authorizing such
issuance of a new certificate or certificates, the Board of Directors may, in
its discretion and as a condition precedent to the issuance thereof, require the
owner of such lost, stolen or destroyed certificate or certificates, or his
legal representative, to advertise the same in such manner as the Board of
Directors shall require and/or to give the Corporation a bond in such sum as it
may direct and with such surety as it may approve, as indemnity against any
claim that may be made against the Corporation with respect to the certificate
alleged to have been lost, stolen or destroyed.
Section 4. Upon surrender to the Corporation or the transfer agent of
the Corporation of a certificate for shares duly endorsed or accompanied by
proper evidence of succession, assignment or authority to transfer, it shall be
the
11
<PAGE>
duty of the Corporation to issue a new certificate to the person entitled
thereto, cancel the old certificate and record the transaction upon its books.
Section 5. In order that the Corporation may determine the
shareholders entitled to notice of or to vote at any meeting of shareholders or
any adjournment thereof, or entitled to receive payment of any dividend or other
distribution or allotment of any rights, or entitled to exercise any rights in
respect of any change, conversion or exchange of stock or for the purpose of any
other lawful action, the Board of Directors may fix, in advance, a record date,
which shall not be more than seventy days before the date of such meeting, nor
more than seventy days prior to any other action; provided, however that if the
Board of Directors does not set a record date for the determination of the
shareholders entitled to notice of, and to vote at, a meeting of shareholders,
only the shareholders of record at the close of business on the twentieth day
preceding the date of the meeting shall be entitled to notice of, and to vote
at, the meeting and any adjournment of the meeting. A determination of
shareholders of record entitled to notice of or to vote at a meeting of
shareholders shall apply to any adjournment of the meeting; provided, however,
that the Board of Directors may fix a new record date for the adjourned meeting.
Section 6. The Corporation shall be entitled to recognize the
exclusive right of a person registered on its books as the owner of shares to
receive dividends, and to vote as such owner, and to hold liable for calls and
assessments a person registered on its books as the owner of shares, and shall
not be bound to recognize any equitable or other claim to or interest in such
share or shares on the part of any other person, whether or not it shall have
express or other notice thereof, except as otherwise provided by law.
ARTICLE VII
GENERAL PROVISIONS
------------------
Section 1. Dividends upon the capital stock of the Corporation,
subject to the provisions of the Articles of Incorporation, if any, may be
declared by the Board of Directors at any regular or special meeting. Pursuant
to law, dividends may be paid in cash, in property, or in shares of the capital
stock.
Section 2. Before payment of any dividend, there may be set aside out
of any funds of the Corporation available for dividends such sum or sums as the
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directors may from time to time, in their absolute discretion, deem proper as a
reserve or reserves to meet contingencies, or for equalizing dividends, or for
repairing or maintaining any property of the Corporation, or for any proper
purpose, and the directors may modify or abolish any such reserve in the manner
in which it was created.
Section 3. All checks or demands for money and all notes and other
obligations of the Corporation shall be signed by such officer or officers or
such other person or persons as the Board of Directors may at any time and from
time to time designate.
Section 4. The fiscal year of the Corporation
shall end on the Saturday closest to the 31st day of January in each year.
Section 5. The corporate seal shall consist of the words "PAYLESS
SHOESOURCE, INC. MISSOURI" arranged in a circular form around the words and
figures "Corporate Seal 1996" and shall be kept by the Secretary. The seal may
be used by causing it or a facsimile thereof to be impressed or affixed or
reproduced or otherwise.
ARTICLE VIII
AMENDMENTS
----------
These Bylaws may be amended, altered, changed or rescinded, in whole
or in part, or new Bylaws may be adopted, in the manner provided in the Articles
of Incorporation.
The substance of such amendment, alteration, change, rescission or
adoption or the subject matter thereof shall be submitted in writing at a
preceding meeting of the Board of Directors or notice thereof shall be given to
the directors at least ten days before; waiver of notice by any director being
deemed equivalent to such notice to him.
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<PAGE>
PAYLESS SHOESOURCE, INC.
and
THE BANK OF NEW YORK
Rights Agent
------------------
Rights Agreement
Dated as of April 2, 1996
<PAGE>
<TABLE>
<CAPTION>
Table of Contents
-----------------
Section Page
- ------- ----
<S> <C>
Section 1. Certain Definitions................................................... 2
Section 2. Appointment of Rights Agent........................................... 4
Section 3. Issue of Rights Certificates.......................................... 5
Section 4. Form of Rights Certificates........................................... 6
Section 5. Countersignature and Registration..................................... 7
Section 6. Transfer, Split Up, Combination and Exchange of Rights Certificates;
Mutilated, Destroyed, Lost or Stolen Rights Certificates.............. 7
Section 7. Exercise of Rights; Purchase Price; Expiration Date of Rights......... 8
Section 8. Cancellation and Destruction of Rights Certificates................... 10
Section 9. Reservation and Availability of Capital Stock......................... 10
Section 10. Preferred Stock Record Date........................................... 11
Section 11. Adjustment of Purchase Price, Number and Kind of Shares or
Number of Rights...................................................... 12
Section 12. Certificate of Adjusted Purchase Price or Number of Shares............ 20
Section 13. Consolidation, Merger or Sale or Transfer of Assets or Earning Power.. 20
Section 14. Fractional Rights and Fractional Shares............................... 23
Section 15. Rights of Action...................................................... 24
Section 16. Agreement of Rights Holders........................................... 24
Section 17. Rights Certificate Holder Not Deemed a Shareowner..................... 25
Section 18. Concerning the Rights Agent........................................... 25
Section 19. Merger or Consolidation or Change of Name of Rights Agent............. 25
Section 20. Duties of Rights Agent................................................ 26
Section 21. Change of Rights Agent................................................ 28
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
Section 22. Issuance of New Rights Certificates................................... 29
Section 23. Redemption and Termination............................................ 29
Section 24. Notice of Certain Events.............................................. 30
Section 25. Notices............................................................... 31
Section 26. Supplements and Amendments............................................ 31
Section 27. Successors............................................................ 32
Section 28. Determinations and Actions by the Board of Directors, etc. .......... 32
Section 29. Benefits of this Agreement............................................ 32
Section 30. Severability.......................................................... 33
Section 31. Governing Law......................................................... 33
Section 32. Counterparts.......................................................... 33
Section 33. Descriptive Headings.................................................. 33
Exhibit A -- Form of Certificate of Designation, Preferences and Rights............... A-1
Exhibit B -- [Form of Rights Certificate]............................................. B-1
</TABLE>
ii
<PAGE>
RIGHTS AGREEMENT
----------------
RIGHTS AGREEMENT, dated as of April 2, 1996 (the "Agreement"), between
Payless ShoeSource Inc., a Missouri corporation (the "Company"), and The Bank of
New York, a banking company organized under the laws of New York (the "Rights
Agent").
W I T N E S S E T H
-------------------
WHEREAS, at a board of directors meeting held on January 16, 1996, The
May Department Stores Company, a New York corporation and the Company's sole
shareowner ("May"), determined to make a dividend distribution of all
outstanding shares of the Company's Common Stock (as hereinafter defined) to the
common shareowners of May (the "Spin-off Distribution");
WHEREAS, as a part of the Spin-off Distribution, May determined that
it desired to distribute Rights (as hereinafter defined) associated with the
Common Stock to be distributed, that certificates representing such Common Stock
would also evidence such Rights and that the registered holders of Common Stock
would also be the registered holders of the associated Rights;
WHEREAS, in order to effectuate the foregoing May is authorizing and
directing the Company to create a shareowner rights plan, to authorize and issue
to May Rights to be attached to the shares of Common Stock and evidenced by
certificates representing Common Stock and to enter into a rights agreement
substantially in the form of this Agreement;
WHEREAS, on April 2, 1996, the board of directors of May authorized a
committee of directors to adopt, on or before April 15, 1996, resolutions
declaring the dividend constituting the Spin-Off Distribution;
WHEREAS, it is anticipated that the committee of directors of May will
declare the dividend constituting the Spin-off Distribution on or about April
15, 1996, which Spin-off Distribution will have a record date of April 25, 1996
and a distribution date of May 4, 1996;
WHEREAS, the dividend to effect the Spin-off Distribution will consist
of .16 share of Common Stock to be distributed in respect of each share of May
common stock held on the record date for the Spin-off Distribution and will be
distributed on or about May 4, 1996 (the "Effective Date"), to holders of record
of common stock of May on April 25, 1996;
WHEREAS, each share of Common Stock distributed in the Spin-off
Distribution will have attached thereto one Right as provided herein; and
WHEREAS, the Board of Directors of the Company has authorized and
declared, and will distribute on or before April 12, 1996, a dividend
distribution of one Right for each share of Common Stock of the Company
outstanding at the close of business on April 12, 1996 (the "Record Date"), and
authorized the issuance of one Right (as such number may hereafter be adjusted
pursuant to the provisions of Section 11(p) hereof) for each share of Common
Stock of the Company issued between the Record Date (whether originally issued
or delivered from the Company's treasury) and the Distribution Date (as
hereinafter defined), each Right initially repre-
<PAGE>
senting the right to purchase one one-hundredth of a share of Series A Junior
Participating Preferred Stock of the Company having the rights, powers and
preferences set forth in the form of Certificate of Designation, Preferences and
Rights attached hereto as Exhibit A, upon the terms and subject to the
conditions hereinafter set forth (the "Rights");
NOW, THEREFORE, in consideration of the premises and the mutual
agreements herein set forth, the parties hereby agree as follows:
Section 1. Certain Definitions. For purposes of this Agreement, the
following terms have the meanings indicated:
(a) "Acquiring Person" shall mean any Person (as such term is
hereinafter defined) who or which, together with all Affiliates (as such term is
hereinafter defined) and Associates (as such term is hereinafter defined) of
such Person, shall after the Effective Date be the Beneficial Owner (as such
term is hereinafter defined) of 20% or more of the sum of the shares of Common
Stock then outstanding, but shall not include the Company, any Subsidiary of the
Company, any employee benefit plan of the Company or of any Subsidiary of the
Company, or any Person or entity organized, appointed or established by or for
the Company for or pursuant to the terms of any such plan, or any Person who
becomes an Acquiring Person solely as a result of a reduction in the number of
shares of Common Stock outstanding due to the repurchase of shares of Common
Stock by the Company, unless and until such Person shall purchase or otherwise
become the Beneficial Owner of additional shares of Common Stock constituting 1%
or more of the then outstanding shares of Common Stock. Notwithstanding the
foregoing, if the Board of Directors of the Company determines in good faith
that a Person who would otherwise be an Acquiring Person has become such
inadvertently, and such Person divests as promptly as practicable a sufficient
number of shares of Common Stock so that such Person would no longer be an
Acquiring Person, then such Person shall not be deemed to be an Acquiring Person
for any purposes of this Agreement.
(b) "Adverse Person" shall mean any Person declared to be an Adverse
Person by the Board of Directors upon determination that the criteria set forth
in Section 11(a)(ii)(B) apply to such Person.
(c) "Affiliate" and "Associate" shall have the respective meanings
ascribed to such terms in Rule 12b-2 of the General Rules and Regulations under
the Securities Exchange Act of 1934, as amended and in effect on the date of
this Agreement (the "Exchange Act").
(d) A Person shall be deemed the "Beneficial Owner" of, and shall
be deemed to "beneficially own," any securities:
(i) which such Person or any of such Person's Affiliates or
Associates, directly or indirectly, has the right to acquire (whether such
right is exercisable immediately or only after the passage of time)
pursuant to any agreement, arrangement or understanding (whether or not in
writing) or upon the exercise of conversion rights, exchange rights,
rights, warrants or options, or otherwise; provided, however, that a Person
shall not be deemed the "Beneficial Owner" of, or be deemed to
"beneficially own," (A) securities tendered pursuant to a tender or
exchange offer made by such Person or any of such Person's
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Affiliates or Associates until such tendered securities are accepted for
purchase or exchange, or (B) securities issuable upon exercise of Rights at
any time prior to the occurrence of a Triggering Event, or (C) securities
issuable upon exercise of Rights from and after the occurrence of a
Triggering Event which Rights were acquired by such Person or any of such
Person's Affiliates or Associates prior to the Distribution Date or
pursuant to Section 3(a) or Section 22 hereof (the "Original Rights") or
pursuant to Section 11(i) hereof in connection with an adjustment made with
respect to any Original Rights;
(ii) which such Person or any of such Person's Affiliates or
Associates, directly or indirectly, has the right to vote or dispose of or
has "beneficial ownership" of (as determined pursuant to Rule 13d-3 of the
General Rules and Regulations under the Exchange Act), including pursuant
to any agreement, arrangement or understanding, whether or not in writing;
provided, however, that a Person shall not be deemed the "Beneficial Owner"
of, or to "beneficially own," any security under this subparagraph (ii) as
a result of an agreement, arrangement or understanding to vote such
security if such agreement, arrangement or understanding: (A) arises
solely from a revocable proxy given in response to a public proxy or
consent solicitation made pursuant to, and in accordance with, the
applicable provisions of the General Rules and Regulations under the
Exchange Act, and (B) is not also then reportable by such Person on
Schedule 13D under the Exchange Act (or any comparable or successor
report); or
(iii) which are beneficially owned, directly or indirectly, by
any other Person (or any Affiliate or Associate thereof) with which such
Person (or any of such Person's Affiliates or Associates) has any
agreement, arrangement or understanding (whether or not in writing), for
the purpose of acquiring, holding, voting (except pursuant to a revocable
proxy as described in the proviso to subparagraph (ii) of this paragraph
(d)) or disposing of any voting securities of the Company; provided,
however, that nothing in this paragraph (d) shall cause a Person engaged in
business as an underwriter of securities to be deemed the "Beneficial
Owner" of, or to be deemed to "beneficially own," any securities acquired
through such Person's participation in good faith in a firm commitment
underwriting until the expiration of forty (40) days after the date of such
acquisition.
(e) "Business Day" shall mean any day other than a Saturday, Sunday or
a day on which banking institutions in the State of Missouri are authorized or
obligated by law or executive order to close.
(f) "Close of business" on any given date shall mean 5:00 P.M., St.
Louis, Missouri time, on such date; provided, however, that if such date is not
a Business Day it shall mean 5:00 P.M., St. Louis, Missouri time, on the next
succeeding Business Day.
(g) "Common Stock" shall mean the common stock, par value $.01 per
share, of the Company, except that "Common Stock" when used with reference to
any Person other than the Company shall mean the capital stock of such Person
with the greatest voting
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power, or the equity securities or other equity interest having power to control
or direct the management, of such Person.
(h) "Continuing Director" shall mean (i) any member of the Board of
Directors of the Company, while such Person is a member of the Board, who is not
an Acquiring Person, an Adverse Person or an Affiliate or Associate of an
Acquiring Person or an Adverse Person, or a representative of an Acquiring
Person or an Adverse Person or of any such Affiliate or Associate, and was a
member of the Board on the Effective Date, or (ii) any Person who subsequently
becomes a member of the Board, while such Person is a member of the Board, who
is not an Acquiring Person or an Adverse Person or an Affiliate or Associate of
an Acquiring Person or an Adverse Person or a representative of an Acquiring
Person, an Adverse Person or of any such Affiliate or Associate, if such
Person's nomination for election or election to the Board is recommended or
approved by a majority of the Continuing Directors.
(i) "Person" shall mean any individual, firm, corporation, partnership
or other entity whether organized under the laws of the United States of America
or any state or territory thereof or under the laws of any other country or
political subdivision thereof.
(j) "Preferred Stock" shall mean shares of Series A Junior
Participating Preferred Stock, par value $.01 per share, of the Company.
(k) "Section 11(a)(ii) Event" shall mean any event described in
Section 11(a)(ii)(A) or (B) hereof.
(l) "Section 13 Event" shall mean any event described in clauses
(x), (y) or (z) of Section 13(a) hereof.
(m) "Stock Acquisition Date" shall mean the first date of public
announcement (which, for purposes of this definition, shall include, without
limitation, a report filed pursuant to Section 13(d) under the Exchange Act) by
the Company or an Acquiring Person that an Acquiring Person has become such.
(n) "Subsidiary" shall mean, with reference to any Person, any
corporation of which an amount of voting securities sufficient to elect at least
a majority of the directors of such corporation is beneficially owned, directly
or indirectly, by such Person, or otherwise controlled by such Person.
(o) "Triggering Event" shall mean any Section 11(a)(ii) Event or any
Section 13 Event.
Section 2. Appointment of Rights Agent. The Company hereby appoints
the Rights Agent to act as agent for the Company and the holders of the Rights
(who, in accordance with Section 3 hereof, shall prior to the Distribution Date
also be the holders of the Common Stock) in accordance with the terms and
conditions hereof, and the Rights Agent hereby accepts such appointment. The
Company may from time to time appoint such Co-Rights Agents as it may deem
necessary or desirable.
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Section 3. Issue of Rights Certificates.
(a) Until the earlier of (i) the close of business on the tenth
Business Day after the Stock Acquisition Date or (ii) the close of business on
the tenth Business Day (or such later date as the Board of Directors shall
determine) after the date that a tender or exchange offer by any Person (other
than the Company, any Subsidiary of the Company, any employee benefit plan of
the Company or of any Subsidiary of the Company, or any Person or entity
organized, appointed or established by or for the Company, for or pursuant to
the terms, of any such plan) is first published or sent or given within the
meaning of Rule 14d-2(a) of the General Rules and Regulations under the Exchange
Act, if upon consummation thereof, such Person would be the Beneficial Owner of
15% or more of the shares of Common Stock then outstanding or (iii) the close of
business on the tenth Business Day after the Board of Directors determines,
pursuant to the criteria set forth in Section 11(a)(ii)(B) hereof, that a Person
is an Adverse Person (the earliest of (i), (ii) and (iii) being herein referred
to as the "Distribution Date"), (x) the Rights will be evidenced (subject to the
provisions of paragraph (b) of this Section 3) by the certificates for the
Common Stock registered in the names of the holders of the Common Stock (which
certificates for Common Stock shall be deemed also to be certificates for
Rights) and not by separate certificates, and (y) the Rights will be
transferable only in connection with the transfer of the underlying shares of
Common Stock (including a transfer to the Company). As soon as practicable
after the Distribution Date, the Rights Agent will send by first-class, postage
prepaid mail, to each record holder of the Common Stock as of the close of
business on the Distribution Date, at the address of such holder shown on the
records of the Company, one or more right certificates, in substantially the
form of Exhibit B hereto (the "Rights Certificates"), evidencing one Right for
each share of Common Stock so held, subject to adjustment as provided herein.
In the event that an adjustment in the number of Rights per share of Common
Stock has been made pursuant to Section 11(p) hereof, at the time of
distribution of the Rights Certificates, the Company shall make the necessary
and appropriate rounding adjustments (in accordance with Section 14(a) hereof)
so that Rights Certificates representing only whole numbers of Rights are
distributed and cash is paid in lieu of any fractional Rights. As of and after
the Distribution Date, the Rights will be evidenced solely by such Rights
Certificates.
(b) Rights shall be issued in respect of all shares of Common Stock
which are issued after the Record Date but prior to the earlier of the
Distribution Date or the Expiration Date. Certificates representing such shares
of Common Stock shall also be deemed to be certificates for Rights, and shall
bear the following legend:
This certificate evidences and entitles the holder hereof to certain
Rights as set forth in the Rights Agreement between Payless ShoeSource,
Inc. (the "Company") and the Rights Agent (the "Rights Agreement"), the
terms of which are hereby incorporated herein by reference and a copy of
which is on file at the principal offices of the Company. Under certain
circumstances, as set forth in the Rights Agreement, such Rights will be
evidenced by separate certificates and will no longer be evidenced by this
certificate. The Company will mail to the holder of this certificate a
copy of the Rights Agreement, as in effect on the date of mailing, without
charge promptly after receipt of a written request therefor. Under certain
circumstances set forth in the Rights Agreement, Rights issued to, or held
by, any Person who is, was or becomes an Acquiring Person or an Adverse
Person or any Affiliate or Associate of either (as such terms are defined
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in the Rights Agreement), whether currently held by or on behalf of such
Person or by any subsequent holder, may become null and void.
With respect to such certificates containing the foregoing legend, until the
earlier of (i) the Distribution Date or (ii) the Expiration Date, the Rights
associated with the Common Stock represented by such certificates shall be
evidenced by such certificates alone and the registered holders of Common Stock
shall also be the registered holders of the associated Rights, and the transfer
of any of such certificates shall also constitute the transfer of the Rights
associated with the Common Stock represented by such certificates.
Section 4. Form of Rights Certificates.
(a) The Rights Certificates (and the forms of election to purchase and
of assignment to be printed on the reverse thereof) shall each be substantially
in the form set forth in Exhibit B hereto and may have such marks of
identification or designation and such legends, summaries or endorsements
printed thereon as the Company may deem appropriate and as are not inconsistent
with the provisions of this Agreement, or as may be required to comply with any
applicable law or with any rule or regulation made pursuant thereto or with any
rule or regulation of any stock exchange on which the Rights may from time to
time be listed, or to conform to usage. Subject to the provisions of Section 11
and Section 22 hereof, the Rights Certificates, whenever distributed, shall be
dated as of the Record Date and on their face shall entitle the holders thereof
to purchase such number of one one-hundredths of a share of Preferred Stock as
shall be set forth therein at the price set forth therein (such exercise price
per one one-hundredth of a share being referred to herein as the "Purchase
Price"), but the amount and type of securities purchasable upon the exercise of
each Right and the Purchase Price thereof shall be subject to adjustment as
provided herein.
(b) Any Rights Certificate issued pursuant to Section 3(a), Section
11(i) or Section 22 hereof that represents Rights beneficially owned by: (i)
an Acquiring Person, an Adverse Person or any Associate or Affiliate of an
Acquiring Person or an Adverse Person, (ii) a transferee of an Acquiring Person
or an Adverse Person (or of any such Associate or Affiliate) who becomes a
transferee after the Acquiring Person or Adverse Person becomes such, or (iii) a
transferee of an Acquiring Person or an Adverse Person (or of any such Associate
or Affiliate) who becomes a transferee prior to or concurrently with the
Acquiring Person or the Adverse Person becoming such and receives such Rights
pursuant to either (A) a transfer (whether or not for consideration) from the
Acquiring Person or the Adverse Person to holders of equity interests in such
Acquiring Person or Adverse Person or to any Person with whom such Acquiring
Person or Adverse Person has any agreement, arrangement or understanding
regarding the transferred Rights or (B) a transfer which the Board of Directors
of the Company has determined is part of a plan, arrangement or understanding
which has as a primary purpose or effect avoidance of Section 7(e) hereof, and
any Rights Certificate issued pursuant to Section 6 or Section 11 hereof upon
transfer, exchange, replacement or adjustment of any other Rights Certificate
referred to in this sentence, shall contain (to the extent feasible) the
following legend:
The Rights represented by this Rights Certificate are or were beneficially
owned by a Person who was or became an Acquiring Person or an Adverse
Person or an Affiliate or Associate of an Acquiring Person or an Adverse
Person (as such terms are defined in the Rights Agreement). Accordingly,
this Rights Certificate
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and the Rights represented hereby may become null and void in the
circumstances specified in Section 7(e) of such Agreement.
Section 5. Countersignature and Registration.
(a) The Rights Certificates shall be executed on behalf of the Company
by its Chairman of the Board, its President or any Vice President, either
manually or by facsimile signature, and shall have affixed thereto the Company's
seal or a facsimile thereof which shall be attested by the Secretary or an
Assistant Secretary of the Company, either manually or by facsimile signature.
The Rights Certificates shall be countersigned by the Rights Agent, either
manually or by facsimile signature, and shall not be valid for any purpose
unless so countersigned. In case any officer of the Company who shall have
signed any of the Rights Certificates shall cease to be such officer of the
Company before countersignature by the Rights Agent and issuance and delivery by
the Company, such Rights Certificates, nevertheless, may be countersigned by the
Rights Agent and issued and delivered by the Company with the same force and
effect as though the person who signed such Rights Certificates had not ceased
to be such officer of the Company; and any Rights Certificates may be signed on
behalf of the Company by any person who, at the actual date of the execution of
such Rights Certificate, shall be a proper officer of the Company to sign such
Rights Certificate, although at the date of the execution of this Rights
Agreement any such person was not such an officer.
(b) Following the Distribution Date, the Rights Agent will keep or
cause to be kept, at its principal office or offices designated as the
appropriate place for surrender of Rights Certificates upon exercise or
transfer, books for registration and transfer of the Rights Certificates issued
hereunder. Such books shall show the names and addresses of the respective
holders of the Rights Certificates, the number of Rights evidenced on its face
by each of the Rights Certificates, the certificate number of each of the Rights
Certificates and the date of each of the Rights Certificates.
Section 6. Transfer, Split Up, Combination and Exchange of Rights
Certificates; Mutilated, Destroyed, Lost or Stolen Rights Certificates.
(a) Subject to the provisions of Section 4(b), Section 7(e) and
Section 14 hereof, at any time after the close of business on the Distribution
Date, and at or prior to the close of business on the Expiration Date, any
Rights Certificate or Certificates may be transferred, split up, combined or
exchanged for another Rights Certificate or Certificates, entitling the
registered holder to purchase a like number of one one-hundredths of a share of
Preferred Stock (or, following a Triggering Event, Common Stock, other
securities, cash or other assets, as the case may be) as the Rights Certificate
or Certificates surrendered then entitled such holder (or former holder in the
case of a transfer) to purchase. Any registered holder desiring to transfer,
split up, combine or exchange any Rights Certificate or Certificates shall make
such request in writing delivered to the Rights Agent, and shall surrender the
Rights Certificate or Certificates to be transferred, split up, combined or
exchanged at the principal office or offices of the Rights Agent designated for
such purpose. Neither the Rights Agent nor the Company shall be obligated to
take any action whatsoever with respect to the transfer of any such surrendered
Rights Certificate until the registered holder shall have completed and signed
the certificate contained in the form of assignment on the reverse side of such
Rights Certificate and shall have provided such additional evidence of the
identity of the Beneficial Owner (or former Beneficial Owner) or Affiliates or
Associates thereof as the Company shall reasonably request. Thereupon the
Rights Agent shall,
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subject to Section 4(b), Section 7(e) and Section 14 hereof, countersign and
deliver to the Person entitled thereto a Rights Certificate or Rights
Certificates, as the case may be, as so requested. The Company may require
payment of a sum sufficient to cover any tax or governmental charge that may be
imposed in connection with any transfer, split up, combination or exchange of
Rights Certificates.
(b) Upon receipt by the Company and the Rights Agent of evidence
reasonably satisfactory to them of the loss, theft, destruction or mutilation of
a Rights Certificate, and, in case of loss, theft or destruction, of indemnity
or security reasonably satisfactory to them, and reimbursement to the Company
and the Rights Agent of all reasonable expenses incidental thereto, and upon
surrender to the Rights Agent and cancellation of the Rights Certificate if
mutilated, the Company will execute and deliver a new Rights Certificate of like
tenor to the Rights Agent for countersignature and delivery to the registered
owner in lieu of the Rights Certificate so lost, stolen, destroyed or mutilated.
Section 7. Exercise of Rights; Purchase Price; Expiration Date of
Rights.
(a) Subject to Section 7(e) hereof, the registered holder of any
Rights Certificate may exercise the Rights evidenced thereby (except as
otherwise provided herein including, without limitation, the restrictions on
exercisability set forth in Section 9(c), Section 11(a)(iii) and Section 23(a)
hereof) in whole or in part at any time after the Distribution Date upon
surrender of the Rights Certificate, with the form of election to purchase and
the certificate on the reverse side thereof duly executed, to the Rights Agent
at the principal office or offices of the Rights Agent designated for such
purpose, together with payment of the aggregate Purchase Price with respect to
the total number of one one-hundredths of a share of Preferred Stock (or other
securities, cash or other assets, as the case may be) as to which such
surrendered Rights are then exercisable, at or prior to the earlier of (i) the
close of business on April 30, 2006 (the "Final Expiration Date"), or (ii) the
time at which the Rights are redeemed as provided in Section 23 hereof (the
earlier of (i) and (ii) being herein referred to as the "Expiration Date").
(b) The Purchase Price for each one one-hundredth of a share of
Preferred Stock pursuant to the exercise of a Right shall initially be $80, and
shall be subject to adjustment from time to time as provided in Sections 11 and
13(a) hereof and shall be payable in accordance with paragraph (c) below.
(c) Upon receipt of a Rights Certificate representing exercisable
Rights, with the form of election to purchase and the certificate duly executed,
accompanied by payment, with respect to each Right so exercised, of the Purchase
Price per one one-hundredth of a share of Preferred Stock (or other securities,
cash or other assets, as the case may be) to be purchased as set forth below and
an amount equal to any applicable transfer tax, the Rights Agent shall, subject
to Section 20(k) hereof, thereupon promptly (i) (A) requisition from any
transfer agent of the shares of Preferred Stock (or make available, if the
Rights Agent is the transfer agent for such shares) certificates for the total
number of one one-hundredths of a share of Preferred Stock to be purchased and
the Company hereby irrevocably authorizes its transfer agent to comply with all
such requests, or (B) if the Company shall have elected to deposit the total
number of shares of Preferred Stock issuable upon exercise of the Rights
hereunder with a depositary agent, requisition from the depositary agent
depositary receipts representing such number of one one-hundredths of a share of
Preferred Stock as are to be purchased (in which case certificates for the
shares of Preferred Stock represented by such receipts shall be deposited by the
transfer agent with
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the depositary agent) and the Company will direct the depositary agent to comply
with such request, (ii) requisition from the Company the amount of cash, if any,
to be paid in lieu of fractional shares in accordance with Section 14 hereof,
(iii) after receipt of such certificates or depositary receipts, cause the same
to be delivered to, or upon the order of, the registered holder of such Rights
Certificate, registered in such name or names as may be designated by such
holder, and (iv) after receipt thereof, deliver such cash, if any, to, or upon
the order of, the registered holder of such Rights Certificate. The payment of
the Purchase Price (as such amount may be reduced pursuant to Section 11(a)(iii)
hereof) may be made (x) in cash or by certified bank check or bank draft payable
to the order of the Company, or (y) by delivery of a certificate or certificates
(with appropriate stock powers executed in blank attached thereto) evidencing a
number of shares of Common Stock equal to the then Purchase Price divided by the
closing price (as determined pursuant to Section 11(d) hereof) per share of
Common Stock on the Trading Day immediately preceding the date of such exercise.
In the event that the Company is obligated to issue other securities (including
Common Stock) of the Company, pay cash and/or distribute other property pursuant
to Section 11(a) hereof, the Company will make all arrangements necessary so
that such other securities, cash and/or other property are available for
distribution by the Rights Agent, if and when appropriate. The Company reserves
the right to require prior to the occurrence of a Triggering Event that, upon
any exercise of Rights, a number of Rights be exercised so that only whole
shares of Preferred Stock would be issued.
(d) In case the registered holder of any Rights Certificate shall
exercise less than all the Rights evidenced thereby, a new Rights Certificate
evidencing Rights equivalent to the Rights remaining unexercised shall be issued
by the Rights Agent and delivered to, or upon the order of, the registered
holder of such Rights Certificate, registered in such name or names as may be
designated by such holder, subject to the provisions of Section 14 hereof.
(e) Notwithstanding anything in this Agreement to the contrary, from
and after the occurrence of a Section 11(a)(ii) Event, any Rights beneficially
owned by (i) an Acquiring Person or an Adverse Person or an Associate or
Affiliate of an Acquiring Person or an Adverse Person, (ii) a transferee of an
Acquiring Person or an Adverse Person (or of any such Associate or Affiliate)
who becomes a transferee after the Acquiring Person or the Adverse Person
becomes such, or (iii) a transferee of an Acquiring Person or an Adverse Person
(or of any such Associate or Affiliate) who becomes a transferee prior to or
concurrently with the Acquiring Person or the Adverse Person becoming such and
receives such Rights pursuant to either (A) a transfer (whether or not for
consideration) from the Acquiring Person or the Adverse Person to holders of
equity interests in such Acquiring Person or Adverse Person or to any Person
with whom the Acquiring Person or Adverse Person has any agreement, arrangement
or understanding regarding the transferred Rights or (B) a transfer which the
Board of Directors of the Company has determined is part of a plan, arrangement
or understanding which has as a primary purpose or effect the avoidance of this
Section 7(e), shall become null and void without any further action, and no
holder of such Rights shall have any rights whatsoever with respect to such
Rights, whether under any provision of this Agreement or otherwise. The Company
shall use all reasonable efforts to ensure that the provisions of this Section
7(e) and Section 4(b) hereof are complied with, but shall have no liability to
any holder of Rights Certificates or other Person as a result of its failure to
make any determinations with respect to an Acquiring Person or an Adverse Person
or any of their respective Affiliates, Associates or transferees hereunder.
(f) Notwithstanding anything in this Agreement to the contrary,
neither the Rights Agent nor the Company shall be obligated to undertake any
action with respect
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to a registered holder upon the occurrence of any purported exercise as set
forth in this Section 7 unless such registered holder shall have (i) completed
and duly executed the certificate and the form of election to purchase set forth
on the reverse side of the Rights Certificate surrendered for such exercise, and
(ii) provided such additional evidence of the identity of the Beneficial Owner
(or former Beneficial Owner) or Affiliates or Associates thereof as the Company
shall reasonably request.
Section 8. Cancellation and Destruction of Rights Certificates. All
Rights Certificates surrendered for the purpose of exercise, transfer, split up,
combination or exchange shall, if surrendered to the Company or any of its
agents, be delivered to the Rights Agent for cancellation or in cancelled form,
or, if surrendered to the Rights Agent, shall be cancelled by it, and no Rights
Certificates shall be issued in lieu thereof except as expressly permitted by
any of the provisions of this Agreement. The Company shall deliver to the
Rights Agent for cancellation and retirement, and the Rights Agent shall so
cancel and retire, any other Rights Certificate purchased or acquired by the
Company otherwise than upon the exercise thereof. The Rights Agent shall
deliver all cancelled Rights Certificates to the Company, or shall, at the
written request of the Company, destroy such cancelled Rights Certificates, and
in such case shall deliver a certificate of destruction thereof to the Company.
Section 9. Reservation and Availability of Capital Stock.
(a) The Company covenants and agrees that it will cause to be reserved
and kept available out of its authorized and unissued shares of Preferred Stock
(and, following the occurrence of a Triggering Event, out of its authorized and
unissued shares of Common Stock and/or other securities or out of its authorized
and issued shares held in its treasury), the number of shares of Preferred Stock
(and, following the occurrence of a Triggering Event, Common Stock and/or other
securities) that, as provided in this Agreement including Section 11(a)(iii)
hereof, will be sufficient to permit the exercise in full of all outstanding
Rights.
(b) So long as the shares of Preferred Stock (and, following the
occurrence of a Triggering Event, Common Stock and/or other securities) issuable
and deliverable upon the exercise of the Rights may be listed on any national
securities exchange, the Company shall use its best efforts to cause, from and
after such time as the Rights become exercisable, all shares reserved for such
issuance to be listed on such exchange upon official notice of issuance upon
such exercise.
(c) The Company shall use its best efforts to (i) file, as soon as
practicable following the earliest date after the occurrence of a Section
11(a)(ii) Event on which the consideration to be delivered by the Company upon
exercise of the Rights has been determined in accordance with Section 11(a)(iii)
hereof, or as soon as is required by law following the Distribution Date, as the
case may be, a registration statement under the Securities Act of 1933 (the
"Act"), with respect to the securities purchasable upon exercise of the Rights
on an appropriate form, (ii) cause such registration statement to become
effective as soon as practicable after such filing, and (iii) cause such
registration statement to remain effective (with a prospectus at all times
meeting the requirements of the Act) until the earlier of (A) the date as of
which the Rights are no longer exercisable for such securities, and (B) the date
of the expiration of the Rights. The Company will also take such action as may
be appropriate under, or to ensure compliance with, the securities or "blue sky"
laws of the various states in connection with the exercisability of the Rights.
The Company may temporarily suspend, for a period of time not to exceed ninety
(90)
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days after the date set forth in clause (i) of the first sentence of this
Section 9(c), the exercisability of the Rights in order to prepare and file such
registration statement and permit it to become effective. Upon any such
suspension, the Company shall issue a public announcement stating that the
exercisability of the Rights has been temporarily suspended, as well as a public
announcement at such time as the suspension is no longer in effect.
Notwithstanding any provision of this Agreement to the contrary, the Rights
shall not be exercisable in any jurisdiction if the requisite qualification in
such jurisdiction shall not have been obtained, the exercise thereof shall not
be permitted under applicable law or a registration statement shall not have
been declared effective.
(d) The Company covenants and agrees that it will take all such action
as may be necessary to ensure that all one one-hundredths of a share of
Preferred Stock (and, following the occurrence of a Triggering Event, Common
Stock and/or other securities) delivered upon exercise of Rights shall, at the
time of delivery of the certificates for such shares (subject to payment of the
Purchase Price), be duly and validly authorized and issued and fully paid and
nonassessable.
(e) The Company further covenants and agrees that it will pay when due
and payable any and all federal and state transfer taxes and charges which may
be payable in respect of the issuance or delivery of the Rights Certificates and
of any certificates for a number of one one-hundredths of a share of Preferred
Stock (or Common Stock and/or other securities, as the case may be) upon the
exercise of Rights. The Company shall not, however, be required to pay any
transfer tax which may be payable in respect of any transfer or delivery of
Rights Certificates to a Person other than, or the issuance or delivery of a
number of one one-hundredths of a share of Preferred Stock (or Common Stock
and/or other securities, as the case may be) in respect of a name other than
that of, the registered holder of the Rights Certificates evidencing Rights
surrendered for exercise or to issue or deliver any certificates for a number of
one one-hundredths of a share of Preferred Stock (or Common Stock and/or other
securities, as the case may be) in a name other than that of the registered
holder upon the exercise of any Rights until such tax shall have been paid (any
such tax being payable by the holder of such Rights Certificate at the time of
surrender) or until it has been established to the Company's satisfaction that
no such tax is due.
Section 10. Preferred Stock Record Date. Each person in whose name
any certificate for a number of one one-hundredths of a share of Preferred Stock
(or Common Stock and/or other securities, as the case may be) is issued upon the
exercise of Rights shall for all purposes be deemed to have become the holder of
record of the whole or fractional shares of Preferred Stock (or Common Stock
and/or other securities, as the case may be) represented thereby on, and such
certificate shall be dated, the date upon which the Rights Certificate
evidencing such Rights was duly surrendered and payment of the Purchase Price
(and all applicable transfer taxes) was made; provided, however, that if the
date of such surrender and payment is a date upon which the Preferred Stock (or
Common Stock and/or other securities, as the case may be) transfer books of the
Company are closed, such Person shall be deemed to have become the record holder
of such whole or fractional shares on, and such certificate shall be dated, the
next succeeding Business Day on which the Preferred Stock (or Common Stock
and/or other securities, as the case may be) transfer books of the Company are
open. Prior to the exercise of the Rights evidenced thereby, the holder of a
Rights Certificate, as such, shall not be entitled to any rights of a shareowner
of the Company with respect to shares for which the Rights shall be exercisable,
including, without limitation, the right to vote, to receive dividends or other
distributions or to
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exercise any preemptive rights, and shall not be entitled to receive any notice
of any proceedings of the Company, except as provided herein.
Section 11. Adjustment of Purchase Price, Number and Kind of Shares
or Number of Rights. The Purchase Price, the number and kind of shares covered
by each Right and the number of Rights outstanding are subject to adjustment
from time to time as provided in this Section 11.
(a) (i) In the event the Company shall at any time after the
date of this Agreement (A) declare a dividend on the Preferred Stock
payable in shares of Preferred Stock, (B) subdivide the outstanding
Preferred Stock, (C) combine the outstanding Preferred Stock into a smaller
number of shares, or (D) issue any shares of its capital stock in a
reclassification of the Preferred Stock (including any such
reclassification in connection with a consolidation or merger in which the
Company is the continuing or surviving corporation), except as otherwise
provided in this Section 11(a) and Section 7(e) hereof, the Purchase Price
in effect at the time of the record date for such dividend or of the
effective date of such subdivision, combination or reclassification, and
the number and kind of shares of Preferred Stock or capital stock, as the
case may be, issuable on such date, shall be proportionately adjusted so
that the holder of any Right exercised after such time shall be entitled to
receive, upon payment of the Purchase Price then in effect, the aggregate
number and kind of shares of Preferred Stock or capital stock, as the case
may be, which, if such Right had been exercised immediately prior to such
date and at a time when the Preferred Stock transfer books of the Company
were open, the holder of such Right would have owned upon such exercise and
been entitled to receive by virtue of such dividend, subdivision,
combination or reclassification. If an event occurs which would require an
adjustment under both this Section 11(a)(i) and Section 11(a)(ii) hereof,
the adjustment provided for in this Section 11(a)(i) shall be in addition
to, and shall be made prior to, any adjustment required pursuant to,
Section 11(a)(ii) hereof.
(ii) In the event:
(A) any Person (other than the Company, any Subsidiary of the
Company, any employee benefit plan of the Company or of any Subsidiary of
the Company, or any Person or entity organized, appointed or established by
or for the Company for, or pursuant to the terms of, any such plan), alone
or together with its Affiliates and Associates, shall, at any time after
the Effective Date, become the Beneficial Owner of 20% or more of the
shares of Common Stock then outstanding, unless the event causing the 20%
threshold to be crossed is a transaction set forth in Section 13(a) hereof
or is an acquisition of shares of Common Stock pursuant to a tender offer
or an exchange offer for all outstanding shares of Common Stock at a price
and on terms determined by at least a majority of the Continuing Directors
to be in the best interests of the Company and its shareowners, or
(B) the Board of Directors shall declare any Person to be an
Adverse Person, upon a determination that such Person, alone or together
with its Affiliates and Associates, has, at any time after the Record Date,
become the Beneficial
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Owner of an amount of Common Stock which the Board of Directors determines
to be substantial (which amount shall in no event be less than 15% of the
shares of Common Stock then outstanding) and a determination by the Board
of Directors of the Company, after reasonable inquiry and investigation,
including consultation with such persons as such directors shall deem
appropriate, that (a) such Beneficial Ownership by such Person is intended
to cause the Company to repurchase the Common Stock beneficially owned by
such Person or to cause pressure on the Company to take action or enter
into a transaction or series of transactions intended to provide such
Person with short-term financial gain under circumstances where the Board
of Directors determines that the best long-term interests of the Company
and its shareowners would not be served by taking such action or entering
into such transaction or series of transactions at that time or (b) such
Beneficial Ownership is causing or reasonably likely to cause a material
adverse impact (including, but not limited to, impairment of relationships
with customers or impairment of the Company's ability to maintain its
competitive position) on the business or prospects of the Company to the
detriment of the Company's shareowners,
then, promptly following the occurrence of a Section 11(a)(ii) Event, proper
provision shall be made so that each holder of a Right (except as provided below
and in Section 7(e) hereof) shall thereafter have the right to receive, upon
exercise thereof at the then current Purchase Price in accordance with the terms
of this Agreement, in lieu of a number of one one-hundredths of a share of
Preferred Stock, such number of shares of Common Stock of the Company as shall
equal the result obtained by (x) multiplying the then current Purchase Price by
the then number of one one-hundredths of a share of Preferred Stock for which a
Right was exercisable immediately prior to the first occurrence of a Section
11(a)(ii) Event, and (y) dividing that product (which, following such
occurrence, shall thereafter be referred to as the "Purchase Price" for each
Right for all purposes of this Agreement) by 50% of the current market price
(determined pursuant to Section 11(d) hereof) per share of Common Stock on the
date of such occurrence (such number of shares being referred to herein as the
"Adjustment Shares").
(iii) In the event that the number of shares of Common Stock
which are authorized by the Articles of Incorporation but not outstanding
or reserved for issuance for purposes other than upon exercise of the
Rights are not sufficient to permit the exercise in full of the Rights in
accordance with the foregoing subparagraph (ii) of this Section 11(a), the
Company shall: (A) determine the excess of (1) the value of the Adjustment
Shares issuable upon the exercise of a Right (the "Current Value") over (2)
the Purchase Price (such excess being referred to herein as the "Spread"),
and (B) with respect to each Right (subject to Section 7(e) hereof), make
adequate provision to substitute for the Adjustment Shares, upon exercise
of the Right and payment of the applicable Purchase Price, (1) cash, (2) a
reduction in the Purchase Price, (3) Common Stock or other equity
securities of the Company (including, without limitation, shares, or units
of shares, of preferred stock which the Board of Directors of the Company
has deemed to have the same value as shares of Common Stock (such shares of
preferred stock being referred to herein as "common stock equivalents")),
(4) debt securities of the Company, (5) other assets, or (6) any
combination of the foregoing, having an aggregate value equal to the
Current Value, where such aggregate value has been determined by the Board
of Directors of the Company based upon the advice of a nationally
recognized investment banking firm selected by the Board of Directors of
the Company; provided, however, if the
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Company shall not have made adequate provision to deliver value pursuant to
clause (B) above within thirty (30) days following the later of (x) the
occurrence of a Section 11(a)(ii) Event and (y) the date on which the
Company's right of redemption pursuant to Section 23(a) expires (the later
of (x) and (y) being referred to herein as the "Section 11(a)(ii) Trigger
Date"), then the Company shall be obligated to deliver, upon the surrender
for exercise of a Right and without requiring payment of the Purchase
Price, shares of Common Stock (to the extent available) and then, if
necessary, cash, which in the aggregate are equal to the Spread. If the
Board of Directors of the Company shall determine in good faith that it is
likely that sufficient additional shares of Common Stock could be
authorized for issuance upon exercise in full of the Rights, the thirty
(30) day period set forth above may be extended to the extent necessary,
but not more than ninety (90) days following the Section 11(a)(ii) Trigger
Date, in order that the Company may seek shareowner approval for the
authorization of such additional shares (such period, as it may be extended
being referred to herein as the "Substitution Period"). To the extent that
the Company determines that some action need be taken pursuant to the first
and/or second sentences of this Section 11(a)(iii), the Company (x) shall
provide, subject to Section 7(e) hereof, that such action shall apply
uniformly to all outstanding Rights, and (y) may suspend the exercisability
of the Rights until the expiration of the Substitution Period in order to
seek any authorization of additional shares and/or to decide the
appropriate form of distribution to be made pursuant to such first sentence
and to determine the value thereof. In the event of any such suspension,
the Company shall issue a public announcement stating that the
exercisability of the Rights has been temporarily suspended, as well as a
public announcement at such time as the suspension is no longer in effect.
For purposes of this Section 11(a)(iii), the value of each Adjustment Share
shall be the current market price (as determined pursuant to Section 11(d)
hereof) per share of the Common Stock on the Section 11(a)(ii) Trigger Date
and the per share or per unit value of any "common stock equivalent" shall
be deemed to be equal to the current market price (as determined pursuant
to Section 11(d) hereof) of the Common Stock on such date.
(iv) If the rules of the national securities exchange, registered
as such pursuant to Section 6 of the Exchange Act, or of the national
securities association, registered as such pursuant to Section 15A of the
Exchange Act, on which the Common Stock is principally traded would
prohibit such exchange or association from listing or continuing to list,
or from authorizing for or continuing quotation and/or transaction
reporting through an inter-dealer quotation system, the Common Stock or
other equity securities of the Company if the Rights were to be exercised
for shares of Common Stock in accordance with subparagraph (ii) of this
Section 11(a) because such issuance would nullify, restrict or disparately
reduce the per share voting rights of holders of Common Stock, the Company
shall: (A) determine the Spread, and (B) with respect to each Right, make
adequate provision to substitute for the Adjustment Shares, upon payment of
the applicable Purchase Price, (1) cash, (2) equity securities of the
Company, including, without limitation, "common stock equivalents," other
than securities which would have the effect of nullifying, restricting or
disparately reducing the per share voting rights of holders of Common
Stock, (3) debt securities of the Company, (4) other assets, or (5) any
combination of the foregoing, having an aggregate value equal to the
Current Value, where such aggregate value has been determined by the Board
of Directors of the
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Company based upon the advice of a nationally recognized investment banking
firm selected by the Board of Directors; provided, however, if the Company
shall not have made adequate provision to deliver value pursuant to clause
(B) above within thirty (30) days following the Section 11(a)(ii) Trigger
Date, then the Company shall be obligated to deliver, upon the surrender
for exercise of a Right and without requiring payment of the Purchase
Price, cash having an aggregate value equal to the Spread. To the extent
that the Company determines that some action need be taken pursuant to the
first sentence of this Section 11(a)(iv), the Company (x) shall provide,
subject to Section 7(e) hereof, that such action shall apply uniformly to
all outstanding Rights and (y) may suspend the exercisability of the
Rights, but not longer than ninety (90) days after the Section 11(a)(ii)
Trigger Date, in order to decide the appropriate form of distribution to be
made pursuant to such first sentence and to determine the value thereof.
In the event of any such suspension, the Company shall issue a public
announcement stating that the exercisability of the Rights has been
temporarily suspended, as well as a public announcement at such time as the
suspension is no longer in effect. For purposes of this Section 11(a)(iv),
the value of the Common Stock shall be the current market price (as
determined pursuant to Section 11(d) hereof) per share of the Common Stock
on the Section 11(a)(ii) Trigger Date and the value of any "common stock
equivalent" shall be deemed to have the same value as the Common Stock on
such date.
(b) In case the Company shall fix a record date for the issuance of
rights, options or warrants to all holders of Preferred Stock entitling them to
subscribe for or purchase (for a period expiring within forty-five (45)
calendar days after such record date) Preferred Stock (or shares having the same
rights, privileges and preferences as the shares of Preferred Stock ("equivalent
preferred stock")) or securities convertible into Preferred Stock or equivalent
preferred stock at a price per share of Preferred Stock or per share of
equivalent preferred stock (or having a conversion price per share, if a
security convertible into Preferred Stock or equivalent preferred stock) less
than the current market price (as determined pursuant to Section 11(d) hereof)
per share of Preferred Stock on such record date, the Purchase Price to be in
effect after such record date shall be determined by multiplying the Purchase
Price in effect immediately prior to such record date by a fraction, the
numerator of which shall be the number of shares of Preferred Stock outstanding
on such record date, plus the number of shares of Preferred Stock which the
aggregate offering price of the total number of shares of Preferred Stock and/or
equivalent preferred stock so to be offered (and/or the aggregate initial
conversion price of the convertible securities so to be offered) would purchase
at such current market price, and the denominator of which shall be the number
of shares of Preferred Stock outstanding on such record date, plus the number of
additional shares of Preferred Stock and/or equivalent preferred stock to be
offered for subscription or purchase (or into which the convertible securities
so to be offered are initially convertible). In case such subscription price
may be paid by delivery of consideration part or all of which may be in a form
other than cash, the value of such consideration shall be as determined in good
faith by the Board of Directors of the Company, whose determination shall be
described in a statement filed with the Rights Agent and shall be conclusive for
all purposes and binding on the Rights Agent and the holders of the Rights.
Shares of Preferred Stock owned by or held for the account of the Company shall
not be deemed outstanding for the purpose of any such computation. Such
adjustment shall be made successively whenever such a record date is fixed, and
in the event that such rights or warrants are not so issued, the Purchase Price
shall be adjusted to be the Purchase Price which would then be in effect if such
record date had not been fixed.
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<PAGE>
(c) In case the Company shall fix a record date for a distribution to
all holders of Preferred Stock (including any such distribution made in
connection with a consolidation or merger in which the Company is the continuing
corporation) of evidences of indebtedness, cash (other than a regular quarterly
cash dividend out of the earnings or retained earnings of the Company), assets
(other than a dividend payable in Preferred Stock, but including any dividend
payable in stock other than Preferred Stock) or subscription rights or warrants
(excluding those referred to in Section 11(b) hereof), the Purchase Price to be
in effect after such record date shall be determined by multiplying the Purchase
Price in effect immediately prior to such record date by a fraction, the
numerator of which shall be the current market price (as determined pursuant to
Section 11(d) hereof) per share of Preferred Stock on such record date, less the
fair market value (as determined in good faith by the Board of Directors of the
Company, whose determination shall be described in a statement filed with the
Rights Agent) of the portion of the cash, assets or evidences of indebtedness so
to be distributed or of such subscription rights or warrants applicable to a
share of Preferred Stock and the denominator of which shall be such current
market price (as determined pursuant to Section 11(d) hereof) per share of
Preferred Stock. Such adjustments shall be made successively whenever such a
record date is fixed, and in the event that such distribution is not so made,
the Purchase Price shall be adjusted to be the Purchase Price which would have
been in effect if such record date had not been fixed.
(d)(i) For the purpose of any computation hereunder, other than
computations made pursuant to Section 11(a)(iii) or (iv) hereof, the
"current market price" per share of Common Stock on any date shall be
deemed to be the average of the daily closing prices per share of such
Common Stock for the thirty (30) consecutive Trading Days (as such term is
hereinafter defined) immediately prior to such date, and for purposes of
computations made pursuant to Section 11(a)(iii) or (iv) hereof, the
"current market price" per share of Common Stock on any date shall be
deemed to be the average of the daily closing prices per share of such
Common Stock for the ten (10) consecutive Trading Days immediately
following such date; provided, however, that in the event that the current
market price per share of the Common Stock is determined during a period
following the announcement by the issuer of such Common Stock of (A) a
dividend or distribution on such Common Stock payable in shares of such
Common Stock or securities convertible into shares of such Common Stock
(other than the Rights), or (B) any subdivision, combination or
reclassification of such Common Stock, and the ex-dividend date for such
dividend or distribution, or the record date for such subdivision,
combination or reclassification shall not have occurred prior to the
commencement of the requisite thirty (30) Trading Day or ten (10) Trading
Day period, as set forth above, then, and in each such case, the "current
market price" shall be properly adjusted to take into account ex-dividend
trading. The closing price for each day shall be the last sale price,
regular way, or, in case no such sale takes place on such day, the average
of the closing bid and asked prices, regular way, in either case as
reported in the principal consolidated transaction reporting system with
respect to securities listed or admitted to trading on the New York Stock
Exchange or, if the shares of Common Stock are not listed or admitted to
trading on the New York Stock Exchange, as reported in the principal
consolidated transaction reporting system with respect to securities listed
on the principal national securities exchange on which the shares of Common
Stock are listed or admitted to trading or, if the shares of Common Stock
are not listed or admitted to trading on any national securities exchange,
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the last quoted price or, if not so quoted, the average of the high bid and
low asked prices in the over-the-counter market, as reported by the
National Association of Securities Dealers, Inc. Automated Quotation System
("NASDAQ") or such other system then in use, or, if on any such date the
shares of Common Stock are not quoted by any such organization, the average
of the closing bid and asked prices as furnished by a professional market
maker making a market in the Common Stock selected by the Board of
Directors of the Company. If on any such date no market maker is making a
market in the Common Stock, the fair value of such shares on such date as
determined in good faith by the Board of Directors of the Company shall be
used. The term "Trading Day" shall mean a day on which the principal
national securities exchange on which the shares of Common Stock are listed
or admitted to trading is open for the transaction of business or, if the
shares of Common Stock are not listed or admitted to trading on any
national securities exchange, a Business Day. If the Common Stock is not
publicly held or not so listed or traded, "current market price" per share
shall mean the fair value per share as determined in good faith by the
Board of Directors of the Company, whose determination shall be described
in a statement filed with the Rights Agent and shall be conclusive for all
purposes.
(ii) For the purpose of any computation hereunder, the "current
market price" per share of Preferred Stock shall be determined in the same
manner as set forth above for the Common Stock in clause (i) of this
Section 11(d) (other than the last sentence thereof). If the current
market price per share of Preferred Stock cannot be determined in the
manner provided above or if the Preferred Stock is not publicly held or
listed or traded in a manner described in clause (i) of this Section 11(d),
the "current market price" per share of Preferred Stock shall be
conclusively deemed to be an amount equal to 100 (as such number may be
appropriately adjusted for such events as stock splits, stock dividends and
recapitalizations with respect to the Common Stock occurring after the date
of this Agreement) multiplied by the current market price per share of the
Common Stock. If neither the Common Stock nor the Preferred Stock is
publicly held or so listed or traded, "current market price" per share of
the Preferred Stock shall mean the fair value per share as determined in
good faith by the Board of Directors of the Company, whose determination
shall be described in a statement filed with the Rights Agent and shall be
conclusive for all purposes. For all purposes of this Agreement, the
"current market price" of one one-hundredth of a share of Preferred Stock
shall be equal to the "current market price" of one share of Preferred
Stock divided by 100.
(e) Anything herein to the contrary notwithstanding, no adjustment in
the Purchase Price shall be required unless such adjustment would require an
increase or decrease of at least one percent (1%) in the Purchase Price;
provided, however, that any adjustments which by reason of this Section 11(e)
are not required to be made shall be carried forward and taken into account in
any subsequent adjustment. All calculations under this Section 11 shall be made
to the nearest cent or to the nearest ten-thousandth of a share of Common Stock
or other share or one-millionth of a share of Preferred Stock, as the case may
be. Notwithstanding the first sentence of this Section 11(e), any adjustment
required by this Section 11 shall be made no later than the earlier of (i) three
(3) years from the date of the transaction which mandates such adjustment, or
(ii) the Expiration Date.
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(f) If as a result of an adjustment made pursuant to Section 11(a)(ii)
or Section 13(a) hereof, the holder of any Right thereafter exercised shall
become entitled to receive any shares of capital stock other than Preferred
Stock, thereafter the number of such other shares so receivable upon exercise of
any Right and the Purchase Price thereof shall be subject to adjustment from
time to time in a manner and on terms as nearly equivalent as practicable to the
provisions with respect to the Preferred Stock contained in Sections 11(a), (b),
(c), (e), (g), (h), (i), (j), (k) and (m), and the provisions of Sections 7, 9,
10, 13 and 14 hereof with respect to the Preferred Stock shall apply on like
terms to any such other shares.
(g) All Rights originally issued by the Company subsequent to any
adjustment made to the Purchase Price hereunder shall evidence the right to
purchase, at the adjusted Purchase Price, the number of one one-hundredths of a
share of Preferred Stock purchasable from time to time hereunder upon exercise
of the Rights, all subject to further adjustment as provided herein.
(h) Unless the Company shall have exercised its election as provided
in Section 11(i), upon each adjustment of the Purchase Price as a result of the
calculations made in Sections 11(b) and (c), each Right outstanding immediately
prior to the making of such adjustment shall thereafter evidence the right to
purchase, at the adjusted Purchase Price, that number of one-hundredths of a
share of Preferred Stock (calculated to the nearest one-millionth) obtained by
(i) multiplying (x) the number of one-hundredths of a share covered by a
Right immediately prior to this adjustment, by (y) the Purchase Price in effect
immediately prior to such adjustment of the Purchase Price, and (ii) dividing
the product so obtained by the Purchase Price in effect immediately after such
adjustment of the Purchase Price.
(i) The Company may elect on or after the date of any adjustment of
the Purchase Price to adjust the number of Rights, in lieu of any adjustment in
the number of one one-hundredths of a share of Preferred Stock purchasable upon
the exercise of a Right. Each of the Rights outstanding after the adjustment in
the number of Rights shall be exercisable for the number of one one-hundredths
of a share of Preferred Stock for which a Right was exercisable immediately
prior to such adjustment. Each Right held of record prior to such adjustment of
the number of Rights shall become that number of Rights (calculated to the
nearest one-ten-thousandth) obtained by dividing the Purchase Price in effect
immediately prior to adjustment of the Purchase Price by the Purchase Price in
effect immediately after adjustment of the Purchase Price. The Company shall
make a public announcement of its election to adjust the number of Rights,
indicating the record date for the adjustment, and, if known at the time, the
amount of the adjustment to be made. This record date may be the date on which
the Purchase Price is adjusted or any day thereafter, but, if the Rights
Certificates have been issued, shall be at least ten (10) days later than the
date of the public announcement. If Rights Certificates have been issued, upon
each adjustment of the number of Rights pursuant to this Section 11(i), the
Company shall, as promptly as practicable, cause to be distributed to holders of
record of Rights Certificates on such record date Rights Certificates
evidencing, subject to Section 14 hereof, the additional Rights to which such
holders shall be entitled as a result of such adjustment, or, at the option of
the Company, shall cause to be distributed to such holders of record in
substitution and replacement for the Rights Certificates held by such holders
prior to the date of adjustment, and upon surrender thereof, if required by the
Company, new Rights Certificates evidencing all the Rights to which such holders
shall be entitled after such adjustment. Rights Certificates so to be
distributed shall be issued, executed and countersigned in the manner provided
for herein (and may bear, at the
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option of the Company, the adjusted Purchase Price) and shall be registered in
the names of the holders of record of Rights Certificates on the record date
specified in the public announcement.
(j) Irrespective of any adjustment or change in the Purchase Price or
the number of one one-hundredths of a share of Preferred Stock issuable upon the
exercise of the Rights, the Rights Certificates theretofore and thereafter
issued may continue to express the Purchase Price per one one-hundredths of a
share and the number of one one-hundredths of a share which were expressed in
the initial Rights Certificates issued hereunder.
(k) Before taking any action that would cause an adjustment reducing
the Purchase Price below the then stated value, if any, of the number of one
one-hundredths of a share of Preferred Stock issuable upon exercise of the
Rights, the Company shall take any corporate action which may, in the opinion of
its counsel, be necessary in order that the Company may validly and legally
issue fully paid and nonassessable such number of one one-hundredths of a share
of Preferred Stock at such adjusted Purchase Price.
(l) In any case in which this Section 11 shall require that an
adjustment in the Purchase Price be made effective as of a record date for a
specified event, the Company may elect to defer until the occurrence of such
event the issuance to the holder of any Right exercised after such record date
the number of one one-hundredths of a share of Preferred Stock and other capital
stock or securities of the Company, if any, issuable upon such exercise over and
above the number of one one-hundredths of a share of Preferred Stock and other
capital stock or securities of the Company, if any, issuable upon such exercise
on the basis of the Purchase Price in effect prior to such adjustment; provided,
however, that the Company shall deliver to such holder a due bill or other
appropriate instrument evidencing such holder's right to receive such additional
shares (fractional or otherwise) or securities upon the occurrence of the event
requiring such adjustment.
(m) Anything in this Section 11 to the contrary notwithstanding, the
Company shall be entitled to make such reductions in the Purchase Price, in
addition to those adjustments expressly required by this Section 11, as and to
the extent that in their good faith judgment the Board of Directors of the
Company shall determine to be advisable in order that any (i) consolidation or
subdivision of the Preferred Stock, (ii) issuance wholly for cash of any shares
of Preferred Stock at less than the current market price, (iii) issuance wholly
for cash of shares of Preferred Stock or securities which by their terms are
convertible into or exchangeable for shares of Preferred Stock, (iv) stock
dividends, or (v) issuance of rights, options or warrants referred to in this
Section 11, hereafter made by the Company to holders of its Preferred Stock
shall not be taxable to such shareowners.
(n) The Company covenants and agrees that it shall not, at any time
after the Distribution Date, (i) consolidate with any other Person (other than a
Subsidiary of the Company in a transaction which complies with Section 11(o)
hereof), (ii) merge with or into any other Person (other than a Subsidiary of
the Company in a transaction which complies with Section 11(o) hereof), or (iii)
sell or transfer (or permit any Subsidiary to sell or transfer), in one
transaction, or a series of related transactions, assets, cash flow or earning
power aggregating more than 50% of the assets, cash flow or earning power of the
Company and its Subsidiaries (taken as a whole) to any other Person or Persons
(other than the Company and/or any of its Subsidiaries in one or more
transactions each of which complies with Section 11(o) hereof), if (x) at the
time of or immediately after such consolidation, merger or sale there are any
rights, warrants or other
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instruments or securities outstanding or agreements in effect which would
substantially diminish or otherwise eliminate the benefits intended to be
afforded by the Rights or (y) prior to, simultaneously with or immediately after
such consolidation, merger or sale, the shareowners of the Person who
constitutes, or would constitute, the "Principal Party" for purposes of Section
13(a) hereof shall have received a distribution of Rights previously owned by
such Person or any of its Affiliates and Associates.
(o) The Company covenants and agrees that, after the Distribution
Date, it will not, except as permitted by Section 23 or Section 26 hereof, take
(or permit any Subsidiary to take) any action if at the time such action is
taken it is reasonably foreseeable that such action will diminish substantially
or otherwise eliminate the benefits intended to be afforded by the Rights.
(p) Anything in this Agreement to the contrary notwithstanding, in the
event that the Company shall at any time after the Effective Date and prior to
the Distribution Date (i) declare a dividend on the outstanding shares of Common
Stock payable in shares of Common Stock, (ii) subdivide the outstanding shares
of Common Stock, or (iii) combine the outstanding shares of Common Stock into a
smaller number of shares, the number of Rights associated with each share of
Common Stock then outstanding, or issued or delivered thereafter but prior to
the Distribution Date, shall be proportionately adjusted so that the number of
Rights thereafter associated with each share of Common Stock following any such
event shall equal the result obtained by multiplying the number of Rights
associated with each share of Common Stock immediately prior to such event by a
fraction the numerator of which shall be the total number of shares of Common
Stock outstanding immediately prior to the occurrence of the event and the
denominator of which shall be the total number of shares of Common Stock
outstanding immediately following the occurrence of such event.
(q) The failure by the Board of Directors to declare a Person to be an
Adverse Person following such Person becoming the Beneficial Owner of 15% or
more of the outstanding Common Stock shall not imply that such Person is not an
Adverse Person or limit the Board of Directors' right at any time in the future
to declare such Person to be an Adverse Person.
Section 12. Certificate of Adjusted Purchase Price or Number of
Shares. Whenever an adjustment is made as provided in Section 11 and Section 13
hereof, the Company shall (a) promptly prepare a certificate setting forth such
adjustment and a brief statement of the facts accounting for such adjustment,
(b) promptly file with the Rights Agent, and with each transfer agent for the
Preferred Stock and the Common Stock, a copy of such certificate, and (c) mail
or cause the Rights Agent to mail a brief summary thereof to each holder of a
Rights Certificate (or, if prior to the Distribution Date, to each holder of a
certificate representing shares of Common Stock) in accordance with Section 25
hereof. The Rights Agent shall be fully protected in relying on any such
certificate and on any adjustment therein contained.
Section 13. Consolidation, Merger or Sale or Transfer of Assets or
Earning Power.
(a) In the event that, following the Stock Acquisition Date, directly
or indirectly, (x) the Company shall consolidate with, or merge with and into,
any other Person (other than a Subsidiary of the Company in a transaction which
complies with Section 11(o) hereof), and the Company shall not be the continuing
or surviving corporation of such consolida-
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tion or merger, (y) any Person (other than a Subsidiary of the Company in a
transaction which complies with Section 11(o) hereof) shall consolidate with, or
merge with or into, the Company, and the Company shall be the continuing or
surviving corporation of such consolidation or merger and, in connection with
such consolidation or merger, all or part of the outstanding shares of Common
Stock shall be changed into or exchanged for stock or other securities of any
other Person or cash or any other property, or (z) the Company shall sell or
otherwise transfer (or one or more of its Subsidiaries shall sell or otherwise
transfer), in one transaction or a series of related transactions, assets, cash
flow or earning power aggregating more than 50% of the assets, cash flow or
earning power of the Company and its Subsidiaries (taken as a whole) to any
Person or Persons (other than the Company or any Subsidiary of the Company in
one or more transactions each of which complies with Section 11(o) hereof),
then, and in each such case (except as may be contemplated by Section 13(d)
hereof), proper provision shall be made so that: (i) each holder of a Right,
except as provided in Section 7(e) hereof, shall thereafter have the right to
receive, upon the exercise thereof at the then current Purchase Price in
accordance with the terms of this Agreement, such number of validly authorized
and issued, fully paid, nonassessable and freely tradeable shares of Common
Stock of the Principal Party (as such term is hereinafter defined), not subject
to any liens, encumbrances, rights of first refusal or other adverse claims, as
shall be equal to the result obtained by (1) multiplying the then current
Purchase Price by the number of one one-hundredths of a share of Preferred Stock
for which a Right is exercisable immediately prior to the first occurrence of a
Section 13 Event (or, if a Section 11(a)(ii) Event has occurred prior to the
first occurrence of a Section 13 Event, multiplying the number of such one one-
hundredths of a share for which a Right was exercisable immediately prior to the
first occurrence of a Section 11(a)(ii) Event by the Purchase Price in effect
immediately prior to such first occurrence), and (2) dividing that product
(which, following the first occurrence of a Section 13 Event, shall be referred
to as the "Purchase Price" for each Right and for all purposes of this
Agreement) by 50% of the current market price (determined pursuant to Section
11(d)(i) hereof) per share of the Common Stock of such Principal Party on the
date of consummation of such Section 13 Event; (ii) such Principal Party shall
thereafter be liable for, and shall assume, by virtue of such Section 13 Event,
all the obligations and duties of the Company pursuant to this Agreement; (iii)
the term "Company" shall thereafter be deemed to refer to such Principal Party,
it being specifically intended that the provisions of Section 11 hereof shall
apply only to such Principal Party following the first occurrence of a Section
13 Event; (iv) such Principal Party shall take such steps (including, but not
limited to, the reservation of a sufficient number of shares of its Common
Stock) in connection with the consummation of any such transaction as may be
necessary to assure that the provisions hereof shall thereafter be applicable,
as nearly as reasonably may be, in relation to its shares of Common Stock
thereafter deliverable upon the exercise of the Rights; and (v) the provisions
of Section 11(a)(ii) hereof shall be of no effect following the first occurrence
of any Section 13 Event.
(b) "Principal Party" shall mean
(i) in the case of any transaction described in clause (x) or (y)
of the first sentence of Section 13(a), the Person that is the issuer of
any securities into which shares of Common Stock of the Company are
converted in such merger or consolidation, and if no securities are so
issued, the Person that is the other party to such merger or consolidation;
and
(ii) in the case of any transaction described in clause (z) of
the first sentence of Section 13(a), the Person that is the party
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<PAGE>
receiving the greatest portion of the assets, cash flow or earning power
transferred pursuant to such transaction or transactions;
provided, however, that in any such case, (1) if the Common Stock of such Person
is not at such time and has not been continuously over the preceding twelve (12)
month period registered under Section 12 of the Exchange Act, and such Person is
a direct or indirect Subsidiary of another Person the Common Stock of which is
and has been so registered, "Principal Party" shall refer to such other Person;
and (2) in case such Person is a Subsidiary, directly or indirectly, of more
than one Person, the Common Stocks of two or more of which are and have been so
registered, "Principal Party" shall refer to whichever of such Persons is the
issuer of the Common Stock having the greatest aggregate market value.
(c) The Company shall not consummate any such consolidation, merger,
sale or transfer unless the Principal Party shall have a sufficient number of
authorized shares of its Common Stock which have not been issued or reserved for
issuance to permit the exercise in full of the Rights in accordance with this
Section 13 and unless prior thereto the Company and such Principal Party shall
have executed and delivered to the Rights Agent a supplemental agreement
providing for the terms set forth in paragraphs (a) and (b) of this Section 13
and further providing that, as soon as practicable after the date of any
consolidation, merger, sale or transfer of assets mentioned in paragraph (a) of
this Section 13, the Principal Party will
(i) prepare and file a registration statement under the Act, with
respect to the Rights and the securities purchasable upon exercise of the
Rights on an appropriate form, and will use its best efforts to cause such
registration statement to (A) become effective as soon as practicable after
such filing and (B) remain effective (with a prospectus at all times
meeting the requirements of the Act) until the Expiration Date; and
(ii) deliver to holders of the Rights historical financial
statements for the Principal Party and each of its Affiliates which comply
in all respects with the requirements for registration on Form 10 under the
Exchange Act.
The provisions of this Section 13 shall similarly apply to successive mergers or
consolidations or sales or other transfers. In the event that a Section 13
Event shall occur at any time after the occurrence of a Section 11(a)(ii) Event,
the Rights which have not theretofore been exercised shall thereafter become
exercisable in the manner described in Section 13(a).
(d) Notwithstanding anything in this Agreement to the contrary,
Section 13 shall not be applicable to a transaction described in subparagraphs
(x) and (y) of Section 13(a) if (i) such transaction is consummated with a
Person or Persons who acquired shares of Common Stock pursuant to a Qualified
Offer (or a wholly owned subsidiary of any such Person or Persons), (ii) the
price per share of Common Stock offered in such transaction is not less than the
price per share of Common Stock paid to all holders of shares of Common Stock
whose shares were purchased pursuant to such tender offer or exchange offer, and
(iii) the form of consideration being offered to the remaining holders of shares
of Common Stock pursuant to such transaction is the same as the form of
consideration paid pursuant to such tender offer or exchange offer. Upon
consummation of any such transaction contemplated by this Section 13(d), all
rights hereunder shall expire.
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<PAGE>
Section 14. Fractional Rights and Fractional Shares.
(a) The Company shall not be required to issue fractions of Rights,
except prior to the Distribution Date as provided in Section 11(p) hereof, or to
distribute Rights Certificates which evidence fractional Rights. In lieu of
such fractional Rights, there shall be paid to the registered holders of the
Rights Certificates with regard to which such fractional Rights would otherwise
be issuable, an amount in cash equal to the same fraction of the current market
value of a whole Right. For purposes of this Section 14(a), the current market
value of a whole Right shall be the closing price of the Rights for the Trading
Day immediately prior to the date on which such fractional Rights would have
been otherwise issuable. The closing price of the Rights for any day shall be
the last sale price, regular way, or, in case no such sale takes place on such
day, the average of the closing bid and asked prices, regular way, in either
case as reported in the principal consolidated transaction reporting system with
respect to securities listed or admitted to trading on the New York Stock
Exchange or, if the Rights are not listed or admitted to trading on the New York
Stock Exchange, as reported in the principal consolidated transaction reporting
system with respect to securities listed on the principal national securities
exchange on which the Rights are listed or admitted to trading, or if the Rights
are not listed or admitted to trading on any national securities exchange, the
last quoted price or, if not so quoted, the average of the high bid and low
asked prices in the over-the-counter market, as reported by NASDAQ or such other
system then in use or, if on any such date the Rights are not quoted by any such
organization, the average of the closing bid and asked prices as furnished by a
professional market maker making a market in the Rights selected by the Board of
Directors of the Company. If on any such date no such market maker is making a
market in the Rights the fair value of the Rights on such date as determined in
good faith by the Board of Directors of the Company shall be used.
(b) The Company shall not be required to issue fractions of shares of
Preferred Stock (other than fractions which are integral multiples of one one-
hundredth of a share of Preferred Stock), which may, at the option of the
Company, be evidenced by depositary receipts upon exercise of the Rights or to
distribute certificates which evidence fractional shares of Preferred Stock
(other than fractions which are integral multiples of one one-hundredth of a
share of Preferred Stock). In lieu of fractional shares of Preferred Stock that
are not integral multiples of one one-hundredth of a share of Preferred Stock,
the Company may pay to the registered holders of Rights Certificates at the time
such Rights are exercised as herein provided an amount in cash equal to the same
fraction of the current market value of one one-hundredth of a share of
Preferred Stock. For purposes of this Section 14(b), the current market value
of one one-hundredth of a share of Preferred Stock shall be one one-hundredth of
the closing price of a share of Preferred Stock (as determined pursuant to
Section 11(d)(ii) hereof) for the Trading Day immediately prior to the date of
such exercise.
(c) Following the occurrence of a Triggering Event, the Company shall
not be required to issue fractions of shares of Common Stock upon exercise of
the Rights or to distribute certificates which evidence fractional shares of
Common Stock. In lieu of fractional shares of Common Stock, the Company may pay
to the registered holders of Rights Certificates at the time such Rights are
exercised as herein provided an amount in cash equal to the same fraction of the
current market value of one (1) share of Common Stock. For purposes of this
Section 14(c), the current market value of one (1) share of Common Stock shall
be the closing price of one (1) share of Common Stock (as determined pursuant to
Section 11(d)(i) hereof) for the Trading Day immediately prior to the date of
such exercise.
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<PAGE>
(d) The holder of a Right by the acceptance of the Rights expressly
waives his right to receive any fractional Rights or any fractional shares upon
exercise of a Right, except as permitted by this Section 14.
Section 15. Rights of Action. All rights of action in respect of
this Agreement are vested in the respective registered holders of the Rights
Certificates (and, prior to the Distribution Date, the registered holders of the
Common Stock); and any registered holder of any Rights Certificate (or, prior to
the Distribution Date, of the Common Stock), without the consent of the Rights
Agent or of the holder of any other Rights Certificate (or, prior to the
Distribution Date, of the Common Stock), may, in such holder's own behalf and
for such holder's own benefit, enforce, and may institute and maintain any suit,
action or proceeding against the Company to enforce, or otherwise act in respect
of, such holder's right to exercise the Rights evidenced by such Rights
Certificate in the manner provided in such Rights Certificate and in this
Agreement. Without limiting the foregoing or any remedies available to the
holders of Rights, it is specifically acknowledged that the holders of Rights
would not have an adequate remedy at law for any breach of this Agreement and
shall be entitled to specific performance of the obligations hereunder and
injunctive relief against actual or threatened violations of the obligations
hereunder of any Person subject to this Agreement.
Section 16. Agreement of Rights Holders. Every holder of a Right by
accepting the same consents and agrees with the Company and the Rights Agent and
with every other holder of a Right that:
(a) prior to the Distribution Date, the Rights will be transferable
only in connection with the transfer of Common Stock;
(b) after the Distribution Date, the Rights Certificates are
transferable only on the registry books of the Rights Agent if surrendered at
the principal office or offices of the Rights Agent designated for such
purposes, duly endorsed or accompanied by a proper instrument of transfer and
with the appropriate forms and certificates fully executed;
(c) subject to Section 6(a) and Section 7(f) hereof, the Company and
the Rights Agent may deem and treat the person in whose name a Rights
Certificate (or, prior to the Distribution Date, the associated Common Stock
certificate) is registered as the absolute owner thereof and of the Rights
evidenced thereby (notwithstanding any notations of ownership or writing on the
Rights Certificates or the associated Common Stock certificate made by anyone
other than the Company or the Rights Agent) for all purposes whatsoever, and
neither the Company nor the Rights Agent, subject to the last sentence of
Section 7(e) hereof, shall be required to be affected by any notice to the
contrary; and
(d) notwithstanding anything in this Agreement to the contrary,
neither the Company nor the Rights Agent shall have any liability to any holder
of a Right or other Person as a result of its inability to perform any of its
obligations under this Agreement by reason of any preliminary or permanent
injunction or other order, decree or ruling issued by a court of competent
jurisdiction or by a governmental, regulatory or administrative agency or
commission, or any statute, rule, regulation or executive order promulgated or
enacted by any governmental authority, prohibiting or otherwise restraining
performance of such obligation; provided, however, the Company shall be required
to use its best efforts to have any such order, decree or ruling lifted,
overturned or otherwise removed as soon as possible.
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<PAGE>
Section 17. Rights Certificate Holder Not Deemed a Shareowner. No
holder, as such, of any Rights Certificate shall be entitled to vote, receive
dividends or be deemed for any purpose the holder of the number of one one-
hundredths of a share of Preferred Stock or any other securities of the Company
which may at any time be issuable on the exercise of the Rights represented
thereby, nor shall anything contained herein or in any Rights Certificate be
construed to confer upon the holder of any Rights Certificate, as such, any of
the rights of a shareowners of the Company or any right to vote for the election
of directors or upon any matter submitted to shareowners at any meeting thereof,
or to give or withhold consent to any corporate action, or to receive notice of
meetings or other actions affecting shareowners (except as provided in Section
24 hereof), or to receive dividends or subscription rights, or otherwise, until
the Right or Rights evidenced by such Rights Certificate shall have been
exercised in accordance with the provisions hereof.
Section 18. Concerning the Rights Agent.
(a) The Company agrees to pay to the Rights Agent reasonable
compensation for all services rendered by it hereunder and, from time to time,
on demand of the Rights Agent, its reasonable expenses and counsel fees and
disbursements and other disbursements incurred in the administration and
execution of this Agreement and the exercise and performance of its duties
hereunder. The Company also agrees to indemnify the Rights Agent for, and to
hold it harmless against, any loss, liability, or expense, incurred without
negligence, bad faith or willful misconduct on the part of the Rights Agent, for
anything done or omitted by the Rights Agent in connection with the acceptance
and administration of this Agreement, including the costs and expenses of
defending against any claim of liability in connection therewith. The
provisions of this Section 18(a) shall survive the termination of this
Agreement.
(b) The Rights Agent shall be protected and shall incur no liability
for or in respect of any action taken, suffered or omitted by it in connection
with its administration of this Agreement in reliance upon any Rights
Certificate or certificate for Common Stock or for other securities of the
Company, instrument of assignment or transfer, power of attorney, endorsement,
affidavit, letter, notice, direction, consent, certificate, statement, or other
paper or document believed by it to be genuine and to be signed, executed and,
where necessary, verified or acknowledged, by the proper Person or Persons.
Section 19. Merger or Consolidation or Change of Name of Rights
Agent.
(a) Any corporation into which the Rights Agent or any successor
Rights Agent may be merged or with which it may be consolidated, or any
corporation resulting from any merger or consolidation to which the Rights Agent
or any successor Rights Agent shall be a party, or any corporation succeeding to
the corporate trust business of the Rights Agent or any successor Rights Agent,
shall be the successor to the Rights Agent under this Agreement without the
execution or filing of any paper or any further act on the part of any of the
parties hereto; provided, however, that such corporation would be eligible for
appointment as a successor Rights Agent under the provisions of Section 21
hereof. In case at the time such successor Rights Agent shall succeed to the
agency created by this Agreement, any of the Rights Certificates shall have been
countersigned but not delivered, any such successor Rights Agent may adopt the
countersignature of a predecessor Rights Agent and deliver such Rights
Certificates so countersigned; and in case at that time any of the Rights
Certificates shall not have been countersigned, any successor Rights Agent may
countersign such Rights Certificates either in the
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<PAGE>
name of the predecessor or in the name of the successor Rights Agent; and in all
such cases such Rights Certificates shall have the full force provided in the
Rights Certificates and in this Agreement.
(b) In case at any time the name of the Rights Agent shall be changed
and at such time any of the Rights Certificates shall have been countersigned
but not delivered, the Rights Agent may adopt the countersignature under its
prior name and deliver Rights Certificates so countersigned; and in case at that
time any of the Rights Certificates shall not have been countersigned, the
Rights Agent may countersign such Rights Certificates either in its prior name
or in its changed name; and in all such cases such Rights Certificates shall
have the full force provided in the Rights Certificates and in this Agreement.
Section 20. Duties of Rights Agent. The Rights Agent undertakes the
duties and obligations imposed by this Agreement upon the following terms and
conditions, by all of which the Company and the holders of Rights Certificates,
by their acceptance thereof, shall be bound:
(a) The Rights Agent may consult with legal counsel (who may be legal
counsel for the Company), and the opinion of such counsel shall be full and
complete authorization and protection to the Rights Agent as to any action taken
or omitted by it in good faith and in accordance with such opinion.
(b) Whenever in the performance of its duties under this Agreement the
Rights Agent shall deem it necessary or desirable that any fact or matter
(including, without limitation, the identity of any Acquiring Person or Adverse
Person and the determination of "current market price") be proved or established
by the Company prior to taking or suffering any action hereunder, such fact or
matter (unless other evidence in respect thereof be herein specifically
prescribed) may be deemed to be conclusively proved and established by a
certificate signed by the Chairman of the Board, the President, any Vice
President, the Treasurer, any Assistant Treasurer, the Secretary or any
Assistant Secretary of the Company and delivered to the Rights Agent; and such
certificate shall be full authorization to the Rights Agent for any action taken
or suffered in good faith by it under the provisions of this Agreement in
reliance upon such certificate.
(c) The Rights Agent shall be liable hereunder only for its own
negligence, bad faith or willful misconduct.
(d) The Rights Agent shall not be liable for or by reason of any of
the statements of fact or recitals contained in this Agreement or in the Rights
Certificates or be required to verify the same (except as to its
countersignature on such Rights Certificates), but all such statements and
recitals are and shall be deemed to have been made by the Company only.
(e) The Rights Agent shall not be under any responsibility in respect
of the validity of this Agreement or the execution and delivery hereof (except
the due execution hereof by the Rights Agent) or in respect of the validity or
execution of any Rights Certificate (except its countersignature thereof); nor
shall it be responsible for any breach by the Company of any covenant or
condition contained in this Agreement or in any Rights Certificate; nor shall it
be responsible for any adjustment required under the provisions of Section 11 or
Section 13 hereof or responsible for the manner, method or amount of any such
adjustment or the
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<PAGE>
ascertaining of the existence of facts that would require any such adjustment
(except with respect to the exercise of Rights evidenced by Rights Certificates
after actual notice of any such adjustment); nor shall it by any act hereunder
be deemed to make any representation or warranty as to the authorization or
reservation of any shares of Common Stock or Preferred Stock to be issued
pursuant to this Agreement or any Rights Certificate or as to whether any shares
of Common Stock or Preferred Stock will, when so issued, be validly authorized
and issued, fully paid and nonassessable.
(f) The Company agrees that it will perform, execute, acknowledge and
deliver or cause to be performed, executed, acknowledged and delivered all such
further and other acts, instruments and assurances as may reasonably be required
by the Rights Agent for the carrying out or performing by the Rights Agent of
the provisions of this Agreement.
(g) The Rights Agent is hereby authorized and directed to accept
instructions with respect to the performance of its duties hereunder from the
Chairman of the Board, the President, any Vice President, the Secretary, any
Assistant Secretary, the Treasurer or any Assistant Treasurer of the Company,
and to apply to such officers for advice or instructions in connection with its
duties, and it shall not be liable for any action taken or suffered to be taken
by it in good faith in accordance with instructions of any such officer.
(h) The Rights Agent and any shareowner, director, officer or employee
of the Rights Agent may buy, sell or deal in any of the Rights or other
securities of the Company or become pecuniarily interested in any transaction in
which the Company may be interested, or contract with or lend money to the
Company or otherwise act as fully and freely as though it were not Rights Agent
under this Agreement. Nothing herein shall preclude the Rights Agent from
acting in any other capacity for the Company or for any other legal entity.
(i) The Rights Agent may execute and exercise any of the rights or
powers hereby vested in it or perform any duty hereunder either itself or by or
through its attorneys or agents, and the Rights Agent shall not be answerable or
accountable for any act, default, neglect or misconduct of any such attorneys or
agents or for any loss to the Company resulting from any such act, default,
neglect or misconduct; provided, however, reasonable care was exercised in the
selection and continued employment thereof.
(j) No provision of this Agreement shall require the Rights Agent to
expend or risk its own funds or otherwise incur any financial liability in the
performance of any of its duties hereunder or in the exercise of its rights if
there shall be reasonable grounds for believing that repayment of such funds or
adequate indemnification against such risk or liability is not reasonably
assured to it.
(k) If, with respect to any Right Certificate surrendered to the
Rights Agent for exercise or transfer, the certificate attached to the form of
assignment or form of election to purchase, as the case may be, has either not
been completed or indicates an affirmative response to clause 1 and/or 2
thereof, the Rights Agent shall not take any further action with respect to such
requested exercise of transfer without first consulting with the Company.
(l) Any application by the Rights Agent for written instructions from
the Company may, at the option of the Rights Agent, set forth in writing any
action proposed to be taken or omitted by the Rights Agent under this Agreement
and the date on and/or after which
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<PAGE>
such action shall be taken or such omission shall be effective. The Rights
Agent shall not be liable for any action taken by, or omission of, the Rights
Agent in accordance with a proposal included in such application on or after the
date specified in such application (which date shall not be less than five
Business Days after the date any officer of the Company actually receives such
application, unless any such officer shall have consented in writing to any
earlier date) unless prior to taking any such action (or the effective date in
the case of an omission), the Rights Agent shall have received written
instructions in response to such application specifying the action to be taken.
(m) In addition to the foregoing, the Rights Agent shall be protected
and shall incur no liability for, or in respect of, any action taken or omitted
by it in connection with its administration of this Agreement if such acts or
omissions are in reliance upon (i) the proper execution of the certifications
concerning beneficial ownership appended to the form of assignment and the form
of election to purchase attached hereto unless the Rights Agent shall have
actual knowledge that, as executed, such certification is untrue, or (ii) the
non-execution of such certification including, without limitation, any refusal
to honor any otherwise permissible assignment or election by reason of such non-
execution.
(n) The Company agrees to give the Rights Agent prompt written notice
of any event or ownership which would prohibit the exercise or transfer of the
Right Certificates.
Section 21. Change of Rights Agent. The Rights Agent or any
successor Rights Agent may resign and be discharged from its duties under this
Agreement upon thirty (30) days' notice in writing mailed to the Company, and to
each transfer agent of the Common Stock and Preferred Stock, by registered or
certified mail, and to the holders of the Rights Certificates by first-class
mail. The Company may remove the Rights Agent or any successor Rights Agent
upon thirty (30) days' notice in writing, mailed to the Rights Agent or
successor Rights Agent, as the case may be, and to each transfer agent of the
Common Stock and Preferred Stock, by registered or certified mail, and to the
holders of the Rights Certificates by first-class mail. If the Rights Agent
shall resign or be removed or shall otherwise become incapable of acting, the
Company shall appoint a successor to the Rights Agent. If the Company shall
fail to make such appointment within a period of thirty (30) days after giving
notice of such removal or after it has been notified in writing of such
resignation or incapacity by the resigning or incapacitated Rights Agent or by
the holder of a Rights Certificate (who shall, with such notice, submit his
Rights Certificate for inspection by the Company), then the Rights Agent or any
registered holder of any Rights Certificate may apply to any court of competent
jurisdiction for the appointment of a new Rights Agent. Any successor Rights
Agent, whether appointed by the Company or by such a court, shall be a
corporation organized and doing business under the laws of the United States or
of the State of Missouri (or of any other state of the United States so long as
such corporation is authorized to do business in the State of Missouri or the
State of New York), in good standing, having a principal office in the State of
Missouri or the State of New York, which is authorized under such laws to
exercise corporate trust or stock transfer powers and is subject to supervision
or examination by federal or state authority and which either has or is an
affiliate of a corporation which has at the time of its appointment as Rights
Agent a combined capital and surplus of at least $100,000,000. After
appointment, the successor Rights Agent shall be vested with the same powers,
rights, duties and responsibilities as if it had been originally named as Rights
Agent without further act or deed; but the predecessor Rights Agent shall
deliver and transfer to the successor Rights
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Agent any property at the time held by it hereunder, and execute and deliver any
further assurance, conveyance, act or deed necessary for the purpose. Not later
than the effective date of any such appointment, the Company shall file notice
thereof in writing with the predecessor Rights Agent and each transfer agent of
the Common Stock and the Preferred Stock, and mail a notice thereof in writing
to the registered holders of the Rights Certificates. Failure to give any
notice provided for in this Section 21, however, or any defect therein, shall
not affect the legality or validity of the resignation or removal of the Rights
Agent or the appointment of the successor Rights Agent, as the case may be.
Section 22. Issuance of New Rights Certificates. Notwithstanding any
of the provisions of this Agreement or of the Rights to the contrary, the
Company may, at its option, issue new Rights Certificates evidencing Rights in
such form as may be approved by its Board of Directors to reflect any adjustment
or change in the Purchase Price and the number or kind or class of shares or
other securities or property purchasable under the Rights Certificates made in
accordance with the provisions of this Agreement. In addition, in connection
with the issuance or sale of shares of Common Stock following the Distribution
Date and prior to the redemption or expiration of the Rights, the Company (a)
shall, with respect to shares of Common Stock so issued or sold pursuant to the
exercise of stock options or under any employee plan or arrangement, granted or
awarded as of the Distribution Date, or upon the exercise, conversion or
exchange of securities hereinafter issued by the Company, and (b) may, in any
other case, if deemed necessary or appropriate by the Board of Directors of the
Company, issue Rights Certificates representing the appropriate number of Rights
in connection with such issuance or sale; provided, however, that (i) no such
Rights Certificate shall be issued if, and to the extent that, the Company shall
be advised by counsel that such issuance would create a significant risk of
material adverse tax consequences to the Company or the Person to whom such
Rights Certificate would be issued, and (ii) no such Rights Certificate shall be
issued if, and to the extent that, appropriate adjustment shall otherwise have
been made in lieu of the issuance thereof.
Section 23. Redemption and Termination.
(a) The Board of Directors of the Company may, at its option, at any
time prior to the earlier of (i) the close of business on the tenth Business Day
following the Stock Acquisition Date or (ii) the Final Expiration Date, redeem
all but not less than all the then outstanding Rights at a redemption price of
$.01 per Right, as such amount may be appropriately adjusted to reflect any
stock split, stock dividend or similar transaction occurring after the date
hereof (such redemption price being hereinafter referred to as the "Redemption
Price"). Notwithstanding the foregoing, the Board of Directors may not redeem
any Rights following a determination pursuant to Section 11(a)(ii)(B) that any
Person is an Adverse Person. Notwithstanding anything contained in this
Agreement to the contrary, the Rights shall not be exercisable after the
occurrence of a Section 11(a)(ii) Event until such time as the Company's right
of redemption hereunder has expired. The Company may, at its option, pay the
Redemption Price in cash, shares of Common Stock (based on the "current market
price," as defined in Section 11(d)(i) hereof, of the Common Stock at the time
of redemption) or any other form of consideration deemed appropriate by the
Board of Directors.
(b) Immediately upon the action of the Board of Directors of the
Company ordering the redemption of the Rights, evidence of which shall have been
filed with the
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Rights Agent and without any further action and without any notice, the right to
exercise the Rights will terminate and the only right thereafter of the holders
of Rights shall be to receive the Redemption Price for each Right so held.
Promptly after the action of the Board of Directors ordering the redemption of
the Rights, the Company shall give notice of such redemption to the Rights Agent
and the holders of the then outstanding Rights by mailing such notice to all
such holders at each holder's last address as it appears upon the registry books
of the Rights Agent or, prior to the Distribution Date, on the registry books of
the transfer agent for the Common Stock. Any notice which is mailed in the
manner herein provided shall be deemed given, whether or not the holder receives
the notice. Each such notice of redemption will state the method by which the
payment of the Redemption Price will be made.
Section 24. Notice of Certain Events.
(a) In case the Company shall propose, at any time after the
Distribution Date, (i) to pay any dividend payable in stock of any class to the
holders of Preferred Stock or to make any other distribution to the holders of
Preferred Stock (other than a regular quarterly cash dividend out of earnings or
retained earnings of the Company), or (ii) to offer to the holders of Preferred
Stock rights or warrants to subscribe for or to purchase any additional shares
of Preferred Stock or shares of stock of any class or any other securities,
rights or options, or (iii) to effect any reclassification of its Preferred
Stock (other than a reclassification involving only the subdivision of
outstanding shares of Preferred Stock), or (iv) to effect any consolidation or
merger into or with any other Person (other than a Subsidiary of the Company in
a transaction which complies with Section 11(o) hereof), or to effect any sale
or other transfer (or to permit one or more of its Subsidiaries to effect any
sale or other transfer), in one transaction or a series of related transactions,
of more than 50% of the assets, cash flow or earning power of the Company and
its Subsidiaries (taken as a whole) to any other Person or Persons (other than
the Company and/or any of its Subsidiaries in one or more transactions each of
which complies with Section 11(o) hereof), or (v) to effect the liquidation,
dissolution or winding up of the Company, then, in each such case, the Company
shall give to each holder of a Rights Certificate, to the extent feasible and in
accordance with Section 25 hereof, a notice of such proposed action, which shall
specify the record date for the purposes of such stock dividend, distribution of
rights or warrants, or the date on which such reclassification, consolidation,
merger, sale, transfer, liquidation, dissolution, or winding up is to take place
and the date of participation therein by the holders of the shares of Preferred
Stock, if any such date is to be fixed, and such notice shall be so given in the
case of any action covered by clause (i) or (ii) above at least twenty (20) days
prior to the record date for determining holders of the shares of Preferred
Stock for purposes of such action, and in the case of any such other action, at
least twenty (20) days prior to the date of the taking of such proposed action
or the date of participation therein by the holders of the shares of Preferred
Stock whichever shall be the earlier.
(b) In case any Section 11(a)(ii) Event shall occur, then (i) the
Company shall as soon as practicable thereafter give to each holder of a Rights
Certificate, to the extent feasible and in accordance with Section 25 hereof, a
notice of the occurrence of such event, which shall specify the event and the
consequences of the event to holders of Rights under Section 11(a)(ii) hereof,
and (ii) all references in the preceding paragraph to Preferred Stock shall be
deemed thereafter to refer to Common Stock and/or, if appropriate, other
securities.
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<PAGE>
Section 25. Notices. Notices or demands authorized by this Agreement
to be given or made by the Rights Agent or by the holder of any Rights
Certificate to or on the Company shall be sufficiently given or made if sent by
first-class mail, postage prepaid, addressed (until another address is filed in
writing with the Rights Agent) as follows:
Payless ShoeSource, Inc.
3231 E. 6th Street
Topeka, Kansas 66607
Attention: Corporate Secretary
Subject to the provisions of Section 21, any notice or demand authorized by this
Agreement to be given or made by the Company or by the holder of any Rights
Certificate to or on the Rights Agent shall be sufficiently given or made if
sent by first-class mail, postage prepaid, addressed (until another address is
filed in writing with the Company) as follows:
The Bank of New York
101 Barclay Street
New York, New York 10286
Attention:
Notices or demands authorized by this Agreement to be given or made by the
Company or the Rights Agent to the holder of any Rights Certificate (or, if
prior to the Distribution Date, to the holder of certificates representing
shares of Common Stock) shall be sufficiently given or made if sent by first-
class mail, postage prepaid, addressed to such holder at the address of such
holder as shown on the registry books of the Company.
Section 26. Supplements and Amendments. Prior to the Distribution
Date and subject to the penultimate sentence of this Section 26, the Company and
the Rights Agent shall, if the Company so directs, supplement or amend any
provision of this Agreement without the approval of any holders of certificates
representing shares of Common Stock. From and after the Distribution Date and
subject to the penultimate sentence of this Section 26, the Company and the
Rights Agent shall, if the Company so directs, supplement or amend this
Agreement without the approval of any holders of Rights Certificates in order
(i) to cure any ambiguity, (ii) to correct or supplement any provision contained
herein which may be defective or inconsistent with any other provisions herein,
(iii) to shorten or lengthen any time period hereunder (including, without
limitation, the period within which the Rights may be redeemed in accordance
with Section 23 hereof) or (iv) to change or supplement the provisions hereunder
in any manner which the Company may deem necessary or desirable and which shall
not adversely affect the interests of the holders of Rights Certificates (other
than an Acquiring Person, an Adverse Person or an Affiliate or Associate of an
Acquiring Person, an Adverse Person); provided, this Agreement may not be
supplemented or amended to lengthen, pursuant to clause (iii) of this sentence,
(A) a time period relating to when the Rights may be redeemed at such time as
the Rights are not then redeemable, or (B) any other time period unless such
lengthening is for the purpose of protecting, enhancing or clarifying the rights
of, and/or the benefits to, the holders of Rights. Upon the delivery of a
certificate from an appropriate officer of the Company which states that the
proposed supplement or amendment is in compliance with the terms of this Section
26, the Rights Agent shall execute such supplement or amendment.
Notwithstanding anything contained in this Agreement to the
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contrary, no supplement or amendment shall be made which changes the Redemption
Price, the Final Expiration Date, the Purchase Price or the number of one one-
hundredths of a share of Preferred Stock for which a Right is exercisable;
provided, however, that at any time prior to (i) existence of an Acquiring
Person, (ii) the date that a tender or exchange offer by any Person (other than
the Company, any Subsidiary of the Company, any employee benefit plan of the
Company or any Subsidiary of the Company, or any Person or entity organized,
appointed or established by the Company for or pursuant to the terms of any such
plan) is first published or sent or given within the meaning of Rule 14d-2(a) of
the General Rules and Regulations under the Exchange Act, if upon consummation
thereof, such Person would be the Beneficial Owner of 20% or more of the shares
of Common Stock then outstanding and if at the time of any amendment or
supplement such tender or exchange offer has not expired or been terminated, or
(iii) the Board of Directors determines that a Person is an Adverse Person, the
Board of Directors of the Company may amend this Agreement to increase the
Purchase Price or extend the Final Expiration Date. Prior to the Distribution
Date, the interests of the holders of Rights shall be deemed coincident with the
interests of the holders of Common Stock.
Section 27. Successors. All the covenants and provisions of this
Agreement by or for the benefit of the Company or the Rights Agent shall bind
and inure to the benefit of their respective successors and assigns hereunder.
Section 28. Determinations and Actions by the Board of Directors,
etc. For all purposes of this Agreement, any calculation of the number of
shares of Common Stock outstanding at any particular time, including for
purposes of determining the particular percentage of such outstanding shares of
Common Stock of which any Person is the Beneficial Owner, shall be made in
accordance with the last sentence of Rule 13d-3(d)(1)(i) of the General Rules
and Regulations under the Exchange Act. The Board of Directors of the Company
(with, where specifically provided for herein, the concurrence of the Continuing
Directors) shall have the exclusive power and authority to administer this
Agreement and to exercise all rights and powers specifically granted to the
Board (with, where specifically provided for herein, the concurrence of the
Continuing Directors) or to the Company, or as may be necessary or advisable in
the administration of this Agreement, including, without limitation, the right
and power to (i) interpret the provisions of this Agreement, and (ii) make all
determinations deemed necessary or advisable for the administration of this
Agreement (including a determination to redeem or not redeem the Rights, to
declare that a Person is an Adverse Person or to amend the Agreement). All such
actions, calculations, interpretations and determinations (including, for
purposes of clause (y) below, all omissions with respect to the foregoing) which
are done or made by the Board (with, where specifically provided for herein, the
concurrence of the Continuing Directors) in good faith, shall (x) be final,
conclusive and binding on the Company, the Rights Agent, the holders of the
Rights and all other parties, and (y) not subject the Board or the Continuing
Directors to any liability to the holders of the Rights.
Section 29. Benefits of this Agreement. Nothing in this Agreement
shall be construed to give to any Person other than the Company, the Rights
Agent and the registered holders of the Rights Certificates (and, prior to the
Distribution Date, registered holders of the Common Stock) any legal or
equitable right, remedy or claim under this Agreement; but this Agreement shall
be for the sole and exclusive benefit of the Company, the Rights Agent and the
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<PAGE>
registered holders of the Rights Certificates (and, prior to the Distribution
Date, registered holders of the Common Stock).
Section 30. Severability. If any term, provision, covenant or
restriction of this Agreement is held by a court of competent jurisdiction or
other authority to be invalid, void or unenforceable, the remainder of the
terms, provisions, covenants and restrictions of this Agreement shall remain in
full force and effect and shall in no way be affected, impaired or invalidated;
provided, however, that notwithstanding anything in this Agreement to the
contrary, if any such term, provision, covenant or restriction is held by such
court or authority to be invalid, void or unenforceable and the Board of
Directors of the Company determines in its good faith judgment that severing the
invalid language from this Agreement would adversely affect the purpose or
effect of this Agreement, the right of redemption set forth in Section 23 hereof
shall be reinstated and shall not expire until the close of business on the
tenth Business Day following the date of such determination by the Board of
Directors. Without limiting the foregoing, if any provision requiring a
majority of the Board of Directors of the Company to be Continuing Directors to
act is held by any court of competent jurisdiction or other authority to be
invalid, void or unenforceable, such determination shall then be made by the
Board of Directors of the Company in accordance with applicable law and the
Company's Articles of Incorporation and By-Laws.
Section 31. Governing Law. This Agreement, each Right and each
Rights Certificate issued hereunder shall be deemed to be a contract made under
the laws of the State of New York and for all purposes shall be governed by and
construed in accordance with the laws of such State applicable to contracts made
and to be performed entirely within such State.
Section 32. Counterparts. This Agreement may be executed in any
number of counterparts and each of such counterparts shall for all purposes be
deemed to be an original, and all such counterparts shall together constitute
but one and the same instrument.
Section 33. Descriptive Headings. Descriptive headings of the
several Sections of this Agreement are inserted for convenience only and shall
not control or affect the meaning or construction of any of the provisions
hereof.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed and their respective corporate seals to be hereunto affixed and
attested, all as of the day and year first above written.
Attest: PAYLESS SHOESOURCE, INC.
By /s/Linda J. Balicki By /s/Richard A. Brickson
------------------- ----------------------
Name: Linda J. Balicki Name: Richard A. Brickson
Title: Assistant Secretary Title: Vice President and Secretary
Attest: THE BANK OF NEW YORK
By /s/Daniel M. Egan By /s/John Sivertsen
----------------- -----------------
Name: Daniel M. Egan Name: John Sivertsen
Title: Assistant Treasurer Title: Vice President
34
<PAGE>
Exhibit A
---------
FORM OF
CERTIFICATE OF DESIGNATION, PREFERENCES AND RIGHTS OF SERIES A JUNIOR
PARTICIPATING PREFERRED STOCK
OF
PAYLESS SHOESOURCE, INC.
Pursuant to Section 351.180 of the
General and Business Corporation Law of the State of Missouri
Payless ShoeSource, Inc., a corporation (the "Corporation") organized
and existing under the General and Business Corporation Law of the State of
Missouri (the "GBCL"), HEREBY CERTIFIES:
That pursuant to the authority conferred upon the Board of Directors
by the Amended and Restated Articles of Incorporation of the Corporation, the
Board of Directors on __________, 1996, adopted the following resolution
creating a series of _______________ (__________) shares of Preferred Stock
designated as Series A Junior Participating Preferred Stock:
RESOLVED, that pursuant to the authority vested in the Board of
Directors of the Corporation in accordance with the provisions of its Amended
and Restated Articles of Incorporation (the "Articles of Incorporation") and
Section 351.180 of the GBCL, a series of Preferred Stock of the Corporation be
and it hereby is created, and that the designation and amount thereof and the
voting powers, preferences and relative, participating, optional and other
special rights of the shares of such series, and the qualifications, limitations
or restrictions thereof are as follows:
1. Designation and Amount. The shares of such series shall be
designated as "Series A Junior Participating Preferred Stock," par value $.01
per share (the "Series A Junior Preferred Stock"), and the number of shares
constituting such series shall be 430,000.
2. Dividends and Distributions.
(a) Subject to the prior and superior rights of the holders of any
shares of any series of Preferred Stock ranking prior and superior to the shares
of Series A Junior Preferred Stock with respect to dividends, the holders of
shares of Series A Junior Preferred Stock in preference to the holders of Common
Stock and of any other junior stock, shall be entitled to receive, when, as and
if declared by the Board of Directors out of funds legally available therefor,
dividends payable in cash quarterly on the fifteenth day of January, April, July
and October (each such date being referred to herein as a "Quarterly Dividend
Payment Date"), commencing on the first Quarterly Dividend Payment Date after
the first issuance of a share or fraction of a share of
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<PAGE>
Series A Junior Preferred Stock, in an amount per share (rounded to the nearest
cent) equal to the greater of (a) $1.00 or (b) subject to the provision for
adjustment hereinafter set forth, 100 times the aggregate per share amount of
all cash dividends, and 100 times the aggregate per share amount (payable in
kind) of all non-cash dividends or other distributions other than a dividend
payable in shares of Common Stock or a subdivision of the outstanding shares of
Common Stock (by reclassification or otherwise), declared on the Common Stock,
par value $.01 per share, of the Corporation (the "Common Stock") since the
immediately preceding Quarterly Dividend Payment Date, or, with respect to the
first Quarterly Dividend Payment Date, since the first issuance of any share or
fraction of a share of Series A Junior Preferred Stock. In the event the
Corporation shall at any time after the record date for the initial distribution
of the Corporation's Preferred Stock Purchase Rights pursuant to the Rights
Agreement, dated as of April 2, 1996, between the Corporation and The Bank of
New York, as Rights Agent (the "Rights Declaration Date"), (i) declare any
dividend on Common Stock payable in shares of Common Stock, (ii) subdivide the
outstanding Common Stock, (iii) combine the outstanding Common Stock into a
smaller number of shares or (iv) issue any shares of its capital stock in a
reclassification of the outstanding Common Stock, then in each such case the
amount to which holders of shares of Series A Junior Preferred Stock were
entitled immediately prior to such event under clause (b) of the preceding
sentence shall be adjusted by multiplying such amount by a fraction, the
numerator of which is the number of shares of Common Stock outstanding
immediately after such event and the denominator of which is the number of
shares of Common Stock that were outstanding immediately prior to such event.
(b) The Corporation shall declare a dividend or distribution on the
Series A Junior Preferred Stock as provided in paragraph (a) above immediately
after it declares a dividend or distribution on the Common Stock (other than a
dividend payable in shares of Common Stock); provided that, in the event no
dividend or distribution shall have been declared on the Common Stock during the
period between any Quarterly Dividend Payment Date and the next subsequent
Quarterly Dividend Payment Date, a dividend of $1.00 per share on the Series A
Junior Preferred Stock shall nevertheless be payable on such subsequent
Quarterly Dividend Payment Date.
(c) Dividends shall begin to accrue and be cumulative on outstanding
shares of Series A Junior Preferred Stock from the Quarterly Dividend Payment
Date next preceding the date of issue of such shares of Series A Junior
Preferred Stock, unless the date of issue of such shares is prior to the record
date for the first Quarterly Dividend Payment Date, in which case dividends on
such shares shall begin to accrue from the date of issue of such shares, or
unless the date of issue is a Quarterly Dividend Payment Date or is a date after
the record date for the determination of holders of shares of Series A Junior
Preferred Stock entitled to receive a quarterly dividend and before such
Quarterly Dividend Payment Date, in either of which events such dividends shall
begin to accrue and be cumulative from such Quarterly Dividend Payment Date.
Accrued but unpaid dividends shall not bear interest. Dividends paid on the
shares of Series A Junior Preferred Stock in an amount less than the total
amount of such dividends at the time accrued and payable on such shares shall be
allocated pro rata on a share-by-share basis among all such shares at the time
outstanding. The Board of Directors may fix a record date for the determination
of holders of shares of Series A Junior Preferred Stock entitled to receive
payment of a dividend or distribution declared thereon, which record date shall
be no more than 60 days prior to the date fixed for the payment thereof.
A-2
<PAGE>
3. Voting Rights. The holders of shares of Series A Junior Preferred
Stock shall have the following voting rights:
(a) Subject to the provision for adjustment hereinafter set forth,
each share of Series A Junior Preferred Stock shall entitle the holder thereof
to 100 votes on all matters submitted to a vote of the shareowners of the
Corporation. In the event the Corporation shall at any time after the Rights
Declaration Date (i) declare any dividend on Common Stock payable in shares of
Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the
outstanding Common Stock into a smaller number of shares, then in each such case
the number of votes per share to which holders of shares of Series A Junior
Preferred Stock were entitled immediately prior to such event shall be adjusted
by multiplying such number by a fraction, the numerator of which is the number
of shares of Common Stock outstanding immediately after such event and the
denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.
(b) Except as otherwise provided herein, in the Articles of
Incorporation or under applicable law, the holders of shares of Series A Junior
Preferred Stock and the holders of shares of Common Stock shall vote together as
one class on all matters submitted to a vote of shareowners of the Corporation.
(c) (i) If at any time dividends on any Series A Junior Preferred
Stock shall be in arrears in an amount equal to six (6) quarterly dividends
thereon, the occurrence of such contingency shall mark the beginning of a period
(herein called a "default period") that shall extend until such time when all
accrued and unpaid dividends for all previous quarterly dividend periods and for
the current quarterly dividend period on all shares of Series A Junior Preferred
Stock then outstanding shall have been declared and paid or set apart for
payment. During each default period, all holders of shares of Series A Junior
Preferred Stock together with any other series of Preferred Stock then entitled
to such a vote under the terms of the Articles of Incorporation, voting as a
separate class, shall be entitled to elect two members of the Board of Directors
of the Corporation.
(ii) During any default period, such voting right of the holders
of Preferred Stock may be exercised initially at a special meeting called
pursuant to subparagraph (iii) of this Subsection 3(c) or at any annual meeting
of shareowners, and thereafter at annual meetings of shareowners, provided that
neither such voting rights nor the rights of holders of Preferred Stock as
hereinafter provided to increase in certain cases the authorized number of
Directors shall be exercised unless the holders of 25% in number of shares of
Preferred Stock outstanding shall be present in person or by proxy. The absence
of a quorum of the holders of Common Stock shall not affect the exercise by the
holders of Preferred Stock of such voting right. At any meeting at which the
holders of Preferred Stock shall exercise such voting right initially during an
existing default period, such holders shall have the right, voting as a separate
class, to elect Directors to fill such vacancies, if any, in the Board of
Directors as may then exist up to two (2) Directors, or, if such right is
exercised at an annual meeting, to elect two (2) Directors. If the number that
may be so elected at any special meeting does not amount to the required number,
the holders of the Preferred Stock shall have the right to make such increase in
the number of Directors as shall be necessary to permit the election by them of
the required number. After the holders of the Preferred Stock shall have
exercised their right to elect Directors in any default period and during
A-3
<PAGE>
the continuance of such period, the number of Directors shall not be increased
or decreased except by vote of the holders of Preferred Stock as herein provided
or pursuant to the rights of any equity securities ranking senior to or pari
passu with the Series A Junior Preferred Stock.
(iii) Unless the holders of Preferred Stock shall, during an
existing default period, have previously exercised their right to elect
Directors, the Board of Directors may order, or any shareowner or shareowners
owning in the aggregate not less than ten percent (10%) of the total number of
shares of Preferred Stock outstanding, irrespective of series, may request the
calling of a special meeting of the holders of Preferred Stock, which meeting
shall thereupon be called by the Chairman of the Board, the President, a Vice
President or the Secretary of the Corporation. Notice of such meeting and of
any annual meeting at which holders of Preferred Stock are entitled to vote
pursuant to this Section 3(c)(iii) shall be given to each holder of record of
Preferred Stock by mailing a copy of such notice to him at his last address as
the same appears on the books of the Corporation. Such meeting shall be called
for a time not earlier than 10 days and not later than 60 days after such order
or request. In the event such meeting is not called within 60 days after such
order or request, such meeting may be called on a similar notice by any
shareowner or shareowners owning in the aggregate not less than ten percent
(10%) of the total number of shares of Preferred Stock outstanding.
Notwithstanding the provisions of this Section 3(c)(iii), no such special
meeting shall be called during the period within 60 days immediately preceding
the date fixed for the next annual meeting of the shareowners.
(iv) In any default period, the holders of Common Stock, and
other classes of stock of the Corporation if applicable, shall continue to be
entitled to elect the whole number of Directors until the holders of Preferred
Stock shall have exercised their right to elect two (2) Directors voting as a
separate class, after the exercise of which right (x) the Directors so elected
by the holders of Preferred Stock shall continue in office until their
successors shall have been elected by such holders or until the expiration of
the default period, and (y) any vacancy in the Board of Directors may (except as
provided in Section 3(c)(ii)) be filled by vote of a majority of the remaining
Directors theretofore elected by the class which elected the Director whose
office shall have become vacant. References in this Section 3(c)(iv) to
Directors elected by the holders of a particular class of stock shall include
Directors elected by such Directors to fill vacancies as provided in clause (y)
of the foregoing sentence.
(d) Immediately upon the expiration of a default period, (x) the right
of the holders of Preferred Stock, as a separate class, to elect Directors shall
cease, (y) the term of any Directors elected by the holders of Preferred Stock,
as a separate class, shall terminate, and (z) the number of Directors shall be
such number as may be provided for in, or pursuant to, the Articles of
Incorporation or By-Laws irrespective of any increase made pursuant to the
provisions of Section 3(c)(ii) (such number being subject, however, to change
thereafter in any manner provided by law or in the Articles of Incorporation or
By-Laws). Any vacancies in the Board of Directors effected by the provisions of
clauses (y) and (z) in the preceding sentence may be filled by a majority of the
remaining Directors, even though less than a quorum.
(e) Except as set forth herein or as otherwise provided in the
Articles of Incorporation, holders of Series A Junior Preferred Stock shall have
no special voting rights and their consent shall not be required (except to the
extent they are entitled to vote with holders of Common Stock as set forth
herein) for taking any corporate action.
A-4
<PAGE>
4. Certain Restrictions.
(a) Whenever quarterly dividends or other dividends or distributions
payable on the Series A Junior Preferred Stock as provided in Section 2 are in
arrears, thereafter and until all accrued and unpaid dividends and
distributions, whether or not declared, on shares of Series A Junior Preferred
Stock outstanding shall have been paid in full, the Corporation shall not:
(i) declare or pay or set apart for payment any dividends or make
any other distributions on, or redeem or purchase or otherwise acquire,
directly or indirectly, for consideration any shares of any class of stock
of the Corporation ranking junior (either as to dividends or upon
dissolution, liquidation or winding up) to the Series A Junior Preferred
Stock;
(ii) declare or pay dividends on or make any other distributions
on any shares of stock ranking on a parity (either as to dividends or upon
liquidation, dissolution or winding up) with the Series A Junior Preferred
Stock, except dividends paid ratably on the Series A Junior Preferred Stock
and all such parity stock on which dividends are payable or in arrears in
proportion to the total amounts to which the holders of all such shares are
then entitled;
(iii) redeem or purchase or otherwise acquire for consideration
shares of any stock ranking on a parity (either as to dividends or upon
liquidation, dissolution or winding up) with the Series A Junior Preferred
Stock, provided that the Corporation may at any time redeem, purchase or
otherwise acquire shares of any such parity stock in exchange for shares of
any stock of the Corporation ranking junior (either as to dividends or upon
dissolution, liquidation or winding up) to the Series A Junior Preferred
Stock; or
(iv) purchase or otherwise acquire for consideration any shares
of Series A Junior Preferred Stock, or any shares of stock ranking on a
parity with the Series A Junior Preferred Stock, except in accordance with
a purchase offer made in writing or by publication (as determined by the
Board of Directors) to all holders of such shares upon such terms as the
Board of Directors, after consideration of the respective annual dividend
rates and other relative rights and preferences of the respective series
and classes, shall determine in good faith will result in fair and
equitable treatment among the respective series or classes.
(b) The Corporation shall not permit any subsidiary of the Corporation
to purchase or otherwise acquire for consideration any shares of stock of the
Corporation unless the Corporation could, under paragraph (a) of this Section 4,
purchase or otherwise acquire such shares at such time and in such manner.
5. Reacquired Shares. Any shares of Series A Junior Preferred Stock
purchased or otherwise acquired by the Corporation in any manner whatsoever
shall be retired and cancelled promptly after the acquisition thereof. All such
shares shall upon their cancellation become authorized but unissued shares of
Preferred Stock and may be reissued as part of a new
A-5
<PAGE>
series of Preferred Stock to be created by resolution or resolutions of the
Board of Directors, subject to the conditions and restrictions on issuance set
forth herein.
6. Liquidation, Dissolution or Winding Up.
(a) Upon any voluntary or involuntary liquidation, dissolution or
winding up of the Corporation, no distribution shall be made to the holders of
shares of stock ranking junior (either as to dividends or upon liquidation,
dissolution or winding up) to the Series A Junior Preferred Stock unless, prior
thereto, the holders of shares of Series A Junior Preferred Stock shall have
received an amount equal to $10 per share, plus an amount equal to accrued and
unpaid dividends and distributions thereon, whether or not declared, to the date
of such payment (the "Series A Liquidation Preference"). Following the payment
of the full amount of the Series A Liquidation Preference, no additional
distributions shall be made to the holders of shares of Series A Junior
Preferred Stock unless, prior thereto, the holders of shares of Common Stock
shall have received an amount per share (the "Common Adjustment") equal to the
quotient obtained by dividing (i) the Series A Liquidation Preference by (ii)
100 (as appropriately adjusted as set forth in paragraph (c) below to reflect
such events as stock splits, stock dividends and recapitalizations with respect
to the Common Stock) (such number in clause (ii) being hereinafter referred to
as the "Adjustment Number"). Following the payment of the full amount of the
Series A Liquidation Preference and the Common Adjustment in respect of all
outstanding shares of Series A Junior Preferred Stock and Common Stock,
respectively, holders of Series A Junior Preferred Stock and holders of shares
of Common Stock shall receive their ratable and proportionate share of the
remaining assets to be distributed in the ratio of the Adjustment Number to 1
with respect to such Series A Junior Preferred Stock and Common Stock, on a per
share basis, respectively.
(b) In the event, however, that there are not sufficient assets
available to permit payment in full of the Series A Liquidation Preference and
the liquidation preferences of all other series of Preferred Stock, if any,
which rank on a parity with the Series A Junior Preferred Stock, then such
remaining assets shall be distributed ratably to the holders of all such shares
in proportion to their respective liquidation preferences. In the event,
however, that there are not sufficient assets available to permit payment in
full of the Common Adjustment, then such remaining assets shall be distributed
ratably to the holders of Common Stock.
(c) In the event the Corporation shall at any time after the Rights
Declaration Date (i) declare any dividend on Common Stock payable in shares of
Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the
outstanding Common Stock into a smaller number of shares, then in each such case
the Adjustment Number in effect immediately prior to such event shall be
adjusted by multiplying such Adjustment Number by a fraction, the numerator of
which is the number of shares of Common Stock outstanding immediately after such
event and the denominator of which is the number of shares of Common Stock that
were outstanding immediately prior to such event.
7. Consolidation, Merger, Share Exchange, etc. In case the
Corporation shall enter into any consolidation, merger, share exchange,
combination or other transaction in which the shares of Common Stock are
exchanged for or changed into other stock or securities, cash and/or any other
property, then in any such case the shares of Series A Junior Preferred Stock
shall at the same time be similarly exchanged or changed in an amount per share
(subject
A-6
<PAGE>
to the provision for adjustment hereinafter set forth) equal to 100 times the
aggregate amount of stock, securities, cash and/or any other property (payable
in kind), as the case may be, into which or for which each share of Common Stock
is changed or exchanged. In the event the Corporation shall at any time after
the Rights Declaration Date (i) declare any dividend on Common Stock payable in
shares of Common Stock, (ii) subdivide the outstanding Common Stock, (iii)
combine the outstanding Common Stock into a smaller number of shares or (iv)
issue any shares of its capital stock in a reclassification of the outstanding
Common Stock, then in each such case the amount set forth in the preceding
sentence with respect to the exchange or change of shares of Series A Junior
Preferred Stock shall be adjusted by multiplying such amount by a fraction, the
numerator of which is the number of shares of Common Stock outstanding
immediately after such event and the denominator of which is the number of
shares of Common Stock that were outstanding immediately prior to such event.
8. No Redemption. The shares of Series A Junior Preferred Stock
shall not be redeemable.
9. Ranking. The Series A Junior Preferred Stock shall rank junior
to all other series of the Corporation's Preferred Stock as to the payment of
dividends and the distribution of assets, unless the terms of any such series
shall provide otherwise.
10. Amendment. The Articles of Incorporation of the Corporation
shall not be amended in any manner which would materially alter or change the
powers, preferences or special rights of the Series A Junior Preferred Stock so
as to affect them adversely without the affirmative vote of the holders of two-
thirds or more of the outstanding shares of Series A Junior Preferred Stock,
voting together as a single voting group.
11. Fractional Shares. Series A Junior Preferred Stock may be issued
in fractions of a share which shall entitle the holder, in proportion to such
holder's fractional shares, to exercise voting rights, receive dividends,
participate in distributions and to have the benefit of all other rights of
holders of Series A Junior Preferred Stock.
IN WITNESS WHEREOF, Payless ShoeSource, Inc. has caused this
Certificate to signed by __________ its _________, this ____ day of __________,
1996.
PAYLESS SHOESOURCE, INC.
By:
-----------------------------------
A-7
<PAGE>
Exhibit B
---------
[Form of Rights Certificate]
Certificate No. R- _________ Rights
NOT EXERCISABLE AFTER April 30, 2006 OR EARLIER IF REDEEMED BY THE COMPANY.
THE RIGHTS ARE SUBJECT TO REDEMPTION, AT THE OPTION OF THE COMPANY, AT $.01
PER RIGHT ON THE TERMS SET FORTH IN THE RIGHTS AGREEMENT. UNDER CERTAIN
CIRCUMSTANCES, RIGHTS BENEFICIALLY OWNED BY AN ACQUIRING PERSON OR AN
ADVERSE PERSON (AS SUCH TERMS ARE DEFINED IN THE RIGHTS AGREEMENT) AND ANY
SUBSEQUENT HOLDER OF SUCH RIGHTS MAY BECOME NULL AND VOID. [THE RIGHTS
REPRESENTED BY THIS RIGHTS CERTIFICATE ARE OR WERE BENEFICIALLY OWNED BY A
PERSON WHO WAS OR BECAME AN ACQUIRING PERSON OR AN ADVERSE PERSON OR AN
AFFILIATE OR ASSOCIATE OF AN ACQUIRING PERSON OR AN ADVERSE PERSON (AS SUCH
TERMS ARE DEFINED IN THE RIGHTS AGREEMENT). ACCORDINGLY, THIS RIGHTS
CERTIFICATE AND THE RIGHTS REPRESENTED HEREBY MAY BECOME NULL AND VOID IN
THE CIRCUMSTANCES SPECIFIED IN SECTION 7(e) OF SUCH AGREEMENT.]/1/
Rights Certificate
PAYLESS SHOESOURCE, INC.
This certifies that , or registered assigns,
is the registered owner of the number of Rights set forth above, each of which
entitles the owner thereof, subject to the terms, provisions and conditions of
the Rights Agreement, dated as of April 2, 1996 (the "Rights Agreement"),
between Payless ShoeSource, Inc., a Missouri corporation (the "Company"), and
The Bank of New York, a banking company organized under the laws of New York,
(the "Rights Agent"), to purchase from the Company at any time prior to 5:00
P.M. (St. Louis, Missouri time) on April 30, 2006 at the office or offices of
the Rights Agent designated for such purpose, or its successors as Rights Agent,
one one-hundredth of a fully paid, nonassessable share of Series A
- ---------------
/1/ The portion of the legend in brackets shall be inserted only if applicable
and shall replace the preceding sentence.
B-1
<PAGE>
Junior Participating Preferred Stock (the "Preferred Stock") of the Company, at
a purchase price of $80 per one one-hundredth of a share (the "Purchase Price"),
upon presentation and surrender of this Rights Certificate with the Form of
Election to Purchase and related Certificate duly executed. The Purchase Price
shall be paid, at the election of the holder, in cash or shares of Common Stock
of the Company having an equivalent value. The number of Rights evidenced by
this Rights Certificate (and the number of shares which may be purchased upon
exercise thereof) set forth above, and the Purchase Price per share set forth
above, are the number and Purchase Price as of April 12, 1996, based on the
Preferred Stock as constituted at such date.
Upon the occurrence of a Section 11(a)(ii) Event (as such term is
defined in the Rights Agreement), if the Rights evidenced by this Rights
Certificate are beneficially owned by (i) an Acquiring Person, an Adverse Person
or an Affiliate or Associate of any such Acquiring Person or Adverse Person (as
such terms are defined in the Rights Agreement), (ii) a transferee of any such
Acquiring Person or an Adverse Person (or of any such Associate or Affiliate),
or (iii) under certain circumstances specified in the Rights Agreement, a
transferee of a person who, after such transfer, became an Acquiring Person, an
Adverse Person or an Affiliate or Associate of an Acquiring Person or an Adverse
Person, such Rights shall become null and void and no holder hereof shall have
any right with respect to such Rights from and after the occurrence of such
Section 11(a)(ii) Event.
As provided in the Rights Agreement, the Purchase Price and the number
and kind of shares of Preferred Stock or other securities, which may be
purchased upon the exercise of the Rights evidenced by this Rights Certificate
are subject to modification and adjustment upon the happening of certain events,
including Triggering Events.
This Rights Certificate is subject to all of the terms, provisions and
conditions of the Rights Agreement, which terms, provisions and conditions are
hereby incorporated herein by reference and made a part hereof and to which
Rights Agreement reference is hereby made for a full description of the rights,
limitations of rights, obligations, duties and immunities hereunder of the
Rights Agent, the Company and the holders of the Rights Certificates, which
limitations of rights include the temporary suspension of the exercisability of
such Rights under the specific circumstances set forth in the Rights Agreement.
Copies of the Rights Agreement are on file at the above-mentioned office of the
Rights Agent and are also available upon written request to the Rights Agent.
This Rights Certificate, with or without other Rights Certificates,
upon surrender at the principal office or offices of the Rights Agent designated
for such purpose, may be exchanged for another Rights Certificate or Rights
Certificates of like tenor and date evidencing Rights entitling the holder to
purchase a like aggregate number of one one-hundredths of a share of Preferred
Stock as the Rights evidenced by the Rights Certificate or Rights Certificates
surrendered shall have entitled such holder to purchase. If this Rights
Certificate shall be exercised in part, the holder shall be entitled to receive
upon surrender hereof another Rights Certificate or Rights Certificates for the
number of whole Rights not exercised.
Subject to the provisions of the Rights Agreement, the Rights
evidenced by this Certificate may be redeemed by the Company at its option at a
redemption price of $.01 per Right at any time prior to the earlier of the close
of business on (i) the tenth Business Day following the
B-2
<PAGE>
Stock Acquisition Date (as such time period may be extended pursuant to the
Rights Agreement), and (ii) the Final Expiration Date.
The Company is not required to issue fractional shares of Preferred
Stock upon the exercise of any Right or Rights evidenced hereby (other than
fractions which are integral multiples of one one-hundredth of a share of
Preferred Stock, which may, at the election of the Company, be evidenced by
depositary receipts), but in lieu thereof a cash payment may be made, as
provided in the Rights Agreement.
No holder of this Rights Certificate shall be entitled to vote or
receive dividends or be deemed for any purpose the holder of shares of Preferred
Stock or of any other securities of the Company which may at any time be
issuable on the exercise hereof, nor shall anything contained in the Rights
Agreement or herein be construed to confer upon the holder hereof, as such, any
of the rights of a shareowner of the Company or any right to vote for the
election of directors or upon any matter submitted to shareowners at any meeting
thereof, or to give or withhold consent to any corporate action, or, to receive
notice of meetings or other actions affecting shareowners (except as provided in
the Rights Agreement), or to receive dividends or subscription rights, or
otherwise, until the Right or Rights evidenced by this Rights Certificate shall
have been exercised as provided in the Rights Agreement.
This Rights Certificate shall not be valid or obligatory for any
purpose until it shall have been countersigned by the Rights Agent.
WITNESS the facsimile signature of the proper officers of the Company
and its corporate seal.
Dated as of _________ __, ____
ATTEST: PAYLESS SHOESOURCE, INC.
________________________________ By_________________________________
Secretary Title:
Countersigned:
THE BANK OF NEW YORK
By_____________________________________
Authorized Signature
B-3
<PAGE>
[Form of Reverse Side of Rights Certificate]
FORM OF ASSIGNMENT
------------------
(To be executed by the registered holder if such
holder desires to transfer the Rights Certificate.)
FOR VALUE RECEIVED__________________________________________________________
hereby sells, assigns and transfers unto____________________________________
____________________________________________________________________________
(Please print name and address of transferee)
_____________________________________________________________________________
this Rights Certificate, together with all right, title and interest therein,
and does hereby irrevocably constitute and appoint ________________ Attorney,
to transfer the within Rights Certificate on the books of the within-named
Company, with full power of substitution.
Date:___________________ , ____
____________________________________
Signature
Signature Guaranteed:
Certificate
-----------
The undersigned hereby certifies by checking the appropriate boxes
that:
(1) this Rights Certificate [ ] is [ ] is not being sold, assigned
and transferred by or on behalf of a Person who is or was an Acquiring Person or
an Adverse Person or an Affiliate or Associate of any such Person (as such terms
are defined pursuant to the Rights Agreement); and
(2) after due inquiry and to the best knowledge of the undersigned,
it [ ] did [ ] did not acquire the Rights evidenced by this Rights Certificate
from any Person who is, was or subsequently became an Acquiring Person or an
Adverse Person or an Affiliate or Associate of any such Person.
Dated: ___________, ____ ________________________________
Signature
Signature Guaranteed:
B-4
<PAGE>
NOTICE
------
The signature to the foregoing Assignment and Certificate must
correspond to the name as written upon the face of this Rights Certificate in
every particular, without alteration or enlargement or any change whatsoever.
B-5
<PAGE>
FORM OF ELECTION TO PURCHASE
----------------------------
(To be executed if holder desires to
exercise Rights represented by the
Rights Certificate.)
To: PAYLESS SHOESOURCE, INC.:
The undersigned hereby irrevocably elects to exercise __________
Rights represented by this Rights Certificate to purchase the shares of
Preferred Stock issuable upon the exercise of the Rights (or such other
securities of the Company or of any other person which may be issuable upon the
exercise of the Rights) and requests that certificates for such shares be issued
in the name of and delivered to:
Please insert social security
or other identifying number
____________________________________________________________________________
(Please print name and address)
____________________________________________________________________________
If such number of Rights shall not be all the Rights evidenced by this
Rights Certificate, a new Rights Certificate for the balance of such Rights
shall be registered in the name of and delivered to:
Please insert social security
or other identifying number
_______________________________________________________________________________
(Please print name and address)
_______________________________________________________________________________
_______________________________________________________________________________
Dated: _______________, ____
____________________________________
Signature
B-6
<PAGE>
Signature Guaranteed:
Certificate
-----------
The undersigned hereby certifies by checking the appropriate boxes
that:
(1) the Rights evidenced by this Rights Certificate [ ] are [ ] are
not being exercised by or on behalf of a Person who is or was an Acquiring
Person, an Adverse Person or an Affiliate or Associate of any such Person (as
such terms are defined pursuant to the Rights Agreement); and
(2) after due inquiry and to the best knowledge of the undersigned,
it [ ] did [ ] did not acquire the Rights evidenced by this Rights Certificate
from any Person who is, was or became an Acquiring Person, an Adverse Person or
an Affiliate or Associate of any such Person.
Dated: ___________, ____ _________________________________
Signature
Signature Guaranteed:
NOTICE
------
The signature to the foregoing Election to Purchase and Certificate
must correspond to the name as written upon the face of this Rights Certificate
in every particular, without alteration or enlargement or any change whatsoever.
B-7
<PAGE>
TAX SHARING AGREEMENT
This TAX SHARING AGREEMENT, dated as of April 2, 1996, is entered into
by THE MAY DEPARTMENT STORES COMPANY, a New York corporation ("May"), and
Payless ShoeSource, Inc., a Missouri corporation ("Payless"), and shall be
deemed effective as of May 4, 1996.
RECITALS
On January 17, 1996, May announced its plans to divest itself of its
discount shoe store operations. To this end, May intends to distribute pro rata
on the Distribution Date (as hereinafter defined) the Payless common stock then
owned by May to the owners of May common stock. After the Distribution Date,
May will own no shares of Payless' common stock.
The purpose of this Agreement is to set forth the agreement between
May and Payless with respect to the Federal, state, local and foreign taxes
attributable to each of them and their subsidiaries for all taxable periods
beginning on or before the Distribution Date. This Agreement also provides
certain indemnity obligations between the parties hereto if the actions of
either party or its shareowners have an adverse effect on the tax-free nature of
the distribution described above and consequently the tax liability of the other
party.
NOW THEREFORE, in consideration of the mutual agreements of the
parties hereto, and further good and valuable consideration, the receipt and
adequacy of which are hereby acknowledged, the parties agree as follows:
Article I
DEFINITIONS
For purposes of this Agreement, the following definitions shall apply:
(a) "Adjustment" shall mean any final change in any pre-Distribution
Income Tax liabilities of any member of the May Affiliated Group initiated
or agreed to by the IRS.
<PAGE>
(b) "Affiliated Group" shall mean an affiliated group of corporations
within the meaning of Code section 1504(a) for the taxable period in
question.
(c) "Carryback Item" shall mean any net operating loss, net capital
loss, unused general business tax credit or any other Tax Item of the
Payless Affiliated Group which under the Code or any other applicable
Income Tax law can be used to generate a Tax Benefit for the May Affiliated
Group.
(d) "Code" shall mean the Internal Revenue Code of 1986, as amended
and in effect for the taxable period in question.
(e) "Deferred Taxes" shall mean the tax effect of differences arising
from the recognition of revenue and expense in different periods for tax
and financial statement purposes.
(f) "Deferred Tax Liabilities" shall mean the net liability for
Deferred Taxes for all taxable periods beginning on or before the
Distribution Date.
(g) "Distribution" shall mean the pro rata distribution by May of the
ownership of the stock of Payless to owners of May common stock as of the
close of business on the record date for such distribution.
(h) "Distribution Date" shall mean the date on which the
Distribution occurs. For all purposes, the Distribution shall be effective
as of the close of business on the Distribution Date.
(i) "Event of Loss" shall mean the incurrence by the May Affiliated
Group of any liability for Income Tax as a result of the Distribution.
(j) "Final Determination" shall mean the final resolution of any tax
liability (including all related interest and penalties) in respect of any
Adjustment for a taxable period. A Final Determination shall result from
the first to occur of:
2
<PAGE>
(i) the expiration of 30 days after IRS acceptance of a Waiver
of Restrictions (or partial Waiver of Restrictions) on Assessment and
Collection of Deficiency in Tax and Acceptance of Overassessment on
Federal Revenue Form 870 or 870-AD, except as to reserved matters
specified therein (or any successor comparable form or the expiration
of a comparable agreement or form under the laws of other
jurisdictions);
(ii) a decision, judgment, decree, or other order by a court of
competent jurisdiction that is (x) not subject to further judicial
review (by appeal or otherwise) or (y) subject to further judicial
review but with respect to which May notifies Payless, in good faith
and in its sole discretion that it has determined not to appeal;
(iii) the execution of a closing agreement under section 7121 of
the Code or the acceptance by the IRS or its counsel of an offer in
compromise under section 7122 of the Code, or comparable agreements
under the laws of other jurisdictions, except as to reserved matters
specified therein;
(iv) the expiration of the time for filing a claim for refund or
for instituting suit in respect of a claim for refund disallowed in
whole or part by the IRS;
(v) any other final disposition of the tax liability for such
period by reason of the expiration of the applicable statute of
limitations; or
(vi) any other event that the parties agree is a final and
irrevocable determination of the liability at issue.
(k) "Income Tax or Taxes" shall mean all Federal, state and local,
and foreign taxes imposed upon, or measured by, income, including, without
limitation, environmental and alternative or add-on minimum taxes, and such
related franchise, excise and similar taxes as have been customarily
included in the provision for income taxes on May's financial statements,
together with all related interest, penalties and additions to tax.
3
<PAGE>
(l) "IRS" shall mean the United States Internal Revenue Service or
any successor thereto, including, but not limited to, its agents,
representatives, and attorneys.
(m) "May Affiliated Group" shall mean, for each taxable period, the
Affiliated Group of which May or any successor of May is a member or the
common parent, as defined in Code Section 1504(a).
(n) "May Group" shall mean, with respect to any taxable period, the
corporations that were members of the May Affiliated Group during such
period, exclusive of the corporations that are included in the Payless
Affiliated Group immediately after the Distribution Date.
(o) "Other Taxes" shall mean any gross income, gross receipts, sales,
use, ad valorem, franchise, license, withholding, payroll, employment,
excise, severance, stamp, occupation, premium, property, windfall profits
tax, custom, duty or other charge of any kind whatsoever, together with
any interest or any penalty, addition to tax or additional amount imposed
by any governmental authority responsible for the imposition of any such
tax.
(p) "Payless Affiliated Group" shall mean, for each taxable period
beginning after the Distribution Date, the Affiliated Group of which
Payless or any successor of Payless is a member or the common parent, as
defined in Code section 1504(a).
(q) "Payless Assets" shall mean all of the assets held by the members
of the Payless Affiliated Group immediately after the Distribution.
(r) "Payless Group" shall mean, with respect to any taxable period,
the corporations that were members of the May Affiliated Group and that are
members of the Payless Affiliated Group immediately after the Distribution
Date.
(s) "Return" shall mean any return, report, information return,
officer report or filing or other document (including, without limitation,
estimated returns and related or supporting information) in respect of
Income Taxes or Other Taxes, as the case may be.
4
<PAGE>
(t) "Stub Period" shall mean the taxable period (or portion thereof)
that begins on February 4, 1996 and ends on the Distribution Date.
(u) "Tax Benefit" shall mean a reduction in the Income Tax liability
of a corporation (or of the Affiliated Group of which it is a member) for
any taxable period that arises, or may arise in the future, as a result of
any adjustment to, or addition or deletion of, a Tax Item in the
computation of the Income Tax liability of the taxpayer (or the Affiliated
Group of which it is a member).
(v) "Tax Detriment" shall mean an increase in the Income Tax
liability of a corporation (or of the Affiliated Group of which it is a
member) for any taxable period that arises, or may arise in the future, as
a result of any adjustment to, or addition or deletion of, a Tax Item in
the computation of the Income Tax liability of the taxpayer (or the
Affiliated Group of which it is a member).
(w) "Taxes" shall mean Income Taxes and Other Taxes.
(x) "Tax Item" shall mean any item of income, gain, loss, deduction,
credit, recapture of credit, or any other item which increases or decreases
Income Taxes paid or payable.
Article II
FILING OF TAX RETURNS
Section 2.1. Pre-Distribution Tax Returns. (a) May shall file all
consolidated Federal Income Tax Returns and all state and local Income Tax
Returns required to be filed on a combined, consolidated or unitary basis for
each member of the May Affiliated Group that are required to be filed for the
taxable year ending February 3, 1996 and for the taxable year that begins on
February 4, 1996 and ends on or after the Distribution Date. Payless
acknowledges that Treas. Reg. sec. 1.1502-77(a) confers certain authority on
May, as the common parent of the May Affiliated Group, with respect to Federal
Income Tax matters for all taxable periods beginning on or before the
Distribution Date and agrees to enter into any election or consent
5
<PAGE>
reasonably requested by May with respect to such matters for such taxable years.
(b) May shall file all foreign Income Tax Returns and all state and
local Income Tax Returns for each member of the Payless Group not required to be
included in a combined, consolidated or unitary state and local Income Tax
Return of the May Affiliated Group for the taxable period ending February 3,
1996 and for the taxable period that begins on February 4, 1996 and ends on or
before the Distribution Date. Payless shall file all foreign Income Tax Returns
and all state and local Income Tax Returns for each member of the Payless Group
not required to be included in a combined, consolidated or unitary state and
local Income Tax Return of the May Affiliated Group for the taxable period (if
any) that begins on February 4, 1996 and ends after the Distribution Date.
(c) All Returns with respect to Other Taxes for a period beginning
before the Distribution Date and all other filings required to be filed with any
taxing authority after the Distribution Date shall be filed by the party that
under Section 3.5 is responsible for paying the tax to which the Return relates
or for making such filing, as the case may be.
Section 2.2. Post-Distribution Tax Returns. For taxable periods
beginning after the Distribution Date (1) May shall be responsible for filing
all Returns relating to members of the May Group and, except with respect to any
requirement under Section 3.7 hereof, shall pay all Taxes required by such
Returns; and (2) Payless shall be responsible for filing all Returns relating to
members of the Payless Group and shall pay all Taxes required by such Returns.
Article III
PAYMENT OF TAXES
Section 3.1. Certain Pre-Distribution Income Taxes. The parties
acknowledge that there has not yet been a Final Determination of the
consolidated Income Tax liability of the May Affiliated Group for any taxable
period beginning on or after February 3, 1991. The parties further acknowledge
that May has contributed to the capital of the Payless Group an amount equal to
Payless's Deferred Tax Liabilities for all taxable periods ending on or before
February 3, 1996 based on the Returns as filed or expected to be filed
6
<PAGE>
for such periods. Absent an adjustment under Section 3.2 or an indemnity
obligation under Section 3.3 or Section 3.7, the parties acknowledge and agree
that no further sum shall be due to May from any member of the Payless Group or
from May to any member of the Payless Group on account of the Income Tax
liabilities reflected in the consolidated and other Returns filed or to be filed
with respect to all taxable periods ending on or before February 3, 1996.
Section 3.2. Payless Deferred Tax Liabilities. (a) In connection
with May's calculation of Payless' share of the consolidated Income Tax
liability of the May Affiliated Group pursuant to Section 3.1 hereof, the
parties acknowledge that a portion of the Deferred Taxes have been reconciled to
and are supported by the Federal and state and local Income Tax Returns of the
May Affiliated Group filed for all taxable periods ending on or before January
28, 1995. The parties further acknowledge that the Payless Group has been
allocated its estimated share of Deferred Taxes for the taxable period ending
February 3, 1996. Within 120 days of the filing of the Federal Income Tax
Return for the taxable period ending on February 3, 1996, the estimate of
Deferred Taxes allocated to the Payless Group will be reconciled to the actual
amounts determined to be allocable to the Payless Group through February 3,
1996, and any necessary adjustments will be made between the parties as provided
in Section 3.2(b) below. The determination of whether such an adjustment is
required shall be made in accordance with generally accepted accounting
principles as set forth in Accounting Principles Board Opinion Number 11 and the
methodology used by the May Affiliated Group in preparing its financial
statement for the fiscal year ended February 3, 1996.
(b) To the extent that the actual Deferred Tax Liabilities for the
taxable period ending February 3, 1996 are in excess of the amount originally
estimated as described in Section 3.2(a), May will pay Payless this difference.
To the extent that actual Deferred Tax Liabilities for the taxable period ending
February 3, 1996 are less than the amount originally estimated as described in
Section 3.2(a), Payless will pay May this difference. Such payment shall be
made within one hundred and fifty (150) days of the filing by the May Affiliated
Group of the Federal Income Tax Return for the taxable period ending on February
3, 1996.
7
<PAGE>
Section 3.3. Responsibility for Certain Pre-Distribution Income Tax
Liabilities. (a) Payless shall pay, reimburse and indemnify May an amount
computed pursuant to paragraph (c) below if there is an Adjustment that results
in a Tax Detriment to the May Affiliated Group and a corresponding decrease in
the Payless Group's Deferred Tax Liabilities that is required to be reflected
(without regard to materiality) in any financial statements of Payless pursuant
to Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for
Income Taxes" ("FAS 109") in a post-Distribution period.
(b) May shall pay, reimburse and indemnify Payless, an amount
computed pursuant to paragraph (d) below if there is an Adjustment that results
in a Tax Benefit to the May Affiliated Group and a corresponding increase in the
Payless Group's Deferred Tax Liabilities that is required to be reflected
(without regard to materiality) in any financial statements of Payless pursuant
to FAS 109 in a post-Distribution period.
(c) Any payment made pursuant to paragraph (a) of this Section 3.3
shall be made in accordance with Section 3.8 hereof and shall equal (i) for any
taxable period beginning prior to January 1, 1993, (x) the amount of the
Adjustment (computed without regard to any interest, penalties or additions to
tax), reduced by the amount of any decrease in the Deferred Tax Liabilities of
the May Affiliated Group arising as a result of the effect of such Adjustment in
all pre-Distribution periods, multiplied by (y) thirty-eight and one-half
percent (38 1/2%) and (ii) for any other taxable period, (x) the amount of the
Adjustment (computed without regard to any interest, penalties or additions to
tax), reduced by the amount of any decrease in the Deferred Tax Liabilities of
the May Affiliated Group arising as a result of the effect of such Adjustment in
all pre-Distribution periods, multiplied by (y) thirty-nine and one-half percent
(39 1/2%).
(d) Any payment made pursuant to paragraph (b) of this Section 3.3
shall be made in accordance with Section 3.8 hereof and shall equal (i) for any
taxable period beginning prior to January 1, 1993 (x) the amount of the
Adjustment (computed without regard to any interest, penalties or additions to
tax), reduced by the amount of any increase in the Deferred Tax Liabilities of
the May Affiliated Group arising as a result of the effect of such Adjustment in
all pre-Distribution periods, multiplied by (y) thirty-eight and one-half
percent (38 1/2%) and (ii) for any other taxable period, (x) the amount of the
Adjustment (computed without regard to any interest, penalties
8
<PAGE>
or additions to tax), reduced by the amount of any increase in the Deferred Tax
Liabilities of the May Affiliated Group arising as a result of the effect of
such Adjustment in all pre-Distribution periods, multiplied by (y) thirty-nine
and one-half percent (39 1/2%).
Section 3.4. Stub Period Income Taxes. (a) Notwithstanding anything
to the contrary in Section 3.3 hereof, Payless shall be responsible for all
Income Taxes imposed upon, or otherwise allocable to, the Payless Group for the
Stub Period. In this regard, the parties acknowledge that, pursuant to Sections
2.1(a) and 2.1(b) hereof, May shall file certain Income Tax Returns on behalf
of, or which include, the members of the Payless Group for the Stub Period.
Payless shall reimburse May for any Income Taxes shown due on such Return which
are imposed upon or otherwise allocable to the Payless Group for the Stub Period
within five (5) days of the earlier to occur of the filing of any Return by May
or the payment by May of any Income Tax (including the payment of estimated
Income Taxes) for the Stub Period.
(b) Payless shall pay any Income Tax shown due on any Return that
includes the Stub Period for which it has filing responsibility pursuant to
Section 2.1 hereof.
(c) Payless shall indemnify and hold harmless May against all Taxes
for the Stub Period. Any payment required to be made by Payless to May pursuant
to this Section 3.4(c) shall be made in accordance with Section 3.8 hereof.
(d) If May receives a refund of Income Taxes for the Stub Period for
which May had previously been reimbursed or otherwise indemnified by Payless
pursuant to paragraph (a) or (c), as the case may be, of this Section 3.4, May
shall pay the amount of such refund to Payless within five (5) days of receipt
thereof. If, in filing any Return for which May has filing responsibility
pursuant to Sections 2.1 or 2.2 hereof, May claims a credit against Income Taxes
that is attributable to Income Taxes for the Stub Period for which May had
previously been reimbursed by Payless pursuant to paragraph (a) of this Section
3.4, May shall pay the amount of such credit to Payless within five (5) days of
the filing of such Return with respect to which such credit is claimed.
Section 3.5. Other Taxes. The May Group shall pay all Other Taxes
(and shall be entitled to receive and retain all refunds of Other Taxes)
9
<PAGE>
which are attributable to members of the May Group. The Payless Group shall pay
all Other Taxes (and shall be entitled to receive and retain all refunds of
Other Taxes) which are attributable to members of the Payless Group.
Section 3.6. Carrybacks. Unless May and Payless otherwise agree in
writing, Payless hereby expressly agrees to elect (under Code section
172(b)(3)(C) and, to the extent feasible, any similar provision of any state and
local Income Tax law) to relinquish any Carryback Item (and hereby acknowledges
that it has no interest in any Carryback Item and that it waives and
relinquishes any claim thereto so that no payment shall be due from May to
Payless in respect of any such Carryback Item).
Section 3.7. Responsibility of Payless Group for an Event of Loss.
Payless and any successor corporation shall be responsible for, and shall
indemnify and hold harmless May and each member of the May Group from all
liability, loss, cost, expense or damage in any way occasioned by an Event of
Loss to the extent such Event of Loss would not have resulted but for a breach
of any covenant contained in Section 6.2 of this Agreement (without regard to
whether an opinion of counsel has been obtained).
Section 3.8. Payment. (a) If Payless is required to make a payment
to a member of the May Group under this Agreement, such payment shall be made by
Payless to May or any successor corporation, and if May is required to make a
payment to a member of the Payless Group under this Agreement, such payment
shall be made to Payless. Any payment by Payless shall be made by the earlier
of 5 days after (1) May makes a tax payment to the applicable taxing authority
(including, without limitation, any payment made in connection with either an
estimated or annual tax liability) or (2) a Final Determination of the tax
liability in question. Any payment by May shall be made by the earlier of 5
days after (1) May receives a refund from any taxing authority or claims a tax
credit on any Return or (2) a Final Determination of the tax liability in
question. May and Payless agree that to the extent permitted, any payment made
shall be reported as non-deductible and any payment received shall be reported
as non-taxable.
(b) Any payment required to be made from one party to the other under
this Agreement and not made when due shall bear interest at the rate per annum
equal the lesser of (i) the maximum rate permitted by applicable law and (ii)
two percentage points in excess of the per annum rate
10
<PAGE>
of interest generally charged from time to time by Citibank, N.A. (or in its
absence, the U.S. bank with the highest market capitalization) at its branches
in New York City in respect of U.S. dollar demand commercial loans to its most
credit worthy commercial borrowers, which per annum rate of interest is
customarily referred to as the "prime rate" of interest. For the purposes of
this Agreement, such "prime rate" of interest shall be ascertained monthly, as
of the first business day of each calendar month, and such rate, as so
ascertained, shall be deemed to be the "prime rate" in effect throughout such
calendar month.
Article IV
COOPERATION AND EXCHANGE OF INFORMATION
Section 4.1. Matters Giving Rise to Indemnity. (a) Whenever May or
Payless becomes aware of an issue which it believes gives rise to an indemnity
from the other party under Article III, May or Payless (as the case may be)
promptly shall give notice of the issue to the other party.
(b) In connection with any pre-Distribution Income Tax liability
arising with respect to a Return for which May had filing responsibilities
pursuant to Section 2.1 or 2.2 hereof, May shall have the sole right to control
any audit or determination by any authority, initiate any claim for refund or
amended return, contest, defend against, resolve and settle any assessment,
notice of deficiency or other adjustment of taxes or otherwise resolve any issue
pertaining to taxes. May acknowledges that, with respect to any negotiation,
settlement or litigation of any Pre-Distribution Tax Liabilities that may give
rise to an indemnification obligation by Payless pursuant to Sections 3.2(a),
3.4 or 3.6(a) hereof in a taxable year beginning after the Distribution, May
shall (i) promptly give notice in writing to Payless of the commencement of the
audit or examination by any taxing authority, (ii) consult in good faith with
Payless in contesting any proposed adjustment to Taxes and (iii) consider any
reasonable advice from Payless concerning such contest. Notwithstanding the
foregoing, all decisions with respect to such negotiation, settlement or
litigation shall be made by May in its sole discretion.
(c) Payless shall have the right, with respect to any Income Tax
Return for which it has filing responsibility pursuant to Sections 2.1 or 2.2
hereof, to control any audit or determination by any authority, initiate any
claim for refund or amended return, contest, defend against, resolve and
11
<PAGE>
settle any assessment, notice of deficiency or other adjustment of such Income
Taxes or otherwise resolve any issue pertaining to such Income Taxes.
(d) The party responsible for the payment of Other Taxes pursuant to
Section 3.5 hereof shall have the right to control any audit or determination by
any authority, initiate any claim for refund or amended return, contest, defend
against, resolve and settle any assessment, notice of deficiency or other
adjustment of such Other Taxes for which such party is responsible or otherwise
resolve any issue pertaining to such Other Taxes.
(e) Except as otherwise provided above, May shall have sole control
over, and shall have no duty to consult with Payless as to, any liability for
Income Taxes of all members of the May Affiliated Group arising on or before the
Distribution Date, including specifically any Income Taxes arising as a result
of the Distribution.
(f) May and Payless hereby agree to pursue and to cooperate in the
pursuit of every opportunity to realize a Tax Benefit for a member of the May
Group or the Payless Group, respectively, unless the Tax Benefit produced
thereby will be less than $25,000.
Section 4.2. Tax Return Information. By July 15, 1996, and November
15, 1996, respectively, Payless shall, and shall cause each appropriate member
of the Payless Group to, provide May with all information reasonably requested
by May to enable May to file the May consolidated Federal Income Tax Return and
those state and local tax Returns required to be filed on a combined,
consolidated or unitary basis for the taxable periods ended February 3, 1996 and
May 4, 1996, respectively.
By January 31, 1997 and January 31, 1998, respectively, May shall
provide Payless with a copy of those portions of the May consolidated Federal
Income Tax Return and those portions of the state and local Income Tax Returns
required to be filed on a combined or consolidated basis relating to the Payless
Group with respect to the taxable periods ended February 3, 1996 and May 3,
1996, respectively. May shall prepare such Returns on a basis consistent with
its past practices, except as to new Tax Items or as to any changes required by
law.
May and Payless agree to cooperate fully with each other in connection
with the preparation of any tax Return or claim for refund or in
12
<PAGE>
conducting any audit or other proceeding in respect of taxes for all open
taxable periods. Such cooperation shall include making personnel and records
available promptly and within 20 days (or such other period as may be
reasonable under the circumstances) after a request for such personnel or
records is made by the tax-imposing authority or the other party. If any member
of the May Group or the Payless Group, as the case may be, fails to provide any
information requested pursuant to this section, then the requesting party shall
have the right to engage a public accountant of its choice to gather such
information. Payless and May, as the case may be, agree to permit any such
public accountant full access to all appropriate records or other information in
the possession of any member of the May Group or the Payless Group, as the case
may be, during reasonable business hours, and to reimburse or pay directly all
costs and expenses in connection with the engagement of such public accountant.
If any member of the May Group or the Payless Group, as the case may
be, supplies information to a member of the other group pursuant to this section
and an officer of the requesting party signs a statement or other document under
penalties of perjury in reliance upon the accuracy of such information, then a
duly authorized officer of the party supplying such information shall certify,
under penalties of perjury, the accuracy and completeness of the information so
supplied. May agrees to indemnify and hold harmless each member of the Payless
Group and its officers and employees, and Payless agrees to indemnify and hold
harmless each member of the May Group and its officers and employees against any
cost, fine, penalty or other expense of any kind attributable to the negligence
of a member of the May Group or the Payless Group, as the case may be, in
supplying a member of the other group with inaccurate or incomplete information.
Payless shall have access to only those portions of the May
consolidated Federal Income Tax Return and those state and local Income Tax
Returns required to be filed on a combined or consolidated basis relating to the
Payless Group. Under no circumstances will Payless have access to any portions
of the May consolidated Federal Income Tax Return pertaining to the May Group
and those state and local Income Tax Returns required to be filed on a combined
or consolidated basis pertaining to the May Group.
Section 4.3. Record Retention. May and Payless agree to retain the
appropriate records for all taxable periods which may affect the determination
of the Income Tax liability of the May Affiliated Group or the
13
<PAGE>
Payless Affiliated Group for such period until such time as a Final
Determination occurs with respect to such taxable period.
Any party intending to destroy any material, records or documents
shall provide the other party with advance notice and the opportunity to copy or
take possession of such records and documents. The parties hereto will notify
each other in writing of any waivers or extensions of the applicable statute of
limitations that may affect the period for which the foregoing records or other
documents must be retained.
Article V
DISPUTES
Section 5.1. Disputes. If the parties are, after negotiation in good
faith, unable to agree upon the appropriate application of this Agreement, the
controversy shall be settled by arbitration in accordance with the rules of the
American Arbitration Association. Upon written notice by any party to the other
party that the controversy is to be submitted to arbitration, each party shall
appoint an independent arbitrator (who shall be a tax attorney or certified
public accountant) within 30 days, and the two arbitrators so appointed shall
appoint a third arbitrator within 30 days after the appointment of the last
arbitrator appointed within the initial 30-day period. If any party fails to
appoint an arbitrator or the parties agree on a single arbitrator, the
controversy shall be determined by a single arbitrator. If the two arbitrators
are unable to agree on a third arbitrator within 30 days, any party may apply to
the American Arbitration Association to make such appointment, and all parties
shall be bound by any appointment so made. The award of the arbitrators (or
arbitrator) shall be final, and judgment upon the award rendered may be entered
in any court having jurisdiction. The locale of the arbitration shall be St.
Louis, Missouri. The expenses of the arbitration procedure shall be borne in
equal parts by the parties unless the arbitration award specifies otherwise.
14
<PAGE>
Article VI
REPRESENTATIONS AND WARRANTIES
Section 6.1. Representations and Warranties. As an inducement to
enter into this Agreement, each party represents to and agrees with the other
that:
(a) Payless is a corporation duly organized, validly existing and in
good standing under the laws of the State of Missouri and May is a corporation
duly organized, validly existing and in good standing under the laws of the
State of New York, and each of them has all requisite corporate power to own,
lease and operate its properties, to carry on its business as presently
conducted and to carry out the transactions contemplated by this Agreement;
(b) it has duly and validly taken all corporate action necessary to
authorize the execution, delivery and performance of this Agreement and the
consummation of the transactions contemplated hereby;
(c) this Agreement has been duly executed and delivered by it and
constitutes its legal, valid and binding obligation enforceable in accordance
with its terms (subject, as to the enforcement of remedies, to (i) applicable
bankruptcy, reorganization, insolvency, moratorium or other similar laws
affecting the enforcement of creditors' rights generally from time to time in
effect, and (ii) to general principles of equity), whether enforcement is sought
in a proceeding at law or in equity; and
(d) none of the execution and delivery of this Agreement, the
consummation of the transactions contemplated hereby or the compliance with any
of the provisions of this Agreement will (i) conflict with or result in a breach
of any provision of its Certificate of Incorporation or by-laws, (ii) breach,
violate or result in a default under any of the terms of any agreement or other
instrument or obligation to which it is a party or by which it or any of its
properties or assets may be bound or (iii) violate any order, writ, injunction,
decree, statute, rule or regulation applicable to it or affecting any of its
properties or assets.
15
<PAGE>
Section 6.2. Covenants. (a) Payless hereby covenants and agrees
that during the two year period after the Distribution Date it will not
participate in or enter into a binding commitment to participate in, nor will
any of Payless' directors or shareowners approve or adopt, any of the following
described events or transactions:
a reorganization, consolidation or merger; the sale or disposition of
Payless Assets other than in the ordinary course of business; Payless'
ceasing to conduct an active trade or business; the acquisition or
disposition of shares of stock of Payless by any person or persons;
the redemption or repurchase (except as otherwise provided in Revenue
Procedure 91-63, 1991-2 C.B. 865, or any successor authority) of
shares of its stock by Payless or any successor, the recapitalization
or other reclassification of the shares of Payless or any successor;
the complete or partial liquidation of Payless or any successor; the
exercisability, transferability or repurchase of rights distributed
pursuant to a stock purchase rights plan or any other act or omission
of Payless which results in failure to comply with each representation
and statement made to counsel in connection with requested opinions
with respect to the Distribution.
(b) Payless represents that, as of the date hereof, it has no present
intention to take any actions described in paragraph (a) of this Section 6.2.
(c) Notwithstanding the foregoing, Payless may engage in acts
inconsistent with the covenants contained in paragraph (a) of this Section 6.2
if:
(i) May consents in writing to such action; or
(ii) on the basis of valid representations, Payless obtains a
ruling from the IRS, or obtains an opinion from a nationally
recognized independent tax counsel selected by Payless and approved by
May, which ruling or opinion states that such action will not cause
either May or its
16
<PAGE>
shareowners to recognize taxable income by virtue of the Distribution.
Article VII
MISCELLANEOUS
Section 7.1. Term of Agreement. This Agreement shall become
effective as of May 4, 1996 and, except as otherwise expressly provided herein,
the respective covenants of the parties contained herein shall continue in full
force and effect until the parties have fully performed.
Section 7.2. Prior Tax Sharing Agreements. This Agreement shall
supersede any other tax-sharing or allocation agreement or arrangement in effect
between the parties hereto prior to the effective date hereof with respect to
the matters expressly dealt with herein.
Section 7.3. Election under Section 1552 of the Code. Nothing in
this Agreement is intended to change or otherwise affect any election made by or
on behalf of the May Affiliated Group with respect to the calculation of
earnings and profits under section 1552 of the Code or the Consolidated Return
Regulations. May, in its sole discretion, is authorized to seek any change in
the method of calculating earnings and profits as it deems desirable.
Section 7.4. Injunctions. The parties acknowledge that irreparable
damage would occur in the event that any of the provisions of this Agreement
were not performed in accordance with its specific terms or were otherwise
breached. The parties hereto shall be entitled to an injunction or injunctions
to prevent breaches of the provisions of this Agreement and to enforce
specifically the terms and provisions hereof in any court having jurisdiction,
such remedy being in addition to any other remedy to which they may be entitled
at law or in equity.
Section 7.5. Severability. If any term, provision, covenant or
restriction of this Agreement is held by a court of competent jurisdiction to be
invalid, void or unenforceable, the remainder of the terms, provisions,
covenants and restrictions set forth herein shall remain in full force and
effect and shall in no way be affected, impaired or invalidated. It is hereby
stipulated and declared to be the intention of the parties that they would have
executed
17
<PAGE>
the remaining terms, provisions, covenants and restrictions without including
any of such which may be hereafter declared invalid, void or unenforceable. In
the event that any such term, provision, covenant or restriction is held to be
invalid, void or unenforceable, the parties hereto shall use their best efforts
to find and employ an alternate means to achieve the same or substantially the
same result as that contemplated by such term, provision, covenant or
restriction.
Section 7.6. Assignment. Except by operation of law (and with
respect thereto, only after two years from the date hereof) or in connection
with the sale of all or substantially all the assets of a party hereto (in
either case, with respect to Payless, subject to the express limitations of
Section 6.2), this Agreement shall not be assignable, in whole or in part,
directly or indirectly, by any party hereto without the written consent of the
other party; and any attempt to assign any rights or obligations arising under
this Agreement without such consent shall be void; provided, however, that the
provisions of this Agreement shall be binding upon, inure to the benefit of and
be enforceable by the parties hereto and their respective successors and
permitted assigns.
Section 7.7. Further Assurances. Subject to the provisions hereof,
the parties hereto shall make, execute, acknowledge and deliver such other
instruments and documents, and take all such other actions, as may be reasonably
required in order to effectuate the purposes of this Agreement and to consummate
the transactions contemplated hereby. Subject to the provisions hereof, each of
the parties shall, in connection with entering into this Agreement, performing
its obligations hereunder and taking any and all actions relating hereto, comply
with all applicable laws, regulations, orders and decrees, obtain all required
consents and approvals and make all required filings with any governmental
agency, other regulatory or administrative agency, commission or similar
authority and promptly provide the other parties with all such information as
they may reasonably request in order to be able to comply with the provisions of
this sentence.
Section 7.8. Parties in Interest. Except as herein otherwise
specifically provided, nothing in this Agreement expressed or implied is
intended to confer any right or benefit upon any person, firm or corporation
other than the parties and their respective successors and permitted assigns.
18
<PAGE>
Section 7.9. Waiver, Etc. No failure or delay on the part of the
parties in exercising any power or right hereunder shall operate as a waiver
thereof, nor shall any single or partial exercise of any such right or power, or
any abandonment or discontinuance of steps to enforce such a right or power,
preclude any other or further exercise thereof or the exercise of any other
right or power. No modification or waiver of any provision of this Agreement
nor consent to any departure by the parties therefrom shall in any event be
effective unless the same shall be in writing, and then such waiver or consent
shall be effective only in the specific instance and for the purpose for which
given.
Section 7.10. Change of Law. If, due to any change in applicable law
or regulations or the interpretation thereof by any court of law or other
governing body having jurisdiction subsequent to the date of this Agreement,
performance of any provision of this Agreement or any transaction contemplated
thereby shall become impracticable or impossible, the parties hereto shall use
their best efforts to find and employ an alternative means to achieve the same
or substantially the same result as that contemplated by such provision.
Section 7.11. Confidentiality. Subject to any contrary requirement
of law and the right of each party to enforce its rights hereunder in any legal
action, each party agrees that it shall keep strictly confidential, and shall
cause its employees and agents to keep strictly confidential, any information
which it or any of its agents or employees may acquire pursuant to, or in the
course of performing its obligations under, any provision of this Agreement;
provided, however, that such obligation to maintain confidentiality shall not
apply to information which (x) at the time of disclosure was in the public
domain not as a result of acts by the receiving party or (y) was in the
possession of the receiving party at the time of disclosure.
Section 7.12. Headings. Descriptive headings are for convenience
only and shall not control or affect the meaning or construction of any
provision of this Agreement.
Section 7.13. Counterparts. For the convenience of the parties, any
number of counterparts of this Agreement may be executed by the parties hereto,
and each such executed counterpart shall be, and shall be deemed to be, an
original instrument.
19
<PAGE>
Section 7.14. Notices. All notices, consents, requests,
instructions, approvals and other communications provided for herein shall be
validly given, made or served, if in writing and delivered by hand, by
facsimile, by United States Postal Service, postage prepaid, registered or
certified mail (delivery verification requested) or by reputable overnight
courier service (charges paid by send, next business day delivery and delivery
verification requested) and shall be deemed given (a) when delivered by hand,
(b) when transmitted by facsimile (with either (i) receipt confirmed or (ii)
hard copy deposited within one business day of such transmission with a
reputable overnight courier service as above provided), (c) three business days
after mailing if mailed through the United States Postal Service as above
provided or (d) one business day after depositing with a reputable overnight
courier service as above provided, in each case addressed to the parties as
followed:
(a) if to May:
The May Department Stores Company
611 Olive Street
St. Louis, Missouri 63101
Attention: General Counsel
Facsimile #: (314) 342-6384
with a copy to:
The May Department Stores Company
611 Olive Street
St. Louis, Missouri 63101
Attention: Vice President Taxes
Facsimile #: (314) 342-6588
(b) if to Payless:
Payless ShoeSource, Inc.
3231 E. 6th Street
Topeka, Kansas 66607
Attention: Chief Financial Officer
Facsimile #: (913) 295-6804
20
<PAGE>
subject to the right of each party to designate a different address in the
United States and/or addressee by notice similarly given at least 15 days before
the effectiveness of such new designation.
Section 7.15. Governing Law. This Agreement shall be governed by and
construed and enforced in accordance with the domestic substantive laws of the
State of Delaware without regard to any choice or conflict of laws rule or
provisions that would cause the application of the domestic substantive laws of
any other jurisdiction.
Section 7.16. Costs and Expenses. Unless otherwise specifically
provided herein, each party agrees to pay its own costs and expenses resulting
from the fulfillment of its respective obligations hereunder.
IN WITNESS WHEREOF, the undersigned have caused this Agreement to be
duly executed by their respective officers, each of whom is duly authorized, all
as of the day and year first above written.
THE MAY DEPARTMENT STORES COMPANY
By: /s/Louis J. Garr, Jr.
---------------------------------------
Executive Vice President
PAYLESS SHOESOURCE, INC.
By: /s/Richard A. Brickson
----------------------
Vice President
21
<PAGE>
================================================================================
THE MAY DEPARTMENT STORES COMPANY
a New York corporation, Sublessor
AND
PAYLESS SHOESOURCE, INC.
a Missouri corporation, Sublessee
--------------------
SUBLEASE
--------------------
Dated as of April 2, 1996
================================================================================
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
SECTION PAGE
- ------- ----
<S> <C> <C>
1. Certain Definitions............................................ 2
"Additional Rent"......................................... 2
"Affiliate"............................................... 2
"Applicable Rate"......................................... 2
"Appurtenant Agreements".................................. 3
"Basic Subrent"........................................... 3
"default"................................................. 3
"Event of Default"........................................ 3
"Impositions"............................................. 3
"Insurance Requirements".................................. 4
"Lease" or "Leases"....................................... 4
"Legal Requirements"...................................... 4
"Lessor".................................................. 5
"Net Award"............................................... 5
"Office and Operating Equipment".......................... 5
"Property" or "Properties"................................ 5
"Property Agreements"..................................... 5
"Restoration"............................................. 5
"Selling Fixtures"........................................ 5
"Taking".................................................. 6
2. Sublease of Properties; Transfer of
Leasehold Improvements......................................... 6
2A. Excluded Rights, Interests, Privileges
and Benefits................................................... 6
3. Term........................................................... 8
4. Basic Subrent, Additional Rent and
Other Expenses................................................. 8
5. Net Sublease................................................... 9
6. Title and Condition; Use....................................... 11
7. Maintenance; Alterations; Operation............................ 11
8. Indemnification................................................ 13
9. Leases......................................................... 14
10. Payment of Impositions, Services and
Sublessor's Expenses........................................... 15
11. Compliance With Requirements................................... 16
</TABLE>
i
<PAGE>
<TABLE>
<S> <C> <C>
12. Discharge of Liens............................................ 16
13. Permitted Contests............................................ 17
14. Insurance..................................................... 17
15. Casualty...................................................... 20
16. Estoppel Certificate; Inspections............................. 22
17. Performance by Sublessor...................................... 23
18. Assignment and Sub-subletting................................. 24
19. Event of Default.............................................. 25
20. Conditional Limitations; Remedies............................. 27
21. Surrender..................................................... 31
22. Merger........................................................ 32
23. Notices....................................................... 32
24. Amendments.................................................... 33
25. Miscellaneous................................................. 33
26. No Recording.................................................. 34
27. Sublessee's Right to Extend Term of Sublease
as to Certain Properties...................................... 34
28. Certifications and Correspondence............................. 37
29. Sublessor's Document Review and/or
Preparation Charges........................................... 38
30. Sublessee's Disclaimer........................................ 38
31. Single Agreement.............................................. 38
32. Financial Statements and Financial Covenants.................. 39
33. Governing Law; Submission to Jurisdiction;
Injunction.................................................... 52
</TABLE>
ii
<PAGE>
SUBLEASE (this "Sublease"), dated as of April 2, 1996, by and between THE
MAY DEPARTMENT STORES COMPANY, a New York corporation ("Sublessor"), having its
headquarters at 611 Olive Street, St. Louis, Missouri 63101, and PAYLESS
SHOESOURCE, INC., a Missouri corporation ("Sublessee"), having its headquarters
at 3231 East 6th Street, Topeka, Kansas 66607.
W I T N E S S E T H:
-------------------
WHEREAS, on January 17, 1996, Sublessor announced its intent to spin-off
Sublessee as an independent publicly owned corporation and, following that
announcement, Sublessor prepared for the eventual distribution of the common
stock of Sublessee to the common stock owners of Sublessor (the "Distribution")
by, among other things, entering into with Sublessee a Distribution Agreement, a
Tax Sharing Agreement and various other agreements, including those referred to
in the Form 10 Registration Statement as initially filed with the Securities
Exchange Commission on February 23, 1996, as amended (the "Form 10");
establishing and providing for various welfare and pension benefit plans for
associates of Sublessee as described in the Form 10; making arrangements for
Sublessee to obtain a revolving credit facility for general corporate and
working capital purposes; and establishing various reserves on Sublessee's
financial books and records and providing for the transfer of Sublessor's equity
investment in Sublessee to stockholder's equity on Sublessee's books and records
in an amount in excess of $750 million;
WHEREAS, this Sublease is an integral part of the Distribution, which is
soon expected to be declared by the board of directors of Sublessor to be
payable to owners of record of Sublessor's common stock at the close of business
on a future date, and Sublessor and Sublessee acknowledge that neither this
Sublease nor any of the other agreements or preparations referred to in the Form
10 would have been entered into or occurred in absence of the contemplation of
the Distribution;
WHEREAS, each of those certain store locations identified and listed on
Schedule A attached hereto and made a part hereof (such store locations, being
the subject matter of and being more
<PAGE>
particularly described in the Leases (as hereinafter defined), are hereinafter
referred to individually as a "Property" and collectively as the "Properties")
is demised and leased to Sublessor, as tenant, pursuant to a written lease
covering each of same (as now or hereafter amended, supplemented, assigned
and/or extended from time to time, individually a "Lease" and collectively the
"Leases");
WHEREAS, Sublessor is unwilling to sublease any one or more Properties to
Sublessee unless Sublessee subleases all Properties;
WHEREAS, Sublessor desires to demise and sublet to Sublessee, and Sublessee
desires to take and sublease from Sublessor, all of the Properties, all upon,
subject to, as limited by, and in accordance with the respective terms,
provisions and conditions hereinafter set forth; and
WHEREAS, Sublessee acknowledges that, other than pursuant to and as
expressly and specifically provided in this Sublease, Sublessee has no right,
title or interest in, to and/or with respect to the Properties and/or the
Leases;
NOW, THEREFORE, in consideration of the premises, including the
Distribution, and for other good and valuable considerations, the receipt and
adequacy of which are hereby acknowledged by each of the parties hereto, and in
consideration of the mutual agreements of the parties hereto, Sublessor and
Sublessee do hereby covenant and agree as follows:
1. Certain Definitions. As used in and for purposes of this Sublease,
the following terms shall have the following respective meanings:
"Additional Rent" has the meaning specified in
Section 4.
"Affiliate" means, as to any person or entity, any other person or
entity controlling, controlled by, or under direct or indirect common
control with such person or entity.
"Applicable Rate" means a per annum rate of interest equal to the
lesser of (a) the maximum rate permitted by applicable law and (b) two
percentage points in excess of
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the per annum rate of interest generally charged from time to time by
Citibank, N.A. (or in its absence, the U.S. bank with the highest market
capitalization) at its branches in New York City in respect of U.S. dollar
demand commercial loans to its most credit worthy commercial borrowers,
which per annum rate of interest is customarily referred to as the "prime
rate" of interest. For the purposes of this Sublease, such "prime rate" of
interest shall be ascertained monthly, as of the first business day of each
calendar month, and such rate, as so ascertained, shall be deemed to be the
"prime rate" in effect throughout such calendar month.
"Appurtenant Agreements" means, with respect to each Property, each
and every agreement, sublease, sub-sublease, declaration, easement and
other document or instrument relating to the Property or to which the
Property is, or may become, subject and binding, directly or indirectly,
upon Sublessor and/or Sublessee.
"Basic Subrent" has the meaning specified in Section 4.
"default" means an event, act, fact, condition or occurrence which,
with the lapse of time or the giving of notice or both, would become an
Event of Default.
"Event of Default" has the meaning specified in Section 19.
"Impositions" means (a) all taxes, assessments (including, without
limitation, all assessments for public improvements or benefits, whether or
not commenced or completed within the term hereof), ground rents, water,
sewer or other rents, rates and charges, excises, levies, license fees,
permit fees, inspection fees and other authorization fees and charges, in
each case whether general or special, ordinary or extraordinary, foreseen
or unforeseen, and whether or not the same shall have been within the
express contemplation of the parties, of every type, kind and character
(including all interest and penalties thereon), which at any time have been
or may be assessed, levied, confirmed or imposed on or in respect of
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or be a lien upon (i) one or more of the Properties or any part thereof, or
any interest therein, or any Basic Subrent or Additional Rent or other sum
reserved or payable hereunder, or this Sublease, or any estate, right of
interest herein, (ii) any occupancy, use or possession of or activity
conducted on one or more of the Properties or any part thereof, or (iii)
the gross receipts from one or more of the Properties, or the earnings from
the use and occupancy thereof; and (b) any income, excess profits, sales,
gross receipts, use or similar taxes, duties or imposts, whether of a like
or different nature, imposed or levied upon, assessed against or payable by
Lessor, Sublessor or Sublessee on account of the acquisition, leasing,
subleasing or use of one or more of the Properties, or any part thereof, or
imposed, levied upon, assessed against or measured by the Basic Rent, Basic
Subrent, Additional Rent or any other sums payable by Sublessor under any
Lease or by Sublessee hereunder.
"Insurance Requirements" means all terms of any insurance policy
covering or applicable to all or any part of a Property, all requirements
of the issuer of any such policy, and all orders, rules, regulations and
other requirements of the National Board of Fire Underwriters (or any other
body exercising similar functions) applicable to or affecting all or any
part of such Property, or the use or condition thereof.
"Lease" or "Leases" have the respective meanings specified in the
preambles of this Sublease.
"Legal Requirements" means all laws, statutes, codes, ordinances,
orders, judgments, decrees, injunctions, rules, regulations, permits,
licenses, authorizations, directions and requirements of, and agreements
with, all governments, departments, commissions, boards, courts,
authorities, agencies, officials and officers, foreseen or unforeseen,
ordinary or extraordinary, and restrictions or agreements of record, which
now or at any time hereafter may be applicable to a Property or any part
thereof, or any of the adjoining
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sidewalks, vaults and vault space, if any, streets or ways, or any use or
condition of a Property or any part thereof.
"Lessor" means the lessor or landlord under a Lease, together with any
successor or successors to its rights and obligations thereunder, including
at any time after the date hereof, the then owner of Lessor's interest in a
Property.
"Net Award" means any insurance proceeds or condemnation award payable
to Sublessor pursuant to the applicable Lease in connection with any
damage, destruction or Taking, less the reasonable costs, fees and expenses
incurred by Lessor or Sublessor in the collection thereof.
"Office and Operating Equipment" means, to the extent necessary in the
customary and normal conduct of Sublessee's business at or within a
Property, any and all desks, tables, chairs, cabinets, office machines,
data processing equipment, electronic point-of-sale equipment, ticketing
and marketing equipment, cleaning equipment, carpeting, trash balers,
compactors, alarm signal devices, computer equipment, signs and other
equipment of a similar or dissimilar nature and use attached to or used in
connection with such Property.
"Property" or "Properties" have the respective meanings specified in
the preambles of this Sublease.
"Property Agreements" means collectively, the Leases, Appurtenant
Agreements and collateral assignments as to one or more of the Leases
and/or Appurtenant Agreements.
"Restoration" means the restoration, repair, replacement or rebuilding
(including any temporary repairs and property protection pending completion
of the work) of one or more of the Properties or any portion thereof and
Sublessee's personal property and leasehold improvements at and/or within
each Property, as nearly as possible to their value, condition and
character immediately prior to any damage, destruction or Taking.
"Selling Fixtures" means, with respect to a Property, any and all
showcases, center islands, modular interior merchandise display partitions,
shelving, display fixtures,
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chairs, display tables, mirrors and other equipment of a similar or
dissimilar nature and use attached to or used in connection with such
Property.
"Taking" means a taking of all or any part of one or more of the
Properties, or any interest therein or right accruing thereto, as the
result of or in lieu of anticipation of the exercise of the right of
condemnation or eminent domain pursuant to any law, general or special, or
by reason of the temporary requisition of the use or occupancy of one or
more of the Properties or any part thereof, by any authority having the
power of condemnation or eminent domain.
2. Sublease of Properties; Transfer of Leasehold Improvements. Upon,
subject to, as limited by, and in accordance with the respective terms,
provisions and conditions set forth in this Sublease, Sublessor hereby demises
and sublets all Properties to Sublessee, and Sublessee hereby takes and
subleases all Properties from Sublessor. Subject to the terms, provisions and
conditions set forth in this Sublease and/or in one or more of the Property
Agreements, Sublessor hereby remises, releases and quitclaims unto Sublessee any
rights, title and interests of Sublessor in and to any and all leasehold
improvements owned by Sublessor and located in, on, or about one or more of the
Properties, all on an "as is, where is, with all faults" basis and there being
no (and Sublessor hereby expressly disclaims any) warranty or representation,
express or implied, with respect thereto, including without limitation that as
to title, merchantability or fitness for a particular purpose, environmental or
hazardous waste matters, any warranty of operation, or otherwise.
2A. Excluded Rights, Interests, Privileges and Benefits. It is expressly
understood and agreed by and between Sublessor and Sublessee that Sublessor is
not assigning, demising, subletting, granting or otherwise conveying to or for
the benefit of Sublessee, and that Sublessee neither has nor shall have any
right, title, interest, benefit and/or privilege with respect to any right,
title, interest, benefit and/or privilege of Sublessor
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under one or more of the Property Agreements, including, without limitation,
with respect to any of the following:
(a) any option or right to renew or extend any Lease of a Property or
the term thereof;
(b) any right, benefit or privilege to assign, terminate, suspend,
reject, amend, modify, extend or supplement one or more of the Property
Agreements;
(c) any right, benefit or privilege to consent to or approve any
matter, action or request for which the Lessor or any other party, pursuant to
one or more of the Property Agreements, may request, or is required to obtain,
an approval or consent; and
(d) any other right, benefit, privilege, interest or remedy under or
arising out of one or more of the Property Agreements; provided, however, that,
without Sublessor representing or warranting in any manner, express or implied,
the existence or transferability of any of the same and without Sublessor having
any obligation to Sublessee to take any action to secure, retain or enforce same
(if, in fact, in existence, transferable and/or enforceable), Sublessor does
hereby conditionally remise, release and quitclaim unto Sublessee during the
term of this Sublease as to the applicable Property, the following but only to
the extent that any of same may be in existence and Sublessor possesses any
right to transfer same to Sublessee:
(i) any right of the tenant under the applicable Lease to participate
in a Merchants' Association (if any) with respect to the Property;
(ii) any right of the tenant under the applicable Lease to use common
area not included in the foregoing general demise, including any right of
the tenant under such Lease to existing tenant signage or to existing
tenant reserved parking spaces;
(iii) any right of tenant under the applicable Lease to existing
separately metered or billed utility connections relative to the Property,
whether or not an existing deposit or written agreement exists;
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(iv) any privilege existing by custom or practice for the tenant under
the applicable Lease to vary ordinary hours of operation from those (if
any) stipulated in such Lease; and
(v) any understanding, written or unwritten, of the tenant and Lessor
under the applicable Lease, as respects the balance or mix of tenants and
Sublessor's status as a tenant falling within a certain category.
3. Term. The term of this Sublease shall begin on the date hereof and,
unless sooner terminated in accordance with the provisions of this Sublease,
shall end on the day before the expiration or sooner termination of the term of
the then only remaining Lease as to a Property still covered by this Sublease;
provided, however, that, in all events, this Sublease shall terminate as to a
particular Property and its related Appurtenant Agreements on the day before the
expiration or sooner termination of the existing current term (or of the then
extended term, if any, arising pursuant to Section 27 hereof) of the applicable
Lease as to such particular Property.
4. Basic Subrent, Additional Rent and Other Expenses. (a) Sublessee
covenants and agrees to pay as rent hereunder (with such payment being made,
unless and until Sublessee is otherwise directed in writing at any time and from
time to time by Sublessor, directly to the persons entitled to receive same as
required under and/or pursuant to one or more of the Property Agreements) all
rents, amounts and charges (collectively, "Basic Subrent") arising under and/or
pursuant to one or more of the Property Agreements, whether accrued and/or
accruing for and/or during either (i) that portion of the respective terms of
the Leases that occurred prior to the date hereof or (ii) the applicable term of
this Sublease with respect to the respective Properties, in the respective
amounts, in the respective manners and at the respective times provided for the
respective payments thereof (regardless of type, kind and character including,
without limitation, any and all additional rent and percentage rent) in the
applicable Property Agreements with respect to the Properties, each of such
payments to be so paid and made for and
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on behalf of Sublessor and for the account of Sublessor. Sublessee covenants
and agrees to so pay, perform and discharge when due, as additional rent
hereunder ("Additional Rent"), (x) unless and until Sublessee is otherwise
directed in writing at any time and from time to time by Sublessor, directly to
the persons entitled to receive the same, all other amounts, liabilities and
obligations arising under and/or pursuant to one or more of the Property
Agreements, together with all interest, penalties and costs which may be added
thereto as provided for therein and/or herein, and (y) to Sublessor or the
persons entitled to receive same, as the case may be, interest at the Applicable
Rate on all overdue Basic Subrent and/or Additional Rent payable by Sublessee
hereunder from the due date thereof until the date of payment. Sublessee also
shall keep, observe and perform, for and on behalf of Sublessor, Sublessor's
other covenants, duties, obligations and undertakings under, pursuant to and/or
arising out of one or more of the Property Agreements.
(b) If and to the extent that Sublessor so requests in writing to
Sublessee from time to time, Sublessee shall furnish satisfactory proof
evidencing payment of Basic Subrent or Additional Rent; and if so requested by
Sublessor, then thereafter and concurrently with making each payment required
hereunder to be paid by Sublessee directly to the persons entitled to receive
same, Sublessee shall send to Sublessor, at such address and to the attention of
such person as Sublessor may direct in writing from time to time, a true and
complete photocopy of the applicable check and stub (indicating thereon the
specific Property, purpose and period for which such payment is being made),
together with a true and complete copy of any writing transmitting same and of
any invoice, statement or bill upon which the payment is based.
5. Net Sublease. This Sublease is a net, net, net sublease and the Basic
Subrent, Additional Rent and all other sums payable by Sublessee hereunder shall
be paid in all events and without counterclaim, setoff, deduction, defense,
abatement, suspension, deferment or diminution of any kind, and Sublessee
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<PAGE>
shall protect, defend, indemnify and hold Sublessor harmless from and against
any and all actions and claims asserted by any Lessor and/or other person
entitled to payment and/or other performance. In the event that Sublessor has
not directed Sublessee to otherwise pay same, if Sublessee timely (not later
than fifteen (15) days prior to their respective due dates) makes directly to
Sublessor any payments due under one or more of the Property Agreements,
Sublessor shall timely pay over such funds to the appropriate Lessor or other
person entitled to receive same. Except as may be otherwise expressly provided
herein and except as and to the extent that the occurrence of certain of the
events listed below results in a reduction, abatement or suspension of Basic
Subrent and/or Additional Rent pursuant to the express terms of the applicable
Property Agreements, this Sublease shall not terminate, nor shall Sublessee have
any right to terminate or avoid this Sublease or be entitled to any abatement or
reduction of any Basic Subrent or Additional Rent, nor shall the obligations and
liabilities of Sublessee hereunder be in any way affected for any reason,
including without limitation, (a) damage to, destruction of or any Taking of any
part of any Property or Properties, (b) any prohibition, restriction of or
interference with any use of any Property or Properties, (c) any matter or
matters affecting title to, or Sublessee's and/or any sub-sublessee's use,
enjoyment and/or occupancy of, any Property or Properties (to all of which
Sublessee hereby acknowledges and agrees it is taking subject), (d) any
bankruptcy or creditor proceeding relating to Sublessor or any Lessor or any
action taken with respect to this Sublease by any trustee or receiver of
Sublessor or by any court in any such proceedings, (e) any failure by Sublessor
to perform or comply with this Sublease or any other agreement or business
dealings with Sublessee, including without limitation, those under and/or
arising out of the Distribution Agreement, (f) acquisition by Sublessee of
ownership of all or part of any Property or Properties or of Sublessor's
interest therein otherwise than as provided herein, (g) any default under one or
more of the Property Agreements, or the expiration, termination, invalidity or
unenforceability of
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one or more (but less than all) of the Leases, or (h) any other occurrence
whatsoever, whether similar or dissimilar to any of the foregoing, any present
or future law to the contrary notwithstanding and whether or not Sublessor or
Sublessee shall have notice or knowledge of any of the foregoing. Sublessee
will remain obligated under this Sublease in accordance with its terms, and
Sublessee waives all rights now or hereafter conferred by statute or otherwise
to modify or avoid strict compliance with this Sublease.
6. Title and Condition; Use. (a) The Properties hereby are sublet, and
Sublessee hereby accepts same, in their respective present condition ("as is,
where is, with all faults") and without any representation or warranty, express
or implied (the same being hereby expressly disclaimed by Sublessor, including
without limitation that as to title, zoning, merchantability or fitness for a
particular purpose, environmental or hazardous waste matters, any warranty of
operation, or otherwise) and subject to the rights of any and all parties in
possession, to the state of Lessor's and Sublessor's title at the commencement
of the term of this Sublease, to any state of the facts which an accurate survey
or a physical inspection thereof might show, and to all Legal Requirements and
Insurance Requirements.
(b) Subject to the terms and provisions of Sections 7(d) and 19
hereof, Sublessee may use a Property for any purpose permitted under the
applicable Lease as to such Property.
7. Maintenance; Alterations; Operation. (a) Sublessee acknowledges that
it has received each of the Properties in good order, condition and repair. As
to each Property, Sublessee covenants and agrees to make all repairs,
replacements and refurbishments and take such other actions in connection
therewith as required under the applicable Property Agreements and to keep and
maintain same in not less than the order, condition and repair required by the
applicable Property Agreements. Sublessor shall not be obligated in any way to
maintain, alter, repair, rebuild, or replace any of the Properties, and
Sublessee expressly waives the right to perform
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any such action at the expense of Sublessor pursuant to any law at any time in
effect.
(b) Sublessee shall protect, defend, indemnify and hold Sublessor and
Lessor harmless in any manner reasonably satisfactory to Sublessor and Lessor
against loss arising out of any encroachment of improvements to a Property upon
any property, street or right-of-way adjoining such Property or violation of any
restrictive covenant affecting such Property or hinderance or obstruction of any
easement or right-of-way to which such Property is subject or impairment of the
rights of others under any such easement or right-of-way.
(c) Sublessee, to the extent and in the manner permitted by the
applicable Property Agreements as to a particular Property, may make
improvements to or alterations of such Property, and each such improvement or
alteration (i) must be in accordance with the applicable terms, provisions and
conditions of the applicable Property Agreements, (ii) must not lessen the
market value, rental value or rentability of any Property or lessen such
Property's usefulness in Sublessee's business, (iii) shall be completed without
undue delay in good and workmanlike manner, and in compliance with the
applicable Property Agreements, all Legal Requirements, and all Insurance
Requirements, and (iv) subject to the applicable provisions of Section 21
hereof, shall become part of such Property and subject to this Sublease.
Sublessee shall promptly pay all costs and expenses of each such improvement or
alteration and shall discharge all liens filed against such Property arising out
of the same except (if and as permitted in the applicable Property Agreements)
when contesting same in good faith in accordance with the applicable terms,
provisions and conditions of the applicable Property Agreements. Sublessee
shall procure and pay for all permits and licenses required in connection with
any such improvement or alteration.
(d) Sublessee shall operate each Property in accordance with the
terms, conditions and provisions of the applicable Property Agreements,
Insurance Requirements and Legal Requirements as to such Property; to the extent
that any of the
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foregoing imposes (directly or indirectly) on Sublessor any obligation to make
improvements, repairs, alterations or remediations, whether or not contemplated
by the applicable Property Agreements, Sublessee shall perform the same at
Sublessee's sole cost and expense.
(e) If and to the extent permitted in the applicable Lease and as
customary and necessary in the normal conduct of Sublessee's business in the
Property, Sublessee may, at its cost and expense, install or place upon or
reinstall or replace upon and remove from each of the Properties any Office and
Operating Equipment, Selling Fixtures and other personal property, inventory and
materials necessary for the operation of the business to be conducted by
Sublessee therein. All such Office and Operating Equipment, Selling Fixtures,
other personal property, inventory and materials shall not become a part of the
Properties and shall not be the property of Sublessor; provided, that upon
termination or expiration of this Sublease and upon the sooner termination or
expiration of this Sublease or the applicable Lease as to a particular Property,
all such Office and Operating Equipment and Selling Fixtures, upon request of
Lessor or Sublessor, and other personal property, inventory and materials shall
be removed by Sublessee promptly and not later than the earlier of (i) fifteen
(15) days thereafter, or (ii) the date required therefor in the applicable
Lease, and Sublessee shall be required to and shall promptly repair any damage
to each Property resulting from such removal to the extent required by the terms
of the applicable Lease.
8. Indemnification. Sublessee hereby agrees to indemnify, defend,
protect and hold Sublessor and Lessor harmless from and against all liabilities,
losses, actions or causes of action, claims, demands, costs, damages, expenses
(including, without limitation, interest, penalties, reasonable attorneys' fees
and the cost of in-house counsel, court costs and expenses of Sublessee,
Sublessor and Lessor) and judgments of any nature arising, or alleged to arise,
from or in connection with (a) any injury to, or the death of, any person or
loss or damage to property on or about each Property or any adjoining property
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heretofore or hereafter arising from or connected with the ownership,
possession, use, condition, occupancy, construction, maintenance, repair or
rebuilding of such Property or any adjoining property, (b) any existing and/or
subsequent breach or violation, or alleged breach or violation of this Sublease,
one or more of the Property Agreements, any Legal Requirement and/or any
Insurance Requirement, (c) performance of any labor or services or the
furnishing of any materials or other property in respect of a Property or any
part thereof, (d) any contest permitted by Section 13, (e) any claim, proceeding
or contest in connection with any insurance proceeds or settlement, or any award
for any Taking, or (f) any nonpayment or delayed payment of any Basic Subrent
and/or Additional Rent, regardless of whether or not same or any such
nonpayments, delayed payments and/or other such claim is based upon matters
accruing or occurring or alleged to have accrued or occurred before, on and/or
after the date hereof. Sublessee will resist and defend any action, suit or
proceeding brought against Sublessor and/or Lessor by reason of any such
aforementioned occurrence. The obligations of Sublessee under this Section 8
shall survive any termination or expiration of this Sublease and any termination
or expiration of the applicable Lease as to a particular Property. Sublessor
will notify Sublessee of any claim asserted against it on account of any such
injury described in clause (a) of the first sentence of this Section 8 and shall
deliver to Sublessee the original or a true copy of any summons or any other
process, pleading or notice issued in connection with any action, suit or
proceeding to assert or enforce any claim in respect of such injury.
9. Leases. Sublessee hereby confirms and acknowledges that it has a
complete, accurate and fully executed counterpart of each of the Leases and that
it is fully familiar with the respective terms, covenants and conditions of each
of the Leases.
Subject to provision for contesting same pursuant to Section 13, Sublessee
will observe and perform all covenants, agreements, terms and conditions
(including all obligations for payment) imposed on the Sublessor by or as a
result of each Lease at the time and in the manner specified in such Lease,
shall promptly
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notify Sublessor of the occurrence of any default under any Lease, and shall
take such action as shall be necessary to cure such default and maintain the
leasehold estate of Sublessor and of each and every Lessor of any Property under
a Lease.
Sublessor shall have no obligation, duty or liability to observe or
perform, or to cause the observance or performance of, any of the covenants,
agreements, terms and conditions (including any and all obligations for payment)
to be observed or performed by Lessor pursuant to the applicable Lease, and
Sublessor shall under no circumstances be obligated to make any repairs or
supply any materials or services or make any payments of money to Sublessee or
to or with respect to any Property.
Sublessee shall not do, or permit or suffer to be done, any act or omission
by Sublessee, its agents, employees, contractors, invitees, subtenants, guests
or representatives, that is prohibited by the applicable Lease as to the
applicable Property, or that would in any way contravene or violate any term,
obligation, covenant, agreement, provision or condition of such Lease, or that
would constitute or give rise to a default under such Lease.
10. Payment of Impositions, Services and Sublessor's Expenses. Sublessee
will pay all Impositions and all charges for utility, communications and other
services rendered or used on or about each of the Properties, before any
interest or penalty may be added, and will furnish to Sublessor and Lessor, upon
request, satisfactory proof evidencing such payment. If any Imposition may
legally be paid in installments and the applicable Lease so permits, Sublessee
shall have the option to pay such Imposition in installments, provided that, if
any Imposition is payable in installments any of which are to become due and
payable after the end of the term of this Sublease or after the termination or
expiration of this Sublease as to a particular Property, as the case may be, all
such installments shall be paid by Sublessee, in the former case, on or before a
date one month prior to the end of the term of this Sublease and, in the latter
case, on the date of termination or expiration of this Sublease as to such
particular Property. Except and unless as otherwise provided in
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the applicable Lease, nothing in this Sublease shall require payment by
Sublessee of any income or excess profits tax or similar tax determined on the
basis of income or revenue of any person or entity other than Sublessee and any
Affiliate of Sublessee, unless such tax is in lieu of or a substitute (in whole
or in part) for another tax or assessment upon or against one or more of the
Properties, which, if such other tax or assessment were in effect, would be
payable by Lessor or Sublessor.
11. Compliance With Requirements. Subject to provision for contesting
same pursuant to Section 13, Sublessee will promptly (a) comply with all Legal
Requirements and Insurance Requirements, (b) procure, maintain and comply with
all permits, licenses and other authorizations required for any use of any
Property or any part thereof then being made, and for the proper construction,
operation, maintenance and repair of any Property or any part thereof, and (c)
comply with all Appurtenant Agreements, instruments of record, contracts and
agreements at the time in force affecting any Property or any part thereof or
any services rendered to or for the benefit of any Property, whether or not any
of the foregoing shall require changes in, or interfere with the use and
enjoyment of, any Property or any part thereof. Sublessee will not do or permit
any act or thing which impairs the rental value or usefulness of any Property or
which constitutes a public or private nuisance.
12. Discharge of Liens. Except for liens being contested in accordance
with Section 13 hereof, Sublessee will not create or permit to be created or to
remain, and will promptly discharge (if created or permitted to be created by
Sublessee), any lien, encumbrance or charge on Sublessee's, Sublessor's or
Lessor's respective interests in any Property, including any Office and
Operating Equipment and Selling Fixtures used in connection with any Property,
or on the Basic Subrent, Additional Rent or any other sum payable under this
Sublease. Nothing contained in this Sublease shall be construed as constituting
the consent or request of Sublessor or Lessor, expressed or implied, to any
contractor, subcontractor, laborer, materialmen or vendor to or
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for the performance of any labor or services or the furnishing of any materials
for the construction, alteration, addition, repair or demolition of or to any
Property or any part thereof. Notice is hereby given that Lessor and Sublessor
will not be liable for any labor, services or materials furnished or to be
furnished to Sublessee, or to anyone holding the Property or any part thereof
through or under Sublessee, and that no mechanic's or other liens for any such
labor, service or materials shall attach to or affect the respective interests
of Lessor or Sublessor in and to any Property or any part thereof.
13. Permitted Contests. If, as, to the extent and in the manner permitted
under the applicable Lease as to a particular Property, Sublessee may contest by
appropriate proceedings, the amount, validity or application of any Imposition,
Legal Requirement or instrument of record, or any lien arising therefrom,
provided that (a) such proceedings shall suspend the collection thereof, (b) no
part of any Property, the Basic Subrent or Additional Rent will during the
pending of such proceedings be subject to sale, forfeiture, loss or
interference, (c) Lessor and Sublessor will not during the pendency of such
proceedings be subject to any criminal or civil liability for failure to pay,
(d) Sublessee shall have furnished such security as may be required in the
proceedings or reasonably required by Sublessor or Lessor pursuant to Section
20(a)(ii), and (e) such contest shall not violate any provision of any one or
more of the Property Agreements. Sublessee will conduct all such contests in
good faith and with due diligence and, promptly after the termination of such
contest, will pay and discharge all amounts which shall be determined to be
payable therein and perform all acts the performance of which shall be ordered
or decreed as a result thereof.
14. Insurance. (a) Sublessee will maintain with insurers of recognized
financial responsibility authorized to do business in the state in which the
applicable Property is located and which are rated not less than A and IX,
respectively, by A.M. Best or equally rated by another recognized national
rating organization, such insurance as is required by the applicable
17
<PAGE>
Lease as to the applicable Property and, notwithstanding the fact that same may
not be required under such Lease, the following:
(i) All risk property insurance written on a replacement cost basis
for the full replacement cost (including debris removal) of the Property,
all leasehold improvements thereto, any other property required to be
insured under the applicable Lease, and all of Sublessee's other real
and/or personal property with respect thereto, insuring against perils
included within the classification of "all risk" physical damage insurance,
including, but not limited to, loss or damage from the following perils:
fire, windstorm, cyclone, tornado, hail, explosion, earthquake (with no
more than a 5% deductible payment clause), riot, riot attending a strike,
civil commotion, malicious mischief, vandalism, aircraft, vehicle, smoke
damage, sprinkler leakage, water damage, collapse, flood and the boiler and
machinery perils;
(ii) Commercial General Liability insurance written on an occurrence
basis and covering bodily injury, death, personal injury and property
damage arising out of incidents or accidents occurring on, in or about, or
arising from the operation of, each Property and the adjoining streets,
sidewalks and parking lots and specifically including coverage for product
liability, completed operations, personal injury and all security related
claims, advertising, injury and contractual liability (insuring Sublessee's
indemnities under this Sublease), in the amount of $5 Million per
occurrence. In addition to the requirements for additional insureds below,
such insurance shall include Sublessor and any other designated persons as
additional insureds for all claims including those where Sublessor or the
other designated persons are wholly or partially negligent; and
(iii) Workers' Compensation insurance for the full statutory
liability of Sublessee.
(b) The policies of insurance required to be maintained by Sublessee
pursuant to this Section 14 shall include
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<PAGE>
as insured parties those parties required to be named under one or more of the
Property Agreements, Lessor, Sublessor and Sublessee, as their respective
interests may appear, may provide such reasonable deductible amounts as are
satisfactory to Lessor and Sublessor, shall be otherwise satisfactory to Lessor
and Sublessor and may be carried under blanket policies maintained by Sublessee
if such policies comply with the provisions of this Section 14 and the
requirements of the Property Agreements. Sublessor shall not be required to
prosecute any claim against any insurer or to contest any settlement proposed by
any insurer. At Sublessee's sole cost and expense and at no cost and expense to
Sublessor, Sublessee may prosecute any such claim or contest any such settlement
and, at Sublessee's request, Sublessor will join therein. The aforesaid
policies of insurance shall include such mortgagee endorsements required under
the Property Agreements, a provision for the benefit of each of the named or
additional insureds that not less than thirty (30) days' prior written notice
(or such longer period as may be required under the Property Agreements) of
cancellation or alteration shall be given, a waiver of all rights of subrogation
against Lessor, Sublessor and Sublessee and their respective successors,
successors in interest and assigns, and a provision to the effect that such
insurance shall not be invalidated by any act or neglect of Lessor or Sublessor
or Sublessee or any owner of one or more of the Properties, nor by any
foreclosure or other proceedings or notices thereof relating to one or more of
the Properties or any interest therein, and shall not contain a provision wholly
relieving the insurer thereunder of liability for any loss by reason of the
existence of other policies of insurance covering and insuring against the peril
involved, whether collectible or not, it being understood and agreed that
insurance carried by Sublessee is primary to that of any other insured or
additional insured.
(c) At the commencement of the term of this Sublease, Sublessee shall
deliver to Sublessor (to the attention of its Vice President for Risk Management
and Insurance), and promptly thereafter shall mail to any additional parties
entitled
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<PAGE>
to same under the Property Agreements, either (a) original or duplicate policies
or (b) certificates of the insurers, evidencing all of the insurance which is
required to be maintained hereunder by Sublessee (including copies of
endorsements evidencing that policies comply with the requirements as to
additional insureds, waiver of subrogation, cancellation, and primary
insurance). Within the time required under the Property Agreements, but not
later than thirty (30) days prior to the expiration of any such insurance, other
original or duplicate policies or certificates evidencing the renewal of such
insurance shall be delivered and mailed as hereinabove provided. Should
Sublessee fail to effect, maintain or renew any insurance provided for in this
Section 14, or to pay the premium therefor, or to deliver to Lessor and
Sublessor any of such policies or certificates, Sublessor, at its option, but
without obligation so to do, may upon five (5) days' notice to Sublessee procure
such insurance, and any sums expended by it to procure such insurance shall be
repaid by Sublessee on demand of Sublessor, with interest on such sums at the
Applicable Rate from the date of expenditure by Sublessor to the date of
repayment by Sublessee.
(d) Sublessee shall not obtain or carry separate insurance (other than
general public liability insurance) concurrent in form or contributing in the
event of loss with that required by this Section 14 unless Lessor, Sublessor,
and any holder or holders of a mortgage lien or security interest in any of the
Properties securing any indebtedness of the Lessor or Sublessor are included
therein as named insureds, with loss payable as in this Sublease provided.
Sublessee shall immediately notify Lessor and Sublessor when any such separate
insurance is obtained and shall deliver to Lessor and Sublessor the policies or
certificates evidencing the same.
15. Casualty. (a) If there is any damage to or destruction of a
Property or if any proceedings or negotiations are instituted which do or may
result in a Taking, Sublessee will promptly give notice thereof to Lessor and
Sublessor describing the nature and extent thereof. This Sublease shall remain
in
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<PAGE>
full force and effect after any such damage, destruction or Taking, subject to
any adjustment of rent as may be expressly provided in the applicable Lease,
and, unless this Sublease is terminated as to a particular Property pursuant to
Section 15(b) below, Sublessee will promptly and with reasonable diligence (but
not later than is required in the applicable Lease) commence and complete
Restoration of the Property (to the extent such Restoration would otherwise be
the obligation of Sublessor under the applicable Property Agreements as to the
Property) and of Sublessee's leasehold improvements and other personal property
thereto or therein, regardless of the availability or sufficiency of any Net
Award. In the case of a Taking for temporary use, Sublessee shall not be
required to effect Restoration until such Taking shall have terminated.
(b) If permitted by the applicable Property Agreements as to a
particular Property, Sublessee may, in lieu of Restoration, give Lessor and
Sublessor notice of its intention to terminate this Sublease as to such Property
within fifteen (15) days prior to the time within which election must be made
under the applicable Lease. Subject to Sublessee's timely compliance with the
provisions hereof, such termination of this Sublease as to such Property will be
effective on the earliest date the Sublessor is entitled to terminate the
applicable Lease and such Lease is validly terminated. Notwithstanding anything
to the contrary set forth above, Sublessee may not so terminate, and must
proceed with Restoration if required by the applicable Property Agreements
unless Sublessee timely furnishes to Sublessor (i) the written consent of Lessor
(and of other parties having the right to so consent or approve) to not proceed
with Restoration and (ii) a valid, written termination of the applicable Lease.
Such notice of termination shall be accompanied by a certificate of Sublessee,
jointly signed by the President or Chairman and Chief Financial Officer of
Sublessee, and a legal opinion of counsel for the Sublessee, stating that the
requirements of this Section 15(b) for termination of this Sublease with respect
to such Property have been met. On such termination date, Sublessee shall no
longer have any interest in
21
<PAGE>
such Property. Sublessee shall pay the installment of Basic Subrent, Additional
Rent and all other sums due and payable under this Sublease as to such Property
(to the extent not abated pursuant to the express terms of the applicable Lease)
to and including such termination date and/or as otherwise required under the
applicable Lease.
(c) If Sublessee is not in default under this Sublease and if this
Sublease shall not have been terminated with respect to a Property pursuant to
Section 15(b), the Net Award, upon actual receipt (if any) by Sublessor, shall
be paid over to Sublessee for Restoration, except if and as hereinafter limited.
Sublessee will pay or make reimbursement for all costs and expenses of
Restoration. If the costs and expenses of Restoration shall exceed the amount
of the Net Award, the deficiency shall be paid by Sublessee. Anything in this
Section 15 (including this Section 15(c)) to the contrary notwithstanding,
disposition of any Net Award with respect to any Property shall be subject to
the provisions of the applicable Property Agreements with respect to such
Property.
(d) Except as otherwise provided or required by the terms of the
applicable Property Agreements, any Net Award actually received by Sublessor as
compensation for a Taking of temporary use or occupancy of such Property for and
during the term of this Sublease as to such Property shall be paid over to
Sublessee to be used by Sublessee for the purposes provided hereunder and/or
under the applicable Property Agreements.
(e) Sublessor does not, and will not, surrender any right available to
it under a Lease to participate in the determination of the amount of any Net
Award and, provided that the applicable Lease permits, shall permit Sublessee,
at its expense, to participate, will indicate its consent to any Net Award
approved by Sublessee and the applicable Lessor which is not unreasonable, and
will not approve any Net Award without Sublessee's prior written consent, which
shall not be unreasonably withheld.
16. Estoppel Certificate; Inspections. (a) Sublessee will deliver to
Lessor and/or Sublessor, promptly after any request by
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<PAGE>
either of them, (i) a statement as to each Property for which such request is
made, executed by Sublessee's President, Chairman or Chief Financial Officer,
certifying the dates to which the Basic Subrent, Additional Rent and other sums
payable hereunder have been paid, that this Sublease is unmodified (except as
specified) and in full force and effect, and that to Sublessee's knowledge there
is no default by Sublessee (or, if there is, specifying the nature and period of
existence thereof and the action Sublessee is taking or proposes to take to cure
such default) or default hereunder by Sublessor or default by Lessor under the
applicable Lease, and (ii) such information with respect to one or more of the
Properties, or any one thereof, as may reasonably be requested, and (b)
Sublessee will use best efforts to obtain and deliver to Sublessor a similar
statement (as provided in (a)(i) above) from the Lessor under the applicable
Lease as to a particular Property. It is intended that any and all such
statement(s) and information may be relied upon by Lessor, Sublessor and their
respective creditors.
(b) Upon reasonable notice, one or more of Lessor, Sublessor and their
respective authorized representatives may (but shall not be obligated to) enter
one or more of the Properties or any part thereof during normal business hours,
and as often as Lessor or Sublessor may reasonably request, for the purpose of
inspecting the same.
17. Performance by Sublessor. Subject to the limitation that Sublessor
shall not disturb a contest that is permitted and proceeding as and in the
manner required by Section 13, if Sublessee shall fail to make any payment or
perform any act required under this Sublease, Sublessor, without notice to or
demand upon Sublessee and without waiving or releasing any obligation or Event
of Default, may (but shall not be obligated to) make such payment or perform
such act, and may enter upon one or more of the Properties or any part thereof
for such purpose and take all such action as in the opinion of Sublessor may be
necessary or appropriate. No such entry shall be deemed an eviction of
Sublessee.
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<PAGE>
18. Assignment and Sub-subletting. Sublessee shall have no right to, and
shall not, (A) assign, mortgage, pledge or otherwise encumber this Sublease or
its interest in this Sublease or any part thereof in any manner, whether by
operation of law or otherwise, or (B) unless, except and in the manner and
extent as a sublet is specifically and expressly permitted under the applicable
Lease as to a particular Property, sub-sublease any such Property or any part
thereof, but no such sub-sublease (notwithstanding the fact that same may be
permitted under such Lease) shall be for a term expiring beyond the existing
current term of such Lease. Any such attempted assignment, mortgage, pledge or
encumbrance, and any sub-sublease made in violation of this Section 18, shall be
null and void and of no force and effect.
Each permitted sub-sublease shall expressly be subject and subordinate to
the terms, provisions and conditions of this Sublease, the applicable Property
Agreements, and all matters then of record. No sub-sublease or purported
assignment by Sublessee shall affect, reduce or release any obligation,
liability, agreement and/or covenant of Sublessee under and/or pursuant to
and/or arising out of this Sublease, nor any right and/or remedy of Sublessor,
Lessor, Lessor's lender and/or any other person or entity, it being understood
and agreed that all such obligations, liabilities, agreements and covenants of
Sublessee shall continue in full force and effect as the obligations,
liabilities, agreements and covenants of a principal, and not of a guarantor or
surety, to the same extent as though no such purported assignment or sub-
sublease had been made. Promptly after the execution and delivery of any sub-
sublease, Sublessee shall give notice to Sublessor of the existence and term of
such sub-sublease and deliver a conformed copy thereof to Sublessor. Except in
the manner, and upon strict compliance with the terms, provisions and
conditions, set forth in this Section 18, Sublessee may not enter into a sub-
sublease of all or any part of any one or more of the Properties.
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<PAGE>
19. Event of Default. Any one or more of the following occurrences,
conditions or acts shall constitute a material default and an "Event of Default"
under this Sublease:
(a) Regardless of the pendency of any bankruptcy, reorganization,
receivership, insolvency or other proceeding, in law or in equity, or before or
by any administrative tribunal which has or might have the effect of preventing
Sublessee from complying with the terms of this Sublease, Sublessee shall
(i) fail to make payment when due of any Basic Subrent, Additional
Rent or other amount payable by Sublessee hereunder and/or under any one or
more of the Property Agreements, or
(ii) fail to observe or perform any provision of Sections 7, 8, 9, 10,
11, 12, 13, 14, 15, 18, 21, 28, 29 or 33 of this Sublease, or
(iii) fail to observe or perform any other provision of this
Sublease, or
(iv) fail to observe or perform any other provision of any one or more
of the Property Agreements,
and such failure shall continue (A) as to subclause (i) above, for ten (10) days
after notice of same from Sublessor or Lessor, or (B) as to subclause (ii)
above, for fifteen (15) days after notice of same from Sublessor or Lessor, or
(C) as to subclauses (iii) and (iv) above, for thirty (30) days after notice of
same from Lessor or Sublessor; provided, however, that if such failure as to
clauses (iii) or (iv) above cannot be wholly cured by the payment of money and
cannot with due diligence be wholly cured within such period specified therefor,
then Sublessee, if permitted by the applicable Lease, shall have such longer
period as shall be necessary to cure such default as to clauses (iii) or (iv)
above so long as Sublessee proceeds promptly so to cure within the specified
period, prosecutes the cure to completion with due diligence, and advises
Sublessor and Lessor from time to time, upon Sublessor's or Lessor's request, of
the actions which Sublessee is taking and the progress being made; or
(b) any Lease as to a particular Property shall terminate by reason of
or as a result of either (i) any failure
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<PAGE>
by Sublessee to comply with such Lease and/or this Sublease or (ii) any action,
inaction and/or omission of Sublessee, and Sublessee does not promptly furnish
Sublessor with a document duly executed by the applicable Lessor effectively
terminating the applicable Lease and fully releasing Sublessor, its
predecessors, successors and assigns from any and all obligations and
liabilities with respect to such Lease and Property, regardless of when or how
arising and/or accruing; or
(c) Sublessee is dissolved, files a voluntary petition under any
chapter of the United States Bankruptcy Code or under any similar federal or
state law, makes an assignment for the benefit of creditors, admits in writing
its inability to pay its debts generally as they become due, or consents to the
appointment of a receiver or liquidator (or other similar official) of Sublessee
or of all or substantially all of its business or assets or of the estate or
interest of Sublessee in the Properties, or a petition or an answer proposing
the reorganization of Sublessee or an arrangement of Sublessee or an arrangement
between Sublessee and some or all of its creditors pursuant to the United States
Bankruptcy Code or any similar law, federal or state, is filed in and approved
by any court; or
(d) any of the creditors of Sublessee files a petition to reorganize
or liquidate Sublessee pursuant to the United States Bankruptcy Code or any
similar law, federal or state, and such petition is not discharged, stayed or
denied within sixty (60) days after the date on which such petition was filed;
or
(e) by the order of any court of competent jurisdiction, a receiver or
liquidator (or other similar official) of Sublessee or of all or substantially
all of its business or assets or of the estate or interest of Sublessee in the
Properties is appointed and is not discharged, stayed or dismissed within thirty
(30) days after such appointment, or by decree of such court Sublessee is
adjudicated a bankrupt or is declared insolvent; or
(f) the holder(s) (or trustee(s) or agent(s) on their behalf) of any
evidences of indebtedness upon which
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Sublessee is or may become liable and aggregating Ten Million Dollars
($10,000,000.00) or more, cause such evidences to become due prior to the stated
maturity(ies) and Sublessee does not promptly replace same or otherwise cure.
20. Conditional Limitations; Remedies. The rights and remedies of
Sublessor upon occurrence of an Event of Default are as provided in this Section
20.
(a) Whenever an Event of Default shall have occurred, be continuing
and not cured as hereinabove provided therefor, Sublessor, at its election:
(i) may proceed by appropriate judicial proceedings, either at law or
in equity, to enforce performance or observance by Sublessee of the
applicable provisions of this Sublease and/or to recover damages for the
breach thereof; or
(ii) by notice to Sublessee, may terminate this Sublease as to the
particular Property or one or more of the particular Properties with
respect to which an Event of Default shall have occurred, whereupon, or
prior to any such termination if Sublessor has not elected to so terminate,
all of the other applicable provisions and rights and remedies of Sublessor
set forth in this Section 20 shall apply; provided, however, that Sublessor
shall not so terminate this Sublease as to such Property or one or more of
such Properties, or exercise any other remedy available to it under this
Section 20, so long as the Event of Default is because of a bona fide
dispute between Sublessee and the applicable Lessor(s) and Sublessee is
contesting such Event of Default in good faith and with due diligence and
Sublessee (in a manner and form reasonably satisfactory to Sublessor in
good faith exercise of its reasonable business judgment) has provided and
shall continue to provide reasonable assurance and security to Sublessor of
Sublessee's ability to protect, defend, indemnify and hold Sublessor
harmless from and against any and all claims, losses, damages, actions,
liabilities, costs and expenses (including reasonable attorneys' fees and
the cost of in-
27
<PAGE>
house counsel and court costs) and judgments in any manner relating to or
arising out of any such Event of Default; or
(iii) notwithstanding the provisions of Section 20(a)(ii) above, in
the event that an Event of Default or more than one Event of Default
results or has resulted in either (x) a termination of this Sublease as to,
or (y) institution of litigation against Sublessor and/or Sublessee as to,
ten (10) or more Properties in the aggregate within any six-month period of
time or twenty (20) or more Properties in the aggregate during the term of
this Sublease, or in any case with respect to an Event of Default under
19(c), (d), (e) or (f), then, in any such event, by notice to Sublessee,
Sublessor may terminate this Sublease, whereupon Sublessee's estate and
interest in and any and all right of Sublessee to possess, use and/or
occupy the Properties shall forthwith terminate but Sublessee shall remain
liable as hereinafter provided; and thereupon Sublessor shall have the
immediate right of re-entry and possession of the Properties and the right
to remove all persons and property therefrom; and Sublessor may thenceforth
hold, possess and enjoy the Properties free from any rights of Sublessee
and any person or entity claiming by, through or under Sublessee; but
Sublessor shall, nevertheless, have the right to recover forthwith from
Sublessee:
(A) any and all Basic Subrent, Additional Rent and all other
amounts payable by Sublessee hereunder which may then be due and
unpaid or which may then be accrued and unpaid, and
(B) any and all other damages and expenses (including without
limitation, interest, penalties, reasonable attorneys' fees and the
cost of in-house counsel, and court costs and expenses) which Lessor
or Sublessor shall have sustained, or may in the future sustain, or
for which Sublessor or Lessor is or may be liable, by reason of any
breach of this Sublease.
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<PAGE>
(b) Upon the occurrence of an Event of Default, Sublessor shall have
the right, whether or not this Sublease shall have been terminated as to a
particular Property pursuant to Section 20(a)(ii) or terminated in total
pursuant to Section 20(a)(iii), to re-enter and repossess one or more (including
all) of the Properties (but in the case of Section 20(a)(ii) only to repossess
the particular Property or Properties) or any part thereof by force, summary
proceedings, ejectment or otherwise and the right to remove any persons and
property therefrom. Sublessor shall be under no liability for or by reason of
such entry, repossession or removal. No such re-entry or taking of possession
shall be construed as an election on Sublessor's part to terminate this
Sublease, or to terminate this Sublease as to any one or more of the Properties,
unless a written notice of such intention is given by Sublessor to Sublessee
pursuant to Section 20(a)(ii) or Section 20(a)(iii), as the case may be, or
unless such termination(s) be decreed by a court of competent jurisdiction.
(c) If Sublessor shall obtain possession of one or more of the
Properties following an Event of Default, Sublessor shall have the right,
without notice, to repair or alter all or any one or more of the Properties in
such manner as Sublessor may deem appropriate to put the same in good order,
condition and repair and to make the same rentable, and shall have the right, at
its option, to relet all or any part of one or more of the Properties, and
Sublessee agrees to pay to Sublessor on demand all reasonable fees, commissions,
costs and expenses incurred by Sublessor in obtaining possession, and in taking
any such action, and to pay to Sublessor when due hereunder during the term of
this Sublease, the Basic Subrent and all Additional Rent and any other amounts
payable by Sublessee hereunder, deducting any rent which Sublessor shall
actually receive in the meantime from any reletting of one or more of the
Properties. Sublessor shall have the right from time to time to begin and
maintain successive legal proceedings against Sublessee for the recovery of any
such deficiency or damages,for and as to all of which Sublessee hereby expressly
agrees to remain liable and further hereby agrees that
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<PAGE>
such liability shall survive the institution of any action to secure possession
of all or a part of one or more of the Properties. Sublessor shall not be
required to wait until the end of the term of this Sublease, or of any
applicable Lease as to a particular Property, to begin any such legal
proceedings.
(d) Sublessee hereby waives and releases all rights at any time
conferred by statute or otherwise which would have the effect of limiting or
modifying any of the provisions of this Section 20, including any right to a
jury trial in an action for ejectment or other action at law. Sublessee will
execute, acknowledge and deliver any instruments which Sublessor may request,
whether before or after the occurrence of an Event of Default, evidencing such
waiver or release. At the request of Sublessor upon the occurrence of an Event
of Default, Sublessee will quit and surrender the Properties (or in case of
Section 20(a)(ii) only the particular Property or Properties) to Sublessor or
its agents, and Sublessor may without further notice enter upon, re-enter and
repossess the Properties by summary proceedings, ejectment or otherwise. The
words "enter", "re-enter", and "re-entry" are not restricted to their technical
legal meanings.
(e) If Sublessee shall be in default in the observance or performance
of any provision of this Sublease and an action shall be brought for the
enforcement thereof, Sublessee shall pay to Sublessor all fees, costs and other
expenses which may become payable as a result thereof or in connection
therewith, including reasonable attorneys' fees and the cost of in-house
counsel, and all court costs and expenses. If Sublessor shall be made a party
to any litigation commenced against Sublessee, Sublessee shall either provide
Sublessor with counsel of recognized ability or pay all costs and attorneys'
fees incurred or paid by Sublessor (including without limitation, the cost of
in-house counsel) in connection with such litigation.
(f) Except as otherwise specifically provided in this Section 20, no
right or remedy herein conferred upon or reserved to Sublessor is intended to be
exclusive of any other right or remedy, and every right and remedy shall be
cumulative
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<PAGE>
and in addition to any other legal or equitable right or remedy given hereunder,
or now or hereafter existing. The failure of Sublessor to insist at any time
upon the strict performance of any covenant or agreement or to exercise any
option, right, power or remedy contained in this Sublease shall not be construed
as a waiver or a relinquishment thereof for the future. A receipt by Sublessor
or Lessor of any Basic Subrent, Additional Rent or any other sum payable
hereunder with knowledge of the breach of any covenant or agreement contained in
this Sublease shall not be deemed a waiver of such breach, and no waiver by
Sublessor of any provision of this Sublease shall be deemed to have been made
unless expressly so made in writing. Sublessor shall be entitled, to the extent
permitted by law, to injunctive relief in case of the violation, or attempted or
threatened violation, of any provision of this Sublease, or to a decree
compelling observance or performance of any provision of this Sublease, or to
any other legal or equitable remedy.
(g) Sublessee hereby waives and surrenders for itself and all those
claiming by, through or under it, including creditors of all kinds, (A) any
right and privilege which it or any of them may have under any present or future
constitution, statute or rule of law to redeem any of the Properties or to have
a continuance of this Sublease for the term hereby demised after termination of
Sublessee's right of occupancy by order or judgment of any court or by any legal
process or writ, or under the terms of this Sublease or after the termination of
the term of this Sublease as herein provided, and (B) the benefits of any
present or future constitution, statute or rule of law which exempts property
from liability, for debt or for distress for rent.
21. Surrender. Upon the expiration or earlier termination of this
Sublease, and upon the expiration or earlier termination of this Sublease or the
applicable Lease as to a particular Property, Sublessee shall surrender the
Property(ies) to Sublessor in good order, condition and repair (but, in all
events, in compliance with the requirements of, and in no less a condition than
that required by, the applicable Leases), subject
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<PAGE>
to any damage, destruction or Taking giving rise to a termination pursuant to
Section 15(b) and as to which Restoration is not required to be made by
Sublessee, and Sublessee shall have removed from each of such Properties all its
personal property situated thereon or therein. In all events, Sublessee shall
promptly repair any damage caused by any such removal and, if Sublessee fails to
do so, Sublessee shall be liable for and pay to Sublessor or Lessor, as the case
may be, all costs and expenses incurred by Sublessor and/or Lessor in connection
with their repairing such damage and Sublessee's failure to do so.
22. Merger. There shall be no merger of this Sublease or of the
subleasehold estate created by this Sublease with the fee or any other estate or
interest in the Properties by reason of the fact that the same person or entity
owns or holds, directly or indirectly, all such estates and interests or any
combination thereof.
23. Notices. All notices and other communications hereunder shall be in
writing and delivered by hand, by facsimile, by United States Postal Service,
postage prepaid, registered or certified mail (delivery verification requested)
or by reputable overnight courier service (charges paid by sender, next business
day delivery and delivery verification requested) and shall be deemed given (a)
when delivered by hand, (b) when transmitted by facsimile (with either (i)
receipt confirmed or (ii) hard copy deposited within one business day of such
transmission with a reputable overnight courier service as above provided), (c)
three business days after mailing if mailed through the United States Postal
Service as above provided, or (d) one business day after depositing with a
reputable overnight courier service as above provided, in each case addressed to
the parties as the follows:
(a) if to Sublessor:
The May Department Stores Company
611 Olive Street
St. Louis, Missouri 63101
Attention: General Counsel
Facsimile #: (314) 342-6384
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with a copy to:
The May Department Stores Company
611 Olive Street
St. Louis, Missouri 63101
Attention: Real Estate Department
Facsimile #: (314) 342-3040
(b) if to Sublessee:
Payless ShoeSource, Inc.
3231 East 6th Street
Topeka, Kansas 66607
Attention: Chief Financial Officer
Facsimile #: (913) 295-6804
subject to the right of each party to designate a different address in the
United States and/or addressee by notice similarly given at least 15 days before
the effectiveness of such new designation.
24. Amendments. This Sublease may not be amended or modified, nor may any
obligation hereunder be waived, orally, and no such amendment, modification or
waiver shall be effective for any purpose unless it is in writing, signed by the
party against whom enforcement thereof is sought.
25. Miscellaneous. Subject to the provisions of Section 31, if any term
of this Sublease or any application thereof shall be invalid or unenforceable,
the remainder of this Sublease and any other application of such term shall not
be affected thereby. Subject to and except as provided in Section 18, this
Sublease shall be binding upon and inure to the benefit of and be enforceable by
the respective successors and assigns of the parties hereto. The table of
contents and the section headings are for convenience of reference only and
shall not limit or otherwise affect the meaning hereof. This Sublease may be
executed in several counterparts, each of which shall constitute an original,
but all of which together shall constitute one and the same instrument.
Nothing contained in this Sublease shall be deemed or construed by the
parties hereto or by any third person to create the relationship of principal
and agent or of partnership or of
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joint venture or any association between Sublessor and Sublessee, and neither
the method of computation of any rent nor any other term, condition or provision
contained in this Sublease and/or in any one or more of the Property Agreements
nor any acts of the parties hereto shall be deemed to create any relationship
between Sublessor and Sublessee other than the relationship of sub-landlord and
sub-tenant.
No waiver of any default and/or Event of Default hereunder shall be implied
from any omission by either party to take any action on account thereof if such
default and/or Event of Default persists or is repeated, and no express waiver
shall affect any default and/or Event of Default other than the default and/or
Event of Default specified in the express waiver, and then only for the time and
to the extent therein stated. No delay or omission by either party hereto to
exercise any right or power accruing upon any non-compliance, default and/or
Event of Default by the other party with respect to any of the terms hereof, or
otherwise accruing hereunder shall impair any such right or power or be
construed to be a waiver thereof. One or more waivers of any breach of any
covenant, term or condition of this Sublease shall not be construed as a waiver
of any subsequent breach of the same covenant, term or condition. The consent
or approval by a party to or of any act by the other party requiring the former
party's consent or approval shall not be deemed to waive or render unnecessary
such former party's consent or approval to or of any subsequent similar acts by
the other party.
Time is of the essence with respect to all matters provided in this
Sublease.
26. No Recording. Neither this Sublease nor any memorandum, notice or
other writing with respect hereto shall be recorded or referred to in any other
recorded document without the express written and mutual consent of Sublessor
and Sublessee.
27. Sublessee's Right to Extend Term of Sublease as to Certain Properties.
Sublessee may request in writing to Sublessor (provided that Sublessee's written
request, together with the "Support Documents" hereinafter defined and described
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(such written request and Support Documents being herein referred to,
collectively, as "Sublessee's Option Request"), are received by Sublessor within
the "Window Period" hereinafter defined) that Sublessor send to the Lessor under
the applicable Lease as to a particular Property (the "Option Property") a
written notice setting forth Sublessor's election to exercise the next
exercisable option (if any) under such Lease to extend the term thereof for the
next applicable option period (such a written notice directly arising from a
Sublessee's Option Request is hereinafter referred to as a "Sublessor's Option
Notice"). Provided that Sublessor received Sublessee's Option Request within
the Window Period, then within thirty (30) days after the expiration of the
Window Period, Sublessor agrees to send Sublessor's Option Notice addressed to
the Lessor and at the address as both were specified in Sublessee's Option
Request unless, notwithstanding Sublessee's certifications and/or assertions to
the contrary (if any) contained in the Support Documents:
(a) Sublessor contends, in good faith, that an Event of Default then
exists with respect to, and gives a notice to terminate this Sublease as to, the
Option Property; or
(b) The Lessor under the Lease of the Option Property has given notice
of a default with respect to such Lease, or such Lease contains a provision
preventing the exercise of an option if the tenant is in default and Sublessee
has not certified to Sublessor in Sublessee's Option Request that there are no
defaults under such Lease; or
(c) Sublessee is not then operating at and within the Option Property
its retail shoe store under a trade name which includes the word "Payless" or,
if then so operating, Sublessee has not certified to Sublessor in Sublessee's
Option Request that Sublessee intends to continue so operating during the
applicable extended term; or
(d) As of the end of Sublessee's fiscal quarter that immediately
preceded Sublessor's receipt of Sublessee's Option Request, the financial
condition of Sublessee does not fully
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satisfy each of the "Financial Covenants" hereinafter defined and specified in
Section 32; or
(e) Sublessee has not provided Sublessor with the certificate required
by Section 32(b); or
(f) Sublessee has notified the "Lender" (hereinafter defined in
Section 32) under any "Major Credit Agreement" (hereinafter defined in Section
32) that an event of default under the Major Credit Agreement has occurred which
has not been cured, or the Lender has declared Sublessee to be in default under
the Major Credit Agreement and such declaration has not been withdrawn; or
(g) Sublessee has not specified the name and address of the Lessor
under the Lease of the Option Property; or
(h) Assuming that it was so sent and constituted a valid exercise of
the option, Sublessor's Option Notice would extend the term of the Lease of the
Option Property beyond May 1, 2006.
In the event that Sublessor is not required to send, and elects not to
send, a Sublessor's Option Notice pursuant to a Sublessee's Option Request as to
an Option Property, Sublessor shall so notify Sublessee and specify the
reason(s) therefor. In the event that such Sublessor's Option Notice is sent
pursuant to Sublessee's Option Request and it is a valid exercise, then the term
of this Sublease as to the Option Property shall be extended accordingly;
otherwise, in all other events, this Sublease shall terminate as to such Option
Property (as provided in Section 3 hereof) on the day before the expiration of
the then current term of the Lease of such Option Property, unless sooner
terminated in accordance with the provisions of this Sublease.
As used in and for the purposes of this Sublease, the following terms shall
have the following respective meanings:
"Support Documents" means a current certification of Sublessee, duly
executed by its President, Chairman or Chief Financial Officer, certifying
as of the date of the applicable Sublessee's Option Request (which shall be
a date within the applicable Window Period): (i) that no Event of Default
then exists under Section 19(a) with respect to the
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Lease of the Option Property or that would entitle Sublessor to pursue its
rights and remedies under Section 20(a)(iii), (ii) that Sublessee is then
operating at and within the Option Property its retail shoe store under a
trade name which includes the word "Payless", and Sublessee intends to
continue so operating during the applicable extended term, (iii) that
Sublessee's certification has attached to it all documents that are to be
delivered to Sublessor before the end of the Window Period pursuant to
Section 32(d)(i) and (ii), (iv) the name and address for the Lessor under
the Lease of the Option Property, (v) that Sublessor's Option Notice, if
sent, is a valid exercise of the next exercisable option to extend under
the Lease of the Option Property and would not extend the term of such
Lease beyond May 1, 2006; and
"Window Period" means that period of time that is neither more than
ninety (90) days nor less than thirty (30) days prior to the date specified
in the Lease of the Option Property for Sublessor, as tenant thereunder, to
give notice of its intention to exercise the next exercisable option to
extend the term of such Lease.
Sublessee acknowledges, understands and agrees that, notwithstanding the
fact that Sublessee may not have any right to extend the term of this Sublease
as to an Option Property pursuant to this Section 27 or, having such right,
fails, is unable or elects not to duly exercise such right as herein provided,
Sublessor shall continue to have all rights under the Lease granted to
Sublessor, as tenant thereunder, including without limitation the right to
exercise for its own benefit and purposes and not for any benefit or purpose of
Sublessee, any one or more of the options to extend the term of such Lease of
the Option Property.
28. Certifications and Correspondence. From time to time upon written
request of Sublessor, Sublessee shall furnish to Sublessor a current written
certification of Sublessee's President, Chairman or Chief Financial Officer,
certifying that, as of the date thereof, all Basic Subrent and Additional Rent
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then due and payable have been paid and no Event of Default then exists under
the Sublease. Further, at all times, promptly upon its receipt of same,
Sublessee shall send to Sublessor or its designee a true and complete copy of
any correspondence and/or other materials received by Sublessee which sets forth
or alleges a dispute or default or a potential dispute or default in connection
with Sublessee's performance of its obligations under, pursuant to and/or
arising out of this Sublease and/or one or more of the Property Agreements.
29. Sublessor's Document Review and/or Preparation Charges. Sublessee
acknowledges that from time to time it will be required, or may otherwise elect,
to furnish certain documents, instruments and/or reports to Sublessor for its
review, consent and/or approval, and that in connection therewith or otherwise
Sublessor may have to review and/or prepare certain documents, instruments,
reports, estoppel certificates, etc., (all of the aforementioned activities
being referred to, collectively, as the "Administrative Activities"). Sublessee
hereby agrees to pay Sublessor for its costs and expenses incurred in connection
with the Administrative Activities promptly upon Sublessor billing Sublessee
therefor. Sublessor's costs and expenses shall include all amounts paid to
third parties and its cost of in-house counsel.
30. Sublessee's Disclaimer. Other than pursuant to and as expressly and
specifically provided in this Sublease, Sublessee hereby disclaims, releases and
relinquishes any and all rights, title, interests, benefits and privileges of
every kind, type and character whatsoever (whether or not written, oral,
contractual, statutory, common law, equitable and/or otherwise) in, to and/or
with respect to the Properties and/or the Leases and/or any of same, it being
the mutual express intent and agreement of Sublessor and Sublessee that any and
all such rights, title, interests, benefits and privileges are hereby
terminated, extinguished and superseded by this Sublease.
31. Single Agreement. This Sublease (including all Schedules hereto)
constitutes a single agreement and no part thereof is severable from any other
part or from the whole.
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Sublessee acknowledges and agrees that but for Sublessee's willingness to
sublease all the Properties from Sublessor pursuant to a single sublease,
Sublessor would not enter into this Sublease nor in any sublease of less than
all the Properties.
32. Financial Statements and Financial Covenants. (a) As used in and for
purposes of this Sublease, the following terms shall have the following
respective meanings:
"Capital Lease" has the meaning specified in the definition of
"Capital Lease Obligations."
"Capital Lease Obligations" means the principal component of all
monetary obligations of Sublessee or any of its subsidiaries under any
leasing or similar arrangement which, in accordance with GAAP, is
classified as a capital lease ("Capital Lease").
"Consolidated Interest Expense" means, for any period, the sum of
total interest expense (including that attributable to Capital Leases in
accordance with GAAP) of Sublessee and its subsidiaries on a consolidated
basis with respect to all outstanding Indebtedness of Sublessee and its
subsidiaries, including, without limitation, all commissions, discounts and
other fees and charges owed with respect to letters of credit and bankers'
acceptance financing, but excluding, however, any amortization of deferred
financing costs, all as determined on a consolidated basis for Sublessee
and its consolidated subsidiaries in accordance with GAAP.
"Consolidated Net Income" means, for any period for any Person, the
aggregate of the net income of such Person for such period, determined in
accordance with GAAP on a consolidated basis provided that (i) the net
income of any other Person which is not a subsidiary of such Person shall
be included in the Consolidated Net Income of such Person only to the
extent of the amount of cash dividends or distributions paid to such Person
or to a consolidated subsidiary of such Person and (ii) the net income of
any other Person acquired in a pooling of interests transaction
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for any period prior to the date of such acquisition shall be excluded from
the Consolidated Net Income of such Person. There shall be excluded in
computing Consolidated Net Income for any Person the excess (or the
deficit), if any, of (i) any gain which must be treated as an extraordinary
item under GAAP or any gain realized upon the sale or other disposition of
any real property or equipment that is not sold in the ordinary course of
business or of any capital stock owned by such Person or a subsidiary of
such Person over (ii) any loss which must be treated as an extraordinary
item under GAAP or any loss realized upon the sale or other disposition of
any real property or equipment that is not sold in the ordinary course of
business or of any capital stock owned by such Person or a subsidiary of
such Person. Without limiting the foregoing, all costs and expenses of the
Sublessee relating to management retention incentive payments which are
treated as extraordinary items shall be excluded in computing Consolidated
Net Income of the Sublessee.
"Consolidated Rental Expense" means, for any period, the sum of the
aggregate payments of Sublessee and its subsidiaries on a consolidated
basis under agreements to rent or lease any real or personal property
(exclusive of Capital Lease Obligations), all as determined on a
consolidated basis for Sublessee and its consolidated subsidiaries in
accordance with GAAP.
"Consolidated Tangible Net Worth" of a Person means, without
duplication, the sum of (a) total stockholders' equity of such Person less
(b) the net book value of all assets of such Person and its consolidated
subsidiaries which would be treated as intangibles under GAAP, including,
without limitation, goodwill and trademarks, but excluding, however, lease
rights associated with acquisitions of below-market leases.
"Contingent Obligation" means, as to any Person, any direct or
indirect liability of that Person, whether or not contingent, with or
without recourse, (a) with respect to
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any Indebtedness, lease, dividend, letter of credit or other obligation
(the "primary obligations") of another Person (the "primary obligor"),
including any obligation of that Person (i) to purchase, repurchase or
otherwise acquire such primary obligations or any security therefor, (ii)
to advance or provide funds for the payment or discharge of any such
primary obligation, or to maintain working capital or equity capital of the
primary obligor or otherwise to maintain the net worth or solvency or any
balance sheet item, level of income or financial condition of the primary
obligor, (iii) to purchase property, securities or services primarily for
the purpose of assuring the owner of any such primary obligation of the
ability of the primary obligor to make payment of such primary obligation,
or (iv) otherwise to assure or hold harmless the holder of any such primary
obligation against loss in respect thereof (each, a "Guaranty Obligation");
(b) with respect to any surety instrument issued for the account of that
Person or as to which that Person is otherwise liable for reimbursement of
drawings or payments; (c) to purchase any materials, supplies or other
property from, or to obtain the services of, another Person if the relevant
contract or other related document or obligation requires that payment for
such materials, supplies or other property, for such services, shall be
made regardless of whether delivery of such materials, supplies or other
property is ever made or tendered, or such services are ever performed or
tendered, or (d) in respect of any swap contract. The amount of any
Contingent Obligation shall, in the case of Guaranty Obligations, be deemed
equal to the stated or determinable amount of the primary obligation in
respect of which such Guaranty Obligation is made, or if not stated or if
indeterminable, the maximum reasonably anticipated liability in respect
thereof; provided that if any Guaranty Obligation (a) is limited to an
amount less than the obligations guaranteed or supported the amount of the
corresponding Contingent Obligation shall be equal to the lesser of the
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amount determined pursuant to the initial clause of this sentence and the
amount to which such guaranty is so limited or (b) is limited to recourse
against a particular asset or assets of such Person the amount of the
corresponding Contingent Obligation shall be equal to the lesser of the
amount determined pursuant to the initial clause of this sentence and the
fair market value of such asset or assets at the date for determination of
the amount of the Contingent Obligation. In the case of other Contingent
Obligations, the Contingent Obligation shall be equal to the maximum
reasonably anticipated liability in respect thereof.
"Contractual Obligation" means, as to any Person, any provision of any
security issued by such Person or of any agreement, undertaking, contract,
indenture, mortgage, deed of trust or other instrument, document or
agreement to which such Person is a party or by which it or any of its
property is bound, and for Sublessee it includes this Sublease.
"EBITR" means, for any period, for Sublessee and its subsidiaries on a
consolidated basis, determined in accordance with GAAP, the sum of (a)
Consolidated Net Income for such period plus (b) all amounts treated as
expenses for taxes to the extent included in the determination of such
Consolidated Net Income plus (c) Consolidated Interest Expense to the
extent included in the determination of such Consolidated Net Income plus
(d) Consolidated Rental Expense to the extent included in the determination
of such Consolidated Net Income.
"Financial Covenants" means the covenants specified in Section
32(e)(ii) below.
"fiscal year" and "fiscal quarter" and "fiscal month" mean and refer
to such fiscal periods of Sublessee.
"Fixed Charge Coverage Ratio" means, for any period, the ratio of (a)
EBITR to (b) the sum of Consolidated Interest Expense plus Consolidated
Rental Expense, in each case, for such period.
"GAAP" means generally accepted accounting principles set forth from
time to time in the opinions and
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pronouncements of the Accounting Principles Board and the American
Institute of Certified Public Accountants and statements and pronouncements
of the Financial Accounting Standards Board (or agencies with similar
functions of comparable stature and authority), which are applicable to the
circumstances as of the date of this Sublease.
"Indebtedness" of any Person means, without duplication, (a) all
indebtedness for borrowed money; (b) all obligations issued, undertaken or
assumed as the deferred purchase price of property or services (other than
trade payables entered into in the ordinary course of business on ordinary
terms); (c) all non-contingent reimbursement or payment obligations with
respect to surety instruments; (d) all obligations evidenced by notes,
bonds, debentures or similar instruments, including obligations so
evidenced incurred in connection with the acquisition of property, assets
or businesses; (e) all indebtedness created or arising under any
conditional sale or other title retention agreement, or incurred as
financing, in either case with respect to property acquired by the Person
(even though the rights and remedies of the seller or bank under such
agreement in the event of default are limited to repossession or sale of
such property); (f) all principal obligations with respect to Capital
Leases; (g) all indebtedness referred to in clauses (a) through (f) above
secured by (or for which the holder of such Indebtedness has an existing
right, contingent or otherwise, to be secured by) any lien upon or in
property (including accounts and contracts rights) owned by such Person,
even though such Person has not assumed or become liable for the payment of
such Indebtedness; and (h) all Guaranty Obligations in respect of
indebtedness or obligations of others of the kinds referred to in clauses
(a) through (g) above. In the event any of the foregoing Indebtedness is
limited to recourse against a particular asset or assets of such Person,
the amount of the corresponding Indebtedness shall be equal to the lesser
of the amount of such Indebtedness
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and the fair market value of such asset or assets at the date for
determination of the amount of the such Indebtedness. In addition, the
amount of any Indebtedness which is also a Contingent Obligation shall be
determined as provided in the definition of "Contingent Obligation."
"Lender" means the "Banks" and/or "Agent" (as such terms are defined
in the "Multicurrency Credit Agreement" referred to in the definition of
"Major Credit Agreement"), provided, however, at Sublessor's election,
Sublessor may by notice to Sublessee substitute for the Banks and/or Agent
as "Lender" any other banks and/or agent making credit available to
Sublessee under a Major Credit Agreement.
"Major Credit Agreement" means the Multicurrency Credit Agreement
entered into among Sublessee, the several financial institutions referred
to therein as "Banks" and Bank of America National Trust and Savings
Association, provided, however, at Sublessor's election, Sublessor may by
notice to Sublessee substitute for the Multicurrency Credit Agreement (or
any subsequent Major Credit Agreement) any future revolving credit facility
or other loan transaction between Sublessee and one or more lending
institutions involving commitments aggregating $100,000,000 or more.
"Material Adverse Effect" means (a) a material adverse change in, or a
material adverse effect upon, the operations, business, properties or
financial condition of Sublessee or Sublessee and its subsidiaries taken as
a whole; (b) a material impairment of the ability of Sublessee to perform
its obligations under the Major Credit Agreement; or (c) a material adverse
effect upon the legality, validity, binding effect or enforceability
against Sublessee or any guarantor of the Major Credit Agreement.
"Person" means an individual, partnership, corporation, limited
liability company, business trust, joint stock company, trust,
unincorporated association, joint venture or governmental authority.
"Present Value" means, with respect to each lease of Sublessee and its
subsidiaries treated as an "operating"
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lease for purposes of external financial reporting, the periodic minimum or
base rental payments due and payable during the primary term (giving effect
to any extension terms as to which the Sublessee or its subsidiaries have
become contractually obligated) of such lease on or after the date of
determination discounted to an equivalent value as of the date of
determination. For purposes of computing the Present Value: (a) the
discount rate utilized to calculate the Present Value of any Existing Lease
(as defined below) shall be the rate actually utilized by Sublessee prior
to the date of this Sublease for purposes of calculating the present value
of such operating lease for disclosure of the present value of all
operating leases in the consolidated external financial reports of
Sublessee and its Affiliates; (b) the discount rate utilized to calculate
the Present Value of any Additional Lease (as defined below) during the
fiscal year in which the term of such lease commences (its "First Lease
Year") shall be the Year-To-Date Rate (as defined below) as of the end of
the fiscal quarter for which the computation is made; and (c) the discount
rate for any Additional Lease during any fiscal year other than its First
Lease Year shall be the Year-To-Date Rate as of the end of its First Lease
Year. For purposes of this definition: (i) "Existing Lease" means any
operating lease with a term commencing before February 4, 1996; (ii)
"Additional Lease" means any operating lease with a term commencing after
February 3, 1996; and (iii) "Year-To-Date Rate" means the weekly year-to-
date average of the Friday rates of the Merrill Lynch Bond Index for
corporate issues of "medium" quality with terms of 10 years or more
("Index") as published in The Wall Street Journal (or similar publication).
In the event that the Index ceases to be published, the Index shall be
replaced by a similar index reflecting rates applicable to corporate issues
with similar terms and credit quality as the Index as jointly selected by
Sublessee and Lender (but if not so selected, as may be reasonably
determined by Sublessor). The discount rate
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applied to any extension of any Existing Lease or Additional Lease shall
be: (A) if the dollar amount of base rent payable during such extension is
prescribed in the original operating lease, the discount rate originally
applicable to such Existing Lease or Additional Lease, as applicable; and
(B) in all other cases, the discount rate determined as if such extension
period constituted an Additional Lease.
"Present Value of Operating Leases" means, at any time, the sum of the
Present Value of each operating lease of Sublessee and its subsidiaries.
"subsidiaries" means, when used in and for purposes of Section 32 of
this Sublease, each and every Person that, in accordance with GAAP, should
or may be consolidated into, or together with, Sublessee for purposes of
external financial reporting, including, without limitation, any parent,
indirect subsidiary, brother/sister corporation or Affiliate.
"Total Capitalization" means, at any time, the sum at such time of (a)
Sublessee's total stockholders' equity plus (b) Total Debt plus (c) the
consolidated non-current deferred taxes of Sublessee and its subsidiaries.
"Total Debt" means, at any time, the sum of (a) the current and long-
term indebtedness obligations for money borrowed, drawn and unreimbursed
letters of credit, drawn and unreimbursed surety bonds, the current portion
of mandatory redeemable preferred stock of Sublessee, Capital Lease
Obligations and, without duplication, Contingent Obligations in respect of
any of the foregoing, in each case, of Sublessee and its subsidiaries on a
consolidated basis, plus (b) the Present Value of Operating Leases.
(b) The obligation of Sublessor to send the Sublessor's Option Notice
hereunder is subject to the conditions and requirements in Section 27 and to the
condition that Sublessor shall have received within the Window Period with
respect to the particular Option Property, a certificate signed by the
President, Chairman or Chief Financial Officer (hereafter a
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"Responsible Officer"), dated within such Window Period, in form and substance
satisfactory to Sublessor, stating that:
(i) the representations and warranties contained in Section 32(c) are
true and correct on and as of such date, as though made on and as of such
date; and
(ii) no default exists in Sublessee's performance of the covenants in
Section 32(d) and no event or occurrence exists which would cause Sublessee
to be in default of the requirements of Section 32(e); and
(iii) there has occurred since the date of this Sublease, no event or
circumstance that has resulted or could reasonably be expected to result in
a Material Adverse Effect; and
(iv) to the best of the Responsible Officer's knowledge, following
diligent inquiry and analysis, as of such date, Sublessee complies with the
Financial Covenants, as if calculated on the last day of the fiscal month
immediately preceding such date, as demonstrated by a schedule attached to
the certificate setting forth the figures providing the basis for the
certificate.
(c) Sublessee represents and warrants to Sublessor that:
(i) There are no actions, suits, proceedings, claims or disputes
pending, or to the best knowledge of Sublessee, threatened or contemplated,
at law, in equity, in arbitration or before any governmental authority,
against Sublessee, or its subsidiaries or any of their respective
properties which may reasonably be expected to have a Material Adverse
Effect.
(ii) Neither Sublessee nor any subsidiary is in default under or with
respect to any Contractual Obligation in any respect which, individually or
together with all such defaults, could reasonably be expected to have a
Material Adverse Effect.
(iii) Sublessee and its subsidiaries have filed all Federal and other
material tax returns and reports required to be filed, and have paid all
Federal and other material taxes, assessments, fees and other governmental
charges
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levied or imposed upon them or their properties, income or assets otherwise
due and payable, except those which are being contested in good faith by
appropriate proceedings and for which adequate reserves have been provided
in accordance with GAAP. There is no proposed tax assessment against
Sublessee or any subsidiary that would, if made, have a Material Adverse
Effect.
(iv) The audited consolidated financial statements of Sublessee and
its subsidiaries for the fiscal year ended February 3, 1996 and the related
consolidated statements of income or operations, shareholders' equity and
cash flows for the fiscal year ended on that date:
(A) were prepared in accordance with GAAP consistently applied
throughout the period covered thereby, except as otherwise expressly
noted therein;
(B) fairly present the financial condition of Sublessee and
its subsidiaries as of the date thereof and results of operations for
the period covered thereby; and
(C) show all material indebtedness and other liabilities,
direct or contingent, of the Sublessee and its consolidated
subsidiaries as of the date thereof, including liabilities for taxes,
material commitments and Contingent Obligations.
To the extent that a certificate is furnished to Sublessor pursuant to Section
32(b) at a time after Sublessee is required to deliver financial statements to
Sublessor pursuant to Section 32(d), the reference in that certificate shall be
to the most current fiscal year ended date of Sublessee.
(d) During the term of this Sublease, unless Sublessor shall waive
compliance in writing:
(i) Sublessee shall deliver to Sublessee, in the same form and detail
as delivered to the Lender (but if not so delivered, in such form and
detail as satisfactory to Sublessor):
(A) as soon as available, but not later than 120 days after
the end of each fiscal year (commencing
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with fiscal year ending January 1997), a copy of the audited
consolidated balance sheet of Sublessee and its subsidiaries as at the
end of such year and the related consolidated statements of income or
operations, shareholders' equity and cash flows for such year, setting
forth in each case in comparative form the figures for the previous
fiscal year, and accompanied by the opinion of Arthur Andersen LLP or
another nationally-recognized independent public accounting firm
("Independent Auditor") which report shall state that such
consolidated financial statements present fairly the financial
position for the periods indicated in conformity with GAAP applied on
a consistent basis. Such opinion shall not be qualified or limited,
in either case, because of a restricted or limited examination by the
Independent Auditor of any material portion of Sublessee's or any
subsidiary's records; and
(B) as soon as available, but not later than 60 days after the
end of each of the first three fiscal quarters of each fiscal year
(commencing with the first fiscal quarter ending after the date
hereof), a copy of the unaudited consolidated balance sheet of
Sublessee and its subsidiaries as of the end of such quarter and the
related consolidated statements of income, shareholders' equity and
cash flows for the period commencing on the first day and ending on
the last day of such quarter, and certified by a Responsible Officer
as fairly presenting, in accordance with GAAP (subject to ordinary,
good faith year-end audit adjustments and the absence of notes
thereto), the financial position and the result of operations of
Sublessee and the subsidiaries.
(ii) Sublessee shall deliver to Sublessor:
(A) concurrently with the delivery of the financial statements
referred to in Sections 32(d)(i), a compliance certificate in the form
delivered to
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Lender (but if not so delivered, in such form as had previously been
delivered to Lender or as Sublessor may request) executed by a
Responsible Officer; and
(B) promptly, but not later than five days after the date of
filing with the SEC, copies of all financial statements and reports
that Sublessee sends to its shareholders, and copies of all financial
statements and regular, periodical or special reports (including Forms
10-K, 10-Q and 8-K) that Sublessee or any subsidiary may make to, or
file with, the SEC and such additional information regarding the
business, financial or corporate affairs of Sublessee or any
subsidiary as Sublessor may from time to time request; and
(C) promptly upon the replacement, modification or amendment
of any Major Credit Agreement, a copy of the replacement, modification
or amendment documentation.
(iii) Sublessee shall promptly notify Sublessor:
(A) upon any Responsible Officer becoming aware of the
occurrence of, or the delivery of notice to or from Lender of, any
default or the occurrence or existence of any event or circumstances
that will foreseeably become a default under the Major Credit
Agreement;
(B) of any matter that has resulted, or may, in the judgment
of the Company, reasonably be expected to result, in a Material
Adverse Effect, including (i) breach or non-performance of, or any
default under, a Contractual Obligation of Sublessee or any
subsidiary, (ii) any dispute, litigation, investigation, proceeding or
suspension between the Sublessee or any subsidiary and any
governmental authority; or (iii) the commencement of, or any material
development in, any litigation or proceeding affecting Sublessee or
any subsidiary, including pursuant to any applicable environmental
laws; and
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(C) of any material change in accounting policies or financial
reporting practices by Sublessee or any of its consolidated
subsidiaries.
Each notice under this Section 32(d)(iii) shall be accompanied by a written
statement by a Responsible Office setting forth details of the occurrence
referred to therein, and stating what action Sublessee or any affected
subsidiary proposes to take with respect thereto and at what time.
(iv) Sublessee shall maintain and shall cause each subsidiary to
maintain proper books of record and account, in which full, true and
correct entries in conformity with GAAP consistently applied shall be made
of all financial transactions and matters involving the assets and business
of Sublessee and such subsidiary.
(e) During the term of this Sublease, unless Sublessor shall waive
compliance in writing:
(i) Sublessee shall not, and shall not suffer or permit any subsidiary
to, directly or indirectly, make, create, incur, assume or suffer to exist
any judgment or judicial attachment liens, unless the enforcement of such
liens is effectively stayed and all such liens in the aggregate at any time
outstanding for Sublessee and its subsidiaries do not exceed $10,000,000.
(ii) Sublessee shall comply with the following covenants (the
"Financial Covenants"):
(A) Fixed Charge Coverage Ratio. For the period of four
consecutive fiscal quarters ending on the last day of each fiscal
quarter, Sublessee shall not permit the Fixed Charge Coverage Ratio to
be less than 1.5:1.0; and
(B) Leverage Ratio. Sublessee shall not permit the ratio of
(i) Total Debt to (ii) Total Capitalization to be greater than 60% as
of the last day of any fiscal quarter; and
(C) Consolidated Tangible Net Worth. Sublessee shall not
permit Consolidated Tangible Net Worth to be
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less than $600,000,000 as of the last day of any fiscal quarter.
In the event that Sublessor elects, by notice to Sublessee, to modify
any or all of the Financial Covenants to conform to similar financial
covenants in any Major Credit Agreement, from and after such notice the
provisions of clauses (A), (B) and/or (C) of (e)(ii) above shall be deemed
amended to reflect such modification or modifications without further
written agreement between Sublessor and Sublessee.
33. Governing Law; Submission to Jurisdiction; Injunction. This Sublease
shall be deemed an agreement and contract made under the laws of the State of
Delaware and all matters arising under, growing out of, or in connection with
this Sublease shall, for all purposes, be governed substantively and, to the
extent the courts specified below must or may follow State procedural laws,
procedurally, including periods for limitations of actions, by, and construed in
accordance with, the laws of the State of Delaware, without giving effect to
such State's conflict of laws rules or principles.
The parties agree that any legal action or proceeding between them arising
under, growing out of, or in connection with this Sublease shall be brought only
in, and tried by the United States District Court for the Eastern District of
Missouri or, absent subject matter jurisdiction by such Federal Court, in the
Circuit Court of the State of Missouri for the City of St. Louis.
Each of the parties irrevocably (a) submits itself to the personal
jurisdiction of such courts (but only for any action or proceeding in connection
with this Sublease and not for any other purpose whatsoever) and, if and only
if, it is not present or does not have an agent for service of process in the
territorial jurisdiction of such courts, consents to the service of process
outside the territorial jurisdiction of such courts in any such action or
proceeding in connection with this Sublease by mailing copies thereof by (i)
certified or registered, return receipt requested United States mail, postage
prepaid, if mailed to a United States of America address or (ii) internationally
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recognized private mail carrier (with evidence of delivery or attempted
delivery), if mailed to an address outside the United States of America, all
charges billed to or paid by sender, in each case to the recipient's last known
address, (b) agrees that it will not attempt to deny or defeat such personal
jurisdiction by motion or other request for leave from any such court, and (c)
agrees that it will not bring any action in whole or in part arising under,
growing out of, or in connection with this Sublease or any of the transactions
contemplated by this Sublease in any court other than a court of the United
States sitting in and for the Eastern District of Missouri or, absent subject
matter jurisdiction by such Federal Court, in the Circuit Court of the State of
Missouri for the City of St. Louis.
The parties agree that irreparable damage would occur in the event that any
of the provisions of this Sublease were not performed in accordance with their
specific terms or were otherwise breached. It is accordingly agreed that the
parties shall be entitled to an injunction or injunctions to prevent breaches of
this Sublease and to enforce specifically the terms and provisions of this
Sublease in the courts and as provided above in this Section 33, such injunctive
relief being in addition to any other remedy to which such party is entitled at
law or in equity.
Sublessee hereby waives and releases any and all rights at any time
conferred by statute or otherwise which would have the effect of limiting or
modifying any of the terms, provisions, and conditions of this Sublease,
including without limitation any right to a jury trial in an action for
ejectment or other action at law. Sublessee hereby agrees to execute,
acknowledge and deliver any and all instruments which Sublessor may request,
whether before or after the occurrence of any Event of Default, evidencing such
waiver and release.
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IN WITNESS WHEREOF, the parties hereto have caused this Sublease to be
executed by their respective officers thereunto duly authorized, as of the day
and year first above written.
THE MAY DEPARTMENT STORES COMPANY
a New York corporation
By /s/Louis J. Garr, Jr.
--------------------------------
Executive Vice President
PAYLESS SHOESOURCE, INC.
a Missouri corporation
By /s/Richard A. Brickson
--------------------------------
Vice President
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ADMINISTRATIVE SERVICES AGREEMENT ("AGREEMENT")
BY AND BETWEEN
PAYLESS SHOESOURCE, INC., A MISSOURI CORPORATION
(HEREINAFTER REFERRED TO AS "PAYLESS")
and
THE MAY DEPARTMENT STORES COMPANY, A NEW YORK CORPORATION
(HEREINAFTER REFERRED TO AS "MAY")
Effective as of the 2nd day of April, 1996.
WHEREAS Payless has liability for, among other matters, certain workers'
compensation, general liability and automobile liability Claims (as defined
herein); and
WHEREAS Payless wishes May to administer, manage, and act as its agent in
all aspects of the handling and resolving of all Claims;
NOW, THEREFORE, in consideration of the mutual covenants and promises
contained herein, and other good and valuable consideration, Payless and May
agree as follows:
ARTICLE I. DEFINITIONS
As used herein, the following terms have the following meanings:
A. Allocable Claim Expense(s) shall mean all costs allocable to the
settling or resolving of a Claim pursuant to this Agreement, including but not
limited to:
1) Judgments, settlements, monies paid in compliance with workers
compensation statutes, and any other monies paid in resolution of a Claim;
2) Legal Expenses (as defined herein);
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3) Court and administrative tribunal costs, fees and expenses, including
those incurred on appeal;
4) Court reporter fees and costs for legal transcripts of testimony taken
at civil, criminal or administrative proceedings or at coroners' inquests;
5) Pre- and post-judgment interest paid on a Claim;
6) Fees for service of process;
7) Medical expenses, including costs of independent medical examinations
and/or evaluations for rehabilitation and/or to determine the extent of
injury and/or liability;
8) Fees of employing experts for their advice, opinions or testimony
concerning Claims under investigation or in litigation;
9) Fees of employing experts for the preparation of maps, professional
photographs, accountings, chemical or physical evidence, engineering
services, handwriting experts or any other type of expert used in
investigating or litigating a Claim;
10) Investigative or detective service costs performed by persons who are
not employees of May;
11) Costs of copies of any public record or medical record or of any
deposition and court reported or recorded statements;
12) Reasonable travel expenses incurred in providing services pursuant to
this Agreement;
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13) All fines and penalties; and,
14) Any other similar cost, fee or expense reasonably chargeable to the
investigation, negotiation, settlement, payment or defense of a Claim or to
the protection or perfection of subrogation rights.
B. Applicable Rate shall mean a per annum rate of interest equal to the
lesser of (a) the maximum rate permitted by applicable law and (b) two
percentage points in excess of the per annum rate of interest generally charged
from time to time by Citibank, N.A. (or in its absence, the U.S. bank with the
highest market capitalization) at its branches in New York City in respect of
U.S. dollar demand commercial loans to its most credit worthy commercial
borrowers, which per annum rate of interest is customarily referred to as the
"prime rate" of interest. For the purposes of this Agreement, such "prime rate"
of interest shall be ascertained monthly, as of the first business day of each
calendar month, and such rate, as so ascertained, shall be deemed to be the
"prime rate" in effect throughout such calendar month.
C. Bank Account(s) shall mean a checking account or checking accounts
established by Payless pursuant to Article VI for the payment of Allocable Claim
Expenses.
D. Claim(s) shall mean all demands for damages due or allegedly due
pursuant to workers' compensation, general liability or automobile liability
which are made against Payless or for which Payless is an indemnitor and which
relate to incidents occurring prior to April 1, 1996, whether or not reported.
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E. Confidential Information shall mean statistics or other information
which is commercially valuable, confidential or not otherwise public,
proprietary or a trade secret.
F. Legal Expenses shall mean attorney's fees, including the cost of in-
house counsel, and all other costs, expenses and obligations paid or incurred in
connection with investigating, defending, being a witness in or participating in
or preparing to defend, be a witness in or participate in, any action (including
any appeal) or threatened action.
G. Nonallocable Expense(s) shall mean expenses incurred in the handling
of Claims pursuant to this Agreement but not allocable to a specific file,
including but not limited to Administrative Fees (as described in Article VII),
state assessments (including without limitation bonds, letters of credit,
actuarial charges and other costs related to the maintaining of Payless's self-
insured status for losses incurred prior to April 1, 1996), costs for
preparation of reports other than those specifically required under this
Agreement, and other miscellaneous costs.
H. Party or Parties shall mean May and/or Payless as the context
requires.
I. Ultimate Projected Loss shall mean the projected estimate of Allocable
Claim Expenses for all Claims covered by this Agreement, as set forth in Article
VIII.
J. Year shall mean a twelve-month period beginning on February 1 and
ending on January 31, except that the first Year shall mean the period beginning
on April 1, 1996 and ending on
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January 31, 1997.
ARTICLE II. TERM OF AGREEMENT
This Agreement shall be effective on April 2, 1996 and shall terminate on
the earlier of (a) the settling of the last Claim under this Agreement, or (b)
March 31, 2016. Termination of the Agreement shall not terminate the rights or
liabilities of either Party arising prior to termination.
ARTICLE III. LIABILITY
A. Payless will have sole liability and responsibility for all Claims.
B. Nothing in this Agreement is intended, nor shall it be construed, to
impose liability on May for any Claims or expenses of whatever nature, or to act
as a warranty or guaranty by May as to any insurance coverage.
ARTICLE IV. ADMINISTRATIVE SERVICES
A. Pursuant to this Agreement, May shall have sole authority to
administer, manage, negotiate, litigate, settle or otherwise handle all Claims
against Payless and shall have sole and absolute discretion in the management of
the Claims, including but not limited to developing strategy with regard to a
Claim, selection of counsel, and valuation of Claim settlements.
B. It is the intent of the Parties that this Agreement apply only to (i)
the Claims listed in Exhibit A attached hereto and incorporated by reference
herein, and (ii) Claims incurred but not reported prior to April 1, 1996 which
are substantially similar in nature to those listed in Exhibit A. The
determination as to
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whether a Claim is substantially similar in nature to those listed in Exhibit A
shall be made by May in its reasonable judgment.
C. Payless shall concurrently herewith, and from time to time at May's
request, grant May power of attorney, express and implied, to act on its behalf
and in its name. A copy of the power of attorney is attached hereto as Exhibit
B and incorporated by reference herein. Payless shall not revoke the power of
attorney without May's written consent.
D. May will prepare and send to Payless a quarterly status report, for
informational purposes only, detailing all Claim activity during the preceding
calendar quarter. The report will include a list of all open Claims, Allocable
Claim Expenses paid to date, and the projected costs per Claim.
E. May will evaluate all open Claims liability annually and, where it so
determines, revise its valuation of such Claims and its projections for
Allocable Claim Expenses and Nonallocable Expenses for the next Year, and will
transmit said projections to Payless no less than sixty (60) days prior to
February 1.
F. Payless may review the status of the Claim files for a reasonable
amount of time once a Year at the premises where they are kept and at a time
mutually agreeable to the Parties, provided that such review does not interfere
with May's normal business operations.
G. May may assign or delegate any and all of its responsibilities and
obligations to provide services pursuant to this Agreement.
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H. Any assignment by Payless not in accordance with the terms of this
Agreement shall not relieve Payless of its obligations under this Agreement, and
no such assignment shall entitle Payless to terminate or limit this Agreement or
to reduce the fees and bonuses payable hereunder.
ARTICLE V. COOPERATION OF THE PARTIES
Payless agrees to cooperate fully with May in all reasonable respects in
the administration by May of Claims under this Agreement, and, with respect to
workers compensation, in a return to work program. Such cooperation shall
include:
(A) Retain and provide records, compilations and information which are, in
May's opinion, reasonably relevant to such Claims and provide such records,
including payroll reports and hours worked, necessary for the payment of state
assessments;
(B) Provide May full opportunity to interview witnesses and Payless
personnel with regard to any Claim covered by this Agreement.
(C) Promptly forward to May all demand letters, summonses and other papers
regarding a Claim or a lawsuit or other proceeding brought pursuant to a Claim.
(D) Assist in the production of evidence and attendance of witnesses at any
deposition, trial or other hearing, whether civil, criminal or administrative.
(E) Not commit fraud or perjury.
(F) Not enter into any settlements of Claims unless authorized to do so by
May.
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ARTICLE VI. SPECIAL FINANCIAL AND BANKING ARRANGEMENTS
A. ESTABLISHMENT OF A BANK ACCOUNT
(1) To implement this Agreement, Payless agrees that May shall establish
one or more Bank Accounts in the name of Payless at First Interstate Bank of
Texas. At any time during the term of this Agreement, the Parties may mutually
agree to move the Bank Account to another financial institution, provided that
such agreement is in writing.
(2) Payless will own the Bank Account and have responsibility for all
related fees and bank services costs. Payless shall authorize the bank to
grant May exclusive checkwriting authority on the Bank Account for the purpose
of paying all Allocable Claim Expenses by checks drawn on the Bank Account.
(3) Payless shall arrange for deposits into the Bank Account of such
amounts and at such intervals as are sufficient to equal or exceed all checks
clearing the Bank Account. Payless shall continue the operation and funding of
the Bank Account for as long as this Agreement is in effect.
(4) For the purpose of assuring the adequate and timely funding of the Bank
Account, Payless and the bank shall develop an operating procedure that is
acceptable to May and not inconsistent with this Agreement.
B. PAYMENT PROCEDURE FOR NONALLOCABLE EXPENSES
Payless agrees to pay all Nonallocable Expenses to May within fifteen (15)
days of receipt of May's written request for payment. The Parties shall develop
a mutually agreeable operating procedure
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consistent with the terms of this Agreement for the submission of payment
requests by May for Nonallocable Expenses and the timely payment of such
requests by Payless.
C. EFFECT OF FAILURE TO PROVIDE ADEQUATE AND TIMELY FUNDING
(1) May is under no obligation whatsoever to use its own funds to pay
either Allocable Claim Expenses or Nonallocable Expenses. However, May, at its
discretion, may pay such expenses and charge Payless interest thereon at the
Applicable Rate from the date of expenditure by May to the date of repayment by
Payless if any one of the following occur: (i) Payless fails to timely pay
Nonallocable Expenses pursuant to Article VI.B; (ii) Payless closes the Bank
Account and does not immediately reopen the Bank Account at another financial
institution mutually agreed to by the Parties pursuant to this Agreement; or
(iii) the bank refuses to honor any check written on the Bank Account due to
insufficiency of funds.
(2) Payless shall reimburse May with interest at the Applicable Rate within
fifteen (15) days of receiving notice from May of the payment.
(3) Failure by Payless to timely pay the Nonallocable Expenses, to
adequately fund the Bank Account or to reimburse May for expenditures made
pursuant to Article VI.C shall constitute a material default by Payless of its
obligations under this Agreement.
ARTICLE VII. ADMINISTRATIVE FEES
A. Payless shall pay May a monthly fee (the "Administrative Fee") equal
to $115 times the number of Claims which are open on
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the first day of the month, but in no case shall the monthly Administrative Fee
be less than three thousand dollars ($3,000.00).
B. May shall bill Payless for Administrative Fees on a monthly basis, and
payment shall be due and payable fifteen (15) days after receipt by Payless and
will be subject to interest from the date due as and at the Applicable Rate.
ARTICLE VIII. INCENTIVE BONUS
A. The Parties agree that the Ultimate Projected Loss for all Allocable
Claim Expenses under this Agreement is Twenty-Four Million Nine Hundred Thousand
Dollars ($24,900,000.00).
B. The Parties agree that Payless shall pay to May an incentive bonus
computed and paid as follows:
(1) Each Year May, in its reasonable discretion, shall review Allocable
Claim Expenses actually paid during the prior Year and revise the Ultimate
Projected Loss. May shall send the revision (the "Revised Ultimate Projected
Loss") to Payless by the first day of May.
(2) If the Revised Ultimate Projected Loss is less than the Ultimate
Projected Loss established by this Agreement, Payless shall pay to May a bonus
equal to fifty percent (50%) of the difference between the Ultimate Projected
Loss and the Revised Ultimate Projected Loss, less the cumulative amount of all
bonuses paid in prior Years.
Example:
Year One: If the Revised Ultimate Projected Loss is $23.9 Million, the
Bonus owed is $500,000 (50% x ($24.9 Million - $23.9 Million);
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Year Two: If the Revised Ultimate Projected Loss is $22.9 Million, the
Bonus owed is $500,000:
Bonus = [50% x ($24.9 Million - $22.9 Million)] -$500,000 paid in
Year One.
Year Three: If the Revised Ultimate Projected Loss is $21.9 Million, the
Bonus owed is $500,000:
Bonus = [50% x ($24.9 Million - $21.9 Million)] - $1 Million paid in
Years One and Two.
Year Four: If the Revised Ultimate Projected Loss is $21.8 Million, the
Bonus owed is $50,000:
Bonus = [50% x ($24.9 Million - $21.8 Million)] - $1.5 Million paid in
Years One, Two and Three.
The bonus shall be due and payable no more than thirty (30) days after
transmittal of notice by May to Payless and will be subject to interest from the
date due as and at the Applicable Rate.
(3) If the Revised Ultimate Projected Loss is equal to or greater than the
Ultimate Projected Loss, Payless shall not be required to pay May a bonus.
(4) In the event that the Revised Ultimate Projected Loss is greater than
the Ultimate Projected Loss, May shall rebate to Payless all bonuses previously
received. In no event shall May be required to pay Payless more than the
cumulative amount of all bonuses paid to it in prior years.
Example:
Year Five: If the Revised Ultimate Projected Loss is $25.2 Million, May
rebates $1,550,000, the cumulative bonuses received in Years One, Two,
Three and Four.
(5) Within 60 days of settling the last open Claim, May will give Payless
written notice, and the bonus will be reconciled by subtracting the actual
Allocable Claim Expenses paid for all Claims under this Agreement from the
Ultimate Projected Loss, and the final bonus will be determined and paid
pursuant to the provisions
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of this section.
ARTICLE IX. INDEMNIFICATION/LIMITATIONS ON LIABILITY
A. It is the intent of the Parties that Payless shall indemnify, protect,
defend and hold May harmless to the fullest extent now or hereinafter authorized
or permitted by law with respect to any action, proceeding or investigation
brought or threatened regarding the performance of services by May under this
Agreement.
(1) Payless shall indemnify, protect and hold harmless May against all
judgments, settlements, costs (including Legal Expenses and expert fees), fines
or penalties resulting from May's performance of services under this Agreement,
including, where lawful, punitive damages, as long as May's conduct is not
finally adjudicated to have been fraudulent or grossly negligent.
(2) Payless shall indemnify and hold harmless May for any bad faith claim
arising out of May's performance of services pursuant to this Agreement as long
as May's conduct is not finally adjudicated to have been fraudulent or grossly
negligent. To the extent permitted by law, Payless intends its indemnification
of May to include punitive damages.
(3) In the event that Payless indemnifies May for a third-party claim, the
indemnification expenses incurred by Payless pursuant to this section shall be
considered Allocable Claim Expenses for purposes of Article VIII.
B. Payless shall provide Commercial General Liability written on an
occurrence basis and professional liability with combined single limits of not
less than Five Million Dollars ($5,000,000.00) per occurrence insuring May (in
the name of The May Department Stores Company and all its divisions and
subsidiaries, including the Central Regional Claims Corporation), and its
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employees and agents as additional insureds for all bodily injury, property
damage, and personal injury claims arising out of the services provided by this
Agreement as well as all damages by reason of any act, error or omission in
professional services rendered or that should have been rendered arising out of
the services performed under this Agreement. This insurance shall be primary to
May's insurance and not subject to any excess or pro-rata type of other
insurance clause in the policy. Prior to the inception of this Agreement Payless
shall provide May with certificates evidencing that coverage is in place as well
as copies of endorsements showing that May is an additional insured and that
this coverage is primary to that of May or any other insured or additional
insureds.
C. Except as otherwise expressly provided by the terms of this Agreement,
each Party shall have the right to bring an action or commence a proceeding
against another Party if it believes the other Party is in breach of its
obligations to perform under the terms of this Agreement. A Party shall be
deemed to have fulfilled its obligations if it has acted with the care, skill
and diligence that a reasonable person acting in a similar capacity and familiar
with such matters would have used. Nothing contained in this Section IX.C shall
be deemed to limit the provisions of Section IX.A.
D. Nothing in this or any other section of this Agreement is intended, nor
shall it be interpreted, to give any non-Party to this Agreement any right,
claim or cause of action against Payless
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or May.
E. The rights of the Parties to sue under this Agreement, whether for
breach of contract or in tort, are not assignable.
ARTICLE X. GENERAL PROVISIONS
A. COMMUNICATIONS
Payless and May acknowledge that in discharging their obligations under
this Agreement they may disclose to each other Confidential Information which is
commercially valuable, confidential or not otherwise public, proprietary or a
trade secret. They agree to make every reasonable effort not to use, distribute
or exploit each other's Confidential Information in whole or in part, to fully
protect and preserve the confidential nature of such information, and not to
disclose such information without the prior written consent of the other Party.
B. BINDING EFFECT
This Agreement shall be binding upon, inure to the benefit of, and be
enforceable by, the Parties hereto and their respective successors (including
any direct or indirect successor by purchase, merger, consolidation or otherwise
to all or substantially all of the business and/or assets).
C. WAIVER
No term or provision of this Agreement shall be deemed waived and no breach
excused, unless such waiver or consent is in writing and signed by the Party
claimed to have waived or consented. No waiver shall constitute a continuing
waiver, and no waiver of a provision shall be deemed or construed to constitute
a waiver of
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any other provision whether similar or not.
D. SEVERABILITY
The provisions of this Agreement shall be severable if any of the
provisions herein (including any provision within a single section, paragraph or
sentence) are held by a court of competent jurisdiction to be invalid, void or
otherwise unenforceable, and the remaining provisions shall remain enforceable
to the fullest extent permitted by law. To the extent possible, any provision
held invalid, void or unenforceable shall be reformed so as to make it valid and
enforceable and to reflect the intent of the Parties.
E. ENTIRETY OF AGREEMENT
This Agreement constitutes the entire contract between the Parties as
respects the administration of the Claims and is intended to supersede any and
all prior written or verbal agreements or representations by and among the
Parties with respect thereto. No modification or amendment of this Agreement
shall be valid unless made in writing and signed by a duly authorized officer of
each of the Parties. This Agreement does not in any way limit the terms of that
certain Distribution Agreement being entered into between the Parties.
F. HEADINGS
Article and section headings contained in this Agreement are for reference
purposes only and will not affect in any manner the meaning or interpretation of
this Agreement.
G. NOTICE
All notices and other communications required hereunder shall
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be in writing and delivered by hand, by facsimile, by United States Postal
Service, postage prepaid, registered or certified mail (return receipt
requested) or by reputable overnight courier service (charges paid by sender,
next business day delivery and delivery verification requested) and shall be
deemed given (a) when delivered by hand, (b) when transmitted by facsimile (with
either (i) receipt confirmed or (ii) hard copy mailed within one business day of
such transmission by reputable overnight courier service as above provided), (c)
three business days after mailing if mailed through the United States Postal
Service as above provided, or (d) one business day after depositing with a
reputable overnight courier service as above provided, in each case addressed to
the parties as follows:
(a) if to May:
The May Department Stores Company
611 Olive Street
St. Louis Missouri 63101
Attention: Vice President-Risk Management
Facsimile #: 314-342-3037
(b) if to Payless:
Payless ShoeSource, Inc.
3231 East Sixth Street
Topeka, Kansas 66607
Attention: Chief Financial Officer
Facsimile #: 913-295-6804
subject to the right of each party to designate a different address in the
United States and/or addressee by notice similarly given at least fifteen (15)
days before the effectiveness of such new designation.
H. GOVERNING LAW
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This Agreement shall be deemed an agreement and contract made under the
laws of the State of Delaware and all matters arising under, growing out of, or
in connection with this Agreement shall, for all purposes, be governed
substantively and, to the extent the courts specified below must or may follow
State procedural laws, procedurally, including periods for limitations of
actions, by, and construed in accordance with, the laws of the State of
Delaware, without giving effect to such State's conflict of laws rules or
principles.
The parties agree that any legal action or proceeding between them arising
under, growing out of, or in connection with this Agreement shall be brought
only in, and tried by the United States District Court for the Eastern District
of Missouri or, absent subject matter jurisdiction by such Federal Court, in the
Circuit Court of the State of Missouri for the City of St. Louis.
Each of the parties irrevocably (a) submits itself to the personal
jurisdiction of such courts (but only for any action or proceeding in connection
with this Agreement and not for any other purpose whatsoever) and, if and only
if, it is not present or does not have an agent for service of process in the
territorial jurisdiction of such courts, consents to the service of process
outside the territorial jurisdiction of such courts in any such action or
proceeding in connection with the Agreement by mailing copies thereof by (i)
certified or registered, return receipt requested United States mail, postage
prepaid, if mailed to a United States of America address or (ii) internationally
recognized
17
<PAGE>
private mail carrier (with evidence of delivery or attempted delivery), if
mailed to an address outside the United States of America, all charges billed to
or paid by sender, in each case to the recipient's last known address, (b)
agrees that it will not attempt to deny or defeat such personal jurisdiction by
motion or other request for leave from any such court, and (c) agrees that it
will not bring any action in whole or in part arising under, growing out of, or
in connection with this Agreement or any of the transactions contemplated by
this Agreement in any court other than a court of the United States sitting in
and for the Eastern District of Missouri or, absent subject matter jurisdiction
by such Federal Court, in the Circuit Court of the State of Missouri for the
City of St. Louis.
The parties agree that irreparable damage would occur in the event that any
of the provisions of this Agreement were not performed in accordance with their
specific terms or were otherwise breached. It is accordingly agreed that the
parties shall be entitled to an injunction or injunctions to prevent breaches of
this Agreement and to enforce specifically the terms and provisions of this
Agreement in the courts and as provided above in this section, such injunctive
relief being in addition to any other remedy to which such party is entitled at
law or in equity.
18
<PAGE>
IN WITNESS WHEREOF, the Parties hereto have caused this Agreement to be
executed by their duly authorized representatives as of the 2nd day of April,
1996.
PAYLESS SHOESOURCE, INC.
By: /s/ Richard A. Brickson
------------------------------
Title: Vice President and Secretary
------------------------------
SEAL
THE MAY DEPARTMENT STORES COMPANY
By: /s/ Louis J. Garr, Jr.
------------------------------
Title: Executive Vice President
------------------------
SEAL
<PAGE>
EXHIBIT A
TO
ADMINISTRATIVE SERVICES AGREEMENT DATED APRIL 2, 1996
BETWEEN
PAYLESS SHOESOURCE, INC.
AND
THE MAY DEPARTMENT STORES COMPANY
<PAGE>
EXHIBIT B
TO
ADMINISTRATIVE SERVICES AGREEMENT DATED APRIL 2, 1996
BETWEEN
PAYLESS SHOESOURCE, INC.
AND
THE MAY DEPARTMENT STORES COMPANY
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that Payless ShoeSource, Inc., a Missouri
corporation with its principal place of business at 3231 East Sixth Street,
Topeka, Kansas, 66607, does hereby irrevocably nominate, constitute and appoint
The May Department Stores Company, a New York corporation with its principal
place of business at 611 Olive Street, St. Louis, Missouri, 63101, as its true
and lawful attorney in fact for itself and in its name, place and stead to act
for Payless ShoeSource, Inc. in all matters related to the investigation,
administration, management, litigation, negotiation, or settlement of claims
based on workers compensation liability, general liability or automobile
liability that relate to occurrences prior to April 1, 1996, and to execute in
its name or in Payless ShoeSource, Inc.'s name, or as agent for Payless
ShoeSource, Inc. any and all agreements or other documents necessary or
advisable to the investigation, administration, management, litigation,
negotiation, or settlement of such claims.
Payless ShoeSource, Inc. hereby irrevocably gives and grants onto its
attorney in fact full power and authority to do and perform every act necessary,
requisite or proper to be done in and about the premises as fully as it might or
could do were it present, with full power of substitution and revocation, hereby
ratifying and confirming all that its said attorney shall lawfully do or cause
to be done by virtue hereof.
IN WITNESS WHEREOF, I have hereunder set my hand this 12th day of April,
1996.
Payless ShoeSource, Inc.
By: /s/ Richard A. Brickson
-------------------------------
Title: Vice President and Secretary
-------------------------------
(SEAL)
Executed in the presence of /s/ Tina M. Toarmina .
-----------------------------------
State of Missouri )
------------
) SS
City of St. Louis )
--------------
21
<PAGE>
On this 12th day of April, 1996, before me personally appeared /s/Richard A.
Brickson, to me personally known, who being by me duly sworn, did say that he
is Vice President and Secretary for Payless ShoeSource, Inc., that the seal
affixed to the foregoing instrument is the Corporate seal of said Corporation,
that he is the duly authorized representative of this Corporation for the
purpose of executing and sealing this instrument, and that he acknowledges said
instrument to be the free act and deed of this Corporation.
/s/ Tina M. Toarmina
- ---------------------------------------
Notary Public
My commission expires 8-19-96 .
------------------
22
