<PAGE> 1
SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the registrant [X]
Filed by a party other than the registrant [ ]
Check the appropriate box:
[ ] Preliminary proxy statement [ ] Confidential, for Use of the
Commission Only (as permitted by
Rule 14a-6(e)(2))
[X] Definitive proxy statement
[ ] Definitive additional materials
[ ] Soliciting material pursuant to Rule 14a-11(c) or Rule 14a-12
PAYLESS SHOESOURCE, INC.
- - --------------------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)
- - --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of filing fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and
0-11.
(1) Title of each class of securities to which transaction applies:
- - --------------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
- - --------------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the filing fee
is calculated and state how it was determined):
- - --------------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
- - --------------------------------------------------------------------------------
(5) Total fee paid:
- - --------------------------------------------------------------------------------
[ ] Fee paid previously with preliminary materials.
- - --------------------------------------------------------------------------------
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the form or schedule and the date of its filing.
(1) Amount previously paid:
- - --------------------------------------------------------------------------------
(2) Form, schedule or registration statement no.:
- - --------------------------------------------------------------------------------
(3) Filing party:
- - --------------------------------------------------------------------------------
(4) Date filed:
- - --------------------------------------------------------------------------------
<PAGE> 2
PAYLESS SHOESOURCE, INC.
3231 EAST SIXTH STREET
TOPEKA, KANSAS 66607
April 14, 1997
Dear Fellow Shareowner:
You are cordially invited to attend the annual meeting of shareowners to be
held at the Washburn University Bradbury Thompson Center (Corner of Jewell and
17th Streets), Topeka, Kansas, on Friday, May 23, 1997, at 10:00 a.m., Central
Daylight Time.
We are pleased that we made substantial progress toward our financial
objectives during 1996, as we completed the first fiscal year after our spin-off
from The May Department Stores Company. We achieved a significant increase in
earnings, and we successfully repositioned our store base by closing
unproductive stores.
We have also made plans for future growth and investment. Toward the end of
fiscal 1996, we announced the acquisition of the Parade of Shoes division of J.
Baker, Inc. We plan to build Parade of Shoes into a significant new business,
while we continue to improve the profitability of our core business, the Payless
ShoeSource chain.
Please be sure your shares are represented at this meeting. Even if you
plan to attend, we encourage you to promptly sign, date and return your proxy in
the enclosed postage-paid envelope.
Sincerely,
Steven J. Douglass
Chairman of the Board and Chief
Executive Officer
<PAGE> 3
NOTICE OF ANNUAL MEETING OF SHAREOWNERS
The annual meeting of Payless ShoeSource, Inc., a Missouri corporation (the
"Company"), will be held at the Washburn University Bradbury Thompson Center,
1700 College Avenue (Jewell and 17th Streets), Topeka, Kansas, on Friday, May
23, 1997 at 10:00 a.m., Central Daylight Time, for the following purposes:
A) To elect two Directors;
B) To ratify the appointment of independent public accountants;
C) To consider and vote upon the 1996 Stock Incentive Plan, as
amended;
D) To consider and vote upon the Executive Incentive Compensation Plan
for Payless Executives;
E) To consider and vote upon the Payless Stock Ownership Plan; and
F) To consider and vote upon such other matters as may properly come
before the meeting.
The foregoing matters are more fully described in the following proxy
statement. All common shareowners of record at the close of business on March
24, 1997 (the "Record Date") are entitled to vote at the meeting and any
adjournment thereof.
IT IS IMPORTANT THAT YOUR SHARES ARE REPRESENTED AT THE ANNUAL MEETING,
WHETHER OR NOT YOU ARE ABLE TO ATTEND PERSONALLY. ACCORDINGLY, YOU ARE REQUESTED
TO SIGN, DATE AND MAIL PROMPTLY THE ENCLOSED PROXY IN THE ENVELOPE PROVIDED.
By order of the Board of Directors
William J. Rainey
Secretary
Topeka, Kansas
April 14, 1997
<PAGE> 4
PROXY STATEMENT
This proxy statement is furnished to shareowners of common stock of Payless
ShoeSource, Inc. (the "Company") in connection with the solicitation of proxies
by the Board of Directors for use at the annual meeting of shareowners and at
all adjournments thereof. This proxy statement and the enclosed form of proxy
are being mailed to shareowners on or about April 14, 1997.
The Record Date of the annual meeting is March 24, 1997. The outstanding
voting securities of the Company as of such date consisted of 39,919,635 shares
of common stock (excluding 1,080,365 shares of treasury stock). Owners of common
stock are entitled to cast one vote for each share owned.
Properly executed and dated proxies which are received by the Company prior
to the annual meeting of shareowners will be voted in accordance with the
instructions thereon. If a proxy is received with no instructions given with
respect to the matters to be acted upon, shares represented by the proxy will be
voted (i) for the election of the nominees to the Company's Board of Directors
designated below, (ii) for the ratification of the appointment of Arthur
Andersen LLP as independent public accountants of the Company for the fiscal
year ending January 31, 1998, (iii) for approval of the 1996 Stock Incentive
Plan, as amended, (iv) for approval of the Executive Incentive Compensation Plan
for Payless Executives, and (v) for approval of the Payless Stock Ownership
Plan.
A proxy confers discretionary authority with respect to the voting of the
shares represented thereby on any other business that may properly come before
the meeting and any adjournments thereof. Management knows of no other matters
to be presented at the meeting other than as mentioned above. However, if a
matter not specifically set forth in the foregoing notice properly comes before
the meeting, it is intended that the holders of proxies will vote thereon in
their discretion. A proxy also confers discretionary authority upon the holders
of the proxy to approve minutes of last year's annual meeting of shareowners, to
vote on matters incident to the conduct of the meeting and to vote on the
election of any person as director if the nominee herein named should decline or
become unable to serve as a director for any reason.
In all matters, including the election of directors, the affirmative vote
of the owners of a majority of shares represented in person or by proxy at the
annual meeting is required. The shares represented by abstentions, withheld
votes and broker non-votes will be considered present at the meeting for quorum
purposes. In the election of directors, a withheld vote will be counted as a
negative vote and broker non-votes will not be counted. On other matters,
abstentions and broker non-votes (i) will not be counted as either FOR or
AGAINST a matter, and (ii) will have no effect upon the ratification of the
appointment of independent public accountants or other proposals.
A shareowner may revoke a proxy with a later-dated, properly executed proxy
or other writing delivered to the Secretary of the Company at any time before
the proxy originally submitted is voted at the annual meeting. Attendance at the
annual meeting will not have the effect of revoking a properly executed proxy
unless the shareowner delivers a written revocation to the Secretary of the
Company before the proxy is voted.
THE ELECTION OF DIRECTORS
PROPOSAL (A) ON THE ACCOMPANYING PROXY CARD.
Directors and Nominees for Directors. The Company's Board of Directors
currently consists of six Directors divided into three classes serving staggered
terms. Four of the Company's current directors are serving in two classes with
terms that continue beyond the 1997 annual meeting, and they are not subject to
election at this meeting. Two Directors, Richard A. Jolosky and Robert L. Stark,
serve as a class with terms that expire at the 1997 annual meeting, and these
Directors are Company nominees for reelection at this meeting. Each of the two
Directors to be elected at the 1997 annual meeting will serve a term of three
years to expire at the annual meeting to be held in the year 2000 or until his
successor is elected and qualifies.
Two of the Company's continuing Directors, Messrs. Thomas A. Hays and
Michael E. Murphy, have terms expiring at the end of the 1998 annual meeting of
shareowners, and the other two continuing Directors,
1
<PAGE> 5
Messrs. Steven J. Douglass and Howard R. Fricke, have terms expiring at the 1999
annual meeting of shareowners.
Each nominee has consented to being named as a nominee and to serve if
elected. If any nominee should subsequently become unavailable for election, the
holders of proxies may, in their discretion, vote for a substitute or the Board
of Directors may reduce the number of Directors to be elected.
Further information concerning both the nominees for election as Directors
at the 1997 annual meeting and the continuing Directors, including their
businesses during at least the past five years, appears below.
RICHARD A. JOLOSKY is 62 years old and has served as 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). Mr. Jolosky has served as a Director of the Company since
April 30, 1996.
ROBERT L. STARK is 63 years old and has been Dean of The Regents Center at
the University of Kansas since 1993. Prior to his becoming Dean, Mr. Stark was
employed by Hallmark Cards, Inc. for 35 years in several capacities, including:
Executive Vice President and President of the Personal Communication Group,
Senior Vice President and Group Vice President of Hallmark, President of
Hallmark Canada and a member of the board of directors. He is also on the board
of directors of Champion Enterprises, Inc., Mercantile Bancorporation and
Century Products. Mr. Stark has served as a Director of the Company since April
30, 1996.
STEVEN J. DOUGLASS is 47 years old and has served as Chairman of the Board
and Chief Executive Officer of the Company since May 4, 1996, the date on which
the Company's shares were distributed in a spin-off by The May Department Stores
Company ("May") to its shareholders (the "Spin-off"). 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). Mr. Douglass has
served as a Director of the Company since April 30, 1996.
HOWARD R. FRICKE is 61 years old and has been 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. Mr. Fricke has served as a
director of the Company since April 30, 1996.
THOMAS A. HAYS is 64 years old and is retired from his position as Deputy
Chairman of May effective April 30, 1996. He had served in such capacity since
1993. He had served as a director of May since 1983. 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 a
member of May's board of directors from 1983 to 1996. Mr. Hays is also a
director of Mercantile Bancorporation, Union Electric Company, Leggett & Platt
Inc., Kinko's Inc., and an advisory board member of Schnucks Markets Inc. Mr.
Hays has served as a Director of the Company since April 30, 1996.
MICHAEL E. MURPHY is 60 years old and has been 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. Mr. Murphy is a member of the Advisory Board of the J.L. Kellogg Graduate
School of Management of Northwestern
2
<PAGE> 6
University, a member of Chicago Committee of the Chicago Council on Foreign
Relations, a principal of Chicago United, and a director of: Northwestern
Memorial Corporation (university hospitals), Civic Federation, Big Shoulders
Fund and Jobs for Youth, Chicago Cultural Center Foundation and Chicago's Lyric
Opera. Mr. Murphy is also on the board of directors of GATX Corporation. Mr.
Murphy has served as a Director of the Company since April 30, 1996.
THE BOARD OF DIRECTORS AND COMMITTEES OF THE BOARD
The Board of Directors held six meetings during the last fiscal year. Each
incumbent director attended at least 75% of the aggregate of (i) the total
number of board meetings held during the period for which such director held
such office and (ii) the total number of meetings held by all board committees
on which such director served during the periods that such director served.
Overall, the average percentage attendance for all directors at all Board and
Committee meetings was 98%.
The Board of Directors has two committees: an Audit and Finance Committee
and a Compensation and Nominating Committee.
Compensation of Directors. Management directors are not entitled to
additional compensation by reason of their directorship or attendance at
meetings of the Board of Directors or any committee thereof or at meetings of
the shareowners. Under the Company's Restricted Stock Plan for Non-Management
Directors, each director who is not an officer of the Company receives 1,000
shares of common stock of the Company upon joining the Board. Non-management
directors also are paid an annual fee of $35,000 payable in common stock and,
commencing in 1997, cash compensation of $5,000. All such shares of common stock
are subject to restrictions on transferability and to forfeiture. For 1996, the
annual fee of $35,000 was paid as 1,295 shares of common stock per
non-management director, as determined based upon the average of the high and
low trading prices of the common stock on the New York Stock Exchange, Inc.
("NYSE") for each of the first thirty trading days on which trading in the
common stock on the NYSE occurred. Beginning in 1997, the portion of the annual
fee payable in common stock will be paid in a number of shares of common stock
as determined based upon the arithmetic average of the high and low trading
prices of the shares on the date of the annual meeting. Non-management directors
are also paid $1,000 in cash per meeting for attending more than twelve meetings
(board and committee) in a year.
The Restricted Stock Plan for Non-Management Directors referred to above
provides for the issuance of not more than 300,000 shares of common stock,
subject to adjustment for changes in the Company's capital structure. Initial
grant shares vest over a five year period following the date of grant. The
annual retainer shares vest one-half on November 1 following the date of the
grant and 1/12 on the first of each succeeding month. Shares awarded under the
plan may not be sold during a person's term as a Director. The Restricted Stock
Plan for Non-Management Directors may not be amended in a manner that would
increase the number of shares issuable thereunder, change the class of persons
eligible to participate thereunder or otherwise materially increase benefits or
modify eligibility requirements without shareowner approval.
Audit and Finance 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 reviews 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 is responsible for reviewing and
making recommendations to the Board of Directors with respect to matters such as
the following: 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
3
<PAGE> 7
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 during the last fiscal year were Messrs. Hays, Murphy (Chairman) and
Stark, each of whom was an independent director as required by the rules of the
NYSE. During the last fiscal year, the Audit and Finance Committee met two
times.
Compensation and Nominating Committee. The functions of the Compensation
and Nominating Committee ("Compensation Committee") include such matters as
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 Compensation Committee reviews significant
changes in employee benefits plans and stock related plans; serves as the
"Committee" under the Company's profit sharing plan, 1996 Stock Incentive Plan,
executive incentive compensation plan for Company executives, supplementary
retirement plan, and deferred compensation plan; and identifies and recommends
to the Board candidates for Directors, members of committees of the Board of
Directors and the successor to the chief executive officer. The Compensation
Committee considers suggestions as to nominees for Directors from any source,
including any shareowner. Any such recommendation for the 1998 election of
Directors should be submitted in writing, at least 75 and not more than 90 days,
prior to the 1998 annual meeting, to the Corporate Secretary of the Company at
3231 S.E. Sixth Street, Topeka, Kansas, 66607. The members of the Compensation
Committee during the last fiscal year were Messrs. Hays (Chairman), Fricke and
Murphy, each of whom was a "non-employee director" 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 of 1986, as amended (the "Code"). During the last fiscal
year, the Compensation Committee met three times.
The Board of Directors of the Company may, from time to time, establish
certain other committees to facilitate its work.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
None of the members of the Compensation Committee was or has been an
officer or employee of the Company or engaged in transactions with the Company
(other than in his capacity as director). None of the Company's executive
officers serves as a director or member of the compensation committee of another
entity one of whose executive officers serves as a member of the Compensation
Committee or a Director of the Company.
COMPENSATION AND NOMINATING COMMITTEE REPORT
The Compensation Committee reviews and approves, among other things, the
compensation payable to each of the executive officers named in the Summary
Compensation Table.
Compensation Philosophy. The Company's basic compensation philosophy is
that the compensation program should:
a) Attract, retain and motivate highly qualified executives;
b) Be competitive;
c) Align the executive's compensation with the Company's objectives;
and
d) Be related to the value created for shareowners.
Compensation for executive officers is comprised of a base salary, bonus
opportunities and long-term stock incentives. The Compensation Committee reviews
compensation based on this philosophy, on the performance of the Company and on
competitive practices. As part of its review of competitive pay levels, the
4
<PAGE> 8
Compensation Committee looks at the base salary levels, annual bonus levels and
long-term incentives of a broad group of companies, including some of the
companies in the peer group in the Company's stock price performance graph on
page 8, and other retail companies of similar size to the Company (the "survey
companies"). The Compensation Committee intends to review the group of companies
that comprise the survey companies annually and make appropriate additions or
deletions to the group.
Base Salary. Base salaries are targeted at approximately the 50th
percentile of base salaries for comparable executive officer positions at the
survey companies. The Compensation Committee intends to review base salaries on
an annual basis and to adjust them based on the Compensation Committee's
discretionary assessment of the individual executive's performance and
competitive pay levels. Base salaries for executive officers increased in 1996
by an average of 4%.
Bonus Opportunities. Executive officers participate in the Executive
Incentive Compensation Plan for Payless Executives, which provides an
opportunity for bonuses based on both annual and long-term results. Both the
annual and long-term bonus opportunities are targeted at approximately the 50th
percentile of the bonus opportunities for comparable positions at the survey
companies. Executive officers are eligible to receive annual cash awards for
individual fiscal years, and long-term cash awards for long-term performance
periods of three years. However, long-term performance periods are being phased
in so that the initial long-term performance period covered only fiscal 1996,
the second long-term performance period covers fiscal 1996-7, and the third
long-term performance period covers fiscal 1996-8. The annual and long-term
awards will be based upon attaining earnings per share ("EPS") growth and return
on net assets ("RONA") performance standards relating to the Company as a whole.
Awards are subject to an automatic upward or downward adjustment to reflect
the Company's performance in EPS growth and RONA as compared to the performance
on these measures of the group of peer companies included in the stock price
performance graph. Each financial measure is ranked with the comparable
financial measure of a group of peer companies designated in advance by the
Compensation Committee. The Company's relative rank is determined based on data
reviewed by the Company's independent public accountants. The relative rank
adjustment varies depending on the number of peer companies designated by the
Compensation Committee. For example, for fiscal 1997, the Compensation Committee
has designated 17 other peer companies (the same peer companies as in the Stock
Price Performance graph, except Melville Corporation has been replaced by
Footstar, Inc.). If the Company were to rank first through fifth, the award for
that measure would not be less than the target level; if the Company were to
rank sixth through ninth, the award for that measure would not be less than
threshold level; and if the Company were to rank fourteenth through eighteenth,
the award for that measure would not be more than threshold level.
The long-term award is also subject to an automatic upward (up to 50%) or
downward (up to 25%) adjustment based on the performance of the Company's common
stock price over the long-term performance periods.
The annual award for fiscal 1996 could have ranged between 0% and 30% of
the executive's base salary. For fiscal 1996, the threshold annual award was 10%
of base salary, the target annual award was 20% of base salary and the maximum
annual award was 30% of base salary. The long-term award for fiscal 1996 could
have ranged between 0% and 30% of the executive's base salary, subject to the
adjustment described above regarding stock price performance over the long-term
period. For fiscal 1996, the threshold long-term award was 10% of base salary,
the target long term award was 20% of base salary and the maximum long-term
award was 30% of base salary, all subject to adjustment based on stock price
performance over the long-term period. Pursuant to discretion granted the
Compensation Committee under the Executive Incentive Compensation Plan, the
maximum annual award has been adjusted for fiscal 1997 and future annual
performance periods to 75% of base salary for the CEO, 62.5% of base salary for
the President and 45% of base salary for the other named executive officers, and
the maximum long-term award has been adjusted for the fiscal 1996 to 1997
long-term performance period and future long-term performance periods to 50% of
average base salary over the long-term performance period for the CEO and 41.66%
of average base salary over the long-term performance period for the President,
and remains at 30% of average base salary over the long-term
5
<PAGE> 9
performance period for the other named executive officers, with the long-term
awards remaining subject to the adjustment described above regarding stock price
performance over each long-term period. The awards for the named executive
officers may also be adjusted downward on a discretionary basis by the
Compensation Committee.
For both the fiscal 1996 annual period and the initial "long-term" period
(fiscal 1996), (i) the Company's performance exceeded the maximum performance
levels set by the Compensation Committee for both annual earnings per share
growth ("EPS Growth") and return on net assets ("RONA"), (ii) the Company's rank
relative to the group of peer companies was 10th with respect to EPS growth and
6th with respect to RONA (therefore, no adjustment was made based on the
Company's relative rank in the group of peer companies), and (iii) the common
stock price increased by $11.80, resulting in a 43.6% increase in the long-term
bonuses. Based on these results, the annual award represented 30 percent of base
salary for each executive officer, including the CEO, and the initial
"long-term" award represented 43.09% of base salary for each executive officer,
including the CEO.
Long-Term Stock Incentives. The Company may provide for long-term stock
incentives with stock options, restricted stock, stock appreciation rights and
performance units, which are designed to attract, retain and motivate management
associates and relate their compensation directly to the performance of the
Company's stock. The mix of such awards is determined by the Compensation
Committee in its discretion. For 1996, the long-term stock incentives consisted
of certain spin-off arrangements and a grant of stock options that essentially
continued the level of annual grants that had been made while the Company was
part of The May Department Stores Company ("May").
Spin-Off Arrangements. A number of special compensation arrangements were
established as of May 4, 1996, the effective date of the spin-off from May (the
"Spin-Off Date") to provide sufficient incentives to retain employees during
this important period.
Executives who had stock options from May that were exercisable before the
Spin-Off Date were eligible to waive all of their rights under those May options
and receive from the Company an option for 1.25 shares of Company common stock
for each share of May common stock that was subject to a May option. In
addition, May options that were to become exercisable after the Spin-Off Date
lapsed, and the Company granted executives an option for 1.25 shares of Company
common stock for each share of May common stock that was subject to a May option
that lapsed.
As of the Spin-Off Date, the Company granted restricted stock awards under
the Spin-Off Stock Plan to executive officers. One-third of the shares were
immediately vested. An additional one-third vest on May 4, 1997 and the final
one-third on May 4, 1998. In addition, employees, including executive officers,
who remain employed by the Company as of certain dates are eligible to receive
cash payments under the Spin-Off Cash Plan ranging from 10% to 37.5% of base
pay. Executive officers other than the CEO and President are eligible to receive
25% of base pay under the Spin-Off Cash Plan. The CEO and President are eligible
to receive 37.5% of base pay under the Spin-Off Cash Plan. The first half of the
payments will be paid on May 4, 1997, and the second half on May 4, 1998.
In addition, as of the Spin-Off Date, the CEO and President each received a
grant of 62,500 stock options and each other executive officer received a grant
of 5,000 stock options.
CEO Pay. The CEO received a base salary increase of 9.1% immediately prior
to the Spin-Off Date in the Company's normal cycle for merit increases in
recognition of the leadership role that the CEO would have in transitioning the
Company from a subsidiary of May to an independent company and in the
development of sound strategic and operating plans.
The CEO's bonus for 1996 of $438,540 was determined entirely by the
quantitative criteria set forth above, and his 1996 long-term grants were
consistent with the Compensation Committee's policies regarding such grants.
Executive Stock Ownership and Future Stock-Based Grant. While the
Compensation Committee believes that the long-term incentive program was
appropriate for 1996, it is concerned that the program does
6
<PAGE> 10
not provide sufficient incentive for 1997 and beyond to accomplish objectives of
attracting and retaining highly qualified executives when compared to the
programs of the survey companies. The Compensation Committee also believes that
the level of stock ownership by executives should be increased to further align
their interests with those of shareowners. Accordingly, the Compensation
Committee has adopted an Executive Stock Ownership Policy and intends to make
the long-term awards described below.
Executive Stock Ownership. The Company believes that it is important for
every Company executive to establish and maintain an equity ownership interest
in the Company that is significant relative to his or her base salary.
Accordingly, in 1997, the Company adopted the following minimum stock ownership
guidelines for senior management, including executive officers.
OWNERSHIP GUIDELINES
<TABLE>
<CAPTION>
VALUE OF SHARES OWNED AS A
POSITION MULTIPLE OF BASE SALARY
-------- --------------------------
<S> <C>
CEO.................................................... 5.0 Times
President.............................................. 3.5 Times
Executive Vice President............................... 2.0 Times
Senior Vice President.................................. 1.5 Times
Vice President......................................... 1.0 Times
</TABLE>
These guidelines are expected to be attained over the next seven years and
may be satisfied through direct ownership of shares, including shares received
upon exercise of options, share equivalents under the Company's profit sharing
plan and phantom stock under the deferred compensation plan. Restricted shares,
however, are not taken into account until the shares vest.
Future Stock-Based Grant. The Compensation Committee has adopted a program
for long-term stock incentives through the year 2001 with the goals of retaining
and motivating executives, providing rewards commensurate with the growth in the
value of the Company and aligning management interests more closely with those
of the Company's shareowners. As part of this policy, the Compensation Committee
believes that the long-term incentives provided to the Company's executives
should be targeted at approximately the 50th percentile of the long-term
incentive opportunities for comparable positions at the survey companies. In
furtherance of these goals, the Compensation Committee intends to grant in
fiscal 1997 long-term stock incentives using shares currently available under
the 1996 Stock Incentive Plan, in the form of stock options and restricted stock
as determined by the Compensation Committee in its discretion and in amounts
equal to approximately three times the size of the grants that would otherwise
be made. The stock options will not vest until six years from the date of grant,
although vesting will be accelerated if specific price targets of the Company's
common stock are met. The restricted stock will vest one-third each on the
second, third and fourth anniversaries of the date of grant. Once these grants
have been made, the Compensation Committee, while it reserves the right to do
so, does not presently intend to make any further long-term stock incentive
grants to these executives until 2000. In addition, repricing of the options is
prohibited under the 1996 Stock Incentive Plan. (See Proposal C, Approval of the
1996 Stock Incentive Plan, for a further description of these awards.) The
Compensation Committee strongly believes that these actions are in the best
interests of the Company and its shareowners.
Deductibility of Compensation. Section 162(m) of the Code generally limits
the Company's tax deduction to $1 million for compensation paid to the CEO and
the four most highly compensated other executive officers who are executive
officers on the last day of the year in question. However, exceptions are made
for "performance-based" compensation.
The Compensation Committee believes that all compensation paid to executive
officers in 1996 is fully deductible and that all stock options granted in 1996
will, upon exercise, result in fully deductible compensation. The Compensation
Committee's intention is to maintain full deductibility of compensation under
the applicable law unless and until the Compensation Committee determines that
this would not be in the best interests of the Company and its shareowners.
7
<PAGE> 11
The law requires that performance-based compensation must be approved by
shareowners. Accordingly, the 1996 Stock Incentive Plan, and the Executive
Incentive Compensation Plan for Payless Executives are being proposed for
shareowner approval at this year's Annual Meeting.
Compensation and Nominating Committee:
Howard R. Fricke
Thomas A. Hays -- Chairman
Michael E. Murphy
STOCK PRICE PERFORMANCE.
The graph below compares the cumulative total shareowner return on the
Company's common stock against the cumulative returns of the Standard and Poor's
Corporation Composite Index (the S&P 500 Index) and of an index of peer group
companies, some of whom are competitors, used in determining bonuses under the
Company's performance based bonus plans (the "Peer Company Group Index").
COMPARISON OF 9-MONTH CUMULATIVE RETURN
PSS, S&P 500 INDEX AND PEER COMPANY GROUP INDEX
<TABLE>
<CAPTION>
MEASUREMENT PERIOD PAYLESS S & P 500 PEER
(FISCAL YEAR COVERED) SHOESOURCE INDEX GROUP
INC.
<S> <C> <C> <C>
5/6/96 100 100 100
6/1/96 99.12 104.42 108.11
7/6/96 104.85 103.17 105.41
8/3/96 112.78 103.96 103.21
8/31/96 123.79 102.32 107.23
10/5/96 128.63 110.70 110.46
11/2/96 120.26 111.07 109.08
11/30/96 137.89 119.47 110.62
1/4/97 133.92 118.66 102.29
2/1/97 132.16 124.70 103.54
</TABLE>
<TABLE>
<CAPTION>
MAY 4, 1996 FEBRUARY 1, 1997
----------- ----------------
<S> <C> <C>
Payless..................................................... $100.00 132.16
S&P 500..................................................... 100.00 124.70
Peer Company Group.......................................... 100.00 103.54
</TABLE>
The graph assumes $100 invested on May 4, 1996 (the Spin-Off Date) in
Company common stock, in the S&P 500 Index and in the Peer Company Group Index
and assumes the reinvestment of dividends. Companies comprising the Peer Company
Group Index are: Charming Shoppes, Inc., Circuit City Stores, Inc., Dayton
Hudson Corporation, The Gap, Inc., The Home Depot, Inc., Kmart Corporation, The
Limited, Inc., Lowe's Companies, Inc., Melville Corporation, The Pep Boys-Manny,
Moe & Jack, Inc., Price/Costco, Inc., Sears, Roebuck and Co., The TJX Companies,
Inc., Tandy Corporation, Toys "R" Us, Inc., Wal-Mart Stores, Inc. and Woolworth
Corporation.
8
<PAGE> 12
Section 16(a) Reporting Delinquencies. Executive officers and directors are
required to report to the Securities and Exchange Commission, pursuant to
Section 16(a) of the Exchange Act, ownership of and transactions in Company
common stock. Based solely on a review of copies of reports provided to it by
such individuals, the Company believes that all reporting requirements were
timely satisfied.
Executive Compensation. The table below shows the compensation paid or
accrued by the Company on behalf of its CEO and the five other most highly
compensated executive officers during fiscal 1996.
SUMMARY COMPENSATION TABLE(1)
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
-----------------------------
ANNUAL COMPENSATION AWARDS
--------------------- -----------------------------
NUMBER OF
SECURITIES
UNDERLYING
RESTRICTED STOCK ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY(2) BONUS(3) STOCK AWARDS(4) OPTIONS(5) COMPENSATION(6)
- - --------------------------- ---- --------- -------- --------------- ---------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Steven J. Douglass......... 1996 $587,500 $438,540 $665,156 108,125 $236,909
Chairman of the Board and
Chief Executive Officer
Richard A. Jolosky......... 1996 450,000 328,905 498,867 87,000 221,506
President
Duane L. Cantrell.......... 1996 290,371 212,473 210,633 14,938 79,769
Senior Vice President --
Retail Operations
Bryan P. Collins........... 1996 286,775 210,645 208,800 14,938 79,232
Senior Vice President --
Division Director Parade
of Shoes
Jed L. Norden.............. 1996 265,850 195,735 192,156 15,000 73,469
Senior Vice President --
Human Resources
Ullrich E. Porzig.......... 1996 262,465 195,735 192,156 7,500 142,913
Senior Vice President --
Chief Financial Officer
</TABLE>
- - -------------------------
(1) The Summary Compensation Table does not reflect certain non-cash
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) "Salary" reflects amounts paid to or deferred by the named executive
officers during fiscal 1996. Annual salary changes for each of the named
executive officers normally occur on May 1 of each year.
(3) "Bonus" reflects both the annual portion of the bonus paid under the
Company's Executive Incentive Compensation Plan for Payless Executives and
the "long-term" portion of such bonus paid under such plan with respect to
the initial long-term performance period which consisted of only one fiscal
year --
9
<PAGE> 13
1996. It includes amounts deferred by the Executive. The following table
shows the annual and initial "long-term" bonus for each named executive
officer for fiscal 1996.
<TABLE>
<CAPTION>
INITIAL LONG-TERM
-----------------------
NAME ANNUAL BONUS BONUS
---- ------------ -----
<S> <C> <C>
Steven J. Douglass..................................... $180,000 $258,540
Richard A. Jolosky..................................... $135,000 $193,905
Duane L. Cantrell...................................... $ 87,210 $125,263
Bryan P. Collins....................................... $ 86,460 $124,185
Jed L. Norden.......................................... $ 80,340 $115,395
Ullrich E. Porzig...................................... $ 80,340 $115,395
</TABLE>
(4) The dollar value of restricted stock awards is equal to the average of the
high and low prices of the Company's common stock on the date of grant,
multiplied by the total number of shares granted to the named executive
officer. All restricted stock awards were made under the Company's Spin-Off
Stock Plan. One-third of the shares awarded vested on May 4, 1996, an
additional one-third will vest on May 4, 1997, and the final one-third will
vest on May 4, 1998. The aggregate number of shares of restricted stock on
which the restrictions have not lapsed and the value of such restricted
stock owned by each of the named executive officers as of the end of fiscal
year 1996 (at $37.50 per share) was $562,500 for Mr. Douglass, representing
15,000 shares; $421,875 for Mr. Jolosky, representing 11,250 shares;
$178,125 for Mr. Cantrell, representing 4,750 shares; $176,550 for Mr.
Collins, representing 4,708 shares; $162,487.50 for Mr. Norden, representing
4,333 shares; and $162,487.50 for Mr. Porzig, representing 4,333 shares.
Dividends will be paid on restricted shares at the same rate paid to all
shareowners, if and when dividends are paid.
(5) For additional information regarding these grants, see the Stock Option
Grants in Fiscal 1996 table on page 11.
(6) "All Other Compensation" represents the Company's contribution to the named
executive officer's account in the Company's profit sharing plan and amounts
payable under the Company's Spin-Off Cash Plan. It also includes payments to
relocate Mr. Jolosky ($47,321) and Mr. Porzig ($72,528) and their respective
families to the Topeka, Kansas area. Under the Spin-Off Cash Plan, employees
who remain employed with the Company at certain dates are eligible to
receive cash payments equal to a percentage of base pay. The percentage
ranges from 10% to 37.5% of base pay. Executive officers other than the CEO
and President are eligible to receive 25% of base pay under the Spin-Off
Cash Plan. The CEO and President are eligible to receive 37.5% of base pay
under the Spin-Off Cash Plan. One-half of the payment will be paid on May 4,
1997, and the second half on May 4, 1998.
The following table shows, for each named executive officer, the amount of
Company contribution allocated under the Company's profit sharing plan and the
amounts of the Spin-Off Cash Plan award:
<TABLE>
<CAPTION>
PROFIT SHARING SPIN-OFF
NAME CONTRIBUTION CASH PLAN AWARD
---- -------------- ---------------
<S> <C> <C>
Steven J. Douglass................................. $11,909 $225,000
Richard A. Jolosky................................. $ 5,385 $168,800
Duane L. Cantrell.................................. $ 8,569 $ 71,200
Bryan P. Collins................................... $ 8,632 $ 70,600
Jed L. Norden...................................... $ 8,469 $ 65,000
Ullrich E. Porzig.................................. $ 5,385 $ 65,000
</TABLE>
10
<PAGE> 14
Stock Option Awards. The following table provides certain information
concerning individual grants of stock options made to the named executive
officers during the last fiscal year under the Company's 1996 Stock Incentive
Plan.
STOCK OPTION GRANTS IN FISCAL 1996
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF
SECURITIES TOTAL OPTIONS
UNDERLYING GRANTED TO
OPTIONS EMPLOYEES IN EXERCISE PRICE EXPIRATION GRANT DATE
NAME GRANTED FISCAL YEAR PER SHARE DATE FAIR VALUE(4)
---- ---------- ------------- -------------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Steven J. Douglass................. 33,125(1) 17.81 27.0271 5/4/06 511,517
62,500(2) 34.72 27.0271 5/4/06 965,127
12,500(3) 9.32 29.25 5/8/96 208,901
Richard A. Jolosky................. 62,500(2) 34.72 27.0271 5/4/06 965,127
12,500(3) 9.38 29.25 5/8/06 208,901
Duane L. Cantrell.................. 7,438(1) 4.00 27.0271 5/4/06 114,858
5,000(2) 2.78 27.0271 5/4/06 77,210
2,500(3) 1.87 29.25 5/8/06 41,780
Bryan P. Collins................... 7,438(1) 4.00 27.0271 5/4/06 114,858
5,000(2) 2.78 27.0271 5/4/06 77,210
2,500(3) 1.87 29.25 5/8/06 41,780
Jed L. Norden...................... 7,500(1) 4.03 27.0271 5/4/06 115,815
5,000(2) 2.78 27.0271 5/4/06 77,210
2,500(3) 1.87 29.25 5/8/06 41,780
Ullrich E. Porzig.................. 5,000(2) 2.78 27.0271 5/4/06 77,210
2,500(3) 1.87 29.25 5/8/06 41,780
</TABLE>
- - -------------------------
(1) On May 4, 1996, options to acquire the number of shares of Company common
stock listed above were granted under the 1996 Stock Incentive Plan in
exchange for options to acquire May common stock previously granted to the
executive. Executives were granted an option for 1.25 shares of Company
common stock with respect to each share of May common stock subject to a May
option that was (i) exercisable before May 4, 1996, and waived by the
executive and (ii) exercisable after May 4, 1996, but lapsed. One-half of
these options will become exercisable on May 4, 1997, and the remaining
one-half will become exercisable on May 4, 1998. These options have an
exercise price equal to the average of the high and low trading prices of
the Company's stock for each of the first 30 days on which trading in the
common stock occurred. The term of each such option is 10 years.
(2) These options, granted under the 1996 Stock Incentive Plan, have a term of
10 years. One-fourth of the options will become exercisable on each of the
first through fourth anniversaries of May 4, 1996. These options have an
exercise price equal to the average of the high and low trading prices of
the Company's common stock for each of the first 30 days on which trading in
the common stock occurred.
(3) These options, granted under the 1996 Stock Incentive Plan, have a term of
10 years. One-fourth of the options become exercisable on each of the first
through fourth anniversaries of the grant date. These options have an
exercise price equal to the average of high and low trading prices of the
common stock on the date granted.
(4) The grant date fair values were determined using the Black-Scholes option
pricing model. The estimated values under the model are based on assumptions
as to variables such as option term, risk-free interest rates, stock price
volatility and dividend yield. The actual value, if any, the option holder
may realize will depend on the excess of the actual market price of the
stock over the exercise price on the date the option is exercised. The grant
date fair value calculation is presented in accordance with SEC proxy
disclosure requirements. There is no assurance that the value that may be
realized by the option holder will be at or near the value estimated by the
Black-Scholes model. The model assumes: (a) an option term of 10
11
<PAGE> 15
years, which represents the length of time between the grant date of options
and the latest possible exercise date by the named executive officers; (b) a
risk-free interest rate that represents the interest rate on a U.S. Treasury
Bond with a maturity date corresponding to that of the option's term; (c)
stock price volatility calculated based on the monthly volatility of the
stock prices of the companies included in the Peer Company Group Index on
page 8 for the 10 year period ending January 31, 1997 and on the monthly
volatility of the Company's stock price for the 9 month period ending
January 31, 1997; and (d) dividends at the rate of $0 per share, the annual
dividend rate with respect to a share of stock on the grant date.
The following table presents information with respect to unexercised
options held by the named executive officers at February 1, 1997:
AGGREGATED STOCK OPTION EXERCISES(1) IN FISCAL 1996
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SHARES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT FISCAL-YEAR END AT FISCAL-YEAR END(2)
---------------------------- ----------------------------
NAME UNEXERCISABLE EXERCISABLE UNEXERCISABLE EXERCISABLE
---- ------------- ----------- ------------- -----------
<S> <C> <C> <C> <C>
Steven J. Douglass............................. 108,125 0 $1,104,596 0
Richard A. Jolosky............................. 75,000 0 757,681 0
Duane L. Cantrell.............................. 14,937 0 150,876 0
Bryan P. Collins............................... 14,937 0 150,876 0
Jed L. Norden.................................. 15,000 0 151,536 0
Ullrich E. Porzig.............................. 7,500 0 72,990 0
</TABLE>
- - -------------------------
(1) No options were exercised by named executive officers in the last fiscal
year.
(2) "In-The-Money Options" are options outstanding at the end of the last fiscal
year for which the fair market value of the Company's common stock at the
end of the last fiscal year ($37.50 per share) exceeded the exercise price
of the options.
12
<PAGE> 16
Long Term Awards. During the last fiscal year, each of the named executive
officers became eligible to receive a potential long-term cash award for the two
fiscal years 1996 to 1997 and for the three fiscal years 1996 to 1998. The
following table shows the maximum long-term cash awards payable to each of them
for these long-term periods.
LONG-TERM INCENTIVE PLAN --
AWARDS IN FISCAL 1996
<TABLE>
<CAPTION>
ESTIMATED MAXIMUM FUTURE
PERFORMANCE OR OTHER PERIOD UNTIL PAYOUTS UNDER NON-STOCK
NAME MATURATION OF PAYOUT(1) PRICE BASED PLAN(2)
---- --------------------------------- ------------------------
<S> <C> <C>
Steven J. Douglass..................... Two Fiscal Year Period (1996- $450,000
97) Ending 1/31/98
Three Fiscal Year Period (1996- 450,000
98) Ending 1/31/99
Richard A. Jolosky..................... Two Fiscal Year Period (1996- 281,250
97) Ending 1/31/98
Three Fiscal Year Period (1996- 281,250
98) Ending 1/31/99
Duane L. Cantrell...................... Two Fiscal Year Period (1996- 130,815
97) Ending 1/31/98
Three Fiscal Year Period (1996- 130,815
98) Ending 1/31/99
Bryan P. Collins....................... Two Fiscal Year Period (1996- 135,000
97) Ending 1/31/99
Three Fiscal Year Period (1996- 135,000
98) Ending 1/31/99
Jed L. Norden.......................... Two Fiscal Year Period (1996- 120,510
97) Ending 1/31/98
Three Fiscal Year Period (1996- 120,510
98) Ending 1/31/99
Ullrich E. Porzig...................... Two Fiscal Year Period (1996- 120,510
98) Ending 1/31/98
Three Fiscal Year Period (1996- 120,510
98) Ending 1/31/99
</TABLE>
- - -------------------------
(1) Awards with respect to the initial long-term performance period consisted of
only one fiscal year -- fiscal 1996. Accordingly, payments with respect
thereto are disclosed as part of Annual Compensation under the Summary
Compensation Table.
(2) Estimates are based on annual salaries as of February 1, 1997. Payouts may
range from $0 to the "maximum" award value. The estimate above assumes that
the individual remains eligible to participate throughout the long-term
performance period, the maximum performance goals have been met, the
Company's performance compared to the group of peer companies included in
the Stock Price Performance graph is such that no downward adjustment is
required for any award, and that the stock price has increased sufficiently
to result in the maximum stock price adjustment (all as described in the
Compensation Committee report on pages 4-8). Actual payouts will be based on
performance and the executive's average annual salary rate during the
applicable performance period. The maximum dollar amount of any such award
for any executive for any long-term performance period is $1,500,000.
See "Proposal to Approve the Executive Incentive Compensation Plan for
Payless Executives -- Annual Awards and Long-Term Awards" for a discussion of
the nature of such awards.
Profit Sharing Plan and Supplementary Retirement Plan. Contributions to the
Payless ShoeSource, Inc. Profit Sharing Plan are related to the Company's
performance each year. Subject to management's discretion each year, the Company
expects to contribute 2.5% of its pretax net profits to the profit sharing plan
each year.
13
<PAGE> 17
Employees are able to voluntarily contribute to the profit sharing plan on both
a before-tax basis under Section 401(k) of the Code and an after-tax basis.
Employees are also 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 in one of several other investment funds.
The Company does not have a broad-based, defined benefit retirement plan.
The Company does, however, have a supplementary retirement plan (the
"Supplementary Plan") covering employees who have had 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 employees 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 and bonus in the Summary Compensation Table) multiplied by their years of
service, up to a maximum of 25 years (ii) reduced by primary Social Security
benefits, Company-provided benefits provided under the Company's profit sharing
plan and by benefits under retirement plans operated by May which may be payable
to the employee, and if appropriate, by amounts to reflect early retirement.
Benefits are payable upon retirement after reaching age 55 and completing at
least 5 years of service. The minimum benefit under the Supplementary Plan is
the amount of Company-provided benefits which would have been payable under the
Company's profit sharing plan and employer provided benefits under the May
Profit Sharing Plan and May Retirement Plan, determined without regard to any
statutory limits, less the amount of 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 would be accelerated in limited circumstances
and benefits would not be forfeitable. The Company plans to establish a trust
which will be funded upon a potential change in control to provide accrued
benefits under the Supplementary Plan and which would, upon an actual change in
control, become irrevocable.
The following table shows the estimated aggregate annual benefits payable
upon retirement (assuming a retirement in 1996 at age 65) 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
individuals named in the Summary Compensation Table had, as of December 31,
1996, the following years of service, respectively: Mr. Douglass, 21 years; Mr.
Jolosky, 20 years; Mr. Cantrell, 18 years; Mr. Collins, 16 years; Mr. Norden, 12
years; and Mr. Porzig, 12 years.
<TABLE>
<CAPTION>
YEARS OF SERVICE
AVERAGE ------------------------------
ANNUAL EARNINGS 20 25 OR MORE
--------------- -- ----------
<S> <C> <C> <C>
$ 500,000.............................................. $200,000 $250,000
600,000............................................. 240,000 300,000
700,000............................................. 280,000 350,000
800,000............................................. 320,000 400,000
900,000............................................. 360,000 450,000
1,000,000............................................. 400,000 500,000
1,100,000............................................. 440,000 550,000
1,200,000............................................. 480,000 600,000
</TABLE>
Employment Contracts, Termination of Employment and Change in Control
Arrangements. Each of the named executive officers have individual contracts of
employment with the Company which expire at various dates on or before May 31,
2001, and which provide for annual base salaries at rates not less than the
amounts reported in the Summary Compensation Table.
The Company has also entered into severance agreements with the named
executive officers. The agreements provide that the executive is entitled to
benefits if (i) a change in control of the Company (as defined in the agreement)
occurs and (ii) during the 180 days following such change in control, the
executive determines in good faith that as a result of the change in control he
is unable to execute his duties effectively. Following such 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
14
<PAGE> 18
Exchange Act, acquires 50% or more of the Company's voting securities; (ii) a
majority of the Company's Directors are replaced during a two-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. 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 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 plans to establish 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.
In addition, in the event of a change in control, (i) amounts deferred
under the Company's deferred compensation plan will be immediately distributed
to participants in a lump sum cash payment, (ii) all options outstanding on that
date will become immediately and fully exercisable, (iii) all restrictions on
any restricted shares (including restricted stock under the Company's Spin-Off
Stock Plan) will lapse and such shares will become fully vested, (iv) any
performance units will be earned and become fully payable, and (v) cash payments
under the Spin-Off Cash Plan will be accelerated.
* * * * * * * * *
THE RATIFICATION OF THE APPOINTMENT OF INDEPENDENT AUDITORS
PROPOSAL (B) ON THE ACCOMPANYING PROXY CARD.
Upon recommendation of the Audit and Finance Committee, the Board of
Directors appointed Arthur Andersen LLP, independent public accountants, as
auditors of the Company and its subsidiaries for the fiscal year ending January
31, 1998, subject to ratification by the shareowners at the Annual Meeting. It
is intended that, unless otherwise directed by shareowners, proxies will be
voted for the ratification of this appointment. A member of the firm of Arthur
Andersen LLP will be present at the meeting to make such statements as that firm
may desire and to answer any questions by shareowners.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE FOR PROPOSAL (B), AND
YOUR PROXY WILL BE SO VOTED UNLESS YOU SPECIFY OTHERWISE.
* * * * * * * * *
PROPOSAL TO APPROVE THE 1996 STOCK INCENTIVE PLAN
PROPOSAL (C) ON THE ACCOMPANYING PROXY CARD.
Prior to the date that the Company was spun off from May, May, as sole
shareowner of the Company, approved the Company's 1996 Stock Incentive Plan (the
"SIP"). Under the SIP, the Company may issue stock options and other stock based
awards. As discussed in the Compensation and Nominating Committee Report, the
Company believes that the retention and incentive value of the current long-term
incentive program should be enhanced and that the level of stock ownership by
executives should be increased to further align their interests with those of
shareowners. Accordingly, the Compensation Committee has adopted the Executive
Stock Ownership Guidelines discussed by the Compensation Committee's report.
In addition, the Compensation Committee intends to make the following stock
option and restricted stock grants to the executive officers named in the
Summary Compensation Table at the normal time for annual grants under the SIP
prior to the 1997 Annual Meeting. These awards will be made from the SIP's
original
15
<PAGE> 19
share authorization and are not subject to shareowner approval. Although it
reserves the right to do so, the Company does not intend to make further
long-term incentive stock grants to these executives until 2000.
EXECUTIVE GROUP AND NON-EXECUTIVE EMPLOYEE GRANTS
<TABLE>
<CAPTION>
NUMBER OF SHARES
OF COMMON NUMBER OF VALUE OF
STOCK UNDERLYING "GRANT DATE" PROPOSED PROPOSED
NAME PROPOSED OPTIONS(1) FAIR VALUE(2) RESTRICTED SHARES(3) RESTRICTED SHARES(4)
---- ------------------- ------------- -------------------- --------------------
<S> <C> <C> <C> <C>
Steven J. Douglass................ 92,000 $ 2,260,275 12,500 $ 468,750
Richard A. Jolosky................ 64,000 1,572,365 8,500 318,750
Duane L. Cantrell................. 23,750 583,495 3,125 117,188
Bryan P. Collins.................. 23,750 583,495 3,125 117,188
Jed L. Norden..................... 23,750 583,495 3,125 117,188
Ullrich E. Porzig................. 23,750 583,495 3,125 117,188
All Executive Officers as a Group
(14 people)..................... 441,000 10,834,581 58,500 2,193,750
All Other Employees (502
people)......................... 1,080,000 26,533,677 125,750 4,715,625
</TABLE>
- - -------------------------
(1) The options will have a ten year term, but will not vest until six years
after grant, although vesting will be accelerated if specific common stock
price targets are met. Those accelerated vesting rules provide that 50% of
the options will vest when the common stock attains a price of $65 per share
(for 20 consecutive trading days) and 100% of the options will vest when the
common stock attains a price of $95 per share (for 20 consecutive trading
days.)
(2) Determined using the Black-Scholes option pricing model with the same
assumptions as set forth in the footnotes to the Stock Option Grant Table,
but assuming an exercise price will be equal to $43.00. The actual exercise
price will be equal to the fair market value of a share of the Company' s
common stock on the date of grant.
(3) Restricted shares will vest ratably over three years beginning with the
second anniversary of the date of grant. Dividends, if any, will be paid on
such shares at the same rate as paid to shareowners generally.
(4) Based on the value of the Company's common stock as of the end of fiscal
year 1996.
As a result of these grants, fewer than 500,000 of the 2.8 million shares
currently authorized will be available for future awards.
The Company believes that it is important to the future success of the
Company that executives and other management employees be provided an
opportunity to acquire a significant ownership interest in the Company, thereby
aligning their interests with those of the Company's shareowners. Accordingly,
the Board of Directors has adopted an amendment to the SlP to increase by
2,400,000 the maximum number of shares that may be issued under the SIP. To
ensure that certain awards can qualify as "performance-based" compensation for
purposes of Section 162(m) of the Code (see Federal Tax Consequences below), the
SIP, thus amended, is being submitted to shareowners for their approval. The
Company believes that adoption of the SIP will enhance and maintain the
Company's ability to attract, retain and motivate key management employees whose
efforts will be important to the Company's future success. The affirmative vote
of the holders of a majority of all outstanding shares entitled to vote thereon
and represented in person or by proxy at the Annual Meeting is required to
approve the adoption of the SIP. For purposes of the foregoing, broker non-votes
and shares represented by a proxy which directs that the shares be voted to
abstain on this proposal will not be deemed represented at the meeting as to
such proposal and will not be counted. If the SIP is not approved, grants will
be made under the SIP after the 1997 Annual Meeting only to employees who are
promoted or newly hired into positions eligible for long-term incentive stock
grants, in amounts prorated from the 1997 grants for such positions, to the
extent shares are available from the SIP's original share authorization.
16
<PAGE> 20
The text of the SIP is in Appendix A. The following summary does not
purport to be complete and is qualified by reference to the SIP.
General. The SIP permits the Company to grant (i) stock options (both
non-qualified stock options and incentive stock options ("ISOs") within the
meaning of Section 422 of the Code), (ii) restricted stock (including
"performance based restricted stock") (iii) stock appreciation rights ("SARs")
(both tandem and non-tandem) and (iv) performance units. The SIP originally
became effective April 30, 1996.
Administration and Eligible Employees. The SIP is administered by the
Compensation Committee of the Board whose members are "outside directors" under
Section 162(m) of the Code. The Compensation Committee determines which
management employees (either individually or by position) of the Company and its
subsidiaries are eligible to participate in the SIP and the amounts, times,
forms, terms and conditions of grants. As of February 1, 1997, approximately 330
management employees including employees who are other executives or officers
were eligible to participate in the SIP. As part of the enhancement of the
retention and incentive value of the SIP, the group of management employees
eligible to participate, including employees who are other executives or
officers, would be increased to a total of approximately 515 management
employees.
Number of Shares/Individual Maximums. Subject to adjustment in the event of
any change in the capital structure of the Company, the maximum number of shares
that may be issued in the aggregate under the SIP is 5,200,000 (increased from
2,800,000 under the SIP, as originally adopted) of which no more than 400,000
may be issued pursuant to restricted stock grants (increased from 250,000 under
the SIP as originally adopted). Over the life of the SIP, the maximum number of
stock options and SARs which may be granted to an individual participant is
500,000; provided, however, that if an SAR is issued in substitution for an
existing stock option or in tandem with a stock option, then the grant of such
an SAR shall not count against the limits. The maximum number of shares that may
be issued to an individual participant free of restrictions pursuant to a grant
of performance based restricted stock is 50,000 per year, and the maximum number
of shares that may be granted to an individual participant pursuant to
performance units is 50,000 per year. For any participant, the aggregate fair
market value of stock subject to ISOs that are first exercisable in any calendar
year may not exceed $100,000. If any unexercised stock options or SARs or any
performance units expire, terminate or are surrendered, or if restricted stock
is forfeited for any reason, the shares available for distribution with respect
thereto will be available again for distribution under the SIP.
Stock Options and SARS. Options granted under the SIP may be nonqualified
stock options, ISOs or any combination thereof. SARs may be granted in tandem
with stock options ("Tandem SARS") or independently of any stock option
("Nontandem SARs"). The Compensation Committee may grant awards of Tandem SARs
with, or Non-tandem SARs in substitution for, stock options currently
outstanding, in which case the exercise price of those SARs shall be the same as
that of the outstanding stock options. Options and SARs may be exercised at any
time during the term of the option or SAR as determined by the Compensation
Committee. However, no option shall be exercisable more than ten years after the
date the option is granted. Certificates for the shares purchased on the
exercise of an option will be issued only upon payment in full of the option
price.
The exercise price of an option or Non-tandem SAR, other than a Non-tandem
SAR substituted in exchange for an outstanding option, shall not be less than
100% of the fair market value (as defined in the SIP) of a share of the
Company's common stock on the grant date.
A Tandem SAR will be exercisable only to the extent and at the same time as
the related stock option is exercisable. When a Tandem SAR is exercised, the
number of shares issuable under the related option will be reduced by the number
of shares covered by the SAR. The exercise of an option will result in an
equivalent reduction in the number of shares covered by the related SAR. If an
option expires "in-the-money", any related Tandem SAR will be deemed exercised
upon the expiration date of the option. A Non-tandem SAR may be exercised at the
time or times specified in the agreement evidencing the grant. Upon exercise of
an SAR, the participant is entitled to receive a payment in cash, stock or a
combination thereof equal to the excess of the market value of the common stock
on the exercise date over the exercise price of the related
17
<PAGE> 21
option, in the case of a Tandem option, or of the Non-tandem SAR. No option will
be granted in exchange for the cancellation of a higher-priced option previously
granted to a participant.
Restricted Stock. The Compensation Committee determines when restricted
stock will be granted, the times within which restricted stock shall be subject
to forfeiture and all of the other terms and conditions of a grant. If the terms
and conditions include the performance based restrictions described below, then
the restricted stock is referred to as "Performance Restricted Stock." Subject
to certain restrictions, when a restricted stock grant is made, the participant
has all of the benefits of ownership with respect to such shares including the
rights to vote the shares and to receive dividends. So long as the restrictions
are in effect, (a) the shares may not be sold or otherwise disposed of, and (b)
if the participant's employment terminates for any reason other than death or
disability, the participant will forfeit and return to the Company any shares
subject to restriction as of the termination date. Restrictions on the shares of
Performance Restricted Stock which would otherwise be released on a given date
will only be released if the Company meets the "target" level of the earnings
per share growth performance standard (after adjustment for relative performance
rank) under the Executive Incentive Compensation Plan for Payless Executives for
the appropriate long-term performance period. If the Company meets the
"threshold" level of that performance standard (after adjustment for relative
performance rank), then restrictions will be released on 50% of the shares. For
Company performance that falls between the "threshold" and "target" levels, the
percentage of shares on which restrictions will be released will be prorated. If
the Company does not meet the "threshold" level, then the shares are forfeited.
No restrictions will be released until the Compensation Committee certifies that
the applicable performance levels have been satisfied.
Performance Units. The Compensation Committee may make awards of
performance units, the value of which is based on the attainment over a
designated period of time of specific performance objectives established by the
Compensation Committee. Performance units may be settled in cash, shares of the
Company's common stock, or a combination thereof.
Change in Control. The SIP provides that in the event of a change in
control of the Company (as defined in the Plan), all stock options and SARs
granted will become fully exercisable and vested. The restrictions applicable to
any grants of restricted stock will lapse and such shares will be fully vested,
and all performance units will be earned and become fully payable.
Amendment or Termination. The SIP will automatically terminate on April 30,
2006. The Board of Directors may terminate the SIP at any time prior to that
date and may make such changes in the SIP as it deems advisable, subject to the
rights of participants under outstanding grants and awards, except that
shareowner approval shall be sought when required by applicable law.
Prior Grants. The Stock Option Grant table on page 11 sets forth the number
and grant date fair value of the options awarded in 1996 to named executive
officers. In 1996, the Company's executive officer group, 14 executives
(including the named executive officers), were granted 321,205 stock options
with a grant date fair value (see footnote 4 to the Stock Option Grant table) of
$5,026,736 and employees other than the executive officer group were granted
178,139 stock options with a grant date fair value of $2,853,513. The restricted
stock awards set forth in the Summary Compensation Table were made under the
Company's Spin-Off Stock Plan. The Company does not intend to make any
additional grants under that plan. Restricted stock awards were made under the
SIP in 1996 to employees who were promoted or newly hired into positions that
would have been eligible for a grant under the Company's Spin-Off Stock Plan had
the employees been in those positions at the time of the spin-off from May. The
restricted stock awards under the SIP were a prorated amount of the grants under
the Spin-Off Stock Plan. A total of 12,192 shares of restricted stock were
granted under the SIP during 1996, none to the executive officers.
Federal Tax Consequences. The Company has been advised by counsel that
under present law, the following are the federal tax income consequences
generally arising with respect to awards under the SIP. Awards of stock options,
SARs and Performance Restricted Stock are intended to qualify as "performance-
based compensation," as defined in Section 162 (m) of the Code in order to
preserve tax deductions by the Company with respect to any such compensation in
excess of $1 million paid to "covered employees," i.e., the
18
<PAGE> 22
Company's CEO and the four most highly compensated other executive officers of
the Company who are executive officers on the last date of the year in question.
To qualify stock options and SARs as "performance-based compensation" for
tax purposes, the SIP limits the total number of shares of common stock subject
to stock options and/or SARs awarded to any one participant as set forth above.
To qualify awards of Performance Restricted Stock as performance-based
compensation, the SIP, as described above, sets forth certain specific
performance criteria with respect thereto and limits the number of such shares
that may be awarded to an individual participant in any one year.
The grant of a stock option or SAR creates no income tax consequences to
the participant or the Company. Upon the exercise of a non-qualified stock
option, the participant generally will recognize ordinary income equal to the
excess of the fair market value of the shares purchased (as of the exercise
date) over the option price. The Company will be entitled to a deduction in the
same amount and at the same time.
Upon exercising an ISO, a participant has no taxable income (except that
the alternative minimum tax may apply), and the Company receives no deduction,
provided that the employment requirements specified in Section 422 of the Code
are satisfied. If the participant holds the stock acquired upon exercise of an
ISO for the statutory holding period, then any gain or loss upon subsequent sale
of the common stock will be a long-term capital gain or loss equal to the
difference between the option price and any amount realized on the disposition.
The Company is allowed no deduction in such case. The statutory holding period
is the later of two years from the grant date or one year from the date the
common stock is transferred to the participant pursuant to the exercise of the
ISO. If a participant disposes of shares acquired by the exercise of an ISO
before expiration of the holding period (a "disqualifying disposition"), then
the amount of ordinary income taxable to the participant is the lesser of (i)
the fair market value of the common stock on the exercise date less the option
price and (ii) the amount realized on disposition less the option price. The
Company will be entitled to a deduction in the same amount and at the same time.
Upon exercise of an SAR, the participant will recognize ordinary income
equal to the amount of any cash and the market value of any common stock
received. The Company will be entitled to a deduction in the same amount at the
same time.
A participant granted shares of restricted stock, including Performance
Restricted Stock, is not required to include the value of such shares in income
until the first time such participant's rights in the shares are transferable or
are not subject to a substantial risk of forfeiture, whichever occurs earlier,
unless such participant timely files an election under Section 83(b) of the Code
to be taxed on the receipt of the shares. In either case, the amount of such
income will be equal to the excess of the fair market value of the stock at the
time the income is recognized over the amount (if any) paid for the stock.
Subject to Code Section 162(m), as described above, the Company will generally
be entitled to a deduction, in the amount of the ordinary income recognized by
the participant, for the Company's taxable year in which the participant
recognizes such income.
A participant granted performance units recognizes income in the amount of
the award of those units when they vest and are no longer subject to forfeiture
and he is entitled to receive the value of the award. Subject to Section 162(m)
of the Code, the Company receives a deduction for the same amount in the year
that income is recognized by the participant.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE FOR PROPOSAL (C), AND
YOUR PROXY WILL BE SO VOTED UNLESS YOU SPECIFY OTHERWISE.
* * * * * * * * *
19
<PAGE> 23
PROPOSAL TO APPROVE THE EXECUTIVE INCENTIVE COMPENSATION
PLAN FOR PAYLESS EXECUTIVES
PROPOSAL (D) ON THE ACCOMPANYING PROXY CARD.
The Executive Incentive Compensation Plan for Payless Executives (the
"EICP") is a performance based bonus plan for management employees of the
Company. It provides opportunities for designated management employees to earn
substantial rewards for superior performance.
The Board of Directors initially adopted the EICP in 1996 prior to the
spin-off from May, and May, as the sole shareowner of the Company, approved the
EICP at that time. Under Section 162(m) of the Code, certain future bonus
payments under the EICP may not qualify as performance based compensation and be
tax deductible unless certain requirements are satisfied, including shareowner
approval. (See the report of the Compensation Committee on page 7 hereof for a
discussion of Section 162(m).) The Company is seeking shareowner approval of the
EICP to help ensure that future bonus awards qualify as "performance based"
compensation for purposes of Section 162(m) of the Code. The affirmative vote of
the shareowners of a majority of all outstanding shares entitled to vote and
represented in person or by proxy at the Annual Meeting is required to approve
the EICP. For purposes of the foregoing, broker non-votes and shares represented
by a proxy which directs that the shares be voted to abstain on this proposal
will not be deemed represented at the meeting as to such proposal and will not
be counted. If the EICP is not approved, no awards will be paid under the EICP
with respect to annual performance for fiscal 1997 or long-term performance with
respect to the fiscal 1997-1999 performance period, in which case the Company
reserves the right to adopt alternative compensation arrangements based on its
assessment of the needs of the Company. However, long-term awards previously
approved prior to the spin-off from May by the Compensation Committee with
respect to the fiscal 1996-1997 and fiscal 1996-1998 periods will be paid, if
earned. The text of the EICP is in Appendix B. The following summary does not
purport to be complete and is qualified by reference to the EICP.
General. The EICP provides for annual performance and long-term awards
based on (i) actual results as compared to pre-established financial performance
targets, (ii) the Company's performance relative to certain peer companies, and
(iii) for long-term awards only, changes in the Company's stock price. The EICP
is administered by the Compensation Committee of the Board of Directors, whose
members are "outside directors" under Section 162(m) of the Code.
EICP Benefits. The Summary Compensation Table on page 9 sets forth the
compensation paid for 1996 pursuant to the EICP to named executive officers.
EICP participants (14 individuals, including the named executive officers)
received $1,096,870 in annual bonuses and $1,575,471 in "long-term" bonuses.
There are no other participants in the EICP. The benefits that will be received
by individual persons for future periods are not currently determinable (since
they are dependent upon performance). However, the following table shows the
estimated target payments with respect to the fiscal 1997 annual award period
and the fiscal 1996 to 1997 long-term award period.
20
<PAGE> 24
EXECUTIVE INCENTIVE COMPENSATION PLAN
FOR PAYLESS EXECUTIVES
<TABLE>
<CAPTION>
TARGET VALUE OF AWARD(1)
----------------------------------------------------------------------------
ANNUAL LONG-TERM
------------------------------ ------------------------------
NAME AND POSITION EPS FACTOR(2) RONA FACTOR(2) EPS FACTOR(2) RONA FACTOR(2) TOTAL
----------------- ------------- -------------- ------------- -------------- -----
<S> <C> <C> <C> <C> <C>
Steven J. Douglass........ $150,000 $150,000 $100,000 $100,000 $ 500,000
Chairman of Board and
Chief Executive Officer
Richard A. Jolosky........ 90,000 90,000 60,000 60,000 300,000
President
Duane L. Cantrell......... 43,605 43,605 29,070 29,070 145,350
Senior Vice President --
Retail Operations
Bryan P. Collins.......... 45,000 45,000 30,000 30,000 150,000
Senior Vice President --
Division Director Parade
of Shoes
Jed L. Norden............. 40,170 40,170 26,780 26,780 133,900
Senior Vice President --
Human Resources
Ullrich E. Porzig......... 40,170 40,170 26,780 26,780 133,900
Senior Vice President --
Chief Financial Officer
All Executive Officers as
a Group (14 people)..... 678,705 678,705 452,470 452,470 2,262,350
</TABLE>
- - -------------------------
(1) Depending upon the extent that performance goals are achieved, actual awards
with respect to each factor, before adjustment as described below, may range
from 50% of target value for threshold performance to 150% of the target
value for maximum performance. No awards are payable for below threshold
performance. The long-term awards otherwise payable may be increased by 50%
or decreased by up to 25% based on changes in the market price of the
Company's stock over the performance period. The annual and long-term awards
reflect the increase for 1996-1997 in the threshold percentages which are
discussed in the Compensation and Nominating Committee report on page 5.
There is no assurance that these higher percentages will apply to subsequent
periods.
(2) See "Annual Awards" below for a discussion of these factors.
Eligibility. Management employees of the Company are eligible to
participate in the EICP. For 1997 and for long-term performance periods which
include 1997, the only participants in the EICP are the executive officers named
in the Summary Compensation Table and eight (8) other executive officers. The
Compensation Committee designates participants for a particular annual and/or
long-term performance period. Performance periods are measured on a fiscal year
basis.
Annual Awards. Annual awards are calculated as a percentage of the
participant's base salary on November 1 of the fiscal year. The EICP requires
the Compensation Committee to establish a maximum percentage that a participant
may earn under the EICP as an annual award for any annual performance period.
Generally, the maximum percentage may not be greater than 30%. Under the EICP,
the Compensation Committee has the discretion to increase the maximum percentage
for any annual performance period to 75% for the CEO, 62.5% for the President
and 45% for the other executive officers. Pursuant to such authority, the
Compensation Committee has increased the maximum percentages for the fiscal 1997
annual performance period and future annual performance periods to 75% for the
CEO, 62.5% for the President and 45% for the other executive officers. The
maximum dollar amount of any annual award is $1,500,000.
21
<PAGE> 25
The financial performance measures for annual awards are EPS Growth and
RONA as disclosed in the Company's annual report and as may be adjusted by the
Compensation Committee and certified by the Company's independent certified
public accountants to exclude non-recurring or extraordinary items that the
Compensation Committee determines are not representative of the Company's
ongoing operations. The Compensation Committee established threshold, target and
maximum performance objectives with respect to EPS Growth and RONA for each
participant for each annual performance period. Generally, for each of EPS
Growth and RONA, the percentages of base salary which a participant may earn are
5% for performance equal to the threshold objective; 10% for performance equal
to the target objective; and 15% for performance equal to or exceeding the
maximum objective. Pursuant to authority granted the Compensation Committee
under the EICP, beginning with the fiscal 1997 annual performance period, the
percentages of base salary which a participant may earn for each of EPS Growth
and RONA are: for performance equal to the threshold objective, 12.5% for the
CEO, 10.42% for the President and 7.5% for the other executive officers; for
performance equal to the target objective, 25% for the CEO, 20.83% for the
President and 15% for the other executive officers; and for performance equal to
or exceeding the maximum objective, 37.5% for the CEO, 31.25% for the President
and 22.5% for the other executive officers. For actual performance that falls
between the threshold and maximum annual objective, the percentage of base
salary earned will be prorated.
Annual awards are subject to an automatic upward or downward adjustment to
reflect the Company's performance as compared to peer companies. Each financial
measure is ranked with the comparable financial measure of a group of peer
companies designated in advance by the Compensation Committee. The Company's
relative rank is determined based on data received by the Company's independent
public accountants. The relative rank adjustment varies depending on the number
of peer companies designated by the Compensation Committee. For example, for
fiscal 1997, the Compensation Committee has designated 17 other peer companies
(the same peer companies as in the Stock Price Performance graph, except
Melville Corporation has been replaced by Footstar, Inc.). If the Company were
to rank first through fifth, the award for that measure would not be less than
the target level; if the Company were to rank sixth through ninth, the award for
that measure would not be less than threshold level; and if the Company were to
rank fourteenth through eighteenth, the award for that measure would not be more
than threshold level.
Long-Term Awards. Generally, each long-term performance period consists of
three consecutive fiscal years. Long-term performance periods operate
concurrently (that is, a new performance period commences annually). However, to
phase in the EICP following the spinoff from May, the initial "long-term"
performance period was fiscal 1996, and the second is fiscal years 1996 and 1997
and the third is fiscal years 1996, 1997 and 1998. A fourth performance period,
covering fiscal years 1997, 1998 and 1999, has also begun. Awards made with
respect to this fourth period are subject to shareowner approval of this
proposal. Long-term awards are calculated as a percentage of the participant's
average base salary over the performance period.
The financial performance measures for long-term awards are EPS Growth and
RONA. EPS Growth is measured by the compound annual growth rate over the
performance period. RONA is measured by averaging the returns for each fiscal
year of the performance period.
As with the annual award portion of the EICP, the Compensation Committee
establishes a maximum percentage of participant's average base salary for
long-term performance period that may be earned for such long-term performance
period. Generally, the maximum percentage that a participant may earn under the
EICP as a long-term award for any long-term performance period (before any share
price adjustment) is 30%. Under the EICP, the Compensation Committee has the
discretion to increase the maximum percentage for any long-term performance
period (before any price adjustment) to 75% for the CEO and 62.5% for the
President. Pursuant to such authority, the Compensation Committee has increased
the maximum percentages for the fiscal 1996 to 1997 long-term performance period
and future long-term performance periods to 50% for the CEO and 41.66% for the
President (before any share price adjustment). The maximum dollar amount of any
long-term award is $1,500,000.
The Compensation Committee established threshold, target and maximum
performance objective with respect to the EPS Growth and RONA for each
participant for each long-term performance period. Generally, for each of EPS
Growth and RONA, the percentages of average base salary which a participant
22
<PAGE> 26
may earn (before any share price adjustment) are 5% for performance equal to the
threshold objective; 10% for performance equal to the target objective; and 15%
for performance equal to or exceeding the maximum objective. Pursuant to
authority granted the Compensation Committee under the EICP, beginning with the
fiscal 1996 to 1997 long-term performance period, the percentages of average
base salary which a participant may earn for each of EPS Growth and RONA (before
any share price adjustment) are: for performance equal to the threshold
objective, 8.33% for the CEO and 6.94% for the President; for performance equal
to the target objective, 16.67% for the CEO and 13.89% for the President; and
for performance equal to or exceeding the maximum objective, 25% for the CEO and
20.83% for the President.
As with the annual award portion of the EICP, long-term awards are subject
to adjustment based on the Company's relative ranking compared to a group of
peer companies designated by the Compensation Committee. Long-term awards are
also adjusted to reflect changes in the market value of the Company's common
stock over the performance period. The award earned is increased or decreased in
direct proportion to the percentage increase or decrease in the market price,
subject to a maximum increase of 50% of such award and maximum decrease of 25%
of such award.
Discretionary Adjustments of Awards and Percentages. The Compensation
Committee may adjust the annual and long-term awards of any participant upward
or downward in its sole and absolute discretion. The Compensation Committee may
not, however, make discretionary upward adjustments in awards of a participant
whose compensation for the particular year is subject to the limits on tax
deductibility in Section 162(m) of the Code. No awards will be paid to such a
participant until the Committee certifies in writing that the terms of the EICP
have been satisfied.
Amendment and Termination. The Compensation Committee may award or
terminate the EICP at any time, subject to the rights of participants to awards
for performance periods which have been commenced prior to such amendment or
termination, except that shareowner approval shall be sought for any change
requiring such approval under Section 162(m) of the Code.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE FOR PROPOSAL (D), AND
YOUR PROXY WILL BE SO VOTED UNLESS YOU SPECIFY OTHERWISE.
* * * * * * * * *
PROPOSAL TO APPROVE THE PAYLESS STOCK OWNERSHIP PLAN
PROPOSAL (E) ON THE ACCOMPANYING PROXY CARD.
The Board of Directors believes that providing employees and executive
officers an opportunity to purchase stock at a discount will play a significant
role in attracting, motivating and retaining highly qualified and talented
employees who are important to the Company's success. The Board further believes
that equity ownership in the Company by employees and executive officers
encourages them to enhance the value of the Company and, hence, the price of the
Company's common stock and the shareowners' return. Upon the recommendation of
the Compensation Committee, and to further the Company's objective of
encouraging stock ownership by employees, the Board has adopted the Payless
Stock Ownership Plan (the "Plan"), effective August 1, 1997, subject to
shareowner approval.
The affirmative vote of the shareowners of a majority of all outstanding
shares entitled to vote and represented in person or by proxy at the Annual
Meeting is required to approve the Plan. For purposes of the foregoing, broker
non-votes and shares represented by proxy which directs that the shares be voted
to abstain on this proposal will not be deemed represented at the meeting as to
such proposal and will not be counted.
The text of the Plan is in Appendix C. The following summary does not
purport to be complete and is qualified by reference to the Plan.
Eligibility. Participation in the Plan is open to each employee and
executive officer (an "Eligible Employee") of the Company and its domestic
subsidiaries (collectively, the "Participating Companies") who
23
<PAGE> 27
has been continuously employed by the Participating Companies for at least one
year. At August 1, 1997, approximately 14,000 eligible employees (including 13
executive officers) could participate in the Plan.
Purchase Methodology, Period and Limits. Eligible Employees may participate
in the Plan by payroll deduction. The amount of each payroll deduction for each
payroll period may not exceed $25 for a weekly payroll period or $50 for a
bi-weekly payroll period of the participant's current regular wage or salary
paid to him by any of the Participating Companies. A participant may change the
amount of his payroll deduction at any time, but not more often than once in any
month. Each calendar month will be a purchase period. At the end of each
purchase period the amount contributed during the purchase period to each
participant's payroll deduction account shall be applied to purchase shares of
common stock of the Company at 85% of fair market value on the date of purchase.
At that time, the Company will contribute the remaining 15% of the fair market
value of the common stock to be purchased. No participant may purchase more than
$1,530 of common stock in any year (this amount is determined by applying the
15% discount on the purchase price of the stock to the maximum contribution of
$1,300 per year) and amounts held for a participant during a purchase period
will not bear interest. Rights acquired under the Plan are not transferable and
may be exercised only by a participant.
Voting and Other Rights. All voting and other rights pertaining to the
shares allocated to a participant's account will be exercised only in accordance
with written directions, if any, given by the participant.
Purchase Price. The purchase price per share of common stock for any
purchase period is 85% of the fair market value of a share of common stock on
the day the stock is purchased (which day shall be no later than the tenth
business day following the last day of the applicable purchase period). However,
the Committee appointed by the Board of Directors has the authority to change
the purchase price, provided that the purchase price may not be below the lesser
of (i) 85% of the fair market value of the common stock on the first day of the
applicable purchase period and (ii) 85% of the fair market value of the common
stock on the last day of the applicable purchase period.
Shares Subject to Plan. The maximum aggregate number of shares of common
stock that may be purchased under the Plan is 2,000,000 (subject to antidilution
provisions as set forth in the Plan). Such shares will be purchased on the open
market.
Termination and Amendment. A participant may elect at any time to terminate
participation in the Plan. The Board of Directors may terminate the Plan at any
time, and the Plan will terminate in any event when the maximum number of shares
of common stock that may be sold under the Plan have been purchased.
Administration. The Plan will administered by a Committee appointed by the
Board of Directors. Shares will be purchased and held by a trustee that may be
an individual or institutional trustee. The Company will bear the costs of
administration of the Plan, including any fees, costs and expenses relating to
the purchase of shares. The employee will be responsible for all fees, costs and
expenses due upon the sale of any shares purchased under the Plan.
Federal Tax Consequences. The Company has been advised by counsel that
under present law, the following are the federal income tax consequences
generally arising with respect to the Plan. No federal income tax will be
recognized by the participant upon the grant of the option to purchase stock or
upon the purchase of the stock under the Plan. If a participant disposes of
stock purchased under the Plan within two (2) years from the first day of the
purchase period during which such stock was purchased, at the time of
disposition, the participant will recognize (a) ordinary income equal to the
fair market value of the stock on the day it was purchased less the amount paid
for the shares, and (b) a capital gain or loss equal to the difference between
the participant's basis in the stock (the amount paid for the stock plus the
amount taxed as ordinary income under (a) above) and the amount realized upon
the disposition of the stock. If the participant holds the stock for more than
one year, the capital gain or loss will be long-term capital gain or loss.
Subject to Section 162(m) of the Code (pursuant to which options granted under
the Plan will not be considered "performance based"), the Company will be
entitled to a deduction in the amount of the ordinary income on which the
participant is taxed under subparagraph (a) above.
24
<PAGE> 28
If a participant disposes of stock purchased under the Plan more than two
(2) years from the first day of the purchase period during which such stock was
purchased or dies while owning such stock, at the time of the disposition or
death, the participant will recognize ordinary income equal to the lesser of (x)
the excess of the fair market value of the stock on the date of disposition or
death over the amount paid for such stock or (y) 15% of the fair market value of
such stock at the time the option to purchase the stock is granted. In addition,
the participant will recognize a long-term capital gain or loss equal to the
difference between the participant's basis in the stock (the amount paid for the
stock plus the amount taxed as ordinary income under [x] or [y] above) and the
amount realized upon the disposition of the stock. The Company will not be
entitled to any deduction related to income recognized by a participant.
Stock Ownership Plan Benefits. It is not possible at this time to determine
the dollar value of benefits available under the Plan. The table below sets
forth the amounts that would have been payable for fiscal year 1996 to the named
executive officers, all current executive officers as a group and all employees,
including all current officers who are not executive officers, as a group if the
Plan had been in effect during fiscal 1996, and if each employee had elected to
participate to the maximum extent permitted by the Plan.
PAYLESS STOCK OWNERSHIP PLAN
<TABLE>
<CAPTION>
DOLLAR VALUE
NAME OF AWARD(1)
---- ------------
<S> <C>
Steven J. Douglass.......................................... $ 229
Richard A. Jolosky.......................................... $ 229
Duane L. Cantrell........................................... $ 229
Bryan P. Collins............................................ $ 229
Jed L. Norden............................................... $ 229
Ullrich E. Porzig........................................... $ 229
All Executive Officers as a Group (14 people)............... $ 3,212
All Other Employees as a Group (14,835 people).............. $3,403,297
</TABLE>
- - -------------------------
(1) Amounts are not determinable for fiscal year 1997 because neither the
participation level for such employee nor the Company's stock price are
known at this time. Assuming that each executive officer had contributed the
maximum of $1,300 of his base pay during fiscal year 1996, the table
reflects what the dollar value (calculated as described below) of the shares
that would have been purchased had the Plan been in effect for all of fiscal
year 1996. The dollar value has been calculated by calculating as of the
last day of each purchase period (x) the fair market value of the stock that
would have been purchased on that day, less (y) the price the employee would
have paid for the stock purchased on that day.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE FOR PROPOSAL (E), AND
YOUR PROXY WILL BE SO VOTED UNLESS YOU SPECIFY OTHERWISE.
* * * * * * * * *
BENEFICIAL STOCK OWNERSHIP OF DIRECTORS, NOMINEES, EXECUTIVE OFFICERS AND
PERSONS OWNING MORE THAN FIVE PERCENT OF COMMON STOCK. The following table sets
forth certain information regarding beneficial ownership of the Company's common
stock as of February 1, 1997 (including shares of Common Stock held in the
Payless Profit Sharing Plan account for executive officers) by (a) each person
known by the Company to own beneficially more than 5% its common stock, (b) each
Director and nominee for election as a Director of the Company and each of the
executive officers named in the Summary Compensation Table on page 9, and (c)
all current Directors, nominees and executive officers as a group. The shares
allocated to the accounts
25
<PAGE> 29
of named participants in the Payless Profit Sharing Plan constitute less than 1%
of the Common Stock of the Company (see note (1) below).
<TABLE>
<CAPTION>
VOTING POWER INVESTMENT POWER
---------------- ------------------ PERCENT
NAME SOLE SHARED SOLE SHARED TOTAL OF CLASS
---- ---- ------ ---- ------ ----- --------
<S> <C> <C> <C> <C> <C> <C>
HOLDER OF MORE THAN FIVE PERCENT OF COMMON
STOCK
FMR Corp. .................................. 303,592 0 6,029,132 0 6,029,132 15.10%
82 Devonshire Street
Boston, MA 02109-3614
Lincoln Capital Management Company.......... 949,732 0 2,070,920 0 2,070,920 5.20%
200 South Wacker Drive
Suite 2100
Chicago, IL 60606
DIRECTORS, NOMINEES AND EXECUTIVE
OFFICERS(1)
Howard R. Fricke............................ 2,295 0 971 0 2,295 *
Thomas A. Hays.............................. 38,800 0 37,476 0 38,800 *
Michael H. Murphy........................... 3,295 0 1,971 0 3,295 *
Robert L. Stark............................. 2,391 0 1,067 0 2,391 *
Steven J. Douglass.......................... 26,975 0 11,975 0 26,975 *
Richard A. Jolosky.......................... 16,937 0 5,625 0 16,937 *
Duane L. Cantrell........................... 8,404 0 3,654 0 8,404 *
Bryan P. Collins............................ 6,330 0 1,621 0 6,330 *
Jed L. Norden............................... 12,645 0 8,311 0 12,645 *
Ullrich E. Porzig........................... 11,248 0 6,914 0 11,458 *
All directors, nominees and executive
officers as a group (18 persons).......... 171,850 0 94,696 0 171,850 *
</TABLE>
- - -------------------------
* Less than one percent.
(1) The Payless Profit Sharing Plan provides for an investment fund which is
invested in shares of Payless common stock (the "Payless Profit Sharing Plan
Common Stock Fund"). As of February, 1997, the trust under the Payless
Profit Sharing Plan owned approximately 290,096 shares of Payless common
stock (less than 1% of the shares of Payless common stock outstanding) in
the Payless Profit Sharing Plan Common Stock Fund. The shares shown as to
which sole voting power is indicated include shares of restricted stock
which have not yet vested, but with respect to which the individual or group
has been granted voting rights.
GENERAL
1998 Shareowners Proposal. Shareowner proposals for the 1998 annual meeting
of shareowners must be received at the Company's principal executive offices,
3231 East Sixth Street, Topeka, Kansas, 66607, Attention: Corporate Secretary,
on or prior to December 15, 1997, for inclusion in the Company's proxy statement
and proxy for such meeting.
Solicitation of Proxies. Your signature on the accompanying proxy card is
solicited by the Company's Board of Directors. The expenses of solicitation of
proxies hereunder will be paid by the Company. Proxies may be solicited by
Directors, officers and regular employees of the Company personally, by mail,
telegraph and telephone from and through registered owners, nominees and others
acting as principals and as intermediaries. The Company may reimburse persons
holding shares in their names or those of their nominees for their expenses in
sending proxies and proxy material to principals. In addition, the Company has
retained Corporate Investor Communications, Inc., to assist in the solicitation
of proxies for a fee of $5,500, plus out-of-pocket expenses.
26
<PAGE> 30
WHETHER OR NOT YOU PLAN TO ATTEND THE ANNUAL MEETING, PLEASE COMPLETE, SIGN
AND RETURN THE ENCLOSED PROXY CARD IN THE ENCLOSED ENVELOPE, WHICH REQUIRES NO
POSTAGE IF MAILED IN THE UNITED STATES. YOUR COOPERATION IN GIVING THIS MATTER
YOUR IMMEDIATE ATTENTION WILL BE APPRECIATED.
By order of the Board of Directors
William J. Rainey
Secretary
Topeka, Kansas
April 14, 1997
27
<PAGE> 31
APPENDIX A
PAYLESS SHOESOURCE, INC.
1996 STOCK INCENTIVE PLAN
I. GENERAL
1. PURPOSE. The purpose of the Plan is to aid the Company and its
Subsidiaries in attracting, retaining, and motivating management employees.
2. DEFINITIONS. Whenever used herein, the following terms shall have the
meanings set forth below:
a. "Board" means the Board of Directors of the Company.
b. "Code" means the Internal Revenue Code of 1986, as amended.
c. "Committee" means a committee designated by the Board, which shall
consist of not less than two members of the Board who shall be appointed by
and serve at the pleasure of the Board and who shall be "disinterested"
within the meaning of Rule 16b-3 of the General Rules and Regulations under
the Securities Exchange Act of 1934, as amended, and who shall be "outside"
directors within the meaning of Section 162(m) of the Code.
d. "Company" means Payless ShoeSource, Inc.
e. "Disability" means a permanent and total disability which enables
the Participant to be eligible for and receive a disability benefit under
the Federal Social Security Act.
f. "Fair Market Value" means the average of the high and low prices of
the Stock on the New York Stock Exchange on the date in question, or, if no
sale or sales of the Stock occurred on such Exchange on that day, the
average of the high and low prices of the Stock on the last preceding day
when the Stock was sold on the New York Stock Exchange; with respect to a
Stock Appreciation Right, the term means the average of the high and low
prices of the Stock on the New York Stock Exchange on such date or dates as
may be provided in the Stock Appreciation Right Agreement; provided,
however, that with respect to Options granted as of the effective date of
the spin-off (the "Effective Date") of the Company by The May Department
Stores Company ("May") with respect to options previously granted by May
which were waived by the Participant or which were not yet exercisable and
therefore lapsed on the Effective Date, the "Fair Market Value" means the
arithmetic average of the high and low trading prices of the Stock on the
New York Stock Exchange for each of the first 30 trading days on which
trading in the Stock on that exchange occurs.
g. "Incentive Stock Option" means an Option granted under the Plan
which constitutes and shall be treated as an "incentive stock option" as
defined in Section 422 of the Code.
h. "Non-Qualified Stock Option" means an Option granted under the Plan
which shall not constitute or be treated as an Incentive Stock Option.
i. "Non-Tandem Stock Appreciation Right" means a Right described in
Part III, Section 3.
j. "Option" means a right or rights to purchase shares of Stock
described in Part II.
k. "Option Agreement" means the agreement between the Company and a
Participant evidencing the grant of an Option and containing the terms and
conditions, not inconsistent with the Plan, that are applicable to such
Option.
l. "Participant" means an individual to whom an Option, Right or
Performance Unit is granted or Restricted Stock Grant is made.
m. "Performance Restricted Stock" means Restricted Stock whose
provisions include the restrictions described in Part IV, Section 3(b).
A-1
<PAGE> 32
n. "Performance Unit" means a right, described in Part V, to receive
up to 100% of the value of shares of Stock.
o. "Plan" means the 1996 Stock Incentive Plan of the Company, as
amended from time to time.
p. "Related Option" means the Option in relation to which a Tandem
Stock Appreciation Right is granted.
q. "Restricted Stock Grant" means a grant described in Part IV.
r. "Retirement" means retirement as that word is defined in the
Company's Profit Sharing Plan.
s. "Stock" means the Common Stock of the Company.
t. "Stock Appreciation Right" or "Right" means a right described in
Part III which provides for the payment of an amount in cash or Stock in
accordance with such terms and conditions as are provided in the Stock
Appreciation Right Agreement applicable to such Right; provided however,
that in Part III, Section 2, "Right" shall refer only to a "Tandem Stock
Appreciation Right" and that in Part III, Section 3, "Right" shall refer
only to a "Non-Tandem Stock Appreciation Right."
u. "Stock Appreciation Right Agreement" means the agreement between
the Company and a Participant evidencing the grant of a Stock Appreciation
Right and containing the terms and conditions, not inconsistent with the
Plan, that are applicable to such Right.
v. "Subsidiary" means a subsidiary of the Company or an unincorporated
organization controlled, directly or indirectly, by the Company.
w. "Tandem Stock Appreciation Right" means a Right described in Part
III, Section 2.
3. ADMINISTRATION. The Plan shall be administered by the Committee. Subject
to all applicable provisions of the Plan, the Committee is authorized to approve
grants of Options, Rights or Performance Units or the making of Restricted Stock
Grants in accordance with the Plan, to construe and interpret the Plan, to
prescribe, amend, and rescind rules and regulations relating to the Plan and to
make all determinations and take all actions necessary or advisable for the
Plan's administration. The Committee shall act by vote or written consent of a
majority of its members. Whenever the Plan authorizes or requires the Committee
to take any action, make any determination or decision or form any opinion, then
any such action, determination, decision or opinion by or of the Committee shall
be in the absolute discretion of the Committee.
4. SHARES SUBJECT TO THE PLAN.
(a) Maximum Number of Shares. Stock issued under the Plan shall be
treasury shares subject to the following limitations:
(i) Plan Maximum. The maximum number of shares of Stock which may
be issued under the Plan is 5,200,000, of which no more than 400,000 may
be issued pursuant to Restricted Stock Grants.
(ii) Participant Maximum. The maximum number of Options and Stock
Appreciation Rights which may be granted to any Participant during the
term of the Plan is 500,000; provided, however, that if a Stock
Appreciation Right is issued in substitution for an existing stock
option or in tandem with a stock option, then the grant of such a Stock
Appreciation Right shall not count against the limit. The maximum number
of shares of Stock which may be issued to each Participant free from
restrictions pursuant to a grant of Performance Restricted Stock is
50,000 per year. The maximum number of shares of Stock which may be
granted to each Participant pursuant to Performance Units is 50,000 per
year.
(b) Expired Options or Rights. If an Option or Right expires,
terminates, ceases to be exercisable or is surrendered without having been
exercised in full, then the shares relating to the Option or Right shall,
unless the Plan has been terminated, again become available under the Plan.
A-2
<PAGE> 33
(c) Lapse of Restrictions on Restricted Stock. If any shares of Stock
shall be returned to the Company pursuant to the provisions of Sections 2
or 3 of Part IV or in the instruments evidencing the making of Restricted
Stock Grants, then such shares shall, unless the Plan has been terminated,
again become available under the Plan.
(d) Expired Performance Units. If a Performance Unit expires,
terminates, is surrendered or otherwise ceases to exist, so that no further
shares of Stock may be issued pursuant to such Performance Unit, then the
shares of Stock which could have been issued but were not issued pursuant
thereto shall, unless the Plan has been terminated, again become available
under the Plan.
5. PARTICIPANTS. Participants in the Plan shall be determined as follows:
(a) Eligibility. The individuals who are eligible to receive Options,
Rights, Performance Units or Restricted Stock Grants hereunder shall be
limited to management employees of the Company and its Subsidiaries
(including employees who are directors and/or officers).
(b) Determination. From time to time the Committee shall, in its sole
discretion, but subject to all of the provisions of the Plan, determine
which of those eligible employees shall receive Option(s), Stock
Appreciation Right(s), Performance Unit(s) or Restricted Stock Grant(s)
under the Plan and the size, terms, conditions and/or restrictions of the
Option(s), Right(s), Performance Unit(s) or Restricted Stock Grant(s).
(c) Differing Terms; Effect of Grant. The Committee may approve the
grant of Option(s) Right(s), or Performance Unit(s) or the making of
Restricted Stock Grant(s) subject to differing terms, conditions and/or
restrictions to any eligible employee in any year. The Committee's decision
to approve the grant of an Option, Right or Performance Unit or the making
of a Restricted Stock Grant to an eligible employee in any year shall not
require the Committee to approve the grant of an Option, Right or
Performance Unit or the making of a Restricted Stock Grant to that employee
in any other year or to any other employee in any year; nor shall the
Committee's decision with respect to the size, terms, conditions and/or
restrictions of any Option, Right or Performance Unit to be granted to an
employee or any Restricted Stock Grant to be made to an employee in any
year require the Committee to approve the grant of an Option, Right or
Performance Unit or the making of a Restricted Stock Grant of the same size
or with the same terms, conditions and/or restrictions to that employee in
any other year or to any other employee in any year. The Committee shall
not be precluded from approving the grant of an Option, Right or
Performance Unit or the making of a Restricted Stock Grant to any eligible
employee solely because such employee may previously have been granted an
Option, Right or Performance Unit or may previously have received a
Restricted Stock Grant.
6. RIGHTS WITH RESPECT TO SHARES OF STOCK. A Participant who has exercised
an Option or Right (payable all or in part in Stock) or to whom a Restricted
Stock Grant has been made or to whom shares of Stock have been issued pursuant
to Performance Units shall have, after a certificate or certificates for the
number of shares of Stock granted have been issued in his name, absolute
ownership of such shares including the right to vote the same and receive
dividends thereon; provided, however that rights with respect to shares issued
in connection with a Restricted Stock Grant shall be subject to the terms,
conditions and restrictions described in the Plan and in the instrument
evidencing the making of the Restricted Stock Grant to such Participant.
7. EMPLOYMENT. In the absence of any specific agreement to the contrary, no
grant of an Option, Right or Performance Unit or making of a Restricted Stock
Grant to a Participant under the Plan shall affect any right of the Company or
its Subsidiaries to terminate the Participant's employment at any time.
II. OPTIONS
1. GENERAL. Each employee chosen to receive an Option(s) may be granted an
Incentive Stock Option, a Non-Qualified Stock Option or both, subject to the
following terms, conditions and restrictions. Each Option granted under the Plan
shall be evidenced by an Option Agreement which shall contain such terms and
conditions consistent with the Plan as the Committee shall determine; provided,
however, that each Option
A-3
<PAGE> 34
shall satisfy the following requirements and each Incentive Stock Option shall
satisfy the requirement of Part II, Section 2:
(a) Option Price. The option price for each share purchased under any
Option shall be specified in the Option Agreement and, subject to the
provisions of paragraph (b) below and Part VII, Section 3, shall not be
less than Fair Market Value on the date the Option is granted; provided,
however, that in no event shall the option price per share be less than the
par value thereof.
(b) Option Period.
(i) General. The period in which an Option may be exercised shall
not exceed ten years from the date the Option is granted; provided,
however, that the Option may be sooner terminated in accordance with the
provisions of this paragraph (b). Subject to the foregoing, the
Committee may provide that any Option may be exercised, in whole or in
part, at such time or times as the Committee may in its discretion
determine.
(ii) Termination of Employment. If the Participant ceases to be an
employee of the Company or a Subsidiary for any reason other than
Retirement, Disability, or death, all of such Participant's outstanding
Options shall immediately terminate.
(iii) Retirement or Disability. If a Participant's employment is
terminated by Retirement or Disability, the term of any then outstanding
Option held by the Participant shall extend for a period specified by
the Committee in the agreement pertaining to such Option, and the number
of shares in respect of which the Option may be exercised after the
Participant's Retirement or Disability shall be determined by the
agreement pertaining to such Option; provided, however, that such
agreement shall provide that the Committee may cancel the Participant's
Option during such period if the Participant's Retirement was without
the consent of the Company, or if the Participant engages during such
period of Retirement or Disability in employment or activities contrary,
in the opinion of the Committee, to the best interests of the Company.
2. INCENTIVE STOCK OPTIONS. Each Option Agreement evidencing an Incentive
Stock Option shall satisfy the requirement that to the extent that the aggregate
Fair Market Value of Stock with respect to which Incentive Stock Options are
exercisable for the first time by any Participant during any calendar year
(under the Plan and all stock option plans of the Company and its Subsidiaries)
exceeds $100,000, such Options shall be treated as Non-Qualified Stock Options.
For purposes of this Section 2, aggregate Fair Market Value of Stock shall be
determined as of the time the Option with respect to such Stock is granted.
3. DEATH. If a Participant's employment is terminated by death at a time
when he or she has not fully exercised any then outstanding Option, or if a
Participant dies after Retirement or Disability without having fully exercised
any then outstanding Option, the beneficiary designated by the Participant (or,
in the absence of such designation, the executors or administrators or legatees
or distributees of the Participant's estate) shall have the right to exercise
such Option in whole or in part during such period following the Participant's
death as is set forth in the Option Agreement. The Company shall prescribe the
procedures and requirements for beneficiary designations not inconsistent with
this provision and has the right to review and approve such designations.
4. NONASSIGNABILITY. Each Option shall not be transferable (other than,
upon the death of the Participant, by beneficiary designation, by last will and
testament or by the laws of descent and distribution) and shall be exercisable
during the Participant's lifetime only by the Participant.
5. PAYMENT FOR STOCK. Full payment in cash or, if the Committee approves,
in Stock, for shares purchased shall be made at the time of exercising the
Option in whole or in part. No certificates for shares so purchased shall be
issued until full payment therefor has been made, and a Participant shall have
none of the rights of a shareowner until such certificates are issued to him or
her. In addition, if the Committee approves, the Option Agreement may provide
that the Participant may elect, on terms set forth in the Option Agreement, to
have the Company withhold from the shares of Stock payable to the Participant
upon exercise
A-4
<PAGE> 35
of an Option the number of shares of Stock having a fair market value equal to
the amount of any required withholding taxes.
6. USE OF PROCEEDS. The proceeds received by the Company from the sale of
Stock pursuant to the exercise of an Option may be used for general corporate
purposes.
7. RESTRICTIONS UPON EXERCISE OF OPTION. The exercise of each Option shall
be subject to the condition that if at any time the Company shall determine in
its discretion that the satisfaction of withholding tax or other withholding
liabilities under any state or Federal law, or that the listing, registration or
qualification of any shares otherwise deliverable upon such exercise upon any
securities exchange or under any state or Federal law, or that the consent or
approval of any regulatory body, is necessary or desirable as a condition of, or
in connection with, such exercise or the delivery or purchase of shares
thereunder, then in any such event such exercise shall not be effective unless
such withholding, listing, registration, qualification, consent or approval
shall have been effected or obtained free of any conditions not acceptable to
the Company.
8. REPRICING PROHIBITED. There shall be no grant of an Option(s) to a
Participant in exchange for a Participant's agreement to cancellation of a
higher-priced Option(s) that was previously granted to such Participant.
III. STOCK APPRECIATION RIGHTS
1. GENERAL. Each employee chosen to receive a Stock Appreciation Right(s)
may be granted a Tandem Stock Appreciation Right, a Non-Tandem Stock
Appreciation Right or both, subject to the following terms, conditions and
restrictions and subject to such additional terms, conditions and restrictions
as may be determined by the Committee from time to time hereafter; provided
however, that no Right shall be subject to additional terms, conditions or
restrictions which are more favorable to a Participant than the terms,
conditions and restrictions set forth in the Plan.
2. TANDEM STOCK APPRECIATION RIGHTS. Each Tandem Stock Appreciation Right
may be granted only with respect to a share(s) of Stock for which an Option(s)
has been granted under the Plan, and may be awarded concurrently with the grant
of such Option or at any time thereafter while the Option is outstanding. If the
Committee so determines, a Tandem Stock Appreciation Right may also be granted
with respect to a share(s) of Stock for which an option has been granted and is
outstanding under any other plan of the Company. A Stock Appreciation Right
shall be evidenced by a Stock Appreciation Right Agreement which shall contain
such terms and conditions (which may include limitations as to the time when
such Stock Appreciation Right becomes exercisable and when it ceases to be
exercisable that are more restrictive than the limitations applicable to the
Related Option(s)) not inconsistent with the Plan as the Committee shall
determine; provided, however, that each Tandem Stock Appreciation Right shall
satisfy the following requirements:
(a) Termination of a Right. If the Related Option is exercised, in
whole or in part, then the Right with respect to the shares of Stock
purchased pursuant to such exercise (but not with respect to any
unpurchased shares of Stock) shall terminate as of the date of the
exercise. If an unexercised Right is otherwise exercisable on the date that
the Related Option expires, and if the Fair Market Value of the shares of
Stock with respect to which such Right was granted, determined as of the
date of such expiration, exceeds the Option price of such shares, then,
notwithstanding Section 2(b), the Right shall automatically be deemed to
have been exercised as of the date of such expiration; otherwise, on the
date that the Related Option expires, any outstanding Right related thereto
shall be terminated as of the date of such expiration.
(b) Exercise. Tandem Stock Appreciation Rights may be exercised (i)
only at such time or times as, and to the extent that, the Related Options
shall be exercisable, (ii) only upon surrender of the Related Options with
respect to the shares for which the Rights are then being exercised, and
(iii) subject to the terms and conditions set forth in the Stock
Appreciation Right Agreement; provided that no Tandem Stock Appreciation
Right may be exercised prior to the expiration of six (6) months
A-5
<PAGE> 36
from the date of the grant and can only be exercised during the ten-day
period beginning on the third business day following the release of the
Company's quarterly or annual statement of sales and earnings.
3. NON-TANDEM STOCK APPRECIATION RIGHTS. Each Non-Tandem Stock Appreciation
Right may be granted with respect to a share(s) of Stock or, if the Committee so
determines, in exchange for an outstanding Option or an outstanding stock option
granted under any other plan of the Company. A Non-Tandem Stock Appreciation
Right shall be evidenced by a Stock Appreciation Right Agreement which shall
contain such terms and conditions not inconsistent with the Plan as the
Committee shall determine; provided, however, that each Non-Tandem Stock
Appreciation Right shall satisfy the following requirements:
(a) Termination of a Right. A Non-Tandem Stock Appreciation Right
shall terminate as of the earlier of (i) the date of exercise of such
Right, to the extent that it is exercised; or (ii) the termination date
specified in the Stock Appreciation Right Agreement. If an unexercised
Right is otherwise exercisable on the date that it expires, and if the Fair
Market Value of the shares of Stock with respect to which such Right was
granted, determined as of the date of such expiration, exceeds the exercise
price of such Right (set forth in the Stock Appreciation Right Agreement),
then the Right shall automatically be deemed to have been exercised as of
the date of such expiration.
(b) Exercise. Non-Tandem Stock Appreciation Rights may be exercised in
accordance with the terms and conditions set forth in the Stock
Appreciation Right Agreement; provided that (i) no Non-Tandem Stock
Appreciation Right that is payable all or in part in Stock may be exercised
prior to the expiration of six (6) months from the date of the grant; (ii)
the exercise price of any Non-Tandem Stock Appreciation Right granted in
exchange for an outstanding Option or for an outstanding stock option
granted under any other plan of the Company shall be the same exercise
price as that outstanding Option or option and (iii) the exercise price of
any Non-Tandem Stock Appreciation Right not granted in exchange for an
outstanding Option or for an outstanding stock option granted under any
other plan of the Company shall be the Fair Market Value of the Stock on
the date of the grant of the Right(s).
4. PAYMENT.
(a) Amount. Upon the exercise of a Stock Appreciation Right, a
Participant shall be entitled to receive the excess of the aggregate Fair
Market Value of the shares of Stock with respect to which the Right is
being exercised (determined as of the date of such exercise) over (i) the
aggregate option price of such shares in the case of Tandem Stock
Appreciation Rights; or (ii) the aggregate exercise price (set forth in the
Stock Appreciation Right Agreement) in the case of Non-Tandem Stock
Appreciation Rights.
(b) Form. Any amount which becomes payable upon exercise of a Stock
Appreciation Right under the Plan shall be paid entirely in cash, entirely
in Stock or partly in cash and partly in Stock in accordance with such
terms and conditions as are provided in the applicable Stock Appreciation
Right Agreement; provided, however, that notwithstanding any provision in
any Stock Appreciation Right Agreement, the Committee may determine in its
sole and absolute judgment that any amount which may become payable upon
exercise of a Right shall be paid entirely in cash.
5. TERMINATION OF EMPLOYMENT.
(a) General. If a Participant ceases to be an employee of the Company
or of a Subsidiary for any reason other than Retirement, Disability or
death, all of such Participant's outstanding Rights shall immediately
terminate.
(b) Retirement or Disability. If a Participant's employment is
terminated by Retirement or Disability, the Participant's right to exercise
all or any portion of any Right after the date of such Retirement or
Disability shall be determined by the provisions of the Stock Appreciation
Right Agreement; provided, however, that such Agreement shall provide that
the Committee may terminate the Participant's Right prior to the date on
which the Right is exercised if the Participant's Retirement was without
the consent of the Company, or if the Participant engages during such
period of Retirement
A-6
<PAGE> 37
or Disability in employment or activities contrary, in the opinion of the
Committee, to the best interests of the Company.
(c) Death. If a Participant's employment is terminated by death at a
time when the Participant has not fully exercised any then outstanding
Rights, or if a Participant dies after Retirement or Disability without
having fully exercised any then outstanding Rights, the beneficiary
designated by the Participant (or, in the absence of such designation, the
executors or administrators or legatees or distributees of the
Participant's estate) shall have the right to exercise such Right in whole
or in part during such period following the Participant's death as set
forth in the Stock Appreciation Right Agreement. The Company shall
prescribe the procedures and requirements for beneficiary designations not
inconsistent with this provision and has the right to review and approve
such designations.
6. EXPIRATION. If the period in which a Stock Appreciation Right is
exercisable expires and the Right has not been exercised, then such Right shall
terminate as of the last day on which it was exercisable.
7. NONASSIGNABILITY. Each Right shall not be transferable (other than, upon
the death of the Participant, by beneficiary designation, by last will and
testament or by the laws of descent and distribution) and shall be exercisable
during the Participant's lifetime only by the Participant.
8. RESTRICTIONS UPON EXERCISE OF RIGHTS. The exercise of each Right shall
be subject to the condition that if at any time the Company shall determine in
its discretion that the satisfaction of withholding tax or other withholding
liabilities under any state or Federal law, or that the consent or approval of
any regulatory body, is necessary or desirable as a condition of, or in
connection with, such exercise, then, in any such event, such exercise shall not
be effective unless such withholding, consent or approval shall have been
effected or obtained free of any conditions not acceptable to the Company.
IV. RESTRICTED STOCK GRANTS
1. GENERAL. A Restricted Stock Grant made under the Plan shall contain the
following terms, conditions and restrictions and such additional terms,
conditions and restrictions as may be determined by the Committee from time to
time hereafter; provided, however, that no Restricted Stock Grant shall be
subject to additional terms, conditions or restrictions which are more favorable
to a Participant than the terms, conditions and restrictions set forth in the
Plan.
2. RESTRICTIONS. Subject to the provisions of Part IV, Section 3, shares of
Stock granted to a Participant pursuant to a Restricted Stock Grant:
(i) shall not be sold, assigned, conveyed, transferred, pledged,
hypothecated, or otherwise disposed of, and
(ii) shall be returned to the Company forthwith, and all the rights of
the Participant to such shares shall immediately terminate without any
payment or consideration by the Company, if the Participant's continuous
employment with the Company or any Subsidiary shall terminate for any
reason, except as provided in Part IV, Section 4. Such return of such Stock
shall be accomplished by the Participant's delivering or causing to be
delivered to the Secretary or any Assistant Secretary of the Company the
certificate(s) for such shares of Stock, accompanied by such endorsement(s)
and/or instrument(s) of transfer as may be required by the Secretary or any
Assistant Secretary of the Company.
3. LAPSE OF RESTRICTIONS.
(a) General. Subject to the provisions of Part IV, Sections 3(b) and 4
and of Part VII, Section 4, the restrictions set forth in Part IV, Section
2 shall lapse on such date or dates on or after the first anniversary and
on or before the tenth anniversary of the date as of which the Restricted
Stock Grant is made, as the Committee shall determine at the time of the
Restricted Stock Grant.
A-7
<PAGE> 38
(b) Performance Restricted Stock. If the Committee has designated the
Stock covered by a Restricted Stock Grant as Performance Restricted Stock,
then the lapse of restrictions set forth in Part IV, Section 2 that would
otherwise occur on a specified date shall also be subject to the following:
(i) if the Company meets or exceeds the Target Long-Term EPS Growth
Objective (after adjustment for Relative Performance Rank) for the most
recently ended Long-Term Performance Period, then the restrictions that
would otherwise lapse on such date shall lapse as to 100% of the shares
of such Performance Restricted Stock; and
(ii) if the Company meets or exceeds the Threshold Long-Term EPS
Growth Objective (after adjustment for Relative Performance Rank) but
does not meet or exceed the Target Long-Term Growth Objective (after
adjustment for Relative Performance Rank) for the most recently ended
Long-Term Performance Period, then the restrictions on the shares of
Performance Restricted Stock that would otherwise lapse on such date
shall lapse as to (i) 50% of such shares plus (ii) 50% of such shares
multiplied by a fraction (not less than zero and not greater than one),
the numerator of which is the Company's actual Long-Term EPS Growth for
the most recently ended Long-Term Performance Period less the Threshold
Long-Term EPS Growth Objective for such period and the denominator of
which is the Target Long-Term EPS Growth Objective for such period less
the Threshold Long-Term EPS Growth Objective for such period, and the
remaining shares of Performance Restricted Stock shall immediately
forfeit to the Company; and
(iii) if the Company does not meet or exceed the Threshold
Long-Term EPS Objective (after adjustment for Relative Performance Rank)
for the most recently ended Long-Term Performance Period, then 100% of
the shares of such Performance Restricted Stock shall immediately
forfeit to the Company.
For purposes of this Section 3(b), the terms Long-Term Performance Period,
Relative Performance Rank, Target Long-Term EPS Objective and Threshold
Long-Term EPS Objective shall have the same meanings as in the Company's
Executive Incentive Compensation Plan for Payless Executives. No restrictions
shall lapse on any Performance Restricted Stock until the Committee certifies,
in writing, that the requirements set forth in this Section 3(b) have been
satisfied.
(c) Forfeiture. All shares of Stock forfeited under this Section 3
shall be returned to the Company forthwith, and all the rights of the
Participant to such shares shall immediately terminate without any payment
or consideration by the Company.
4. TERMINATION OF EMPLOYMENT BY REASON OF DEATH OR DISABILITY. If a
Participant who has been in the continuous employment of the Company or of a
Subsidiary since the date as of which a Restricted Stock Grant was made to such
Participant shall, while in such employment, die or become Disabled and such
Participant's death or Disability shall occur more than one year after the date
as of which the Restricted Stock Grant was made to such Participant, then the
restrictions set forth in Part IV, Section 2 shall lapse as to all shares of
Restricted Stock granted to such Participant pursuant to such Restricted Stock
Grant on the date of such event. A Participant may file a written designation of
beneficiary to receive, in the event of the Participant's death, any shares for
which restrictions lapse on the date of death. The Company shall prescribe
procedures and requirements for beneficiary designations not inconsistent with
this provision and has the right to review and approve such designations.
A-8
<PAGE> 39
5. AGREEMENT BY EMPLOYEE REGARDING WITHHOLDING TAXES. Each Participant
shall agree that, subject to the provisions of Part IV, Section 6,
(i) no later than the date as of which the restrictions mentioned in
Part IV, Section 2 and in the instrument evidencing the making of the
Restricted Stock Grant shall lapse, such Participant will pay to the
Company in cash, or, if the Committee approves, in Stock, or make other
arrangements satisfactory to the Committee regarding payment of, any
Federal, state or local taxes of any kind required by law to be withheld
with respect to the shares of Stock subject to such Restricted Stock Grant,
and
(ii) the Company and its Subsidiaries shall, to the extent permitted
by law, have the right to deduct from any payment of any kind otherwise due
to the Participant any Federal, state or local taxes of any kind required
by law to be withheld with respect to the shares of Stock subject to such
Restricted Stock Grant.
6. ELECTION TO RECOGNIZE GROSS INCOME IN THE YEAR OF GRANT. If any
Participant properly elects, within thirty (30) days of the date of grant, to
include in gross income for Federal income tax purposes an amount equal to the
fair market value of the shares of Stock granted on the date of grant, such
Participant shall pay to the Company, or make arrangements satisfactory to the
Committee to pay to the Company in the year of such grant, any Federal, state or
local taxes required to be withheld with respect to such shares. If such
Participant shall fail to make such payments, the Company and its Subsidiaries
shall, to the extent permitted by law, have the right to deduct from any payment
of any kind otherwise due to the employee any Federal, state or local taxes of
any kind required by law to be withheld with respect to such shares.
7. RESTRICTIVE LEGEND; CERTIFICATES MAY BE HELD IN CUSTODY. Each
certificate evidencing shares of Stock granted pursuant to a Restricted Stock
Grant shall, (i) if issued to any person other than the Company for safekeeping
while the restrictions apply, bear an appropriate legend referring to the terms,
conditions and restrictions applicable to such Restricted Stock Grant and (ii)
if issued to the Company for safekeeping while the restrictions apply, be noted
as restricted on the records of the transfer agent. Any attempt to dispose of
such shares of Stock in contravention of such terms, conditions and restrictions
shall be ineffective. The Committee may adopt rules which provide that the
certificates evidencing such shares may be held in custody by a bank or other
institution, or that the Company may itself hold such shares in custody, until
the restrictions thereon shall have lapsed.
8. RESTRICTIONS UPON MAKING OF RESTRICTED STOCK GRANTS. The listing upon
the New York Stock Exchange or the registration or qualification under any
Federal or state law of any shares of Stock to be granted pursuant to Restricted
Stock Grants (whether to permit the making of Restricted Stock Grants or the
resale or other disposition of any such shares of Stock by or on behalf of the
employees receiving such shares) may be necessary or desirable as a condition of
or in connection with such Restricted Stock Grants and if, in any such event,
the Board in its sole discretion so determines, delivery of the certificates for
such shares of Stock shall not be made until such listing, registration or
qualification shall have been completed. In such connection, the Company agrees
that it will use its best effort to effect any such listing, registration or
qualification; provided, however, the Company shall not be required to use its
best efforts to effect such registration under the Securities Act of 1933 other
than on Form S-8, as presently in effect, or such other forms as may be in
effect from time to time calling for information comparable to that presently
required to be furnished under Form S-8.
9. RESTRICTIONS UPON RESALE OF STOCK. If the shares of Stock that have been
granted to a Participant pursuant to the terms of the Plan are not registered
under the Securities Act of 1933, as amended, pursuant to an effective
registration statement, such Participant, if the Committee shall deem it
advisable, may be required to represent and agree in writing that (i) any shares
of Stock acquired by such employee pursuant to the Plan will not be sold except
pursuant to an effective registration statement under the Securities Act of
1933, as amended, or pursuant to an exemption from registration under said Act
and (ii) such Participant is acquiring such shares of Stock for the
Participant's own account and not with a view to the distribution thereof.
A-9
<PAGE> 40
V. PERFORMANCE UNITS
1. GENERAL. The Committee may, from time to time and upon such terms and
conditions as it may determine, grant Performance Units which will become
payable to a Participant upon the achievement of specified performance
objectives. Each grant of Performance Units shall be evidenced by a Performance
Unit Agreement which shall contain such terms and conditions consistent with the
Plan as the Committee shall determine; provided, however that each grant of
Performance Units shall satisfy the following requirements:
(a) Each grant shall specify the number of Performance Units to which
it pertains.
(b) The performance period with respect to each Performance Unit shall
be such period of time commencing with the date of grant as shall be
determined by the Committee at the time of grant.
(c) Each grant shall specify performance objectives, if any, that are
to be achieved in order for payments to be made with respect to such
Performance Units.
(d) Each grant shall specify a minimum acceptable level of achievement
in respect of the specified performance objective below which no payment
will be made and shall set forth a formula for determining the amount of
payment to be made if performance is at or above such minimum, but short of
full achievement of the performance objectives.
(e) Each grant shall specify the time and manner of payment (whether
in cash, shares of Stock or a combination thereof) of Performance Units
which have been earned.
(f) The Committee may adjust the performance objectives and the
related minimum acceptable level of achievement if, in the sole judgment of
the Committee, events or transactions, such as stock splits,
recapitalizations, mergers, combinations, divestitures, spin-offs and the
like, have occurred after the date of grant which are unrelated to the
performance of the Participant and result in distortion of the performance
objectives or the related minimum.
2. PAYMENT FOR PERFORMANCE UNITS. Full and/or partial payment of
Performance Units will be made only upon certification by the Committee of the
attainment by the Participant of the performance objectives.
3. TERMINATION OF EMPLOYMENT BY REASON OF DEATH, DISABILITY OR
RETIREMENT. The Committee may, in its sole discretion, determine that
Performance Units awarded to a Participant shall become partially or fully
vested upon such Participant's termination of employment due to death,
Disability or Retirement.
VI. CANCELLATION AND RESCISSION
1. COMPETITION; CONFIDENTIAL INFORMATION.
(a) Unless an Option Agreement or a Stock Appreciation Right Agreement
(any such agreement being referred to herein as an "Agreement") specifies
otherwise, the Committee may
(1) cancel at any time any unexercised Option or Right; or
(2) rescind any exercise of an Option or Right;
if the Participant is not in compliance with all other applicable
provisions of the Agreement or the Plan or if, prior to any such exercise
or within six months after such exercise, the Participant
(i) engages in a Competing Business, as such term is defined in the
Agreement; or
(ii) solicits for employment, hires or offers employment to, or
discloses information to or otherwise aids or assists any other person
or entity other than the Company in soliciting for employment, hiring or
offering employment to, any employee of the Company; or
(iii) takes any action which is intended to harm the Company or its
reputation, which the Company reasonably concludes could harm the
Company or its reputation or which the Company reasonably concludes
could lead to unwanted or unfavorable publicity to the Company; or
A-10
<PAGE> 41
(iv) discloses to anyone outside the Company, or uses in other than
the Company's business, any "confidential information," as such term is
defined in the Agreement.
(b) Upon exercise of an Option or Right, the Participant shall certify
on a form acceptable to the Committee that the Participant is in compliance
with the terms and conditions of the Agreement and the Plan.
(c) The Company shall immediately notify the Participant in writing of
any cancellation of any unexercised Option or Right. Following receipt of
such notice, the Participant shall have no further rights with respect to
such Option or Right.
(d) The Company shall notify the Participant in writing of any
rescission of an exercise of an Option or Right within one year after the
activity referred to in Part VI, Section 1(a). Within ten days after
receiving such a notice from the Company, the Participant shall either (i)
pay to the Company the excess of the fair market value of the Stock on the
date of exercise of an Option over the exercise price for the Option or the
fair market value of the Stock and/or cash distributed to the Participant
as a result of the exercise of a Right or (ii) return the Stock received
upon the exercise of an Option (in which case the Company will return the
exercise price to the Participant) or return the Stock and/or cash
distributed upon the exercise of a Right.
2. AGREEMENT BY PARTICIPANT REGARDING DEDUCTION. The Participant shall
agree and consent to a deduction from any amounts the Company owes to the
Participant from time to time (including amounts owed as wages or other
compensation, fringe benefits, or vacation pay, as well as any other amounts
owed to the Participant by the Company), to the extent of the amounts the
Participant owes the Company under this Article VI. Whether or not the Company
elects to make any set-off in whole or in part, if the Company does not recover
by means of set-off the full amount owed by the Participant, calculated as set
forth in this Article VI, then the Participant agrees to pay immediately the
unpaid balance to the Company.
VII. MISCELLANEOUS
1. EFFECTIVE DATE. The Plan became effective on April 30, 1996, subject to
approval by shareowners, and the Plan was approved by shareowners on April 30,
1996.
2. DURATION OF PLAN. Unless sooner terminated, the Plan shall remain in
effect until April 30, 2006. Termination of the Plan shall not affect any
Options or Rights previously granted, which Options or Rights shall remain in
effect until exercised, surrendered, or cancelled, or until they have expired,
all in accordance with their terms. Termination of the Plan shall not affect any
Restricted Stock Grants previously made, or Stock previously granted pursuant to
a Restricted Stock Grant; the terms, conditions and restrictions applicable to
shares issued pursuant to a Restricted Stock Grant shall remain in effect until
such terms, conditions and restrictions shall have lapsed all in accordance with
their terms. Termination of the Plan shall not affect any grant of Performance
Units previously made; the terms and conditions applicable to such Performance
Units shall remain in effect until the Performance Units are earned in
accordance with their terms.
3. CHANGES IN CAPITAL STRUCTURE. In the event that there is any change in
the capital structure of the Company through merger, consolidation,
reorganization, recapitalization, spin-off or otherwise, or if there shall be
any dividend on the Company's Stock, payable in such Stock, or if there shall be
a Stock split or a combination of shares, then:
(i) the number of shares reserved for Options (both in the aggregate
and with respect to each Participant) and the number of shares subject to
outstanding Options and the price per share of each such Option;
(ii) the number of shares with respect to which Rights may be
exercised (both in the aggregate and with respect to each Participant); and
(iii) the number of shares of Stock reserved for Restricted Stock
Grants under the Plan shall be proportionately adjusted by the Board as it
deems equitable, in its absolute discretion, to prevent dilution
A-11
<PAGE> 42
or enlargement of the rights of a Participant and any shares issued
pursuant to such change in capital structure shall be subject to the same
terms, conditions and restrictions as the shares of Stock with respect to
which newly issued shares are issued. The issuance of Stock for
consideration and the issuance of Stock rights shall not be considered a
change in the Company's capital structure. No adjustment provided for in
this Section 3 shall require the issuance of any fractional share.
4. CHANGE IN CONTROL. If while unexercised Options, Rights, Restricted
Stock Grants or Performance Units remain outstanding under the Plan:
(i) any "person," as such term is used in Sections 13(d) and 14(d) of
the Securities Exchange Act of 1934, as amended (the "Exchange Act") (other
than the Company, any trustee or other fiduciary holding securities under
an employee benefit plan of the Company, or any company owned, directly or
indirectly, by the shareowners of the Company in substantially the same
proportions as their ownership of stock of the Company), is or becomes the
"beneficial owner" (as defined in Rule 13d-3 under the Exchange Act),
directly or indirectly, of securities of the Company representing 50% or
more of the combined voting power of the Company's then outstanding
securities;
(ii) during any period of two consecutive years, individuals who at
the beginning of such period constitute the Board, and any new director
(other than a director designated by a person who has entered into an
agreement with the Company to effect a transaction described in clause (i),
(iii) or (iv) of this Section) whose election by the Board or nomination
for election by the Company's shareowners was approved by a vote of at
least two-thirds (2/3) of the directors then still in office who either
were directors at the beginning of the period or whose election or
nomination for election was previously so approved, cease for any reason to
constitute at least a majority thereof;
(iii) the shareowners of the Company approve a merger or consolidation
of the Company with any other Company, other than (1) a merger or
consolidation which would result in the voting securities of the Company
outstanding immediately prior thereto continuing to represent (either by
remaining outstanding or by being converted into voting securities of the
surviving entity) more than 50% of the combined voting power of the voting
securities of the Company or such surviving entity outstanding immediately
after such merger or consolidation or (2) a merger or consolidation
effected to implement a recapitalization of the Company (or similar
transaction) in which no "person" (as hereinabove defined) acquires more
than 50% of the combined voting power of the Company's then outstanding
securities; or
(iv) the shareowners of the Company approve a plan of complete
liquidation of the Company or an agreement for the sale or disposition by
the Company of all or substantially all of the Company's assets,
then from and after the date of the first of the foregoing events to occur, (a)
all Options and Rights held by active employees on such date shall be
exercisable in full, whether or not otherwise exercisable; (b) the restrictions
set forth in Part IV, Section 2 on all outstanding Restricted Stock Grants,
including Performance Restricted Stock Grants, shall lapse; and (c) Performance
Units shall be earned and become fully payable.
5. AMENDMENT OR TERMINATION. The Board may, by resolution, amend or
terminate the Plan at any time; provided, however, that
(i) shareowner approval shall be required for any changes to the Plan
which would require shareowner approval under the New York Business
Corporation Law, Rule 16b-3 of the Securities Exchange Act of 1934, as
amended, or Section 162(m) of the Code; and
(ii) the Board may not, without the written consent of the
Participant, alter, impair or adversely affect any right of such
Participant with respect to any Option, Right or Performance Unit
previously granted, or Restricted Stock Grant grant previously made to such
Participant under the Plan except as authorized herein.
Notwithstanding the foregoing, the Board may, by resolution, amend the Plan in
any way that it deems necessary or appropriate in order to make income with
respect to the Plan deductible for Federal income tax purposes under Section
162(m) of the Code without regard to the foregoing provisos (i) and (ii), and
any
A-12
<PAGE> 43
such amendment shall be effective as of such date as is necessary to make such
income under the Plan so deductible.
7. UNFUNDED PLAN. The Plan shall be unfunded. Neither the Company nor the
Committee shall be required to segregate any assets that may at any time be
represented by Options or Rights under the Plan. Neither the Company nor the
Committee shall be deemed to be a trustee of any amounts to be paid under the
Plan. Any liability of the Company to any Participant with respect to a right
shall be based solely upon any contractual obligations created by the Plan, a
Performance Unit Agreement, a Stock Appreciation Right Agreement or an Option
Agreement; no such obligation shall be deemed to be secured by any pledge or any
encumbrance on any property of the Company.
A-13
<PAGE> 44
APPENDIX B
PAYLESS SHOESOURCE, INC.
EXECUTIVE COMPENSATION PLAN
This document constitutes and sets forth the terms of the Payless
ShoeSource, Inc. Executive Incentive Compensation Plan for Payless Executives.
Section 1. PURPOSES OF THE PLAN. The purposes of the Plan are (i) to
provide a means to attract, retain and motivate talented personnel and (ii) to
provide to participating management employees added incentive for high levels of
performance and for additional effort to improve the Company's financial
performance. Payments of awards under this Plan are intended to qualify for tax
deductibility under the provisions of Section 162(m) of the Internal Revenue
Code of 1986, as amended (the "Code"). Notwithstanding any other provisions of
this Plan, if any decision must be made before a specified date in order for
payments to qualify for such tax deductibility under the tax rules in effect
from time to time, then such decision is to be made before such date.
Section 2. DEFINITIONS. Whenever used herein, the following terms shall
have the following meanings:
(a) "Annual Award" means, for a Participant for a Fiscal Year, the
product of the Participant's Minimum Annual Compensation for such Fiscal
Year multiplied by the aggregate of:
(i) the Participant's Annual EPS Factor for such Fiscal Year, plus
(ii) the Participant's Annual RONA Factor for such Fiscal Year.
(b) "Annual EPS Factor" means, for a Participant for a Fiscal Year (i)
five percent, if actual EPS Growth for such Fiscal Year equals or exceeds
the Participant's Threshold Annual EPS Growth Objective for such Fiscal
Year, plus (ii) ten percent multiplied by a fraction (not less than zero
and not greater than one), the numerator of which is the actual EPS Growth
for such Fiscal Year less the Participant's Threshold Annual EPS Growth
Objective for such Fiscal Year and the denominator of which is the
Participant's Maximum Annual EPS Growth Objective for such Fiscal Year less
the Participant's Threshold Annual EPS Growth Objective for such Fiscal
Year; provided, however,
(i) that the Annual EPS Factor shall be subject to adjustment as
provided in Section 6(b);
(ii) that the percentages referred to in this definition may be
adjusted by the Committee as provided in Section 4(b); and
(iii) that the percentages referred to in this definition may be
adjusted by the Committee as provided in Section 4(c).
(c) "Annual RONA Factor" means, for a Participant for a Fiscal Year
(i) five percent if actual RONA for such Fiscal Year equals or exceeds the
Participant's Threshold Annual RONA Objective for such Fiscal Year, plus
(ii) ten percent multiplied by a fraction (not less than zero and not
greater than one), the numerator of which is the actual RONA for such
Fiscal Year less the Participant's Threshold Annual RONA Objective for such
Fiscal Year and the denominator of which is the Participant's Maximum
Annual RONA Objective for such Fiscal Year less the Participant's Threshold
Annual RONA Objective for such Fiscal Year; provided, however,
(i) that the Annual RONA Factor shall be subject to adjustment as
provided in Section 6(b);
(ii) that the percentages referred to in this definition may be
adjusted by the Committee as provided in Section 4(b); and
(iii) that the percentages referred to in this definition may be
adjusted by the Committee as provided in Section 4(c).
B-1
<PAGE> 45
(d) "Average Annual Compensation" means, for a Long-Term Performance
Period, the Participant's average annual salary rate during such period,
determined on a monthly basis, or such lesser amount as the Participant and
the Company shall agree to, in writing.
(e) "Board" means the Board of Directors of the Company.
(f) "Committee" means a committee designated by the Board, which shall
consist of not less than two members of the Board who shall be appointed by
and serve at the pleasure of the Board and who shall be "outside" directors
within the meaning of Section 162(m) of the Code.
(g) "Company" means Payless ShoeSource, Inc.
(h) "Disability" means the inability of a Participant to perform the
normal duties of the Participant's regular occupation.
(i) "EPS Growth" means (i) for a Fiscal Year, the annual growth rate
in EPS measured from the immediately preceding Fiscal Year; and (ii) for a
Long-Term Performance Period, the compound annual growth rate in EPS
measured from the Fiscal Year immediately preceding the Long-Term
Performance Period to the last Fiscal Year in the Long-Term Performance
Period. For purposes of this definition, "EPS" for a Fiscal Year means the
Company's EPS for such Fiscal Year as reported in the Company's annual
report to its shareholders for the year of determination (or, in the event
that such item is not included in such annual report, such comparable
figure as may be determined by the Committee) adjusted by the Company's
independent certified public accountants to exclude such non-recurring or
extraordinary items as the Committee shall determine are not representative
of the on-going operations of the Company.
(j) "Fiscal Year" means the fiscal year of the Company.
(k) "Long-Term Award" means, for a Participant for a Long-Term
Performance Period, the product of the Participant's Average Annual
Compensation for such period multiplied by the aggregate of:
(i) the Participant's Long-Term EPS Factor for such period, plus
(ii) the Participant's Long-Term RONA Factor for such period as
such product is adjusted in accordance with Section 5(b) of the Plan.
(l) "Long-Term EPS Factor" means, for a Participant for a Long-Term
Performance Period, (i) five percent if actual EPS Growth for such period
equals or exceeds the Participant's Threshold Long-Term EPS Growth
Objective for such period, plus (ii) ten percent multiplied by a fraction
(not less than zero and not greater than one) the numerator of which is the
actual EPS Growth for such period less the Participant's Threshold
Long-Term EPS Growth Objective for such period and the denominator of which
is the Participant's Maximum Long-Term EPS Growth Objective for such period
less the Participant's Threshold Long-Term EPS Growth Objective for such
period; provided, however,
(i) that the Long-Term EPS Factor shall be subject to adjustment as
provided in Section 6(b); and
(ii) that the percentages referred to in this definition may be
adjusted by the Committee as provided in Section 5(c).
(m) "Long-Term Performance Period" means three consecutive Fiscal
Years; provided, however, that the first Long-Term Performance Period under
the Plan shall be Fiscal Year 1996 and the second Long-Term Performance
Period under the Plan shall be Fiscal Years 1996 and 1997.
(n) "Long-Term RONA Factor" means, for a Participant for a Long-Term
Performance Period (i) five percent if actual RONA for such period equals
or exceeds the Participant's Threshold Long-Term RONA Objective for such
period plus (ii) ten percent multiplied by a fraction (not less than zero
and not greater than one), the numerator of which is the actual RONA for
such period less the Participant's Threshold Long-Term RONA Objective for
such period and the denominator of which is
B-2
<PAGE> 46
the Participant's Maximum Long-Term RONA Objective for such period less the
Participant's Threshold Long-Term RONA Objective for such period; provided,
however,
(i) that the Long-Term RONA Factor shall be subject to adjustment
as provided in Section 6(b); and
(ii) that the percentages referred to in this definition may be
adjusted by the Committee as provided in Section 5(c).
(o) "Market Value" means the average closing price of the Stock on the
New York Stock Exchange, Inc. during the month of February of the year
specified; provided, however, that "Market Value" for Fiscal Year 1996
means the arithmetic average of the high and low trading prices of the
Stock on the New York Stock Exchange for each of the first 30 trading days
on which trading in the Stock on that exchange occurs
(p) "Minimum Annual Compensation" means, for a Fiscal Year, the
Participant's rate of minimum annual salary on the first day of the fiscal
month of November in the Fiscal Year.
(q) "Participant" means an individual who has been designated to
participate in the Plan in accordance with Section 3 of the Plan.
(r) "Plan" mean the Payless ShoeSource, Inc. Executive Incentive
Compensation Plan for Payless Executives.
(s) "Relative Performance Rank" means, for a Fiscal Year or for a
Long-Term Performance Period, the relative rank of the Company (as among
the Company and a group of peer companies designated by the Committee)
based on the EPS Growth and RONA, respectively, of all such corporations
for such corporations' comparable fiscal periods, as determined by the
Committee. Relative Performance Rank shall be determined based on data
provided by the Company's independent certified public accountants from
publicly available information about all such corporations, and adjusted by
such independent certified public accountants for comparability
(adjustments for LIFO, major non-recurring transactions, etc.) subject to
the direction and approval of the Committee. The Committee may change the
number of peer companies or corporations included in the group when, as a
result of extraordinary or unforeseen events, it is no longer appropriate
for a particular corporation to be included in the peer group (such as when
one of the group ceases operations, merges with another corporation, files
for bankruptcy protection or significantly changes the nature of its
business).
(t) "Retirement" means, as to a Participant, retirement as that word
is defined in the Company's Profit Sharing Plan.
(u) "RONA" means (i) for a Fiscal Year, the Company's return on
beginning net assets for such Fiscal Year as reported in the Company's
annual report to its shareowners for the year of determination (or, in the
event that such item is not included in such annual report, such comparable
figure as may be determined by the Committee) adjusted by the Company's
independent certified public accountants to exclude such non-recurring or
extraordinary items as the Committee shall determine are not representative
of the ongoing operations of the Company; and (ii) for a Long-Term
Performance Period, the sum of the RONA for each Fiscal Year in the
Long-Term Performance Period divided by three.
(v) "Stock" means the common stock of the Company.
(w) "Subsidiary" means a subsidiary corporation of the Company within
the meaning of Section 425(f) of Code.
(x) The terms "Maximum Annual EPS Growth Objective," "Maximum
Long-Term EPS Growth Objective," "Target Annual EPS Growth Objective,"
"Target Long-Term EPS Growth Objective," "Threshold Annual EPS Growth
Objective," "Threshold Long-Term EPS Growth Objective," "Maximum Annual
RONA Objective," "Maximum Long-Term RONA Objective," "Target Annual RONA
Objective," "Target Long-Term RONA Objective," "Threshold Annual RONA
Objective" and
B-3
<PAGE> 47
"Threshold Long-Term RONA Objective" shall mean the respective objectives
determined by the Committee for each Participant pursuant to Section 7 of
the Plan.
Section 3. ELIGIBILITY. Management employees of the Company and its
Subsidiaries shall be eligible to participate in the Plan. The Committee may, in
its sole discretion, designate any such individual as a Participant for a
particular Fiscal Year and/or for a particular Long-Term Performance Period
before the end of such Fiscal Year and Long-Term Performance Period,
respectively. Designation of an individual as a Participant for any period shall
not require designation of such individual as a Participant in any other period,
and designation of one individual as a Participant shall not require designation
of any other individual as a Participant in such period or in any other period.
Section 4. ANNUAL AWARD. (a) Subject to the other provisions of the Plan, a
Participant for a Fiscal Year who is designated as such for an entire Fiscal
Year shall be entitled to an Annual Award for such Fiscal Year. Subject to the
other provisions of the Plan, a Participant for a Fiscal Year who is designated
as such for less than an entire Fiscal Year shall be entitled to a reduced
Annual Award for such Fiscal Year equal to the Annual Award for such Fiscal Year
multiplied by a fraction, the numerator of which shall be the number of complete
fiscal months between (i) the first day of the fiscal month in which occurs the
date as of which the Participant was so designated and (ii) the end of such
Fiscal Year and the denominator of which shall be twelve.
(b) The Committee may change the percentages referred to in the definitions
of "Annual EPS Factor" and "Annual RONA Factor" for any Fiscal Year, provided
that the maximum Annual Award which may be paid under such different percentage
may not be greater than 45% of the Participant's Minimum Annual Compensation for
such Fiscal Year.
(c) The percentages referred to in the definitions of "Annual EPS Factor"
and "Annual RONA Factor" may be adjusted by the Committee, in its sole
discretion, to provide that such percentages
(i) with respect to the chairman of the Board and chief executive
officer of the Company may be up to two times the percentages stated in
such definitions (subject to a maximum of 37.5% for each factor), and
(ii) with respect to the president of the Company may be up to one and
two-thirds times the percentages stated in such definitions (subject to a
maximum of 31.25% for each factor).
(d) Notwithstanding any other provision of the Plan, the maximum dollar
amount of any Annual Award for any Participant for any Fiscal Year shall not
exceed $1,500,000.
Section 5. LONG-TERM AWARD. (a) Subject to the other provisions of the
Plan, a Participant for a Long-Term Performance Period who is designated as such
for an entire Long-Term Performance Period shall be entitled to a Long-Term
Award for such period. Subject to the other provisions of the Plan, a
Participant for a Long-Term Performance Period who is designated as such for
less than an entire Long-Term Performance Period shall be entitled to a reduced
Long-Term Award for such period equal to the Long-Term Award for such period
multiplied by a fraction, the numerator of which shall be the number of complete
fiscal months between (i) the first day of the fiscal month in which occurs the
date as of which the Participant was so designated and (ii) the end of such
Long-Term Performance Period and the denominator of which shall be thirty-six.
(b) The Long-Term Award otherwise payable pursuant to Section 5(a) of the
Plan for a Long-Term Performance Period shall be adjusted by multiplying such
Long-Term Award by a percentage equal to a fraction, the numerator of which
shall be the Market Value of the Stock in February of the calendar year in which
such Long-Term Performance Period ends and the denominator of which shall be the
Market Value of the Stock in February of the calendar year in which such
Long-Term Performance Period begins; provided, however, that such percentage
shall in no event be greater than one hundred fifty percent nor less than
seventy-five percent.
B-4
<PAGE> 48
(c) The percentages referred to in the definitions of "Long-Term EPS
Factor" and "Long-Term RONA Factor" may be adjusted by the Committee, in its
sole discretion, to provide that such percentages
(i) with respect to the chairman of the Board and chief executive
officer of the Company may be up to two times the percentages stated in
such definitions (subject to a maximum of 37.5% for each factor), and
(ii) with respect to the president of the Company may be up to one and
two-thirds times the percentages stated in such definitions (subject to a
maximum of 31.25% for each factor).
(d) Notwithstanding any other provision of the Plan, the maximum dollar
amount of any Long-Term Award for any Participant for any Long-Term Performance
Period shall not exceed $1,500,000.
Section 6. ADJUSTMENTS. (a) DISCRETIONARY ADJUSTMENT OF AWARDS. In the
event that the Committee determines, in its absolute discretion, that an Annual
Award or a Long-Term Award payable to a Participant in accordance with the other
terms of the Plan should be adjusted, upwards or downwards, based on all the
facts and circumstances known to the Committee at the time, then, the Committee
may, in its sole and absolute discretion, increase or decrease any such Annual
Award or Long-Term Award to such amount as it determines; provided, however,
that the Committee may not adjust upwards any Annual Award or Long-Term Award of
any Participant who is a "covered employee" (as defined in Section 162(m) of the
Code and the regulations thereunder) with respect to the particular performance
period for which the Annual Award or Long-Term Award is being granted.
(b) ADJUSTMENT FOR RELATIVE RANK. A Participant's Annual EPS Factor, Annual
RONA Factor, Long-Term EPS Factor and Long-Term RONA Factor shall be adjusted in
the following manner based upon the number of peers in the group of peer
companies used to determine the Company's Relative Performance Rank and the
Company's Relative Performance Rank therein:
NUMBER OF PEER COMPANIES (NOT INCLUDING THE COMPANY)
<TABLE>
<CAPTION>
20 19 18 17 16 15 14 13 12 11 10 9
-- -- -- -- -- -- -- -- -- -- -- -
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Factor will be no less
than "Target" if the
Company's rank is...... 1st - 1st - 1st - 1st - 1st - 1st - 1st - 1st - 1st - 1st - 1s - 1st -
6th 5th 5th 5th 5th 4th 4th 4th 4th 3rd 3rd 3rd
Factor will be no less
than 'Threshold" if the
Company's rank is...... 7th - 7th - 6th - 6th - 6th - 6th - 5th - 5th - 5th - 4th - 4th - 4th -
11th 10th 10th 9th 9th 8th 8th 8th 7th 6th 6th 6th
Factor will be no higher
than "Threshold" if the
Company's rank is...... 16th - 16th - 15th - 14th - 13th - 13th - 12th - 11th - 10th - 10th - 9th - 8th -
21st 20th 19th 18th 17th 16th 15th 14th 13th 12th 11th 10th
<CAPTION>
8 7 6 5 4
- - - - -
<S> <C> <C> <C> <C> <C>
Factor will be no less
than "Target" if the
Company's rank is...... 1st - 1st - 1st - 1st - 1st -
3rd 2nd 2nd 2nd 2nd
Factor will be no less
than 'Threshold" if the
Company's rank is...... 4th - 3rd - 3rd - 3rd - 3rd -
6th 4th 4th 4th 4th
Factor will be no higher
than "Threshold" if the
Company's rank is...... 7th - 7th - 6th - 5th - 5th
9th 8th 7th 6th
</TABLE>
Section 7. ANNUAL AND LONG-TERM TARGETS. Threshold, target and maximum
annual and long-term objectives with respect to EPS Growth and with respect to
RONA shall be determined by the Committee as soon as practicable prior to the
commencement of each Fiscal Year and each Long-Term Performance Period for each
Participant or within the period permitted by applicable law. The Committee
shall cause the respective objectives for each Participant to be provided to
such Participant as soon thereafter as practicable. Such objectives shall remain
in effect for the entire Fiscal Year or Long-Term Performance Period, as
appropriate.
Section 8. PAYMENT OF AWARDS. (a) Annual Awards for a Fiscal Year shall be
payable in cash within three months after the close of such Fiscal Year or as
soon thereafter as practicable.
(b) Long-Term Awards for a Long-Term Performance Period shall be payable in
cash within three months after the close of such Long-Term Performance Period or
as soon thereafter as practicable.
(c) A Participant may elect to defer all or a portion of an award by making
such election under the Deferred Compensation Plan with respect to such award.
Such election must be made not later than December 31 of the calendar year
preceding the commencement of the Fiscal Year or Long-Term Performance Period,
as appropriate.
B-5
<PAGE> 49
(d) The Company shall have the right to deduct any sums that federal, state
or local tax laws require to be withheld with respect to any payment of awards.
(e) Before any award is paid to a Participant who is a "covered employee"
(as defined in Section 162(m) of the Code and the regulations thereunder), the
Committee shall certify in writing that the material terms of the Plan have been
satisfied.
Section 9. TERMINATION OF EMPLOYMENT.
(a) Death or Disability. In the event of either the death or Disability of
the Participant while employed (a "Section 9(a) Event"), the Participant shall
be entitled to the following:
(i) An Annual Award with respect to the Fiscal Year in which the
Section 9(a) Event occurs equal to the Annual Award otherwise payable (if
any) for that Fiscal Year, prorated to the end of the fiscal month in which
such Section 9(a) Event occurs; and
(ii) A Long-Term Award with respect to each Long-Term Performance
Period which includes the Fiscal Year of the Section 9(a) Event; provided,
however, that for purposes of this Section 9(a)(ii) the Long-Term Award for
any Long-Term Performance Period (1) shall be determined at the end of the
Fiscal Year in which the Section 9(a) Event occurs, (2) shall be determined
(and averages used in that determination shall be calculated) based only on
the Fiscal Year and any preceding Fiscal Years otherwise included in the
Long-Term Performance Period and (3) shall be prorated to the end of the
fiscal month in which the Section 9(a) Event occurs.
(b) Retirement.
(i) In the event of the Retirement of the Participant with the written
consent of the Company, such event shall be deemed to be a Section 9(a)
Event, and the Participant shall be entitled to an Annual Award and to a
Long-Term Award as provided in Section 9(a).
(ii) In the event of the Retirement of the Participant without the
consent of the Company (a "Section 9(b)(ii) Event"), the Participant shall
be entitled to the following:
(1) An Annual Award with respect to the Fiscal Year in which the
Section 9(b)(ii) Event occurs equal to the Annual Award otherwise
payable (if any) for the Fiscal Year, prorated to the end of the fiscal
month in which the Section 9(b)(ii) Event occurs; and
(2) No Long-Term Award following the Section 9(b)(ii) Event. The
Participant shall forfeit any right or entitlement to any award with
respect to any Long-Term Performance Period which has not been completed
on the date of the Section 9(b)(ii) Event. Any Long-Term Award for a
period which ended prior to the Section 9(b)(ii) Event shall remain
unaffected.
(c) Termination of Employment.
(i) In the event of the termination of employment of the Participant
not covered by Sections 9(a) or 9(b) above which occurs at the end of the
term of the Participant's then-current written employment agreement (if
any) with the Company or Subsidiary, or in the event of such a termination
of a Participant who has no current written employment agreement with the
Company or Subsidiary, such event shall be deemed to be a Section 9(b)(ii)
Event, and the Participant shall be entitled to an Annual Award (but not to
a Long-Term Award) as provided in Section 9(b)(ii).
(ii) In the event of the termination of employment of the Participant
not covered by Sections 9(a) or 9(b) above before the end of the term of
the Participant's then-current written employment agreement (if any) with
the Company or Subsidiary, with the written consent of the Company (a
"Section 9(c)(ii) Event"), the Participant shall be entitled to the
following:
(1) An Annual Award with respect to the Fiscal Year in which the
Section 9(c)(ii) Event occurs equal to the actual award otherwise
payable for the Fiscal Year (if any); provided, however, that in the
event that the term of the Participant's then-current employment
agreement is due to
B-6
<PAGE> 50
expire during that Fiscal Year, then the Annual Award shall be prorated
to the end of the fiscal month in which such term is due to expire; and
(2) A Long-Term Award with respect to each Long-Term Performance
Period which includes the Fiscal Year of the 9(c)(ii) Event equal to the
Long-Term Award otherwise payable with respect to each Long-Term
Performance Period; provided, however, that in the event that the term
of the Participant's then-current employment agreement (if any) with the
Company is otherwise due to expire during any such period, then the
Long-Term Award with respect to such period shall be prorated to the end
of the calendar month in which such term is due to expire.
(iii) In the event of the termination of employment of the Participant
not otherwise covered by this Section 9 before the end of the term of the
then-current written employment agreement (if any) with the Company or
Subsidiary, without the written consent of the Company, the Participant
shall not be entitled to any Annual Award or to any Long-Term Award with
respect to any Fiscal Year or Long-Term Performance Period which has not
been completed as of the date of such termination of employment. The
Participant shall forfeit any right or interest in any award for any such
Fiscal Year or Long-Term Performance Period. Annual Awards and Long-Term
Awards with respect to Fiscal Years and Long-Term Performance Periods which
ended prior to the date of such termination of employment shall remain
unaffected.
(d) For purposes of this Section 9, the term "written consent of the
Company" shall refer to an express written consent of the Company, duly executed
by the Company, which, by its own terms, expressly refers to this Section 9 of
the Plan.
Section 10. CHANGES IN RESPONSIBILITIES. In the event that (i) the duties
of a Participant change and the Participant becomes eligible to participate in
another bonus plan of the Company, or (ii) the duties of an employee who is a
participant in another bonus plan of the Company change and the employee is
newly designated by the Committee as a Participant in this Plan, then the
maximum amount that such Participant would be entitled to receive under the Plan
shall be
(1) the Annual Award determined in accordance with the provisions of
the Plan with respect to the entire Fiscal Year in which such event
occurred; and
(2) a Long-Term Award with respect to each Long-Term Performance
Period which has commenced at the time of the event, determined in
accordance with the provisions of the Plan,
subject, in all events, to the Committee's right to adjust such awards in
accordance with and subject to the restrictions set forth in Section 6(a), in
its absolute discretion, which may be exercised in such a way that the Committee
deems fair and equitable based on the performance of Participant while
participating in the other bonus plan of the Company.
Section 11. RIGHTS OF PARTICIPANTS AND BENEFICIARIES. (a) Nothing contained
in the Plan shall confer upon any Participant any right to continue in the
employ of the Company or constitute any contract or agreement of employment or
interfere in any way with the right of the Company to terminate or change the
conditions of employment.
(b) The Company shall pay all amounts payable hereunder only to the
Participant or his or her personal representatives. In the event of the death of
a Participant, payments of all amounts otherwise due to the Participant under
the Plan shall be made to the Participant's beneficiary at the time of death
under the Company Paid Life Plan of Payless ShoeSource, Inc. or to such other
beneficiary as the Participant shall have designated, in writing, for purposes
of this Plan on a form provided by the Company.
(c) Subject to the provisions of Section 11(d), rights to payments under
the Plan shall not be subject in any manner to anticipation, alienation, sale,
transfer, assignment, pledge, encumbrance, levy or charge, and any attempt to do
so shall be void; nor shall any such amounts be in any manner liable for or
subject to the debts, contracts, liabilities, engagements or torts of the
Participant or his or her beneficiaries.
B-7
<PAGE> 51
(d) Nothing in this Section 11 shall prohibit the personal representatives
of a Participant from designating that any amount that would otherwise be
distributed to the Participant's estate should be distributed in accordance with
the terms of the Participant's last will and testament or pursuant to the laws
of descent and distribution.
Section 12. UNFUNDED CHARACTER OF THE PLAN. The right of a Participant to
receive any Annual Award or Long-Term Award hereunder shall be an unsecured
claim against the general assets of the Company. Nothing in the Plan shall
require the Company to invest any amounts in Stock or in any other medium.
Section 13. CHANGES IN CAPITAL STRUCTURE. In the event that there is any
change in the Stock through merger, consolidation, reorganization,
recapitalization, spin-off or otherwise, or if there shall be any dividend on
the Stock, payable in such Stock, or if there shall be a stock split or
combination of shares, then the fraction provided for in Section 5(b) of the
Plan shall be adjusted by the Committee as it deems desirable, in its absolute
discretion, to prevent dilution or enlargement of the rights of Participants.
The issuance of Stock for consideration and the issuance of Stock rights shall
not be considered a change in the Company's capital structure.
Section 14. AMENDMENT OR TERMINATION. The Committee may, by resolution,
amend or terminate the Plan at any time. Any amendment necessary to bring the
Plan into compliance with Section 162(m) of the Code and any regulations
thereunder shall not require shareowner approval and the effectiveness of such
amendment shall be as of the effective date of the provision in Section 162(m)
of the Code or regulations thereunder giving rise to the amendment. However, (i)
shareowner approval shall be sought for any changes to the Plan which would
require shareowner approval under Section 162(m) of the Code and (ii) except as
provided in the preceding sentence, the Committee may not, without the consent
of the Participant, amend or terminate the Plan in such a manner as to affect
adversely any Annual Award or Long-Term Award which would have been payable,
based on the terms of the Plan immediately prior to any such amendment or
termination, for any Fiscal Year or Long-Term Performance Period which has
already commenced as of the effective date of the amendment or termination.
B-8
<PAGE> 52
APPENDIX C
PAYLESS SHOESOURCE, INC.
STOCK OWNERSHIP PLAN
1. PURPOSE AND EFFECT OF PLAN
The purpose of the Plan is to provide associates, including executive
officers, an opportunity to purchase Common Stock of Payless ShoeSource, Inc.
(the "Company") through payroll deductions at a discount on a tax deferred
basis. It is believed that this will help attract, motivate and retain highly
qualified and talented associates who are important to the Company's success.
The Plan is also intended to offer equity ownership in the Company to associates
to encourage them to enhance the value of the Company and therefore the price of
the Company's Common Stock and the shareowners' return.
The Plan is intended to comply with Code section 423 and to be a "tax
conditioned plan" within the meaning of SEC Rule 16b-3(c).
2. SHARES RESERVED FOR THE PLAN
There shall be reserved for issuance and purchase by Eligible Associates
under the Plan an aggregate of 2,000,000 shares of Common Stock, subject to
adjustment as provided in Section 16. Shares purchased for the Plan shall be
purchased in the open market or in private transactions, or a combination
thereof.
3. DEFINITIONS
Where indicated by initial capital letters, the following terms shall have
the following meanings:
ACT: The Securities Exchange Act of 1934.
BASE COMPENSATION: The regular earnings of an Eligible Associate (before
withholding or other deductions), including overtime, after any salary reduction
contributions pursuant to elections under a plan subject to Code sections 125 or
401(k) and excluding bonuses and any other special payments; provided, that the
Committee may expand or narrow the definition of Base Compensation from time to
time so long as such definition is consistent with the requirements of Section
423 of the Code.
BOARD: The Board of Directors of the Company.
BUSINESS DAY: Each day on which shares of Common Stock are or could be
traded on the New York Stock Exchange, or such other definition as the Committee
may from time to time specify.
CODE: The Internal Revenue Code of 1986, as amended, or any subsequently
enacted federal revenue law. A reference to a particular section of the Code
shall include a reference to any regulations issued under the section and to the
corresponding section of any subsequently enacted federal revenue law.
COMMITTEE: The committee established pursuant to Section 13 to be
responsible for the general administration of the Plan.
COMMON STOCK: The Company's common stock, $.01 par value.
COMPANY: Payless ShoeSource, Inc. and any successor by merger,
consolidation or otherwise.
ELIGIBLE ASSOCIATE: Each employee, including each executive officer, of the
Company and its domestic Subsidiaries who meet the eligibility requirements of
Section 4.
EMPLOYER: A Participating Company that is the employer of a Participant.
ENROLLMENT PROCEDURE: The procedure specified from time to time by the
Committee to enable an Eligible Associate to participate in the Plan and to
authorize payroll deductions pursuant to Section 5.
C-1
<PAGE> 53
FAIR MARKET VALUE: The weighted average price per share paid for all shares
purchased on the date in question with respect to a determination of the
Purchase Price of Common Stock purchased other than from the Company by an
independent trustee or purchasing agent in arms-length transactions. For all
other purposes, Fair Market Value shall mean the average of the reported lowest
and highest sales prices per share for the Common Stock on the New York Stock
Exchange on the date in question, or, if there are no such sales on that date,
the reported lowest and highest sales prices per share for the Common Stock on
the New York Stock Exchange for the last Business Day prior to the date in
question for which sales of the Common Stock were reported.
INVESTMENT ACCOUNT: The account established for each Participating
Associate to hold Common Stock purchased under the Plan pursuant to Section 5.
INVESTMENT DATE: The date on which the shares of Common Stock are purchased
for the Plan.
MONTH: A calendar month.
PARENT: Any corporation (other than the Company) in an unbroken chain of
corporations ending with the Company if, as of an Investment Date, each of the
corporations other than the Company owns stock possessing 50% or more of the
total combined voting power of all classes of stock in one of the other
corporations in such chain.
PARTICIPATING COMPANIES: The Company and its domestic Subsidiaries.
PARTICIPANT OR PARTICIPATING ASSOCIATE: Eligible Associates who elect to
participate in the Plan pursuant to Section 5.
PAYROLL DEDUCTION ACCOUNT: The account established for a Participating
Associate to hold payroll deductions pursuant to Section 5.
PLAN: The "Payless ShoeSource, Inc. Stock Ownership Plan," as set forth
herein and as amended from time to time.
PURCHASE PRICE: The price for each whole and fractional share of Common
Stock, including those purchased by dividend reinvestment, which shall be 85% of
the Fair Market Value of such whole or fractional share on the Investment Date;
provided, however, the Committee may change such purchase price so long as the
purchase price is not lower than the lesser of (i) 85% of the Fair Market Value
of the Common Stock on the first day of the applicable purchase period, and
(ii) 85% of the Fair Market Value of the Common Stock on the Investment Date.
PURCHASE PERIOD: That period specified by the Committee during which
payroll deductions shall be accumulated for the purchase of Common Stock under
the Plan; provided, that such period shall not have a duration that exceeds the
limitations provided in Section 423(b)(7) of the Code.
RULE 16B-3: Rule 16b-3 of the Securities and Exchange Commission
promulgated under the Act, as now and hereafter amended.
SUBSIDIARY OR SUBSIDIARIES: Any corporation (other than the Company) in an
unbroken chain of corporations beginning with the Company if, as of an
Investment Date, each of the corporations other than the last corporation in the
unbroken chain owns stock possessing 50% or more of the total combined voting
power of all classes of stock in one of the other corporations in such chain.
TRUSTEE: The trustee of the Plan designated by the Committee as provided in
Section 13.
4. ELIGIBLE ASSOCIATES
Participation in the Plan shall be open to each associate of a
Participating Company (including each executive officer of the Company) who has
been continuously employed by one or more Participating Companies for at least
one year; provided, that the Committee may establish such other or different
employment requirements as it may deem appropriate so long as such other or
different requirements are consistent with the provisions of Section 423 of the
Code. For purposes of this section any break in service of
C-2
<PAGE> 54
less than thirty days shall not be deemed to constitute a discontinuance of
employment, unless the Committee shall otherwise provide.
No director of the Company or of any its Subsidiaries who is not an
associate shall be eligible to participate in the Plan.
5. ELECTION TO PARTICIPATE; METHOD OF PURCHASE; INVESTMENT ACCOUNTS; DIVIDENDS
5.1 ELECTION TO PARTICIPATE. Each Eligible Associate may become a
Participant effective on the first day of any Month coincident with or following
the date the Participant becomes an Eligible Associate by complying with the
Enrollment Procedure authorizing specified regular payroll deductions from the
Participant's Base Compensation. Such regular payroll deductions shall be
subject to a minimum deduction of $5.00 per weekly pay period and $10.00 per
bi-weekly pay period and a maximum deduction of $25.00 per weekly pay period and
$50.00 per bi-weekly pay period; provided, that the Committee may increase or
decrease such minimum and maximum deductions from time to time. All regular
payroll deductions shall be credited to the Payroll Deduction Account that the
Company has established in the name of the Participant.
5.2 PURCHASE OF COMMON STOCK. Each Participating Associate having eligible
funds in the Participant's Payroll Deduction Account on an Investment Date shall
be deemed, without any further action, to have purchased the number of shares
which the eligible funds in the Participant's Payroll Deduction Account could
purchase at the Purchase Price on that Investment Date. All shares purchased
shall be maintained by the Trustee in separate Investment Accounts for
Participating Associates. Fractional shares will be allocated to accounts under
the Plan unless the Committee otherwise provides; provided that share
certificates shall only be issued for whole shares. If fractional shares are not
allocated to accounts under the Plan, amounts that otherwise would have been
applied to the purchase of fractional shares will continue to be held for the
Participant and be applied towards the purchase of shares on the last day of the
next Purchase Period.
5.3 TIMING AND MANNER OF PURCHASE. The Committee shall designate Purchase
Periods during which funds shall be accumulated in Payroll Deduction Accounts
for the purchase of Common Stock. Until otherwise specified the Purchase Periods
shall consist of each Month in a year. The Investment Date shall occur during an
interval immediately following the end of each Purchase Period having such
duration as the Committee shall from time to time specify, provided that until
the Committee otherwise specifies, such interval shall be the ten Business Days
immediately following the end of the Purchase Period. However, nothing contained
in this Plan shall authorize the Committee, the Company or any affiliate of the
Company to exercise any direct or indirect control or influence over the times
when, or the prices at which, the Trustee or its independent agent may purchase
the Common Stock for the Plan, the amounts of the Common Stock to be purchased,
the manner in which the Common Stock is to be purchased, or the selection of a
broker or dealer (other than the Trustee) through which purchases may be
executed; provided, that the Company, the Committee and affiliates of the
Company, shall not be deemed to have such control or influence solely because
the Committee revises not more than once in any three month period the basis for
determining the amount of the Company's contributions to the Plan, the basis for
determining the frequency of the Company's allocations to the Plan, or any
formula in the Plan that determines the amount or timing of shares to be
purchased by the Trustee.
5.4 DIVIDENDS AND OTHER DISTRIBUTIONS. All cash dividends paid with respect
to the whole and fractional shares of the Common Stock and shares so purchased
shall be reinvested in Common Stock on the immediately following Investment Date
and added to the shares held for a Participating Associate in the Participant's
Investment Account. Stock dividends and stock splits received by the Plan will
be credited to Participants having Common Stock allocated to their Investment
Account to the extent that they are attributable to such allocated Common Stock.
Property, other than shares of Common Stock or cash, received by the Trustee as
a distribution with respect to Common Stock allocated to Participant Common
Stock accounts will be distributed in kind to Participants in proportion to the
number of shares of Common Stock contained in their Investment Account.
5.5 STOCK PURCHASES. The Trustee shall effect purchases of Common Stock on
the open market or in private transactions. Purchases shall be made using total
amounts contained in all Payroll Deduction Accounts
C-3
<PAGE> 55
immediately preceding the purchase. The Company will pay the difference between
the Purchase Price and the price at which such shares are purchased for the Plan
on or prior to the required closing date for the purchase. Expenses incurred in
the purchase of shares shall also be paid by the Company.
5.6 PAYMENT OF DEDUCTIONS TO THE TRUSTEE. Participating Companies shall pay
to the Trustee or to the order of the Trustee payroll deductions made during a
Month prior to the time required for the closing of purchases of Common Stock
for the Plan, as directed by the Committee. Interest shall not accrue on any
amount paid to the Trustee or otherwise allocated to an Investment Account
pending investment in Common Stock or other distribution.
6. CHANGE IN PARTICIPATION, WITHDRAWALS AND DISTRIBUTIONS
6.1 PERIOD OF PARTICIPATION. After an Eligible Associate has become a
Participant in the Plan, such participation will continue thereafter, so long as
the Plan continues in effect, until the employment of the Participant with all
Participating Companies terminates, the Participant ceases to make contributions
to the Plan and makes a complete withdrawal from the Plan, or the Participant
ceases to be an Eligible Associate.
6.2 CHANGE IN PARTICIPATION. A Participant may change the amount of the
Participant's payroll deductions in accordance with rules established by the
Committee.
6.3 PARTIAL WITHDRAWALS. The Trustee shall deliver whole shares allocated
to a Participant's Investment Account upon written request for a partial
withdrawal received in accordance with rules established by the Committee so
long as the Participant's Investment Account following such delivery contains at
least one share or such other amount as the Committee may from time to time
require. Deliveries shall be made as soon as practicable after the request is
received.
6.4 COMPLETE WITHDRAWAL, TERMINATION OF EMPLOYMENT, DEATH. A Participant
may effect a complete withdrawal from the Plan by giving notice in accordance
with rules established by the Committee. A withdrawal from the Plan shall also
be deemed to occur at such time as the Participant ceases to be an Eligible
Associate for any reason, including death, or upon the occurrence of such other
event as may herein be specified as one which triggers a withdrawal. The
Employer shall give prompt notice to the Trustee of such withdrawal. Upon any
such withdrawal the Participant, or the Participant's beneficiary or estate in
the case of death, shall be entitled to receive from the Trustee, as soon as
practicable after the Trustee shall have completed its purchases of Common Stock
hereunder with all funds attributable to amounts received by the Trustee with
respect to the part of the Purchase Period that precedes the effective date of
such withdrawal: (a) the number of whole shares of Common Stock credited to the
account of such Participant, (b) cash in the amount of any fractional share
credited to the Participant's Investment Account and (c) any cash balance
credited to such Participant's Accounts which has not been invested by the
Trustee. In the case of the death of the Participant the deliveries shall be
made to the beneficiary designated by the Participating Associate in a writing
filed with the Company. If no beneficiary has been designated, or if the
designated beneficiary does not survive the Participating Associate, such amount
and all shares shall be delivered to the Participant's estate.
6.5 PLAN RE-ENTRY; SUSPENSION DURING APPROVED LEAVE. A Participant who
withdraws from the Plan and continues to otherwise be an Eligible Associate may
re-enter the Plan in accordance with such rules as the Committee may establish;
provided that until the Committee otherwise specifies, re-entry may be effected
at any time in accordance with the Enrollment Procedure. A Participant whose
contributions under the Plan shall have been temporarily discontinued shall not
be considered to have withdrawn from the Plan.
7. REGISTRATION OF SHARES
The shares to be delivered to a Participant will be issued in such
registration as shall have been specified by the Participant in accordance with
procedures established by the Committee. The Committee may, in its discretion,
restrict the use of any form of registration other than registration solely in
the name of the Participant and may permit such other registrations as may be
permitted under Section 423 of the Code and related Code sections and rules. The
shares of a Participant who is a minor may, with the consent of the
C-4
<PAGE> 56
Committee, and upon written instructions by such associate, be registered in the
name of an adult as custodian for such minor associate.
8. REQUIRED NOTICE OF SUBSEQUENT SALE
As a condition of participation in the Plan, each Participating Associate
agrees to notify the Company if the Participant sells or otherwise disposes of
any of the Participant's shares of Common Stock within two years of the
Investment Date on which such shares were purchased.
9. STATEMENT OF ACCOUNT
As soon as practicable after the end of each calendar quarter each
Participant will receive from the Trustee or the Company a statement of the
Participant's account with respect to such period, subject to the right of the
Committee to prescribe the form and content of such statement and to otherwise
change the frequency, coverage and delivery of such statement.
10. EXERCISE OF VOTING AND OTHER RIGHTS
Prior to the time when the Trustee makes delivery to the Participating
Associate of the shares of Common Stock held in the Participant's Investment
Account, the Trustee will exercise all voting rights pertaining to the shares of
Common Stock allocated to the Investment Account of each Participant only in
accordance with written directions, if any, given to the Trustee by such
Participant prior to the date fixed for the exercise of such voting rights. In
the absence of such direction, the Trustee shall not vote allocated shares but
may vote any unallocated Common Stock in its discretion. All stock rights or
offers received by the Trustee with respect to any Common Stock held by it
hereunder shall be exercised by the Trustee to the extent appropriately
specified in writing by Participants with respect to Common Stock allocated to
the Investment Accounts of such Participants. Rights or offers relating to any
unallocated Common Stock shall be exercised or otherwise disposed of by the
Trustee in its discretion.
11. DESIGNATION OF BENEFICIARY
A Participant may file with the Company a written designation of a
beneficiary with respect to the assets in the accounts of the Participant in the
event of the Participant's death, provided that no such designation shall be
effective unless so filed prior to the death of the Participant. The written
designation of a beneficiary filed with the Company may be changed or revoked by
the sole action of the Participant unless such action is precluded by statute.
If upon the death of a Participant there is doubt as to the right of any
beneficiary to receive any amount, the Committee may direct the Trustee to
retain such amount, without liability for any interest thereon, until the rights
thereto are determined, or the Committee may direct the Trustee to distribute
such amount into any court of appropriate jurisdiction, in either of which
events neither the Trustee nor the Committee nor any Employer shall be under any
further liability to anyone with respect to such amount.
12. SALE OF SHARES
A Participating Associate shall have the right to direct the Trustee to
sell shares in the Participant's Investment Account in lieu of a withdrawal or
distribution of the shares in kind; provided that the Committee may adopt rules
regulating such elections, the timing of such sales, and requirements that sales
be aggregated with other sales. The Committee may also choose to completely or
temporarily suspend or terminate such rights. Upon any permitted direction to
sell, the Trustee will sell all shares allocated to the Investment Account that
are covered by the direction together with any fractional interest that may be
aggregated with other fractional interests into a whole share, and remit the
proceeds of such sale, less brokerage commissions and other selling expenses to
the Participant or other permitted distributee. The Trustee may, consistent with
applicable securities laws, sell the shares in private transactions, in the open
market, or to the Company. If so directed the Trustee shall sell the shares to
the Company. Any sale of shares to the Company shall be effected at Fair Market
Value on the date of purchase.
C-5
<PAGE> 57
13. ADMINISTRATION OF THE PLAN
13.1 THE COMMITTEE. The Plan shall be administered by the Committee, which
shall consist of not less than two members appointed by the Board. Committee
members shall be directors, officers or salaried employees of the Company. The
Board from time to time may appoint members previously appointed and may fill
vacancies, however caused, in the Committee.
13.2 THE TRUSTEE. The Committee will designate one or more individuals, a
bank, trust company or investment firm having trust powers to act as trustee
under the Plan (the "Trustee"), with the right in the Committee to change such
designation in its discretion. The Trustee will hold all funds received by it
under the Plan and, until delivery thereof to the Participants hereunder, all
shares of Common Stock acquired by the Trustee under the Plan. The Trustee may
rely on all orders, requests, and instructions with respect to the Plan given in
writing and signed by any person authorized by the Committee or the Company's
Board of Directors, and the Trustee shall not be liable to any person for any
action taken in accordance therewith. The Trustee or such other agent as the
Trustee may appoint to effect purchases under the Plan shall be an "agent
independent of the issuer" within the meaning of Regulation M of the Securities
and Exchange Commission, as amended.
13.3 AUTHORITY OF THE COMMITTEE. Subject to the express provisions of the
Plan, the Committee shall have the authority to take any and all actions
(including directing the Trustee as to the acquisition of shares) necessary to
implement the Plan, to interpret the Plan, to prescribe, amend and rescind rules
and regulations relating to it, and to make all other determinations necessary
or advisable in administering the Plan. All of such determinations shall be
final and binding upon all persons. A quorum of the Committee shall consist of a
majority of its members and the Committee may act by vote of a majority of its
members at a meeting at which a quorum is present, or without a meeting by a
written consent to the action taken signed by all members of the Committee. The
Committee may request advice or assistance or employ such other persons as are
necessary for proper administration of the Plan. To the extent that the
Committee exercises discretionary authority with respect to the establishment
and modification of rules, regulations and guidelines for the administration of
the Plan, such rules and rule changes shall be made to apply uniformly to all
Participants, consistent with the requirements of Section 423 of the Code.
14. LIMITATION ON PURCHASES
No Participating Associate may purchase during any one calendar year under
the Plan (or under any other plan of the Company, a Parent or Subsidiary
qualified under Code section 423) shares of Common Stock having an aggregate
Fair Market Value (determined by reference to the Fair Market Value on each
Investment Date) in excess of the limitations of Code section 423(b)(8).
A Participating Associate's Payroll Deduction Account may not be used to
purchase Common Stock on any Investment Date to the extent that after such
purchase the Participating Associate would own (or be considered as owning
within the meaning of Code section 424(d)) stock possessing 5 percent or more of
the total combined voting power of the Company or its Parent or Subsidiary. For
this purpose, Common Stock which the Participating Associate may purchase under
any outstanding rights to purchase shall be treated as owned by such
Participating Associate. As of the first Investment Date on which this paragraph
limits a Participating Associate's ability to purchase Common Stock, the
associate shall cease to be an Eligible Associate.
15. RIGHTS NOT TRANSFERABLE
Rights under the Plan are not transferable by a Participating Associate
otherwise than by will or the laws of descent and distribution, and are
exercisable, during the Associate's lifetime, only by the Associate.
16. CHANGE IN CAPITAL STRUCTURE
In the event of a stock dividend, stock split or combination of shares,
recapitalization or merger in which the Company is the surviving corporation or
other change in the Company's capital stock (including, but not limited to, the
creation or issuance to shareholders generally of rights, options or warrants
for the purchase of
C-6
<PAGE> 58
Common Stock or preferred stock of the Company), the number and kind of shares
of stock or securities of the Company to be subject to the Plan, the maximum
number of shares or securities which may be delivered under the Plan, the
selling price and other relevant provisions shall be appropriately adjusted by
the Committee, whose determination shall be binding on all persons.
If the Company is a party to a consolidation or a merger in which the
Company is not the surviving corporation, a transaction that results in the
acquisition of substantially all of the Company's outstanding stock by a single
person or entity, or a sale or transfer of substantially all of the Company's
assets, the Committee may take such actions with respect to the Plan as the
Committee deems appropriate.
Notwithstanding anything in the Plan to the contrary, the Committee may
take the foregoing actions without the consent of any Participant, and the
Committee's determination shall be conclusive and binding on all persons for all
purposes.
17. AMENDMENT OF THE PLAN
The Board of Directors may at any time, or from time to time, amend the
Plan in any respect; provided, however, that the shareholders of the Company
must approve any amendment that would (i) increase the number of securities that
may be issued under the Plan, or (ii) modify the requirements as to eligibility
for participation in the Plan.
18. TERMINATION OF THE PLAN
The Plan and all rights of associates hereunder shall terminate:
a. on the Investment Date that Participating Associates become
entitled to purchase a number of shares greater than the number of reserved
shares remaining available for purchase; or
b. at any date at the discretion of the Board of Directors.
In the event that the Plan terminates under circumstances described in (a)
above, reserved shares remaining as of the termination date shall be issued to
Participating Associates on a pro rata basis. Upon termination of the Plan, all
amounts in an associate's Payroll Deduction Account that are not used to
purchase Common Stock will be refunded.
19. EFFECTIVE DATE OF PLAN
The Plan was approved by the Board of Directors on March 20, 1997, and
shall become effective on August 1, 1997, subject to receiving shareholder
approval.
20. GOVERNMENT AND OTHER REGULATIONS
The Plan, and the grant and exercise of the rights to purchase shares
hereunder, and the Company's obligation to sell and deliver shares upon the
exercise of rights to purchase shares, shall be subject to all applicable
federal, state and foreign laws, rules and regulations, and to such approvals by
any regulatory or government agency as may, in the opinion of counsel for the
Company, be required.
21. INDEMNIFICATION AND LIABILITY OF COMMITTEE AND TRUSTEE
The Committee and all persons employed by each Participating Company who
are engaged in administering the Plan shall be entitled to rely upon all
valuations, certificates and reports furnished by the Trustee or by any
accountant or actuary selected by the Committee and upon all opinions given by
any legal counsel selected by the Committee. The members of the Committee, the
Trustee, each Participating Company, and all persons employed by each
Participating Company and the Trustee who are engaged in administering the Plan
(a) shall be fully protected with respect to any action taken by them in good
faith and all actions so taken shall be conclusive and binding upon all persons
having or claiming to have any interest under the Plan; and (b) shall not be
personally liable by reason of any instrument made or executed by them or on
their behalf or in the course of administering the Plan or for any mistake of
judgment made by them or
C-7
<PAGE> 59
any other person, or for any neglect, omission or wrongdoing of any other person
or for any loss to the Plan unless resulting from their own willful misconduct.
No member of the Committee shall have any liability to any person for any action
or omission except each for his own individual willful misconduct.
Service on the Committee shall constitute service as a director of the
Company so that members of the Committee shall be entitled to indemnification
and reimbursement as directors of the Company pursuant to its Articles of
Incorporation and Bylaws.
In addition to the foregoing, each member of the Committee, the Trustee,
and each director and officer of each Participating Company shall be indemnified
by the Company against all expenses (including costs and attorneys fees)
actually and necessarily incurred or paid by such person in connection with the
defense of any action, suit or proceeding in any way relating to or arising from
the Plan to which the Participant may be made a party by reason of the party
being or having been such member of the Committee, Trustee, director or officer
or by reason of any action or omission or alleged action or omission by him in
such capacity, and against any amount or amounts which may be paid by him (other
than to the Employer) in reasonable settlement of any such action, suit or
proceeding, where the Company has consented to such settlement. In cases where
such action, suit or proceeding shall proceed to final adjudication, such
indemnification shall not extend to matters as to which it shall be adjudged
that such member of the Committee, Trustee, director or officer is liable for
willful misconduct in the performance of the duties of such person as such. The
right of indemnification herein provided shall not be exclusive of other rights
to which any member of the Committee, Trustee, director or officer may now or
hereafter be entitled, shall continue as to a person who has ceased to be such
member of the Committee, Trustee, director or officer and shall inure to the
benefit of the heirs, executors, administrators, successor or assigns of such
members of the Committee, director or officer.
22. APPLICABLE LAW
The place of administration of the Plan shall conclusively be deemed to be
within the State of Kansas and the validity, construction, interpretation and
administration of the Plan and of any rules or regulations or determinations or
decisions made thereunder, and the rights of any and all persons having or
claiming to have any interest therein or thereunder, shall be governed by and be
determined exclusively and solely in accordance with, the laws of the State of
Kansas. Without limiting the generality of the foregoing, the period within
which any action arising under or in connection with the Plan, or any payment or
award made or purportedly made under or in connection therewith, must be
commenced, shall be governed by the laws of the State of Kansas, irrespective of
the place where the act or omission complained of took place and of the
residence of any party to such action and irrespective of the place where the
action may be brought.
C-8
<PAGE> 60
Bradbury Thompson Center Map
The Bradbury Thompson Center is located on the Washburn University Campus on the
southwest corner of the 17th and Jewell Streets. The meeting will be held in
Ruth Garvey Fink Room, First Floor of the Bradbury Thompson Center.
Parking is available for you in Parking Lots 10 and 11. From the parking lot,
you may enter the Bradbury Thompson Center from the south or east entrances.
<PAGE> 61
PAYLESS SHOESOURCE, INC.
3231 EAST 6TH STREET
P.O. BOX 1189
TOPEKA, KANSAS 66601-1189
(913) 233-5171
To Shareowners of Payless ShoeSource, Inc.:
The Annual Meeting of PSS shareowners will be held at Washburn
University Bradbury Thompson Center, 1700 College Avenue, corner of
17th and Jewell Streets, Topeka, Kansas on Friday, May 23, 1997, at
10:00 a.m. Central Daylight Time. The enclosed proxy statement
provides you with information regarding the meeting.
It is important that your shares be represented at this meeting. Even
if you plan to attend, please promptly sign, date and return your proxy
in the enclosed postage-paid envelope.
ADMISSION TICKET
(Please detach this proxy card below and return it in the enclosed
envelope. If you are planning to attend the annual meeting, please
save this Admission Ticket and bring it to the meeting for admission.)
DETACH PROXY CARD HERE
<TABLE>
<CAPTION>
<S><C>
- - -----------------------------------------------------------------------------------------------------------------------------------
[ ]
Management recommends a vote FOR items (a), (b), (c), (d) and (e).
(a) Election of Directors FOR [X] WITHHOLD AUTHORITY [X] *EXCEPTIONS [X]
INSTRUCTIONS: To vote your shares for all nominees, please mark the FOR box
in Item (a). To withhold voting for all nominees, please mark the WITHHOLD
box. If you do not wish your shares voted FOR a particular nominee, please
mark the EXCEPTION box and enter the name of the exception(s) in the space
provided.
*Exceptions___________________________________________________________________
(b) Ratification of the appointment of independent auditors. (d) Proposal to approve the Executive Incentive
Compensation Plan for Payless Executives.
FOR [X] AGAINST [X] ABSTAIN [X] FOR [X] AGAINST [X] ABSTAIN [X]
(c) Proposal to approve the 1996 Stock Incentive Plan, as amended. (e) Proposal to approve the Payless Stock Ownership
Plan.
FOR [X] AGAINST [X] ABSTAIN [X] FOR [X] AGAINST [X] ABSTAIN [X]
If you plan to [X] Change of Address and
attend the Annual or Comments Mark Here [X]
Meeting, please
mark here.
Please sign name(s) exactly as shown on this card.
Dated:_______________________________________, 1997
___________________________________________________
___________________________________________________
Signature(s)
Votes MUST be indicated
(x) in Black or Blue ink. [X]
</TABLE>
Please Sign, Date and Return the Proxy Promptly Using the Enclosed Envelope.
<PAGE> 62
DIRECTIONS TO WASHBURN UNIVERSITY
BRADBURY THOMPSON CENTER
17th and Jewell
Topeka, Kansas
[MAP]
The Bradbury Thompson Center is located on the Washburn University
Campus on the southwest corner of the 17th and Jewell Streets. The
meeting will be held in Ruth Garvey Fink Room, First Floor of the
Bradbury Thompson Center.
Parking is available for you in Parking Lots 10 and 11. From the
parking lot you may enter the Bradbury Thompson Center from the south
or east entrances.
- - -------------------------------------------------------------------------------
(PSS)
PROXY PAYLESS SHOESOURCE, INC.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS FOR THE ANNUAL
MEETING ON MAY 23, 1997.
By signing this card, the undersigned appoints each of Jed L. Norden and
William J. Rainey, or each or either of them, with full power of substitution,
as proxies for the undersigned, to vote all common shares of the undersigned in
Payless ShoeSource, Inc. at the May 23, 1997, Annual Meeting of shareowners,
and at any adjournment of the meeting, on all subjects that may properly come
before the meeting, subject to the directions on the other side of this card.
The Board of Directors recommends a vote FOR election of all listed director
nominees, FOR proposals (b), (c), (d) and (e) on the other side of this card.
IF NO DIRECTIONS ARE GIVEN, AND THIS SIGNED CARD IS RETURNED, THE UNDERSIGNED
UNDERSTANDS THAT THE PROXIES WILL VOTE IN ACCORDANCE WITH RECOMMENDATIONS OF
THE BOARD OF DIRECTORS AND IN EACH PROXY'S DISCRETION ON ANY OTHER MATTERS THAT
MAY PROPERLY COME BEFORE THE MEETING.
The nominees for the board of directors are Richard A. Jolosky and Robert L.
Stark.
Please sign the other side of this card and PAYLESS SHOESOURCE, INC.
return this card promptly to the address shown P.O. BOX 11147
on the right in the enclosed return envelope to: NEW YORK, N.Y. 10203-0147
(Continued, and to be dated and signed on reverse side.)
<PAGE> 63
PAYLESS SHOESOURCE, INC.
3231 EAST 6TH STREET
P.O. BOX 1189
TOPEKA, KANSAS 66601-1189
(913) 233-5171
To Members of the Profit Sharing Plan:
Enclosed please find the Company's 1996 Annual Report to Shareowners
and the proxy statement for the 1997 Annual Meeting, a confidential
voting instruction card and a return envelope. It is important that
you vote. Management's recommendation on each issue and the reasons
for the recommendations are described in the proxy statement.
Please complete, sign and return the confidential voting instruction
card; the Profit Sharing Plan trustee (The Bank of New York) will
follow your voting instuctions. These instructions cannot be disclosed
by the trustee.
DETACH PROXY CARD HERE
<TABLE>
<CAPTION>
<S> <C>
- - ------------------------------------------------------------------------------------------------------------------------------------
[ ]
Management recommends a vote FOR items (a), (b), (c), (d) and (e).
(a) Election of Directors FOR [X] WITHHOLD AUTHORITY [X] * EXCEPTIONS [X]
INSTRUCTIONS: To vote your shares for all nominees, please mark the FOR box
in Item (a). To withhold voting for all nominees, please mark the WITHHOLD
box. If you do not wish your shares voted FOR a particular nominee, please
mark the EXCEPTION box and enter the name of the exception(s) in the space
provided.
*Exceptions___________________________________________________________________
(b) Ratification of the appointment of independent auditors. (d) Proposal to approve the Executive Incentive
Compensation Plan for Payless Executives.
FOR [X] AGAINST [X] ABSTAIN [X] FOR [X] AGAINST [X] ABSTAIN [X]
(c) Proposal to approve the 1996 Stock Incentive Plan, as amended. (e) Proposal to approve the Payless Stock Ownership
Plan.
FOR [X] AGAINST [X] ABSTAIN [X] FOR [X] AGAINST [X] ABSTAIN [X]
Change of Address and
or Comments Mark Here [X]
Please sign name(s) exactly as shown on this card.
Dated:_______________________________________, 1997
___________________________________________________
___________________________________________________
Signature(s)
Votes MUST be indicated
(x) in Black or Blue ink. [X]
Please Sign, Date and Return the Proxy Promptly Using the Enclosed Envelope.
</TABLE>
<PAGE> 64
(PSS)
CONFIDENTIAL VOTING INSTRUCTIONS TO THE BANK OF NEW YORK AS TRUSTEE UNDER
PAYLESS SHOESOURCE, INC. PROFIT SHARING PLAN.
By signing this card, I appoint the Trustee to vote all shares of common
stock of Payless ShoeSource, Inc. represented by units credited to my account in
the PSS Common Stock Fund of the Profit Sharing Plan, all as of January 31,
1997 (the latest practicable Valuation Date), at the May 23, 1997, Annual
Meeting of the shareowners, and at any adjournment of the meeting, on all
subjects that may properly come before the meeting, subject to the directions
on the other side of this card.
The Board of Directors recommends a vote FOR election of all listed director
nominees, FOR proposals (b), (c), (d) and (e) listed on the other side of this
card. IF NO DIRECTIONS ARE GIVEN, AND THIS SIGNED CARD IS RETURNED, I
UNDERSTAND THAT THE TRUSTEE WILL VOTE IN ACCORDANCE WITH THE RECOMMENDATIONS OF
THE BOARD OF DIRECTORS AND IN ITS DISCRETION ON ANY OTHER MATTERS THAT MAY
PROPERLY COME BEFORE THE MEETING. If this card is not received by the Trustee
on or before May 16, 1997, the Trustee will vote my shares in the same
proportion as the other shares held by the Trustee are voted pursuant to
instructions received from other participants in the Profit Sharing Plan.
The nominees for the Board of Directors are Richard A. Jolosky and Robert L.
Stark.
Please sign the other side of this card and PAYLESS SHOESOURCE, INC.
return this card promptly to the address shown P.O. BOX 11147
on the right in the enclosed return envelope to: NEW YORK, N.Y. 10203-0147
(Continued, and to be dated and signed on reverse side.)
