<PAGE>1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
/ X / Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 [No fee required]
For the fiscal year ended November 28, 1998
OR
/ / Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 [No fee required]
For the transition period from ____________to_____________
Commission file number 0-4437
PAYLESS CASHWAYS, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 42-0945849
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
Two Pershing Square
2300 Main, P.O. Box 419466
Kansas City, Missouri
(Address of Principal Executive Offices) 64141-0466
(Zip Code)
(816) 234-6000
(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12 (b) of
the Act:
Name of Each Exchange on
Title of Each Class Which Registered
Common Stock, $.01 par value None
Securities registered pursuant to Section 12 (g) of the Act:
Common Stock, $.01 par value
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES / X / NO / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
The aggregate market value of the Common Stock, par value $.01 per share, of the
registrant held by nonaffiliates of the registrant as of February 17, 1999, was
$ 43,520,761.
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distributions of securities under a plan
confirmed by a court. YES / X / NO / /
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.
There were 19,995,027 shares of Common Stock, $.01 par value, outstanding as of
February 17, 1999.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to Stockholders for the year ended
November 28, 1998, are incorporated by reference into Part II. Portions of the
Annual Proxy Statement for the Annual Meeting of Stockholders to be held April
21, 1999, are incorporated by reference into Part III.
<PAGE>2
PART I
------
Item 1. BUSINESS.
General
Payless Cashways, Inc. ("Payless" or the "Company") is the fifth
largest retailer of building materials and home improvement products in the
United States as measured by sales. The Company operates 154 building materials
stores, excluding five stores that are currently in the process of closing, in
18 states located in the Midwest, Southwest, Pacific Coast, and Rocky Mountain
areas under the names Payless Cashways Building Materials, Furrow Building
Materials, Lumberjack Building Materials, Hugh M. Woods Building Materials, Knox
Lumber, and Contractor Supply. Each store is designed as a one-stop source that
provides the professional homebuilder, remodel and repair contractor,
institutional buyer, and project-oriented do-it-yourself customer with a
complete selection of quality products and services needed to build, improve,
and maintain home, business, farm or ranch properties. The Company's merchandise
assortment in each store currently averages approximately 31,000 items in the
following categories: lumber and building materials, millwork, tools, hardware,
electrical and plumbing products, paint, lighting, home decor, kitchens,
decorative plumbing, heating, ventilating and cooling (HVAC), and seasonal
items. The Company believes that the combination of a full-line lumberyard, a
broad product mix tailored to serve the professional customer, a high level of
in-store customer assistance concerning product usage and installation, an array
of services including credit, delivery, estimating and design services as well
as targeted marketing distinguishes Payless from many competitors.
The Company's primary customers are professionals and project-oriented
do-it-yourselfers. Professionals ("Pros") include professional homebuilders,
remodel and repair contractors, and institutional buyers. Project-oriented
do-it-yourselfers ("DIY-ers") are those who engage in more frequent and complex
repair or home improvement projects and typically spend in excess of $1,000
annually on home improvement products. Payless also serves the needs of the
moderate and light DIY-er. Due to its product mix (especially the advantage
provided by its full-line lumberyard) and customer service approach, the Company
believes that it is positioned to increase business to the professional customer
and serve the project-oriented do-it-yourself customer.
Emergence from Chapter 11 Reorganization
On July 21, 1997, the Company filed a voluntary petition to reorganize
under Chapter 11 and filed a plan of reorganization for its emergence from
Chapter 11. From that date until December 2, 1997, the Company operated its
business as a debtor-in-possession, subject to the jurisdiction of the Court.
On November 19, 1997, the Bankruptcy Court entered an order confirming
the Company's First Amended Plan of Reorganization, as modified (the "Plan of
Reorganization"). In connection with the Plan of Reorganization, a new Board of
Directors of the Company was appointed effective December 2, 1997. In addition,
the Company's previously outstanding shares of common stock, par value $0.01per
share (the "Old Common Stock"), and series A cumulative preferred stock, par
value $1.00 per share (the "Old Preferred Stock" and, collectively, with the Old
Common Stock, the "Old Stock"), were canceled, and up to 20,000,000 shares of
Common Stock of the reorganized Company was, or will be, issued to the holders
of the Old Stock and to certain of the Company's creditors. In connection with
the Plan of Reorganization, Payless Cashways, Inc., an Iowa corporation, was
merged into a wholly-owned subsidiary to effect a reincorporation of the Company
in Delaware, with the surviving entity continuing under the name, "Payless
Cashways, Inc."
Industry Overview
Building materials and home improvement products are sold primarily
through two distribution channels -- wholesale supply outlets and retail units.
Retail distribution channels include neighborhood hardware stores, home centers,
warehouse stores, specialty stores (such as paint and tile stores) and
lumberyards. Although the industry remains highly fragmented, the retail
distribution channel has consolidated somewhat in the last ten years,
particularly in metropolitan areas.
In general terms, customers can be characterized as either
wholesale-oriented (professional) or retail-oriented (consumer). Purchases by
professionals tend to be larger in volume and require specialized merchandise
assortments, personal service representatives, competitive bid pricing, superior
lumber quality, telephone order placement, commercial credit and job-site
delivery. The consumer segments, as defined by the Company, include light
DIY-ers who spend less than $200 annually on building materials and home
improvement products; moderate DIY-ers who make annual purchases of $200 to
$1,000; and project-oriented DIY-ers who make annual purchases in excess of
$1,000.
<PAGE>3
Mission
It is our mission at Payless Cashways, Inc. to be the building
materials and home improvement supplier of first choice for the professional
builder, remodel and repair contractor, institutional buyer, and
project-oriented consumers. Our team will leverage our merchandising expertise
and vendor partnerships to provide professional quality assortments and superior
customer service while growing revenue, earnings, and stockholder value.
Business Strategy
Objectives
The Company's principal objectives are:
1) to increase its market share in the professional and project-oriented DIY
segments primarily through its existing stores,
2) to continue to improve its balance sheet by reducing its debt, and
3) to grow revenue, earnings and stockholder value.
The professional segment (Pro) includes builders, remodel and repair contractors
and institutional buyers. Payless Cashways intends to target the Pro business as
the primary source of growth and to position itself as the preferred alternative
to the home improvement warehouse shopping experience for the project-oriented
do-it-yourselfer. The Company's 1998 revenues were approximately 51% from sales
to the Pro customer and 49% from sales to the DIY customer.
Strategy
The Company believes it is particularly well-positioned to serve the
needs of professional customers. It enjoys economies of scale, buying power and
professional management that the traditional outlets supplying the professional
customer commonly do not have. These advantages, along with the broad product
assortment, full service package and outside sales force, position the Company
well to supply local Pros as well as national professional businesses seeking to
centralize their purchasing needs.
A sales and service staff is dedicated to serving the professional
customer. Professional sales representatives have assigned customers for whom
they provide service tailored to the customers' business needs. Sales
representatives call on professional customers at their places of business and
job sites. The sales representatives have detailed information regarding account
purchases and the profitability of their accounts. The Company believes that
this level of customer service and type of sales management system are effective
in increasing purchases and improving profitability from current professional
customers as well as building customer loyalty. The Company added a new position
of inside sales representative in 1998. These sales people are located in the
contractor sales offices and serve customers by phone who do not require job
site presence. Plans are in the works to centralize this activity.
Each store has a separate commercial sales area for the professional
customer to use. These offices speed the purchase process for the Pro, provide
professional estimating services including blueprint take-offs, allow private
discussions between customers and their sales representatives, and offer small
amenities to these customers such as coffee and phone access. The Company has
drive-through lumberyards that significantly reduce the time required to
complete a purchase and meet the Pros' requirement for fast and efficient
service.
The Company's merchandise assortment is specifically tailored to the
Pro. Preferred brands, commercial grade items, contractor packs and extensive
special order capabilities ensure that the Company meets the broad product
requirements of this customer segment. The Company has negotiated purchase
arrangements with key lumber suppliers that ensure a consistent source of high
quality lumber.
The Company offers a number of special services that are tailored to
meet the needs of various professional and commercial customer segments.
Delivery services include on-time job-site delivery and roof top delivery.
Credit programs include a full-service commercial credit program that provides
job-based billing and other more sophisticated credit features. Additionally,
all stores offer automated blueprint estimating services featuring rapid
turnaround. This estimating system utilizes a digitizer that ensures accuracy in
the measurement process, and it is fully integrated into the store's point of
sale ("POS") system. The Company also supports the Pro with joint marketing
programs such as its contractor referral database.
<PAGE>4
The Company has national account managers who target businesses that
utilize large amounts of building materials and improvement products for
facility construction or maintenance. This often includes companies with new
construction of commercial job sites, often geographically dispersed. It may
also include major facilities or multiple locations for which the Company
provides repair and maintenance materials, new construction products and
insurance rehabilitation work.
The Company is pursuing a number of opportunities in an effort to
become the building materials and home improvement supplier of first choice for
the professional builder, remodel and repair contractor, institutional buyer and
project-oriented consumers. Two examples of these opportunities are a pilot
program with a large insurance company in two of Payless' markets to provide
materials for the repair of damaged property and arrangements with large home
builders in three other markets to supply building products and services,
including installed panels and trusses.
Property management firms are an important component of the Company's
Pro portfolio. They provide non-seasonal repair and maintenance business which
balances business from builders, remodelers and commercial accounts.
Strategic Initiatives
The Company has developed business plans in support of the budget for
fiscal 1999. Key initiatives include:
1. Building sales momentum through redesigned assortments and better
in-stock position including job-lot quantities
2. Strengthening the merchandising function through access to better
management information including technology and regular customer
contact
3. Designing a fresh store layout that is shopper-friendly and highly
productive
4. Improving targeted marketing communications with customers
5. Satisfying customers by achieving excellence in store standards
6. Adding manufacturing capability to improve our capacity to serve
the Pro in additional markets
7. Lowering operating costs through introduction of new technologies
in the stores and distribution centers
8. Improving inventory productivity through better utilization of
distribution centers, more frequent delivery to stores from
distribution centers and elimination of non-performing inventory
9. Improving communications with all constituents
The Company's ongoing market research regarding the Pro indicates that,
while the Company has established significant business with this group,
substantial growth opportunity remains. Industry research indicates that a
significant number of customers prefer a distinctly different type of shopping
experience (human scale; finished, well-lighted showrooms; full-line,
drive-through lumberyards) as compared to a warehouse-store format. Payless
Cashways offers such a shopping experience. The Company expects the professional
builder, the remodel and repair contractor and institutional buyer to continue
to be the primary source of growth. In order to increase market share with those
customers, the Company has planned to attract and retain more large-volume
accounts whose business is often job-site direct.
Manufacturing capabilities have been added in certain markets to better
serve the needs of high-volume professional customers. The Company recognizes
significant opportunity in this area and now owns and operates four facilities
that add this capability. They include a door and trim company in Phoenix, which
specializes in manufacturing a wide range of custom doors, molding and trim
products used by carpenters, homebuilders and remodelers; door plants in Dallas
and Indianapolis; and a plant in Cincinnati that specializes in manufactured
house packages and building components for the professional builder customer.
These manufactured items include engineered roof and floor trusses, wall and
floor panels, and stair systems. The Company believes that these capabilities
help position it to be the supplier of choice for the large-volume professional
and has plans to continue developing and acquiring these types of capabilities
in additional markets.
The Company's strategy of focusing on the Pro customer has the effect
of drawing project-oriented consumers as well. Sales to project-oriented
consumers makes up about 49% of the Company's current revenues, and while the
Company will focus on the Pro, it intends to continue to serve this profitable
segment of customers. Knowledgeable employees, high quality products with brand
names, full-line drive-in lumberyards, consistent in-stock position, all the
products needed to complete a project and competitive pricing are important to
the project-oriented DIY customer, as well as the Pro. Project-oriented DIY-ers
are similar to the Pro customer with regard to the brands preferred and the
importance of stocking high quality lumber. The Company believes that many of
the steps it has taken to serve the Pro customer have also had a positive impact
on sales to the project-oriented DIY customer. The Company also recognizes that
the lifestyle of the target Pro customer includes products for the Pro's own
home and family. Most of these Pro customers are already in
<PAGE>5
the Company's locations on a regular basis, and the Company intends to identify
and stock items that may be otherwise purchased by this customer in other retail
outlets as a convenience to that customer. These products are also appealing to
the project-oriented do-it-yourselfer.
Payless Cashways is known for its well-trained work force. The
Company's knowledgeable employees study, take tests, and become certified in
various product categories. Employees who successfully master product areas can
become certified and wear a symbol of that achievement on their name badges.
Customer service is a priority for the Company. The outside sales force, inside
sales representatives and employees who staff the service counter and product
departments in each store location are among the most knowledgeable in the
industry. They are trained to build customer relationships by supporting the
customer through delivery, credit, special orders, and attentiveness to
customers' needs. A recognition program is in place to promote excellent
customer service, which drives a higher average ticket and repeat business.
Merchandising and Marketing
During 1998, Payless' full-line stores sold a broad range of building
material products currently averaging approximately 31,000 items, many of which
are nationally advertised brand-name items. The Company continues to improve its
attractiveness to customers through reviewing its assortment, bringing in new
products, determining the best supplier, and updating displays. The focus is on
categories where the Company can be dominant such as lumber, hardware, tools,
plumbing, electrical, and paint.
Payless categorizes its product offerings into the classes described below:
Lumberyard - Dimensional lumber, plywood, siding, roofing materials,
fencing materials, windows, doors and moldings, insulation materials and
drywall.
Hardware - Electrical wire and wiring materials, plumbing materials,
power and hand tools, paint and painting supplies, lawn and garden
products, door locks, fasteners, and heating and cooling products.
Showroom - Interior and exterior lighting, bathroom fixtures and
vanities, kitchen cabinets, flooring, paneling, wallcoverings and ceiling
tiles.
During the last three fiscal years, the three product classifications
accounted for the following percentages of Payless' sales:
1998 1997 1996
---- ---- ----
Lumberyard 51 % 51 % 50 %
Hardware 38 35 35
Showroom 11 14 15
------ ------ ------
100 % 100 % 100 %
===== ===== =====
Payless addresses its primary target customers through a mix of
newspaper, targeted mailings, and broadcast media advertising methods. The
primary media vehicle is newspaper advertisements, both freestanding inserts and
run-of-press ads. Additionally, the Company participates in or hosts a variety
of customer hospitality events, contractor product shows and national trade
association shows and conferences. During fiscal 1998, the Company's
expenditures on all forms of advertising totaled approximately $38.3 million or
2.0% of sales.
<PAGE>6
Store Locations
The Company's 154 building materials stores, excluding five stores that
are currently in the process of closing, are located in the following states:
Number of Stores
Arizona................... 7 Missouri.................. 8
California................ 13 Nebraska.................. 4
Colorado.................. 18 Nevada.................... 6
Illinois.................. 3 New Mexico................ 2
Indiana................... 10 Ohio...................... 12
Iowa...................... 10 Oklahoma.................. 5
Kansas.................... 11 Oregon.................... 2
Kentucky.................. 5 Tennessee................. 3
Minnesota................. 8 Texas..................... 27
Payless owns 130 of these store facilities and 122 of the 154 sites on
which such stores are located. The remaining 24 stores and 32 sites are leased.
Mortgages or deeds of trust on 137 store parcels secure existing indebtedness.
Payless has generally located retail stores adjacent to residential areas
of major metropolitan cities or adjacent to major arteries in smaller
communities that are convenient to the Pro and DIY customer. Operation of
multiple stores in a trade area permits more effective supervision of stores and
provides certain economies in distribution expenses and advertising costs. Each
of Payless' 154 stores has an average total selling space of approximately
187,000 square feet consisting of 33,000 square feet of indoor display space and
154,000 square feet of lumberyard. In addition, each store has an average of
51,000 square feet of warehouse space. The average Payless store occupies
approximately nine acres of land.
An average Payless store currently carries approximately $1.8 million of
inventory, and during fiscal 1998, sales at Payless stores averaged
approximately $11.7 million per store.
During fiscal 1998, one store was opened and four stores were closed. The
Company also has closed two stores in December 1998 and has announced the
closing of an additional five stores in early fiscal 1999. During fiscal 1997,
two stores were opened and 30 stores were closed. During fiscal 1996, 14 stores
were closed.
Store Management and Personnel
Payless coordinates the operation of its 154 building materials stores
through 154 Store Managers, each of whom reports directly to one of 17 District
Managers who in turn reports to one of three Regional Vice Presidents.
Supervision and control over the individual stores are facilitated by means of
detailed operating reports. Most of Payless' Store Managers, and all of Payless'
District Managers and Regional Vice Presidents have been promoted from within
Payless or from within the stores Payless has acquired.
To obtain candidates for store supervisory and management positions,
Payless hires both persons with business experience and recent college
graduates. Employees identified as candidates for store management positions are
placed on formal development plans in preparation for these positions. In
addition, Payless maintains an ongoing training program for store personnel.
District Managers and Store Managers have, on average, more than ten years of
experience with the Company.
The stores utilize a departmental management structure designed to
provide a superior level of service to customers. Sales personnel are trained in
product knowledge, selling skills and systems and procedures. Formal classroom
training sessions are supplemented with product clinics and special assignments.
Incentive compensation systems reward employees for store performance
above goal. In addition to management personnel, all sales and support personnel
in the retail stores participate in incentive compensation programs. In fiscal
1998, the Company paid $2.2 million in incentive compensation to its
non-management store personnel. District Managers can earn in excess of 30% of
base salary in incentive compensation and Store Managers can earn in excess of
35% of base salary in incentive compensation. The Company paid approximately
$9.3 million in incentive compensation to its store management personnel for
fiscal 1998. The Company believes that its incentive compensation systems are
key to employee performance and motivation.
<PAGE>7
Information Systems
The Company has invested substantial time, effort and dollars ensuring
that technology and information are used to the maximum benefit throughout its
entire enterprise. In-store-processors based upon current technology standards
are an integral part of store management and support customer services with
programs designed to enhance the shopping experience. Each of the Company
facilities transmits daily transaction detail data including item-level sales
from point-of-sale terminals equipped with the latest in scanning technology.
This network also serves to provide automatic check authorization and on-line
credit card processing. In addition to sales support and data gathering, the
Company has built merchandising, inventory management, distribution and
promotional systems which are utilized at the corporate office to manage the
purchasing, movement and marketing of product lines.
The Company has completed an assessment of the impact of the Year 2000 on its
computer systems, both hardware and software, and has developed a plan to timely
address the Year 2000 issue. Systems that interact with customers and that focus
on the core business functions of buying, selling and accounting have been given
the highest priority. Some of the Company's current systems are being renovated
and others are being replaced with Year 2000-compliant systems. All renovation
code and system replacements are being unit-tested as they are completed.
Integrated full-system testing will begin in the first quarter of 1999 and is
expected to continue through the third quarter of 1999. Code renovation is 99%
complete as of January 1, 1999. All core business systems requiring replacement
will be complete by mid-1999. The Company currently believes that it will
complete all phases of the plan without any material adverse consequences to its
business, operations, or financial condition.
Distribution and Suppliers
The Company operates a total of seven distribution centers and four
manufacturing locations. The distribution centers maintain inventories and ship
product to stores twice per week. The Sedalia, Missouri, distribution center
handles small-sized, conveyable, high value items such as hardware, plumbing and
electrical supplies, and hand tools. The other six distribution centers handle
commodity products and bulky manufactured products such as tubs, paneling and
ceiling tile. The manufacturing locations assemble pre-hung doors, customized
windows, engineered roof and floor trusses, wall and floor panels, and stair
systems.
In fiscal 1998, 52% of merchandise was channeled through the distribution
centers for redistribution to individual stores. This benefits the Company in
the areas of product costs, in-stock positions and inventory turnover.
The Sedalia distribution center serves all 154 stores with some or all of
their distribution center sourced replenishment. The 592,000 square foot
facility utilizes computerized receiving, storage and selection technology.
Excluding the Sedalia operation, the Company's regional distribution centers
average 17 acres with 143,000 square feet of warehouse space, operating with
manual storage and selection systems.
Payless purchases substantially all of its merchandise from approximately
3,200 suppliers, no one of which accounted for more than 5% of the Company's
purchases during fiscal 1998.
Credit
The Company offers credit to both its DIY and Pro customers. Purchases
under national credit cards and the Company's private-label credit card program
as a percentage of sales represented 27.1% in fiscal 1998, 28.3% in fiscal 1997,
and 28.0% in fiscal 1996. Purchases under the Company's commercial credit
program as a percentage of sales represented 34.8% in fiscal 1998, 32.7% in
fiscal 1997, and 29.9% in fiscal 1996. A large finance and asset management
company administers the Company's private-label credit card program and
commercial credit program. Accounts written off (net of recoveries) under the
commercial credit program in fiscal 1998 were approximately $4.0 million or .6 %
of net commercial credit sales. The cost of the private label credit card
program represents a fixed percentage fee of charge sales. The fees on the
commercial credit program consist of administrative fees that are primarily tied
to commercial credit sales and fees for accounts written off, which are
substantially all absorbed by the Company.
The current commercial and consumer credit contracts will not be renewed after
November 1999. Approximately 40% of the Company's fiscal 1998 sales were made
pursuant to these programs. The Company is in discussions with other providers
and believes that it will secure an alternative provider prior to termination of
the current programs, although the Company's ability to secure an alternative
provider or the terms of any such agreement cannot be assured. Commercial credit
is a key component of the services the Company offers to the professional
customer, and the Company believes that this transition creates an opportunity
to enhance customer satisfaction.
<PAGE>8
Competition
The business of Payless is highly competitive. As a result of its focus
on the professional customer, the Company competes with local independent
lumberyards, independent wholesalers, supply houses and distributors who market
primarily to commercial and professional users. On the consumer side, Payless
encounters competition from national and regional chains, including those with a
warehouse format, and from local independent wholesalers, supply houses and
distributors. In recent years, the building materials retailing industry has
experienced increased levels of competition as several national chains have
expanded their operations. Certain of these competitors are larger in terms of
capital and sales volume and have been operating longer than Payless in
particular areas. Although Payless' competition varies by geographical area,
Payless continues to differentiate itself from the large warehouse competitors
by targeting the professional customer and the project-oriented DIY-er. Payless
offers a full-line lumberyard, a broad mix of high quality products, high levels
of customer service by knowledgeable employees, consistent in-stock position and
competitive pricing.
Employees
At November 28, 1998, Payless employed approximately 11,000 persons,
approximately 30% of whom were part-time, although the number of employees may
fluctuate seasonally. Payless believes its employee relations are satisfactory.
Payless' employees are primarily nonunion with less than 3% being represented by
a union.
A substantial portion of the administrative, purchasing, advertising and
accounting functions is centralized at Payless' headquarters in Kansas City,
Missouri.
====================
Forward-looking statements in the "Business" section of this Form 10-K
are made pursuant to the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995. There are certain important factors that could
cause results to differ materially from those anticipated by the forward-looking
statements made above. Investors are cautioned that all forward-looking
statements involve risks and uncertainty. Among the factors that could cause
actual results to differ materially are the following: competitor activities;
stability of customer demand; stability of the sales force; supplier support;
consumer spending and debt levels; interest rates; housing activity; lumber
prices; product mix; growth of certain market segments; weather; an excess of
retail space devoted to the sale of building materials; the success of the
Company's strategy; and success of the Company's remediation for the Year 2000
issue. Additional information concerning these and other factors is contained in
the Company's Annual Report, copies of which are available from the Company
without charge or on the Company's web site, payless.cashways.com.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth the name and age of all executive officers
of Payless and their present positions and recent business experience.
<TABLE>
<CAPTION>
Principal Occupation and
Name Age Five-Year Employment History
- ---- --- ----------------------------
<S> <C> <C>
Millard E. Barron.........49 President and Chief Executive Officer of Payless since June 1998; President of Zellers,
First elected a director: Inc.and Executive Vice President of Hudson's Bay Company from September 1996 to
1998
February 1998; Senior Vice President and Chief Operating Officer of the
International Division of Wal-Mart Stores, Inc. from August 1994 to September 1996; and
Vice President - Operations of Wal-Mart Stores, Inc. from November 1992 to August 1994.
Stanley K. Boyd...........47 Senior Vice President - Store Operations of Payless since June 1997; Vice President -
Sales and Marketing of A&I Bolt and Nut from September 1993 to June 1997; and President
of Outdoor Kids, Inc. from June 1992 to September 1993. Mr. Boyd was previously with
Payless from June 1974 to December 1990.
Richard G. Luse...........51 Senior Vice President - Finance and Chief Financial Officer of Payless since February
1998; and Vice President - Controller of Payless from February 1988 to February 1998.
<PAGE>9
Principal Occupation and
Name Age Five-Year Employment History
- ---- --- ----------------------------
Kelly R. Abney............44 Vice President - Logistics, Replenishment and Facilities of Payless since June 1998; Vice
President - Distribution and Transportation of Payless from February 1997 to June 1998;
Vice President - Logistics of Pamida from September 1994 to February 1997; and Director
of Distribution of Payless from April 1990 to September 1994.
James L. Deats............50 Vice President - Information Systems of Payless since October 1998; Vice President -
Information Services of One Price Clothing, Inc. from July 1997 to April 1998; and Vice
President - Information Services of Pier 1 Imports, Inc. from September 1990 to February
1997.
Renae G. Gonner...........36 Vice President - Marketing and Advertising of Payless since October 1998; Director of
Advertising and Marketing Communications of Payless from July 1996 to October 1998;
Creative Services Manager of Payless from November 1993 to July 1996; and Print Manager
of Payless from March 1993 to November 1993. Mr. H. D. Cleberg, a Director of the
Company, is Ms. Gonner's father.
Shawn J. Hepinstall.......38 Vice President - Merchandising of Payless since August 1998; Merchandising Director of
Payless from March 1995 to August 1998; and Merchandising Manager of Payless from July
1991 to March 1995.
Louise R. Iennaccaro......54 Vice President - Human Resources of Payless since February 1998; and Director of Field
Human Resources of Payless from April 1989 to February 1998. Ms. Iennaccaro joined
Payless in January 1987.
David J. Krumbholz........44 Vice President - Professional Business of Payless since July 1998; and Regional Vice
President of Payless from August 1988 to July 1998. Mr. Krumbholz joined Payless in
January 1976.
Ronald D. Long............42 Vice President - Merchandising Display and Productivity of Payless since August 1998;
Vice President - Merchandising Planning and Control of Payless from May 1998 to August
1998; and Vice President - Merchandising/Building Materials of Payless from November 1993
to May 1998. Mr. Long joined Payless in December 1975.
Timothy R. Mertz..........47 Vice President - Treasury of Payless since September 1998; Director of Tax and Risk
Management from December 1995 to September 1998; and Tax Director of Payless from October
1987 to December 1995.
</TABLE>
Item 2. PROPERTIES.
Excluding five stores that are currently in the process of closing,
Payless owns 130 of its store facilities and 122 of the 154 sites on which such
stores are located. The remaining 24 facilities and 32 sites are leased. The
leases provide for various terms. Mortgages or deeds of trust on 137 store
parcels secure existing indebtedness.
Five of the Company's seven distribution centers are owned and, of the
remaining two, one is leased for land only and the facility and land are leased
for the other. Mortgages or deeds of trust on five distribution center parcels
secure existing indebtedness.
Two of the Company's manufacturing locations are owned and two are
leased. Mortgages or deeds of trust on two manufacturing parcels secure existing
indebtedness.
Payless leases its corporate office in Kansas City, Missouri, under a
lease expiring on December 31, 2002. The administrative offices occupy several
floors (approximately 130,000 square feet) of a multi-story building.
See also "Strategic Initiatives," "Store Locations" and "Distribution and
Suppliers" in Item 1, above.
<PAGE>10
Item 3. LEGAL PROCEEDINGS.
On January 6, 1995, a group of terminated employees and others ("Former
Employees") filed a lawsuit against the Company and other named defendants (the
"Company"), entitled The Payless Cashways, Inc. Partners [et al.] v. Payless
Cashways, Inc. [et al], in the United States District Court for the Southern
District of Iowa. The Former Employees include management employees who were
terminated effective January 10, 1994, in connection with a reduction in force
pursuant to a restructuring, in which the Company eliminated certain management
in the field organization. The complaint asserted a variety of claims including
federal and state securities fraud claims, alleged violations of the Racketeer
Influenced and Corrupt Organizations Act ("RICO"), federal and state claims of
age discrimination, alleged violations of the Employment Retirement Income
Security Act of 1974, and various state law claims including, but not limited
to, fraudulent misrepresentation allegations. The complaint also asserted the
Former Employees' claims as class representatives and sought to expand the group
of party plaintiffs as to the federal age discrimination claims. Various forms
of relief, including unspecified monetary damages and an injunctive order, were
requested.
The Company, in response, filed a motion to dismiss as to the majority of
the pending claims except the federal and state age discrimination claims, the
state law fraudulent misrepresentation claim and several other state law
equitable claims. The Former Employees responded, in part, by filing a second
amended complaint and providing, in large part, additional supportive factual
detail. The Company filed a reply brief in support of the motion to dismiss. A
ruling has been entered on the Company's motion to dismiss the majority of
pending claims, substantially narrowing the Former Employee's legal claims by
dismissing some age discrimination counts, all federal securities counts and
RICO counts except one each, and all state law counts related to an alleged
partnership. The plaintiffs' motion for class certification has been denied on
all claims except the age discrimination claims. The court granted the
plaintiffs' motion for class certification of certain age discrimination claims.
As a result of this ruling, eight additional individuals chose to participate in
the age claims asserted in this suit. Each of the parties has conducted
discovery pursuant to the court's scheduling order and discovery plan. The
lawsuit was formally stayed pursuant to the automatic stay issued by the
Bankruptcy Court following the voluntary Chapter 11 reorganization filing on
July 21, 1997. During the Chapter 11 reorganization, plaintiffs timely filed
proofs of claim, including a purported claim on behalf of the potential Age
Discrimination in Employment Act opt-in class, for an aggregate of $37 million,
which was limited by the Bankruptcy Court to a maximum of $22 million. The case
has been returned to the United States District Court for the Southern District
of Iowa for resolution with mediation scheduled for April 1999 and a trial date
currently set for July 1999. Any recovery for the plaintiffs against the Company
would be treated as a general unsecured claim entitling the plaintiffs to their
pro rata share of 8,269,329 shares of New Common Stock reserved for such claims.
The Company denies any and all claimed liability and is vigorously
defending this litigation, but is unable to estimate the likely outcome of this
matter.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
PART II
-------
Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
Market and dividend information, included on page 44 of the Annual
Report to Stockholders for the fiscal year ended November 28, 1998, are
incorporated herein by reference.
Item 6. SELECTED FINANCIAL DATA.
The Five-Year Financial Summary, included on page 40 of the Annual Report
to Stockholders for the fiscal year ended November 28, 1998, is incorporated
herein by reference.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Management's Discussion and Analysis of the Financial Condition and
Results of Operations, included on pages 12 through 19 of the Annual Report to
Stockholders for the fiscal year ended November 28, 1998, is incorporated herein
by reference.
<PAGE>11
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Market Risk disclosures, included on page 15 of the Annual Report to
Stockholders for the fiscal year ended November 28, 1998, are incorporated
herein by reference.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements and independent auditors' report, included on
pages 20 through 39 of the Annual Report to Stockholders for the fiscal year
ended November 28, 1998, are incorporated herein by reference.
The Quarterly Consolidated Statements of Operations, included on pages
10 and 11 of the Annual Report to Stockholders for the fiscal year ended
November 28, 1998, are incorporated herein by reference.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
--------
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by this item with respect to directors and
compliance with Section 16(a) of the Securities Exchange Act of 1934 is
incorporated herein by reference to the Registrant's Proxy Statement for the
1999 Annual Meeting of Stockholders to be filed pursuant to Regulation 14A. The
required information as to executive officers is set forth in Part I hereof.
Item 11. EXECUTIVE COMPENSATION.
The information required by this item is incorporated herein by reference
to the Registrant's Proxy Statement for the 1999 Annual Meeting of Stockholders
to be filed pursuant to Regulation 14A.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information called for by this item is incorporated herein by
reference to the Registrant's Proxy Statement for the 1999 Annual Meeting of
Stockholders to be filed pursuant to Regulation 14A.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information called for by this item is incorporated herein by
reference to the Registrant's Proxy Statement for the 1999 Annual Meeting of
Stockholders to be filed pursuant to Regulation 14A.
PART IV
-------
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) Document list.
1. and 2. The response to this portion of Item 14 is submitted as a separate
section of this report.
3. List of exhibits.
2.1 First Amended Plan of Reorganization, as modified October 9, 1997
(incorporated by reference to Exhibit 2.1 filed as
part of Payless' Quarterly Report on Form 10-Q for the quarter
ended August 30, 1997).
<PAGE>12
2.2 Agreement and Plan of Merger in connection with the
Reincorporation from Iowa to Delaware (incorporated by reference
to Exhibit 2.2 filed as part of Payless' Current Report on Form
8-K dated December 2, 1997).
3.1 Amended and Restated Bylaws of the Company.
3.2 Certificate of Incorporation (incorporated by reference to Exhibit
4.1 filed as part of Payless' Current Report on Form 8-K dated
December 2, 1997).
4.0 Long-term debt instruments of the Registrant in amounts not
exceeding ten percent (10%) of the total assets of the Registrant
will be furnished to the Commission upon request.
4.1(a) Amended and Restated Credit Agreement dated December 2, 1997,
among Payless, the Banks listed on the signature pages thereof and
Canadian Imperial Bank of Commerce, New York Agency, as
Coordinating and Collateral Agent (incorporated by reference to
Exhibit 4.1(a) filed as part of Payless' Annual Report on Form
10-K for the year ended November 29, 1997).
4.1(b) First amendment to Amended and Restated Credit Agreement dated
August 13, 1998, among Payless, the Banks listed on the signature
pages thereof and Canadian Imperial Bank of Commerce, New York
Agency, as Coordinating and Collateral Agent (incorporated by
reference to Exhibit 4.1 filed as part of Payless' Quarterly
Report on Form 10-Q for the quarter ended August 29, 1998).
4.1(c) Amended and Restated Security and Pledge Agreement, dated December
2, 1997, made by Payless for the benefit of Canadian Imperial Bank
of Commerce, New York Agency, as Coordinating and Collateral
Agent, and the banks and other financial institutions party to the
Amended and Restated Credit Agreement (incorporated by reference
to Exhibit 4.1(b) filed as part of Payless' Annual Report on Form
10-K for the year ended November 29, 1997).
4.1(d) Form of Second Mortgage, dated December 2, 1997, given to Canadian
Imperial Bank of Commerce, New York Agency, as Coordinating and
Collateral Agent, and the banks and other financial institutions
party to the Amended and Restated Credit Agreement (incorporated
by reference to Exhibit 4.1(c) filed as part of Payless' Annual
Report on Form 10-K for the year ended November 29, 1997).
4.1(e) Form of Second Deed of Trust, dated December 2, 1997, given to
Canadian Imperial Bank of Commerce, New York Agency, as
Coordinating and Collateral Agent, and the banks and other
financial institutions party to the Amended and Restated Credit
Agreement (incorporated by reference to Exhibit 4.1(d) filed as
part of Payless' Annual Report on Form 10-K for the year ended
November 29, 1997).
4.1(f) Form of Amended and Restated Mortgage, dated December 2, 1997,
given to Canadian Imperial Bank of Commerce, New York Agency, as
Coordinating and Collateral Agent, and the banks and other
financial institutions party to the Amended and Restated Credit
Agreement (incorporated by reference to Exhibit 4.1(e) filed as
part of Payless' Annual Report on Form 10-K for the year ended
November 29, 1997).
4.1(g) Form of Amended and Restated Deed of Trust, dated December 2,
1997, given to Canadian Imperial Bank of Commerce, New York
Agency, as Coordinating and Collateral Agent, and the banks and
other financial institutions party to the Amended and Restated
Credit Agreement (incorporated by reference to Exhibit 4.1(f)
filed as part of Payless' Annual Report on Form 10-K for the year
ended November 29, 1997).
4.2(a) Amended and Restated Loan Agreement dated December 2, 1997, by and
among Payless and UBS Mortgage Finance, Inc (incorporated by
reference to Exhibit 4.2(a) filed as part of Payless' Annual
Report on Form 10-K for the year ended November 29, 1997).
4.2(b) Form of Deed of Trust, Mortgage and Security Agreement
Modification Agreement dated December 2, 1997, between Payless and
Lasalle National Bank, as trustee for UBS Mortgage Finance, Inc
(incorporated by reference to Exhibit 4.2(b) filed as part of
Payless' Annual Report on Form 10-K for the year ended November
29, 1997).
<PAGE>13
4.2(c) Consolidated, Amended and Restated Promissory Note dated December
2, 1997, by and among Payless and Lasalle National Bank, as
trustee for UBS Mortgage Finance, Inc (incorporated by reference
to Exhibit 4.1(c) filed as part of Payless' Annual Report on Form
10-K for the year ended November 29, 1997).
4.2(d) First Amendment to Amended and Restated Loan Agreement dated
February 26, 1998, by and among Payless and UBS Mortgage Finance,
Inc.
4.2(e) Assignment of Amended and Restated Promissory Note dated August
12, 1998, by and among Payless and Greenwich Capital Financial
Products, Inc.
10.1* Amended and Restated Payless Cashways, Inc. 1998 Omnibus Incentive
Plan effective February 17, 1999.
10.2* Settlement Agreement, Resignation, and Full General Release dated
January 5, 1998, by and between Payless and David Stanley.
(incorporated by reference to Exhibit 10.2 filed as part of
Payless' Quarterly Report on Form 10-Q for the quarter ended
February 28, 1998).
10.3* Settlement Agreement, Resignation, and Full General Release dated
January 6, 1998, by and between Payless and Susan M. Stanton.
(incorporated by reference to Exhibit 10.3 filed as part of
Payless' Quarterly Report on Form 10-Q for the quarter ended
February 28, 1998).
10.4* Settlement Agreement, Resignation, and Full General Release dated
January 21, 1998, by and between Payless and Stephen A.
Lightstone. (incorporated by reference to Exhibit 10.4 filed as
part of Payless' Quarterly Report on Form 10-Q for the quarter
ended February 28, 1998).
10.5* Settlement Agreement, Resignation, and Full General Release dated
January 17, 1998, by and between Payless and G. Michael Buchen.
(incorporated by reference to Exhibit 10.5 filed as part of
Payless' Quarterly Report on Form 10-Q for the quarter ended
February 28, 1998).
10.6* Settlement Agreement, Resignation, and Full General Release dated
January 23, 1998, by and between Payless and E. J. Holland, Jr.
(incorporated by reference to Exhibit 10.6 filed as part of
Payless' Quarterly Report on Form 10-Q for the quarter ended
February 28, 1998).
10.7* Form of Employment Agreement between Payless and certain executive
officers.
10.8* Form of Indemnification Agreement between Payless and various
officers and directors.
10.9* Payless Cashways, Inc. Corporate Management Incentive Plan, dated
as of December 1998.
10.10(a)* Payless Cashways, Inc. Supplemental Death Benefit Plan
(incorporated by reference to Exhibit 10.12 filed as part of
Payless' Annual Report on Form 10-K for the fiscal year ended
November 27, 1993).
10.10(b)* First Amendment to the Payless Cashways, Inc. Supplemental Death
Benefit Plan, dated June 16, 1994 (incorporated by reference to
Exhibit 10.1 filed as part of Payless' Quarterly Report on Form
10-Q for the quarter ended May 28, 1994).
10.11* Payless Cashways, Inc. Supplemental Disability Plan (incorporated
by reference to Exhibit 10.13 filed as part of Payless' Annual
Report on Form 10-K for the fiscal year ended November 27, 1993).
13.1 Annual Report to Stockholders.
23.1 Consent of KPMG LLP.
27.1 Financial data schedule.
* Represents a management contract or a compensatory plan or arrangement.
Copies of any or all Exhibits will be furnished upon written request and payment
of Payless' reasonable expenses in furnishing the Exhibits.
<PAGE>14
(b) Reports on Form 8-K.
None
(c) Exhibits.
The response to this portion of Item 14 is submitted as a separate section
of this report.
(d) Financial Statement Schedules.
The response to this portion of Item 14 is submitted as a separate section
of this report.
<PAGE>15
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, Payless has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
PAYLESS CASHWAYS, INC.
(Registrant)
By s/Millard E. Barron
----------------------
Millard E. Barron,
Principal Executive Officer
Dated: February 17, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of Payless and in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
=================================== ========================================= ======================
<S> <C> <C>
s/Millard E. Barron
---------------------
Millard E. Barron President, Chief Executive Officer and February 17, 1999
Director
(Principal Executive Officer)
s/Peter G. Danis
---------------------
Peter G. Danis Non-Executive Chairman of the February 17, 1999
Board
s/H. D. Cleberg
---------------------
H. D. Cleberg Director February 17, 1999
s/David G. Gundling
---------------------
David G. Gundling Director February 17, 1999
s/Max D. Hopper
---------------------
Max D. Hopper Director February 17, 1999
s/Donald E. Roller
---------------------
Donald E. Roller Director February 17, 1999
s/Peter M. Wood
---------------------
Peter M. Wood Director February 17, 1999
s/Richard G. Luse
---------------------
Richard G. Luse Senior Vice President-Finance February 17, 1999
and Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
</TABLE>
<PAGE>16
ANNUAL REPORT ON FORM 10-K
ITEM 14(a) (1) and (2), (c) and (d)
LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
FINANCIAL STATEMENT SCHEDULES
EXHIBITS
(Exhibits included in Form 10-K filed with the Securities and Exchange
Commission are not reproduced here. See Item 14(a)3.)
YEAR ENDED NOVEMBER 28, 1998
PAYLESS CASHWAYS, INC.
KANSAS CITY, MISSOURI
<PAGE>17
PAYLESS CASHWAYS, INC.
FORM 10-K--ITEM 14(a) (1) and (2)
LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
The following financial statements of Payless Cashways, Inc. included
in Payless' Annual Report to the Stockholders for the year ended November 28,
1998, are incorporated by reference in Item 8:
Statements of Operations--fiscal years ended November 28, 1998,
November 29, 1997, and November 30, 1996.
Balance Sheets--November 28, 1998, and November 29, 1997.
Statements of Cash Flows--fiscal years ended November 28, 1998,
November 29, 1997, and November 30, 1996.
Statements of Stockholders' Equity--fiscal years ended November 28,
1998, November 29, 1997, and November 30, 1996.
Notes to Financial Statements.
The following financial statement schedule of Payless Cashways, Inc. is
included in Item 14(d):
II - Valuation and Qualifying Accounts
All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are not required
under the related instructions or are inapplicable, and therefore have been
omitted.
<PAGE>18
[KPMG LLP Letterhead]
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Payless Cashways, Inc.:
Under date of January 15, 1999 we reported on the balance sheets of Payless
Cashways, Inc. as of November 28, 1998 and November 29, 1997 and the
related statements of operations, stockholders' equity and cash flows for
each of the fiscal years in the three-year period ended November 28, 1998
as contained in the 1998 annual report to stockholders. These financial
statements and our report thereon are incorporated by reference in the
annual report on Form 10-K for the fiscal year 1998. In connection with our
audits of the aforementioned financial statements, we also audited the
related financial statement schedule as listed in the index. This financial
statement schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion on this financial statement
schedule based on our audits.
In our opinion, such financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
As discussed in Note B to the financial statements, the financial
statements reflect the application of fresh-start reporting as of November
29, 1997 and, therefore, are not comparable in all respects to the
financial statements for periods prior to such date. As discussed in Note J
to the financial statements, the Company adopted Statement of Financial
Accounting Standards No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of, in fiscal 1996.
/s/ KPMG LLP
Kansas City, Missouri
January 15, 1999
<PAGE>19
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
PAYLESS CASHWAYS, INC.
(In thousands)
<TABLE>
<CAPTION>
====================================================================================================================================
COL. A COL. B COL. C COL. D COL. E
====================================================================================================================================
Balance at Charged to Balance at
beginning cost and end of
Description of period expenses Deductions period
====================================================================================================================================
<S> <C> <C> <C> <C>
YEAR ENDED NOVEMBER 28, 1998:
Reserve for Inventory Shrink
and Obsolescence................. $ 15,031 $ 22,667 $ 25,806 $ 11,892
Reserves for Special Charges..... $ 6,876 $ 7,421 $ 9,909 $ 4,388
Reserve for Bad Debt............. $ 5,879 $ 5,450 $ 5,448 $ 5,881
YEAR ENDED NOVEMBER 29, 1997:
Reserve for Inventory Shrink
and Obsolescence................. $ 13,604 $ 21,960 $ 20,533 $ 15,031
Reserves for Special Charges..... $ 10,532 $ 13,056 $ 16,712 $ 6,876
Reserve for Bad Debt............. $ 5,740 $ 6,765 $ 6,626 $ 5,879
YEAR ENDED NOVEMBER 30, 1996:
Reserve for Inventory Shrink
and Obsolescence................. $ 20,354 $ 31,840 $ 38,590 $ 13,604
Reserves for Special Charges..... $ 20,083 $ 8,184 $ 17,735 $ 10,532
Reserve for Bad Debt............. $ 5,513 $ 4,944 $ 4,717 $ 5,740
</TABLE>
<PAGE>1
AMENDED AND RESTATED BYLAWS
OF
PAYLESS CASHWAYS, INC.,
AS AMENDED
ARTICLE I
OFFICES
Section 1. Registered Office. The registered office of the corporation
in the State of Delaware shall be located at The Corporation Trust Center, 1209
Orange Street, Wilmington, New Castle County, Delaware 19801. The name of the
corporation's registered agent at such address shall be The Corporation Trust
Company. The registered office and/or registered agent of the corporation may be
changed from time to time by action of the board of directors.
Section 2. Other Offices. The corporation may have additional offices
at such other places, both within and without the State of Delaware, as the
board of directors may from time to time determine or the business of the
corporation may require.
ARTICLE II
MEETINGS OF STOCKHOLDERS
Section 1. Annual Meetings. Annual meetings of stockholders for the
election of directors, and for such other business as may be stated in the
notice of the meeting, shall be held at such place, either within or without the
State of Delaware, and at such time and date as the board of directors, by
resolution, shall determine and as set forth in the notice of the meeting. If
the board of directors fails so to determine the time, date and place of
meeting, the annual meeting of stockholders shall be held at the principal
executive office of the corporation on the first Tuesday in April. If the date
of the annual meeting shall fall upon a legal holiday, the meeting shall be held
on the next succeeding business day.
Section 2. Special Meetings. Except as otherwise required by law,
special meetings of the stockholders for any purpose or purposes may be called
by the Chairman or Chief Executive Officer, by resolution of the board of
directors adopted by the affirmative vote of a majority of the directors or by
the written request of the holders of record representing at least 25% of the
voting power of all of the shares of the corporation entitled to vote on the
issue or issues to be presented to the meeting.
<PAGE>2
Section 3. Place of Meetings. The board of directors may designate any
place, either within or without the State of Delaware, as the place of meeting
for any annual meeting. The person or persons calling a special meeting may
designate any place, either within or without the State of Delaware, as the
place of meeting for such special meeting. If no designation is made, the place
of the annual or special meeting shall be in the State of the corporation's
principal executive offices.
Section 4. Notice. Whenever stockholders are required or permitted to
take action at a meeting, written or printed notice stating the place, date and
time of such meeting, and, in the case of a special meeting, the purpose or
purposes for which the meeting is called, shall be given to each stockholder
entitled to vote at such meeting not less than ten nor more than sixty days
before the date of the meeting. Such notices may be given, either personally or
by mail, by or at the direction of the board of directors, the chief executive
officer or the secretary. Written notice may also be given by telegram, telex,
cable or facsimile transmission followed, if required by Delaware law, by
deposit in the United States mail, with postage prepaid. If mailed, such notice
shall be deemed to be delivered when deposited in the United States mail,
postage prepaid, addressed to the stockholder at his, her or its address as the
same appears on the records of the corporation. Attendance of a stockholder at a
meeting shall constitute a waiver of notice of such meeting, except when the
stockholder attends for the express purpose of objecting at the beginning of the
meeting to the transaction of any business because the meeting is not lawfully
called or convened.
Section 5. Stockholders List. The officer having charge of the stock
ledger of the corporation shall make, at least ten days before every meeting of
the stockholders, a complete list of the stockholders entitled to vote at such
meeting arranged in alphabetical order, showing the address of each stockholder
and the number of shares registered in the name of each stockholder. Such list
shall be open to the examination of any stockholder, for any purpose germane to
the meeting, during ordinary business hours, for a period of at least ten days
prior to the meeting, either at a place within the city where the meeting is to
be held, which place shall be specified in the notice of the meeting or, if not
so specified, at the place where the meeting is to be held. The list shall also
be produced and kept at the time and place of the meeting during the whole time
thereof and may be inspected by any stockholder who is present.
Section 6. Quorum. The holders of a majority of the outstanding shares
of capital stock of the corporation, present in person or represented by proxy
at a meeting of the stockholders and entitled to vote thereat, shall constitute
a quorum at such meeting, except as otherwise provided by statute or by the
certificate of incorporation. If a quorum is not present, the holders of a
majority of the shares present in person or represented by proxy at the meeting
and entitled to vote thereat may adjourn the meeting to another time and/or
place, without further notice to the stockholders other than an announcement at
such meeting until holders of the number of shares required to constitute a
quorum shall be present in person or by proxy. When a quorum is once present to
commence a meeting of stockholders, it is not broken by the subsequent
withdrawal of any stockholders or their proxies.
<PAGE>3
Section 7. Adjourned Meetings. When a meeting is adjourned to another
time and/or place, notice need not be given of the adjourned meeting if the time
and place thereof are announced at the meeting at which the adjournment is
taken. The corporation may transact any business at the adjourned meeting which
might have been transacted at the original meeting. If the adjournment is for
more than thirty days or if after the adjournment a new record date is fixed for
the adjourned meeting, a notice of the adjourned meeting shall be given to each
stockholder of record entitled to vote at the meeting.
Section 8. Vote Required. When a quorum is present, the affirmative
vote of a majority of votes cast by holders of shares entitled to vote on the
subject matter shall be the act of the stockholders, unless the question is one
upon which, by express provisions of an applicable law, the certificate of
incorporation or these bylaws, a different vote is required, in which case such
express provision shall govern and control the decision of such question.
Section 9. Voting Rights. Except as otherwise provided by the Delaware
General Corporation Law or by the certificate of incorporation, and subject to
Section 3 of Article VI hereof, every stockholder shall at every meeting of the
stockholders be entitled to one vote in person or by proxy for each share of
capital stock having voting power held by such stockholder.
Section 10. Proxies. Each stockholder entitled to vote at a meeting of
stockholders may authorize another person or persons to act for him or her by
proxy, but such proxy, whether revocable or irrevocable, shall comply with the
requirements of Delaware law. A duly executed proxy shall be irrevocable if it
states that it is irrevocable and if, and only as long as, it is coupled with an
interest sufficient in law to support an irrevocable power. A proxy may be made
irrevocable regardless of whether the interest with which it is coupled is an
interest in the stock itself or an interest in the corporation generally. Any
proxy is suspended when the person executing the proxy is present at a meeting
of stockholders and elects to vote, except that when such proxy is coupled with
an interest and the fact of the interest appears on the face of the proxy, the
agent named in the proxy shall have all voting and other rights referred to in
the proxy, notwithstanding the presence of the person executing the proxy. At
each meeting of the stockholders, and before any voting commences, all proxies
filed at or before the meeting shall be submitted to and examined by the
secretary of the corporation or a person designated by the secretary, and no
shares may be represented or voted under a proxy that has been found to be
invalid or irregular.
Section 11. Proposed Business for Annual Meetings. Except as may
otherwise be required by applicable law or regulation or be expressly authorized
by the entire board of directors, a stockholder may make a nomination or
nominations for director of the corporation at an annual meeting of stockholders
or may bring up any other matter for consideration and action by the
stockholders at an annual meeting of stockholders, only if the provisions of
subsections A, B, C and D hereto shall have been satisfied. If such provisions
shall not have been satisfied, any nomination sought to be made or other
business sought to be presented by a stockholder for consideration and action by
the stockholders at such a meeting shall be deemed not properly
<PAGE>4
brought before the meeting, shall be ruled by the chairman of the meeting to be
out of order, and shall not be presented or acted upon at the meeting.
A. The stockholder must be a stockholder of record on the record
date for such annual meeting, must continue to be a
stockholder of record at the time of such meeting, and must be
entitled to vote thereat.
B. The stockholder must deliver or cause to be delivered a
written notice to the secretary of the corporation. Such
notice must be received by the secretary no less than sixty
days prior to the first anniversary of the previous year's
annual meeting; provided, however, that if the date of the
annual meeting has been changed by more than thirty days from
the date of the previous year's annual meeting, such notice
must be received by the secretary not later than ten days
following the date on which public announcement of the date
of such meeting is first made. The notice shall specify (a)
the name and address of the stockholder as they appear on the
books of the corporation, (b) the number of shares of the
corporation which are beneficially owned by the stockholder;
(c) any material interest of the stockholder in the proposed
business described in the notice; (d) if such business is a
nomination for director, each nomination sought to be made,
together with the reasons for each nomination,a description of
the qualifications and business or professional experience of
each proposed nominee and a statement signed by each nominee
indicating his or her willingness to serve if elected, and
disclosing the information about him or her that is required
by the Securities Exchange Act of 1934, as amended
(the "1934 Act"), and the rules and regulations promulgated
thereunder to be disclosed in the proxy materials for the
meeting involved if he or she were a nominee of the
corporation for election as one of its directors; (e) if such
business is other than a nomination for director, the nature
of the business, the reasons why it is sought to be raised and
submitted for a vote of the stockholders and if and why it is
deemed by the stockholder to be beneficial to the corporation,
and (f) if so requested by the corporation, all other
information that would be required to be filed with the
Securities and Exchange Commission if, with respect to the
business proposed to be brought before the meeting, the person
proposing such business was a participant in a solicitation
subject to Section 14 of the 1934 Act.
C. Notwithstanding satisfaction of the provisions of subsection A
and subsection B, the proposed business described in the
notice may be deemed not to be properly brought before the
meeting if, pursuant to state law or to any rule or regulation
of the Securities and Exchange Commission, it was offered as a
stockholder proposal and was omitted from the notice of, and
proxy material for, the meeting (or any supplement thereto)
authorized by the board of directors.
D. In the event such notice is timely given pursuant to
subsection B and the business described therein is not
disqualified pursuant to subsection C, such business may
<PAGE>5
be presented by, and only by, the stockholder who shall have
given the notice required by subsection B or a representative
of such stockholder who is qualified under the law of the
State of Delaware to present the proposal on the stockholder's
behalf at the meeting.
ARTICLE III
DIRECTORS
Section 1. General Powers. The business and affairs of the corporation
shall be managed by or under the direction of the board of directors.
Section 2. Number, Election and Term of Office. Upon the effective date
of these bylaws, the number of directors which shall constitute the board of
directors shall be nine. Thereafter, the number of directors which shall
constitute the board of directors shall be established from time to time by, and
only by, resolution duly adopted by a majority of the directors then
constituting the entire board of directors. Except as otherwise provided in the
certificate of incorporation or in Section 3 of this Article III, a director
shall be elected at an annual meeting of the stockholders by a plurality of the
votes of the shares present in person or represented by proxy at the meeting and
entitled to vote in the election of directors. A director's term of office shall
be as provided in the certificate of incorporation and, to the extent
applicable, the order of the United States Bankruptcy Court for the Western
District of Missouri confirming the First Amended Plan of Reorganization of
Payless Cashways, Inc., an Iowa corporation, as a debtor and a
debtor-in-possession in a Chapter 11 proceeding in such Court. A director shall
hold office until the annual meeting for the year in which such director's term
expires and until a successor shall be duly elected and qualified, or until such
director's earlier death, resignation, disqualification or removal as
hereinafter provided. Directors need not be stockholders of the corporation.
Section 3. Vacancies. Vacancies and newly created directorships
resulting from any increase in the authorized number of directors may be filled
only by the board of directors and in the manner provided in the certificate of
incorporation. The term of office of a director so chosen shall be as provided
in the certificate of incorporation. Each director so chosen shall hold office
until the annual meeting for the year in which such director's term expires and
until a successor shall be duly elected and qualified, or until such director's
earlier death, resignation, disqualification or removal as hereinafter provided.
Section 4. Removal and Resignation. Any director or the entire board of
directors may be removed at such time and in such manner as provided in the
certificate of incorporation. Any director who is also an officer of the
corporation who resigns his or her position as an officer of the corporation, or
is terminated, disqualified or removed as an officer of the corporation, or
otherwise ceases to serve in such capacity, shall also be deemed to have
resigned as a director of the corporation. Any director may resign at any time
upon written notice to the corporation.
<PAGE>6
Section 5. Regular Meetings. The annual meeting of each newly elected
board of directors shall be held without notice other than this bylaw
immediately after, and at the same place as, the annual meeting of stockholders.
Other regular meetings of the board of directors may be held without notice at
such time and at such place, either within or without the State of Delaware, as
shall from time to time be determined by resolution of the board of directors.
Section 6. Special Meetings. Special meetings of the board of directors
may be called by or at the request of the Chairman, Chief Executive Officer,
President or a majority of the board of directors. The person or persons so
calling such special meeting shall designate the time and place for the holding
of such meeting. The place so designated may be any place in the United States,
either within or without the State of Delaware. Notice of any special meeting
shall be given at least two days prior to the date fixed for such meeting by
written notice delivered personally, by mail, or by a nationally recognized
overnight delivery service to each director at his business address, or by telex
or telecopy. If notice is given by mail, such notice shall be deemed to be
delivered three days after such notice is deposited with the United States mail
properly addressed, postage prepaid. If notice is given by overnight delivery
service, such notice shall be deemed delivered one day after such notice is
delivered during business hours to such overnight delivery service properly
addressed, postage prepaid. If notice is given personally or by telex or
telecopy, such notice shall be deemed to be delivered when received. Neither the
business to be transacted at nor the purpose of any special meeting of the board
of directors need be specified in the notice or waiver of notice of such
meeting. Any member of the board of directors or any committee thereof who is
present at a meeting shall be conclusively presumed to have waived notice of
such meeting except when such member attends for the express purpose of
objecting at the beginning of the meeting to the transaction of any business
because the meeting is not lawfully called or convened.
Section 7. Quorum, Required Vote and Adjournment. A majority of the
total number of directors then in office shall constitute a quorum for the
transaction of business at any meeting of the board of directors. Except as
otherwise provided by the certificate of incorporation, the vote of a majority
of directors present at a meeting at which a quorum is present shall be the act
of the board of directors. A majority of the directors present, whether or not a
quorum is present, may adjourn any regular or special meeting of the board of
directors to another time and place. Notice need not be given of the adjourned
meeting if the time and place to which the meeting is adjourned are announced at
the meeting at which adjournment is taken, and at the adjourned meeting any
business may be transacted that might have been transacted at the original
meeting.
Section 8. Committees. The board of directors may, by resolution or
resolutions adopted by a majority of the whole board, designate an audit
committee, a compensation committee, and a corporate governance and nominating
committee, each such committee to consist of one or more directors of the
corporation. The audit committee shall monitor and review the adequacy of
financial, operating and system controls, financial reporting, compliance with
legal, ethical and regulatory requirements, and the performance of the external
and internal auditors, serving as the conduit for communication between the
board of directors and external and internal auditors. The audit committee shall
recommend to the board of directors the independent public
<PAGE>7
accountants to conduct the annual examination of financial statements and shall
also review the proposed scope and fees of the examination, as well as its
results, and any significant, non-audit services and fees. The compensation
committee shall review the compensation (wages, salaries, supplemental
compensation and benefits) of the executive officers of the corporation,
including approval of compensation and benefit policies, approval of direct and
indirect executive officer compensation, administration of stock programs, and
oversight of the corporation's executive development plan. The compensation
committee shall make recommendations to the board of directors regarding
compensation and benefits for directors. The corporate governance and nominating
committee shall review the size, composition and effectiveness of the board of
directors, including retention, tenure and retirement policies, criteria for
selection of nominees to the board of directors, qualifications of candidates,
membership and structure of board committees, and developments in corporate
governance.
In addition to the committees specifically provided for in these
bylaws, the board of directors of the corporation, by resolution or resolutions
adopted by a majority of the whole board of directors, may designate any other
committees, each such committee to consist of one or more of the directors of
the corporation. To the extent provided in such resolution or resolutions, each
such committee shall have and may exercise all of the authority of the board of
directors in the management of the corporation. Notwithstanding the foregoing,
no committee established hereunder shall have the power or authority to (a)
approve, adopt or recommend to the stockholders any action or matter expressly
required by the Delaware General Corporation Law to be submitted to the
stockholders for approval, (b) amend the certificate of incorporation or adopt,
amend or repeal any bylaw of the corporation, (c) authorize dividends or other
distributions, (d) fill vacancies on the board of directors, (e) adopt an
agreement of merger or consolidation under Section 251 or 252 of the Delaware
General Corporation Law or a certificate of ownership and merger pursuant to
Section 253 of the Delaware General Corporation Law; (f) recommend to the
stockholders the sale, lease or exchange of all or substantially all of the
corporation's property and assets or recommend to the stockholders a dissolution
of the corporation or a revocation of a dissolution of the corporation, (g)
authorize or approve a reacquisition of shares, except according to a formula or
method prescribed by the board of directors, and (h) authorize or approve the
issuance or sale or contract for sale of shares, or determine the designation
and relative rights, preferences, and limitations of a class or series of
shares, except that the board of directors may authorize a committee or a senior
executive officer of the corporation to do so within limits specifically
prescribed by the board of directors.
The designation of any such committee and the delegation thereto of
authority shall not operate to relieve the board of directors, or any member
thereof, of any responsibility imposed upon the board or any director by law.
The board of directors shall elect the members of any such committee,
which members shall serve at the pleasure of the board. The board of directors
may designate one or more directors as alternate members of any committee, who
may replace any absent or disqualified member at any meeting of such committee.
<PAGE>8
Section 9. Committee Rules. Each committee of the board of directors
may fix its own rules of procedure and shall hold its meetings as provided by
such rules, except as may otherwise be provided by a resolution of the board of
directors designating such committee. Unless otherwise provided in such a
resolution, a majority of the members of the committee shall constitute a
quorum. In the event that a member and that member's alternate, if alternates
are designated by the board of directors as provided in Section 8 of this
Article III, of such committee is or are absent or disqualified, the member or
members thereof present at any meeting and not disqualified from voting, whether
or not such member or members constitute a quorum, may unanimously appoint
another member of the board of directors to act at the meeting in place of any
such absent or disqualified member.
Each committee shall keep regular minutes of its proceedings, which
minutes shall be recorded in the minute book of the corporation. The secretary
or an assistant secretary of the corporation may act as secretary for any
committee if the committee so requests.
Section 10. Lead Director; Chairman. In an effort to enhance
efficiency, independence and informed decision-making, the board of directors
may designate a Lead Director when the Chairman of the Board and the Chief
Executive Officer are the same person, who shall perform a number of tasks,
including: acting as Chairman of the Board when the Chairman/CEO is unable or it
is inadvisable for the Chairman/CEO to chair the Board; acting as Chairman of
the Corporate Governance and Nominating Committee; convening meetings of the
independent directors'; coordinating and communicating CEO performance
evaluations; and representing independent directors in communications with
stockholders, as appropriate. When the Chief Executive Officer is not the
Chairman, the board of directors may select one of its number to serve as
Chairman. The Chairman of the Board shall preside at all meetings of
stockholders and of the board of directors and shall have and perform such other
duties as may be assigned by the board of directors
Section 11. Meetings of Independent Directors. The independent
directors of the corporation shall meet at least annually to discuss significant
corporate governance matters, executive review, management succession and other
items.
Section 12. Communications Equipment. Members of the board of directors
or any committee thereof may participate in and act at any meeting of such board
or committee through the use of a conference telephone or other communications
equipment by means of which all persons participating in the meeting can hear
each other, and participation in the meeting pursuant to this section shall
constitute presence in person at the meeting.
Section 13. Presumption of Assent. A director of the corporation who is
present at a meeting of the Board of Directors at which action on any corporate
matter is taken shall be presumed to have assented to such action unless his or
her dissent shall be entered in the minutes of the meeting or unless such
director shall file his or her written dissent to such action with the person
acting as the secretary of the meeting before the adjournment thereof or shall
forward such dissent by registered or certified mail to the secretary of the
corporation immediately after
<PAGE>9
the adjournment of the meeting. Such right to dissent shall not apply to a
director who voted in favor of such action.
Section 14. Action by Written Consent. Unless otherwise restricted by
the certificate of incorporation, any action required or permitted to be taken
at any meeting of the board of directors, or of any committee thereof, may be
taken without a meeting if all members of the board or committee, as the case
may be, consent thereto in writing. Such written consents shall be filed with
the minutes of proceedings of the board or committee.
Section 15. Compensation. The board of directors shall fix the
compensation of directors. The directors may be paid their expenses, if any, of
attendance at each meeting of the board of directors and may be paid a fixed sum
for attendance at each meeting of the board of directors or a stated salary as
director. No such payment shall preclude any director from serving the
corporation in any other capacity and receiving compensation therefor. Members
of special or standing committees may be allowed like compensation for attending
committee meetings. Any Lead Director and any director serving as the chairman
of a committee may receive additional compensation for serving as such.
ARTICLE IV
OFFICERS
Section 1. Number. The officers of the corporation shall be a Chief
Executive Officer, a President, one or more Vice Presidents, a Treasurer and a
Secretary, all of whom shall be elected by the board of directors and shall hold
office until their successors are elected and qualified. In addition, the board
of directors may elect such Assistant Secretaries and Assistant Treasurers as it
may deem proper. The board of directors may appoint such other officers and
agents as it may deem advisable, who shall hold their offices for such terms and
shall exercise such powers and perform such duties as shall be determined from
time to time by the board of directors. Any number of offices may be held by the
same person except that neither the chairman of the board nor the chief
executive officer shall also hold the office of secretary. In its discretion,
the board of directors may choose not to fill any office for any period as it
may deem advisable, except that the offices of chief executive officer and
secretary shall be filled as expeditiously as possible.
Section 2. Election and Term of Office. The officers of the corporation
shall be elected annually by the board of directors at its first meeting held
after each annual meeting of stockholders or as soon thereafter as may be
practicable. Vacancies may be filled or new offices created and filled at any
meeting of the board of directors. Each officer shall hold office until a
successor is duly elected and qualified or until such officer's earlier death,
resignation, disqualification or removal as hereinafter provided.
Section 3. Removal. Any officer or agent elected by the board of
directors may be removed by the board of directors whenever in its judgment the
best interests of the corporation would be served thereby.
<PAGE>10
Section 4. Vacancies. Any vacancy occurring in any office because of
death, resignation, removal, disqualification or otherwise, may be filled by the
board of directors for the unexpired portion of the term.
Section 5. Compensation. Compensation of all executive officers shall
be fixed by the board of directors, and no officer shall be prevented from
receiving such compensation by virtue of his or her also being a director of the
corporation.
Section 6. The Chief Executive Officer. The Chief Executive Officer
shall have general charge and management of the business, affairs,
administration and operations of the corporation, shall carry out such duties as
are delegated by the board of directors, shall see that all orders and
resolutions of the board of directors are carried out, shall have power to
execute all contracts and agreements authorized by the board of directors, shall
make reports to the board of directors and stockholders, and shall perform such
other duties as are incident to the office or are properly required by the board
of directors. The Chief Executive Officer shall be responsible for the direction
and supervision of all personnel within his or her appointive powers and shall
also have the power to discipline or discharge such personnel. The Chief
Executive Officer shall sit with the board of directors in deliberation upon all
matters pertaining to the general business and policies of the corporation.
Section 7. President. The President shall have such powers and shall
perform such duties as shall be assigned to him or her by the board of directors
or the Chairman as appropriate. Except as the board of directors shall authorize
execution thereof in some other manner, the President shall execute bonds,
mortgages and other contracts on behalf of the corporation.
Section 8. Vice Presidents. Each Vice President shall have such powers
and shall perform such duties as shall be assigned to him or her by the board of
directors or Chief Executive Officer, as appropriate.
Section 9. Treasurer. The Treasurer shall be the custodian of all the
corporate funds and securities and shall keep full and accurate account of
receipts and disbursements in books belonging to the corporation, shall deposit
all moneys and other valuables in the name and to the credit of the corporation
in such depositaries as may be designated by the board of directors, shall
disburse the funds of the corporation as may be ordered by the board of
directors, or the Chairman, Chief Executive Officer or President, taking proper
vouchers for such disbursement, and shall render to the board of directors at
the regular meetings of the board of directors, or whenever they may request it,
an account of all transactions as Treasurer and of the financial condition of
the corporation. The Treasurer shall at all reasonable times exhibit the
corporation's books and accounts to any director of the corporation upon
application at the principal office of the corporation during business hours.
The Treasurer shall have such other powers and shall perform such other duties
as may from time to time be assigned to him or by her by the Chief Executive
Officer or the board of directors, as appropriate. If required by the board of
directors, the Treasurer shall give the corporation a bond for the faithful
discharge of the Treasurer's duties in such amount and with such surety as the
board shall prescribe.
<PAGE>11
Section 10. Secretary. The Secretary shall give, or cause to be given,
notice of all meetings of stockholders and directors and all other notices
required by law or by these bylaws, and in case of the absence or refusal or
neglect so to do, any such notice may be given by any person thereunto directed
by the Chairman, Chief Executive Officer, or President, or by the directors,
upon whose request the meeting is called as provided in these bylaws. The
Secretary shall be the custodian of, and shall make or cause to be made the
proper entries in, the minute book of the corporation and such other books and
records as the board of directors may direct. The Secretary shall be the
custodian of the corporate seal for the corporation and shall affix or cause to
be affixed such seal to such contracts and other instruments as the board of
directors may direct and shall perform such other duties as may from time to
time be assigned to him or her by the Chief Executive Officer or the board of
directors, as appropriate.
Section 11. Assistant Treasurers and Assistant Secretaries. Assistant
Treasurers and Assistant Secretaries, if any, shall be appointed by the Chief
Executive Officer and shall have such powers and shall perform such duties as
shall be assigned to them, respectively, by the Chief Executive Officer or the
board of directors, as appropriate.
Section 12. Other Officers, Assistant Officers and Agents. Officers,
assistant officers and agents, if any, other than those whose duties are
provided for in these bylaws, shall have such authority and perform such duties
as may from time to time be prescribed by resolution of the board of directors.
Section 13. Absence or Disability of Officers. In the case of the
absence or disability of any officer of the corporation and that of any person
hereby authorized to act in such officer's place during such officer's absence
or disability or for any other reason the board of directors may deem
sufficient, the board of directors may by resolution delegate the powers and
duties of such officer to any other officer, to any director, or to any other
person whom it may select.
ARTICLE V
INDEMNIFICATION OF OFFICERS, DIRECTORS AND OTHERS
Section 1. Procedure for Indemnification of Directors and Officers. Any
indemnification of a director or officer of the corporation or advance of
expenses under Article VIII of the certificate of incorporation shall be made
promptly, and in any event within thirty days, upon the written request of the
director or officer. If a determination by the corporation that the director or
officer is entitled to indemnification pursuant to this Article V is required,
and the corporation fails to respond within sixty days to a written request for
indemnity, the corporation shall be deemed to have approved the request. If the
corporation denies a written request for indemnification or advancing of
expenses, in whole or in part, or if payment in full pursuant to such request is
not made within thirty days, the right to indemnification or advances as granted
by this Article V shall be enforceable by the director or officer in any court
of competent jurisdiction. Such person's costs and expenses incurred in
connection with successfully establishing his or her right to indemnification,
in whole or in part, in any such action shall also be indemnified by the
corporation. It shall be a defense to any such action (other than an action
<PAGE>12
brought to enforce a claim for expenses incurred in defending any proceeding in
advance of its final disposition where the required undertaking, if any, has
been tendered to the corporation) that the claimant has not met the standards of
conduct which make it permissible under the Delaware General Corporation Law for
the corporation to indemnify the claimant for the amount claimed, but the burden
of such defense shall be on the corporation. Neither the failure of the
corporation (including its board of directors, independent legal counsel or its
stockholders) to have made a determination prior to the commencement of such
action that indemnification of the claimant is proper in the circumstances
because he or she has met the applicable standard of conduct set forth in the
Delaware General Corporation Law, nor an actual determination by the corporation
(including its board of directors, independent legal counsel or its
stockholders) that the claimant has not met such applicable standard of conduct,
shall be a defense to the action or create a presumption that the claimant has
not met the applicable standard of conduct.
Section 2. Article Not Exclusive. The rights to indemnification and the
payment of expenses incurred in defending a proceeding in advance of its final
disposition conferred in this Article V shall not be exclusive of any other
right which any person may have or hereafter acquire under any statute,
provision or the certificate of incorporation, bylaw, agreement, vote of
stockholders or disinterested directors or otherwise.
Section 3. Employees and Agents. Persons who are not covered by the
foregoing provisions of this Article V and who are or were employees or agents
of the corporation, or who are or were serving at the request of the corporation
as employees or agents of another corporation, partnership, joint venture, trust
or other enterprise, may be indemnified to the extent authorized at any time or
from time to time by the board of directors. Expenses (including attorneys'
fees) incurred by employees and agents may be paid upon such terms and
conditions, if any, as the board of directors deems appropriate; provided, that
such expenses may only be paid by the corporation in advance of a proceeding's
final disposition upon receipt of an undertaking by or on behalf of such
employee or agent to repay such amount if it shall ultimately be determined that
he or she is not entitled to be indemnified by the corporation.
Section 4. Contract Rights. The provisions of this Article V shall be
deemed to be a contract right between the corporation and each director or
officer who serves in any such capacity at any time while this Article V and the
relevant provisions of the Delaware General Corporation Law or other applicable
law are in effect, and any repeal or modification of this Article V or any such
law shall not affect any rights or obligations then existing with respect to any
state of facts or proceeding then existing.
Section 5. Merger or Consolidation. For purposes of this Article V,
references to "the corporation" shall include, in addition to the resulting
corporation, any constituent corporation (including any constituent of a
constituent) absorbed in a consolidation or merger which, if its separate
existence had continued, would have had power and authority to indemnify its
directors, officers, and employees or agents, so that any person who is a
director, officer, employee or agent of such constituent corporation or is or
was serving at the request of such constituent corporation as a director,
officer, employee or agent of another corporation, partnership, joint
<PAGE>13
venture, trust or other enterprise, shall stand in the same position under this
Article V with respect to the resulting or surviving corporation as he or she
would have with respect to such constituent corporation if its separate
existence had continued.
ARTICLE VI
CERTIFICATES OF STOCK
Section 1. Form. Every holder of stock in the corporation shall be
entitled to have a certificate signed by, or in the name of, the corporation by
the chief executive officer or a vice-president of the corporation and by the
secretary or an assistant secretary of the corporation, certifying the number of
shares of the corporation owned by such holder. The signature of any such chief
executive officer, vice-president, secretary or assistant secretary may be
facsimiles. In case any officer or officers who have signed, or whose facsimile
signature or signatures have been used on, any such certificate or certificates
shall cease to be such officer or officers of the corporation, whether because
of death, resignation or otherwise, before such certificate or certificates have
been delivered by the corporation, such certificate or certificates may
nevertheless be issued and delivered as though the person or persons who signed
such certificate or certificates or whose facsimile signature or signatures have
been used thereon had not ceased to be such officer or officers of the
corporation. All certificates for shares shall be consecutively numbered or
otherwise identified. The name of the person to whom the shares represented
thereby are issued, with the number of shares and date of issue, shall be
entered on the books of the corporation. Shares of stock of the corporation
shall be transferred on the books of the corporation only by the holder of
record thereof or by such holder's attorney duly authorized in writing, upon
surrender to the corporation of the certificate or certificates for such shares
endorsed by the appropriate person or persons, with such evidence of the
authenticity of such endorsement, transfer, authorization and other matters as
the corporation may reasonably require, and accompanied by all necessary stock
transfer stamps. In that event, it shall be the duty of the corporation to issue
a new certificate or certificates and record the transaction on its books. The
board of directors may appoint a bank or trust company organized under the laws
of the United States or any state thereof to act as its transfer agent or
registrar, or both, in connection with the transfer of any class or series of
securities of the corporation.
Section 2. Lost Certificates. The board of directors may direct a new
certificate or certificates to be issued in place of any certificate or
certificates previously issued by the corporation alleged to have been lost,
stolen or destroyed, upon the making of an affidavit of the fact by the person
claiming the certificate of stock to be lost, stolen or destroyed. When
authorizing such issue of a new certificate or certificates, the board of
directors may, in its discretion and as a condition precedent to the issuance
thereof, require the owner of such lost, stolen or destroyed certificate or
certificates, or his or her legal representative, to give the corporation a bond
sufficient to indemnify the corporation against any claim that may be made
against the corporation on account of the loss, theft or destruction of any such
certificate or the issuance of such new certificate.
<PAGE>14
Section 3. Fixing a Record Date for Stockholder Meetings. In order that
the corporation may determine the stockholders entitled to notice of or to vote
at any meeting of stockholders or any adjournment thereof, the board of
directors may fix a record date, which record date shall not precede the date
upon which the resolution fixing the record date is adopted by the board of
directors, and which record date shall not be more than sixty nor less than ten
days before the date of such meeting. If no record date is fixed by the board of
directors, the record date for determining stockholders entitled to notice of or
to vote at a meeting of the stockholders shall be the close of business on the
next day preceding the day on which notice is given, or if notice is waived, at
the close of business on the day next preceding the day on which the meeting is
held. A determination of stockholders of record entitled to notice of or to vote
at a meeting of stockholders shall apply to any adjournment of the meeting;
provided, however, that the board of directors may fix a new record date for the
adjourned meeting.
Section 4. Fixing a Record Date for Other Purposes. In order that the
corporation may determine the stockholders entitled to receive payment of any
dividend or other distribution or allotment or any rights or the stockholders
entitled to exercise any rights in respect of any change, conversion or exchange
of stock, or for the purposes of any other lawful action, the board of directors
may fix a record date, which record date shall not precede the date upon which
the resolution fixing the record date is adopted, and which record date shall be
not more than sixty days prior to such action. If no record date is fixed, the
record date for determining stockholders for any such purpose shall be at the
close of business on the day on which the board of directors adopts the
resolution relating thereto.
Section 5. Registered Stockholders. Prior to the surrender to the
corporation of the certificate or certificates for a share or shares of stock
with a request to record the transfer of such share or shares, the corporation
may treat the registered owner as the person entitled to receive dividends, to
vote, to receive notifications and otherwise to exercise all the rights and
powers of an owner. The corporation shall not be bound to recognize any
equitable or other claim to or interest in such share or shares on the part of
any other person, whether or not it shall have express or other notice thereof.
ARTICLE VII
GENERAL PROVISIONS
Section 1. Dividends. Dividends upon the capital stock of the
corporation may be declared by the board of directors at any regular or special
meeting, subject to and in the manner provided by law and the applicable
provisions of the certificate of incorporation, if any. Dividends may be paid in
cash, in property, or in shares of the capital stock. Before payment of any
dividend, there may be set aside out of any funds of the corporation available
for dividends such sum or sums as the board of directors from time to time, in
its absolute discretion, think proper as a reserve or reserves to meet
contingencies, to equalize dividends, to repair or maintain any property of the
corporation, or to accomplish any other purpose, and the board of directors may
modify or abolish any such reserve in the manner in which it was created.
<PAGE>15
Section 2. Checks, Drafts or Orders. All checks, drafts or other orders
for the payment of money by or to the corporation and all notes and other
evidences of indebtedness issued in the name of the corporation shall be signed
by such officer or officers, agent or agents of the corporation, and in such
manner, as shall from time to time be determined by resolution of the board of
directors or a duly authorized committee thereof. In the absence thereof, the
signature of the Chief Executive Officer shall suffice.
Section 3. Contracts. The board of directors may authorize any officer
or officers, or any agent or agents, of the corporation to enter into any
contract or to execute and deliver any instrument in the name of and on behalf
of the corporation, and such authority may be general or confined to specific
instances. In the absence thereof, the signature of the Chief Executive Officer
shall suffice.
Section 4. Fiscal Year. The fiscal year of the corporation shall be
determined by resolution of the board of directors. In the absence of a
resolution by the board of directors, the fiscal year of the corporation shall
end on the last Saturday in the month of November.
Section 5. Corporate Seal. The board of directors shall provide a
corporate seal which shall be in the form of a circle and shall have inscribed
thereon the name of the corporation, the year of its incorporation and the words
"Corporate Seal, Delaware." The seal may be used by causing it or a facsimile
thereof to be impressed, affixed or otherwise reproduced.
Section 6. Voting Securities Owned by Corporation. Voting securities in
any other corporation held by the corporation shall be voted by the chief
executive officer, unless the board of directors specifically confers authority
to vote with respect thereto, which authority may be general or confined to
specific instances, upon some other person or officer. Any person authorized to
vote securities shall have the power to appoint proxies, with general power of
substitution.
Section 7. Section Headings. Section headings in these bylaws are for
convenience of reference only and shall not be given any substantive effect in
limiting or otherwise construing any provision herein.
Section 8. Inconsistent Provisions. In the event that any provision of
these bylaws is or becomes inconsistent with any provision of the certificate of
incorporation, the Delaware General Corporation Law or any other applicable law,
the provision of these bylaws shall not be given any effect to the extent of
such inconsistency but shall otherwise be given full force and effect.
ARTICLE VIII
AMENDMENTS
These bylaws may be amended, altered, or repealed and new bylaws
adopted in the manner provided in the certificate of incorporation.
<PAGE>16
Certificate of Secretary
The above and foregoing is a true and correct copy of the Amended and
Restated Bylaws of Payless Cashways, Inc., as Amended as of February 17, 1999.
/s/ Gary D. Gilson
------------------
Gary D. Gilson, Corporate Secretary
<PAGE>1
FIRST AMENDMENT TO AMENDED
AND RESTATED LOAN AGREEMENT
This First Amendment to Amended and Restated Loan Agreement
(this "Amendment"), dated as of the 26th day of February, 1998, by and between
PAYLESS CASHWAYS, INC., a Delaware corporation (herein called "Borrower"), and
UBS MORTGAGE FINANCE, INC. (herein called "Lender").
WHEREAS, the parties have previously entered into that certain
Amended and Restated Loan Agreement, dated as of December 2, 1997 (the "Loan
Agreement"), pursuant to which Borrower executed in favor of Lender a certain
Consolidated, Amended and Restated Promissory Note in the principal amount of
$100,809,000.00 (the "Note"), which Note, among other things, consolidated the
Prior Notes (as such term is defined in the Loan Agreement) into a single
promissory note and evidences a certain loan transaction (the "Loan") between
Borrower and Lender.
WHEREAS, by assignments of even date herewith (collectively,
the "Assignments"), LaSalle National Bank, as Trustee for Lender has become the
owner and holder of a certain (i) mortgage encumbering real property located in
Johnson County, Kansas (the "Kansas Mortgage"), (ii) mortgage encumbering real
property located in Monroe County, Indiana (the "Indiana Mortgage") and (iii)
deed of trust encumbering real property in Clark County, Nevada (the "Nevada
DOT"; and collectively with the Kansas Mortgage and the Indiana Mortgage, the
"Existing Mortgages") and the notes secured thereby (collectively, the "Existing
Notes") evidencing a debt with a principal balance, at the time of delivery of
the Assignments, of $16,000,000, which, immediately prior to the effectiveness
of the Reduction Letter (as such term is hereinafter defined) was due and owing
without any offset, defense or counterclaim whatsoever;
WHEREAS, pursuant to a separate letter, dated the date hereof,
from Lender to Borrower (the "Reduction Letter"), and immediately following the
delivery of the Assignments and prior to the effectiveness of the modifications
contemplated hereby, Lender reduced the principal amount of the Existing Notes
to the principal amount of $13,000,000.00 which is due and owing without any
offset, defense or counterclaim whatsoever;
WHEREAS, Lender and Borrower desire, after the effectiveness
of the reduction of the aggregate principal amounts of the Existing Notes as set
forth in the Reduction Letter to (i) amend and restate the terms of each of the
Existing Mortgages (the Existing Mortgages, as so amended and restated shall
hereinafter be referred to, collectively, as the "New Mortgages"), (ii)
consolidate into one indebtedness the Existing Notes and the Note in the
aggregate principal amount of $102,689,450 and (iii) amend and restate the terms
of the Existing Note and the Note pursuant to a certain Amended and Restated
Promissory Note, dated the date hereof, in the principal amount of $102,689,450
from Borrower to Lender (the "New Note"); and
WHEREAS, Lender and Borrower desire to amend the Loan
Agreement to reflect, among other things, the increased amount of the Loan
evidenced thereby and by the New Note.
<PAGE>2
NOW THEREFORE, in consideration of the premises and the mutual
agreements, covenants and conditions hereinafter set forth, Borrower and Lender
agree as follows:
1. All capitalized terms used herein and not otherwise defined
are used as defined in the Loan Agreement.
2. The definition of "Loan" contained in Section 1.1 of the
Loan Agreement is hereby deleted in its entirety and the following shall be
substituted therefor:
"Loan" means the indebtedness of the Borrower to
Lender evidenced by the terms of Borrower's promissory
note dated February 26, 1998, in the principal amount
of One Hundred and Two Million Six Hundred Eighty Nine
Thousand Four Hundred and Fifty Dollars ($102,689,450).
3. The definition of "Mortgage" contained in Section 1.1 of
the Loan Agreement is hereby deleted in its entirety and the following shall be
substituted therefor:
"Mortgage" means collectively, all of the
mortgages and deeds of trust included in the Security
Documents and executed by the Borrower, as the same may
be amended, supplemented, extended or otherwise
modified from time to time.
4. The definition of "Note" contained in Section 1.1 of the
Loan Agreement is hereby deleted in its entirety and the following shall be
substituted therefor:
"Note" means the Amended and Restated Promissory
Note dated February 26, 1998 made by Borrower to Lender
in the principal amount of One Hundred and Two Million
Six Hundred Eighty Nine Thousand Four Hundred and Fifty
Dollars ($102,689,450).
5. The following defined terms shall be inserted in Section
1.1 of the Loan Agreement:
"Payment Notice" has the meaning given it in Section
2.3(e)."
"Sale Payment" has the meaning given it in Section
2.7(e)."
"Sale Payment Date" has the meaning given it in Section
2.7(e)."
6. Section 2.3 of the Loan Agreement is hereby amended
by adding a new subsection (e) thereto to read as follows:
"(e) Each month during the term of the Loan,
Lender shall calculate the amount due on each
Payment Date and provide Borrower with at least one
(1) Business Day notice thereof (each, a "Payment
Notice"), provided however, that Lender shall not
in any way be liable to Borrower for its failure to
provide any such Payment Notice pursuant to this
subsection (e)
<PAGE>3
and any such failure shall not, in any way relieve Borrower
from its obligation to timely make the payments on each
Payment Date required under this Agreement or under the Note.
If the amount set forth in any Payment Notice provided by
Lender pursuant to this subsection (e) shall be incorrect,
Borrower shall remain obligated to pay to Lender the amount
that otherwise should have been paid had such Payment
Notice been correct, and Lender's failure to deliver a correct
Payment Notice shall not in any way be deemed a waiver by
Lender of its right to receive the full, correct amount of
such payment."
7. Section 2.7 of the Loan Agreement is hereby
amended by adding a new subsection (e)thereto to read as follows:
"(e) Notwithstanding anything to the contrary
contained herein, in connection with any prepayment of
principal pursuant to Sections 2.7(a) or 2.7(b) hereof,
any and all interest accrued on such principal being
prepaid, through and including the date of prepayment,
shall be paid by Borrower on the first Payment Date
following such date of prepayment."
8. Exhibit C to the Loan Agreement is hereby amended by adding
thereto the properties listed on Exhibit A attached hereto and made a part
hereof.
9. Lender's obligation to consummate the transaction
contemplated hereby is subject to the satisfaction by Borrower of each of the
following conditions:
a. Borrower shall have obtained all consents to the
transaction contemplated hereby required under the Credit
Agreement, which consents shall be in recordable form and
otherwise in form and substance reasonably satisfactory to
Lender in all respects;
b. No Event of Default shall exist and be continuing as
of the date hereof;
c. Lender shall have received an opinion of counsel for
Borrower in form and substance satisfactory to Lender;
d. Lender shall have received a mortgagee policy of
title insurance or title commitment to issue a mortgagee
policy of title insurance with respect to each of the New
Mortgages, in form satisfactory to Lender in all respects;
e. Borrower shall have executed and delivered to Lender
the New Note, the New Mortgages (together with appropriate
Uniform Commercial Code Financing Statements) and such other
documents and items as Lender may reasonably request;
f. Lender shall have received from the holders of the
Permitted Second Lien, amendments to the mortgages or deeds of
trust that are subordinate to the Existing Mortgages, which
amendments shall contain, among other things, the
<PAGE>4
provisions set forth on Exhibit B attached hereto and which
amendments shall otherwise be in form and substance
satisfactory to Lender in all respects;
g. Borrower shall have provided Lender with evidence,
reasonably satisfactory to Lender in all respects, that (i)
all real estate taxes affecting the Property have been paid to
date or (ii) real estate taxes that are due and owing as of
the date hereof and that have not been paid are being disputed
in good faith by Borrower; and
h. Borrower shall have provided Lender with evidence,
reasonably satisfactory to Lender in all respects, that all
title insurance premiums due and owing in connection with the
transaction consummated on December 2, 1997 between Borrower
and Lender, have been paid in full.
10. Borrower hereby represents and warrants that (a) Borrower
is the sole legal and beneficial owner of each of the properties encumbered by
the Existing Mortgages (collectively, the "New Properties"); (b) Borrower is not
in Default in the performance of any of the covenants and agreements contained
in the Loan Agreement as amended hereby, or in the Loan Documents; (c) no event
has occurred and is continuing which constitutes a Default; (d) Borrower is a
corporation duly organized, validly existing and in good standing under the laws
of its state or organization, having all corporation or partnership powers
required to carry on its business and enter into and carry out the transactions
contemplated hereby; (e) Borrower has all requisite power and all governmental
certificates of authority, licenses, permits qualifications and other
documentation to own, lease and operate the New Properties and to carry on its
business as now conducted and as contemplated to be conducted except where
failure to obtain any such governmental certificate of authority, license,
permit, qualification or other documentation would not have a Materially Adverse
Effect; (f) Borrower is duly qualified, in good standing and authorized to do
business in each of the jurisdictions where the New Properties are located; (g)
Borrower had duly taken all corporate action necessary to authorize the
execution and delivery by it of this Agreement and all other documents executed
in connection herewith (collectively, the "New Loan Documents") and to authorize
the consummation of the transactions contemplated thereby and the performance of
its obligations hereunder and thereunder; (h) the execution and delivery by
Borrower of this Amendment and the New Loan Documents, the performance of its
obligations under this Amendment and the New Loan Documents, and the
consummation of the transactions contemplated by this Amendment, do not and will
not (1) conflict with any provision of (A) any application domestic or foreign
law, statute, decree, rule or regulation, except where failure to comply
therewith would not have a Materially Adverse Effect, (B) the articles or
certificates of incorporation, bylaws, charter or partnership agreement or
certificate of Borrower or (C) any agreement, judgment, license, order or permit
applicable to or binding upon Borrower, (2) result in the acceleration of any
Debt owed by Borrower, (3) result in or require the creation of any Lien upon
any assets or properties of Borrower except as expressly contemplated in this
Amendment or the Loan Documents, or (4) contravene, result in a breach of or
constitute a default under any mortgage, deed of trust, lease, promissory note,
loan agreement or other material contract or material agreement to which
Borrower is a party or by which Borrower or any of its Properties may currently
be bound or affected; (i) except as otherwise provided herein, no consent,
approval, authorization or order of, and no notice to or filing with, any court
or
<PAGE>5
governmental authority or third party is required in connection with the
execution, delivery or performance by Borrower of this Amendment or the New Loan
Documents or to consummate any transactions contemplated by this Amendment; (j)
this Amendment and the New Loan Documents are legal and binding obligations of
Borrower, enforceable in accordance with their respective terms, except as
limited by bankruptcy, insolvency or similar laws of general application
relating to the enforcement of creditors' rights; and (k) all representations
and warranties of Borrower set forth in the Loan Agreement are true and complete
in all material respects as of the date hereof. Borrower agrees to indemnify and
hold Lender harmless against any loss, claim, damage, liability or expense
(including without limitation reasonable attorneys' fees and disbursements)
incurred as a result of any representation or warranty made by Borrower herein
proving to be untrue in any material respect.
11. Borrower agrees to execute such other and future documents
as may be reasonably necessary or appropriate to consummate the transaction
contemplated hereby or to perfect the liens and security interests intended to
secure the payment of the New Note.
12. Except as provided herein, the terms and revisions of the
Loan Agreement and the other Loan Documents shall remain unchanged and shall
remain in full force and effect. Any modification herein of the Loan Agreement
and the other Loan Documents shall in no way affect the security of the payment
of the New Note. Borrower hereby agrees, covenants and represents that the Loan
Agreement and the other Loan Documents as modified and amended hereby are and
remain valid and that nothing herein shall affect the validity or enforceability
thereof.
13. Borrower hereby acknowledges that the liens and security
interests created and evidenced by the Mortgage are valid and subsisting and
further acknowledges and agrees that there are no offsets, claims or defenses to
the Note, the Loan Agreement or any other Loan Documents. Borrower further
acknowledges that it has no knowledge that there are any defects or deficiencies
with respect to the liens and security interests created and evidenced by any of
the Security Documents.
14. Contemporaneously with the execution and delivery hereof,
Borrower shall pay, or cause to be paid, all costs and expenses incident to the
preparation hereof and the consummation of the transactions specified herein,
including but not limited to legal fees and expenses of outside counsel and
title costs.
15. This Agreement may be executed in one or more
counterparts, each of which shall constitute an original of this Agreement, and
which, when taken together, shall constitute but one instrument.
<PAGE>6
IN WITNESS WHEREOF, the undersigned parties have
executed this Agreement this 26 day of February, 1998.
PAYLESS CASHWAYS, INC.
By: /s/ Richard G. Luse
-------------------------
Name: Richard G. Luse
Title: Sr. Vice President-Finance
UBS MORTGAGE FINANCE, INC.
By: /s/ Randy Nardone
-------------------------
Name: Randy Nardone
Title:
By: /s/ Jonathan Ashley
-------------------------
Name: Jonathan Ashley
Title:
<PAGE>1
August 12, 1998
Mr. Richard Luse
Payless Cashways, Inc.
2300 Main, Suite 300
Kansas City, Missouri 64180
Ladies and Gentlemen:
Please refer to: (a) that certain Amended and Restated Promissory Note
dated February 26, 1998 (the "Note") executed by Payless Cashways, Inc. (the
"Maker") in favor of LaSalle National Bank, as Trustee for UBS Mortgage Finance
Inc., as assigned to Fortress IOFP, LLC, (the "Seller"), in the amount of
$102,689,450.00; (b) the Loan Agreement dated as of December 2, 1997 between the
Maker and UBS Mortgage Finance, Inc., dated December 2, 1997, as amended by the
First Amendment to Amended and Restated Loan Agreement dated February 26, 1998
(the "Loan Agreement"); (c) the Security Documents as defined in the Loan
Agreement (the "Security Documents"); and (d) all other documents securing
Maker's obligations under the Note (together with the Loan Agreement and the
Security Documents, the "Loan Documents"). You are advised as follows (the
"Notice"), effective as of the date of this letter.
Assignment. Seller has, pursuant to that certain Master Repurchase
Agreement for Mortgage Loans and REO Property, dated as of August 12, 1998,
assigned all the Loan Documents to Greenwich Capital Financial Products, Inc.
(the "Purchaser"). This assignment shall remain in effect unless and until
Purchaser has notified Maker otherwise in writing.
Payments. Please refer to any and all payments otherwise required to be
made to Seller on account of Maker's obligations under the Loan Documents
(collectively, the "Payments"). Except to the extent, if any, that Purchaser has
instructed Maker otherwise in writing, Maker shall make all Payments only to
Purchaser in care of the following bank account:
Chase Manhattan Bank, New York
ABA #021-000-021
Account Name: Greenwich Capital Financial Products
Account Number: 1400-95961
Reference:
or such other account as Purchaser shall specify from time to time by written
notice to Maker. Any payments made directly to Seller shall be null, void, and
of no force or effect, and shall not be deemed to discharge, in whole or in
part, or be applied against or reduce, any obligations of Maker under the Loan
Documents.
Modifications and Waivers, Etc. No material modification, waiver,
deferral, or release (in whole or in part) of any of Maker's obligations under
the Loan Documents shall be effective without prior written consent of
Purchaser.
<PAGE>2
Please sign and return to Purchaser one counterpart of the foregoing
Notice to Maker to confirm and evidence Maker's receipt of the foregoing.
Very truly yours,
GREENWICH CAPITAL FINANCIAL PRODUCTS, INC.
By: /s/ Mark R. Jarrell
- -----------------------------
Name: Mark R. Jarrell
Title: Senior Vice President
Seller confirms the above Notice to Maker and directs Maker to comply with the
Notice, notwithstanding any contrary instructions or directions that Seller may
give Maker at any time, unless Purchaser has consented to those contrary
instructions or directions in writing.
FORTRESS IOFP, LLC
By: /s/ Randall A. Nardone
- ---------------------------------
Name: Randall A. Nardone
Title: Chief Operating Officer of Fortress Investment Corp.,
the general partner of Fortress Partners, L.P.,
the sole member of Fortress IOFP, LLC
CONFIRMATION BY MAKER
The undersigned, Maker of the foregoing Note and a party to the Loan
Documents, confirms the following:
Receipt of Notice. Maker has received the foregoing Notice to Maker.
No Offsets or Defenses. Maker has no offsets or defenses against
Maker's obligations under the Loan Documents.
Very truly yours,
PAYLESS CASHWAYS, INC.
By: /s/ Richard G. Luse
- ------------------------------
Name: Richard G. Luse
Title: Senior Vice President - Finance
Date: August 12, 1998
- --------------------------
<PAGE>1
AMENDED AND RESTATED
PAYLESS CASHWAYS, INC.
1998 OMNIBUS INCENTIVE PLAN
Section 1. Purpose.
The purposes of the Amended and Restated 1998 Omnibus Incentive Plan of
Payless Cashways, Inc. (the "Plan") are to give the Company and its Affiliates a
competitive advantage in attracting, motivating and retaining Employees and
Outside Directors and to more closely align the interests of the Employees with
the Company's stockholders and to motivate Employees to enhance the value of the
Company for the benefit of all stockholders.
Section 2. Definitions.
As used in the Plan, the following terms shall have the meanings set
forth below:
(a) "Affiliate" means (i) any Person that directly, or through one or more
intermediaries, controls, or is controlled by, or is under common control with,
the Company, (ii) any entity in which the Company has an equity interest of at
least 50%, and (iii) any entity in which the Company has any other significant
equity interest, as determined by the Committee.
(b) "Award" means any Option, Limited Right, Performance Share, Performance
Unit, Restricted Stock, Shares, Dividend Equivalent, or any other right,
interest, or option relating to Shares granted pursuant to the provisions of the
Plan.
(c) "Award Agreement" means any written agreement or contract, setting forth the
terms and conditions of any Award granted hereunder.
(d) "Board" means the Board of Directors of the Company.
(e) "Code" means the Internal Revenue Code of 1986, as amended from time to
time, and any successor thereto.
(f) "Committee" means the Compensation Committee of the Board, or such other
committee designated by the Board, authorized to administer the Plan under
Section 3 hereof. The Committee shall consist of not less than two directors,
each of whom shall be a Non-Employee Person within the meaning of Rule 16b-3 and
an outside director within the meaning of Code Section 162(m).
(g) "Company" means Payless Cashways, Inc., a Delaware corporation.
(h) "Disability" means permanent and total disability as determined under
procedures established by the Committee for purposes of the Plan.
(i) "Dividend Equivalent" means any right granted pursuant to Section 11 hereof.
<PAGE>2
(j) "Employee" means any employee (including officers) of the Company or any
Affiliates regularly employed for more than 20 hours per week.
(k) "Exchange Act" means the Securities Exchange Act of 1934, as amended, and
any successors thereto, and the rules and regulations promulgated thereunder,
all as shall be amended from time to time.
(l) "Fair Market Value" means, with respect to any property, the market value of
such property as determined by such methods or procedures as shall be
established from time to time by the Committee.
(m) "Incentive Stock Option" means an Option granted under Section 6 hereof that
is intended to meet the requirements of Code Section 422 or any successor
provision thereto.
(n) "Limited Right" means any right granted to a Participant pursuant to Section
7 hereof.
(o) "Non-Qualified Stock Option" means an Option granted under Section 6 hereof
that is not intended to be an Incentive Stock Option, and an Option granted to
an Outside Director pursuant to Section 10 hereof.
(p) "Option" means an Incentive Stock Option or a Non-Qualified Stock Option.
(q) "Outside Director" means a member of the Board who is not an Employee of the
Company or an Affiliate.
(r) "Participant" means an Employee or Outside Director who receives an Award
under the Plan.
(s) "Performance Award" means any Award of Performance Shares or Performance
Units pursuant to Section 8 hereof.
(t) "Performance Goals" means preestablished, objectively determinable
performance goals, and a level or levels of performance with respect to each of
the goals, adopted by the Committee prior to the grant of Restricted Stock or
Performance Awards and that are based, in whole or in part, on one or more of
the following performance-based criteria: (i) attainment during the Performance
Period of a specified price per share of the Company's common stock; (ii)
attainment during the Performance Period of a specified rate of growth or
increase in the amount of growth in the price per share of the Company's common
stock; (iii) attainment during the Performance Period of a specified level of
the Company's earnings or earnings per share of the Company's common stock; (iv)
attainment during the Performance Period of a specified rate of growth or
increase in the amount of growth of the Company's earnings or earnings per share
of the Company's common stock; (v) attainment during the Performance Period of a
specified level of the Company's cash flow or cash flow per share of the
Company's common stock; (vi) attainment during the Performance Period of a
specified rate of growth or increase in the amount of growth of the Company's
cash flow or cash flow per share
<PAGE>3
of the Company's common stock; (vii) attainment during the Performance Period of
a specified level of the Company's return on equity; (viii) attainment during
the Performance Period of a specified rate of growth or increase in the amount
of growth of the Company's return on equity; (ix) attainment during the
Performance Period of a specified level of the Company's return on assets or
return on net assets. For purposes hereof, "earnings" may, but need not, be
measured by reference to earnings before interest, taxes, depreciation and
amortization.
(u) "Performance Period" means that period established by the Committee at the
time any Performance Award is granted or at any time thereafter during which any
performance criteria, including any Performance Goal, if applicable, specified
by the Committee with respect to such Award are to be measured.
(v) "Performance Share" means any grant pursuant to Section 8 hereof of a unit
valued by reference to a designated number of Shares.
(w) "Performance Unit" means any grant pursuant to Section 8 hereof of (i) a
bonus consisting of cash or other property, the amount or value of which, and/or
the entitlement to which, is conditioned upon the attainment of any performance
criteria, including any Performance Goals, if applicable, specified by the
Committee, or (ii) a unit valued by reference to a designated amount of property
other than Shares.
(x) "Person" means any individual, corporation, limited liability company,
partnership, association, joint-stock company, trust, unincorporated
organization, or government or political subdivision thereof.
(y) "Restricted Stock" means any Share issued pursuant to Section 9 hereof with
the restriction that the holder may not sell, transfer, pledge, or assign such
Share and with such other restrictions as the Committee, in its sole discretion,
may impose (including, without limitation, any restriction on the right to vote
such Share, and the right to receive any cash dividends), which restrictions may
lapse separately or in combination upon such conditions and at such time or
times, in installments or otherwise, as the Committee may deem appropriate, and
which restriction shall provide that the Shares subject to such restriction
shall be forfeited if the restriction does not lapse prior to such date or such
event as the Committee may deem appropriate.
(z) "Restricted Stock Award" means an award of Restricted Stock pursuant to
Section 9 hereof.
(aa) "Rule 16b-3" means Rule l6b-3 promulgated by the Securities and Exchange
Commission under the Exchange Act, or any successor rule or regulation thereto.
(bb) "Shares" means shares of the Common Stock of the Company, par value $.01
per share.
(cc) "Termination of Employment" means the termination of the Participant's
employment with the Company and any Affiliate. A Participant employed by an
Affiliate shall
<PAGE>4
also be deemed to incur a Termination of Employment if the Affiliate ceases
to be an Affiliate and the Participant does not immediately thereafter become
an employee of the Company or another Affiliate.
Section 3. Administration.
(a) Committee. The Plan shall be administered by the Committee.
(b) Committee Authority. Subject to the terms of the Plan and applicable law,
the Committee shall have full power and authority to: (i) designate
Participants, (ii) determine the type or types of awards to be granted to each
Participant hereunder, (iii) determine the number of Shares to be covered by or
with respect to which payments, rights, or other matters are to be calculated in
connection with each Award, (iv) determine the terms and conditions of any
Award, (v) determine whether, to what extent, and under what circumstances
Awards may be settled or exercised in cash, Shares, other securities, other
Awards, or other property, or canceled, forfeited, or suspended, and the method
or methods by which Awards may be settled, exercised, canceled, forfeited, or
suspended, (vi) interpret and administer the Plan and any instrument or
agreement relating to, or Award made under, the Plan, (vii) establish, amend,
suspend or waive such rules and regulations and appoint such agents as it deems
appropriate for the proper administration of the Plan, (viii) make any other
determination and take any other action that the Committee deems necessary or
desirable for administration of the Plan, and (ix) determine to what extent and
under what circumstances Shares and other amounts payable with respect to an
Award shall be deferred either automatically or at the election of the
Participant or the Committee.
(c) Replacement Awards. Subject to the terms of the Plan (including without
limitation Section 13 hereof), the Committee shall also have the authority to
grant Awards in replacement of Awards previously granted under this Plan or any
other compensation plan of the Company or an Affiliate.
(d) Delegation. The Committee, in its discretion, may delegate its authority and
duties under the Plan to an officer of the Company under such conditions and/or
limitations as the Committee may establish; provided, however, that only the
Committee may select and grant Awards, or otherwise take any action with respect
to Awards, to Participants who are (i) officers or directors of the Company for
purposes of Section 16 of the Exchange Act, or (ii) Participants who are
"covered employees" under Code Section 162(m).
(e) Decisions of Committee and Its Delegates. Unless otherwise expressly
provided in the Plan, all determinations, designations, interpretations, and
other decisions of the Committee, or (unless the Committee has specified an
appeal process to the contrary) any other Person(s) to whom the Committee has
delegated authority, shall be final, conclusive and binding upon all Persons,
including the Company, any Participant, any stockholder, and any Employee. All
determinations of the Committee shall be made by a majority of its members.
The Committee and each member thereof shall be entitled to rely upon
any report or other information furnished by any officer or employee of the
Company or any Affiliate, or the
<PAGE>5
Company's independent auditors, and shall be entitled to rely upon the advice of
counsel, who may be counsel to the Company. Members of the Committee and any
employee of the Company or an Affiliate acting at the direction or on behalf of
the Committee shall not be personally liable for any action or determination
taken or made in good faith with respect to the Plan upon such report,
information or advice.
Section 4. Shares Subject to the Plan.
(a) Subject to adjustment as provided in Section 4(c) hereof, a total of Two
Million Four Hundred Thousand (2,400,000) Shares shall be available for the
grant of Awards under the Plan; provided, however, that not more than Four
Hundred Eighty Thousand (480,000) of such shares shall be issued as Restricted
Stock and that no more than Two Hundred Thousand (200,000) shares of Restricted
Stock shall be issued in any one fiscal year. Any Shares issued hereunder may
consist of authorized and unissued shares or treasury shares. If any Shares
subject to any Award granted hereunder, or to which such an Award relates, are
forfeited or such Award otherwise terminates without the issuance of such Shares
or of other consideration in lieu of such Shares, the Shares subject to such
Award, or to which such Award relates, to the extent of any such forfeiture or
termination, shall again be available for grant under the Plan. In addition, to
the extent permitted by Code Section 422, any Shares issued by, and any Awards
granted by or that become obligations of, the Company through or as the result
of the assumption of outstanding grants or the substitution of Shares under
outstanding grants of an acquired company shall not reduce the Shares available
for grants under the Plan.
(b) For purposes of this Section 4,
(i) If an Award (other than a Dividend Equivalent) is denominated in Shares, the
number of Shares covered by such Award, or to which such Award relates, shall be
counted on the date of grant of such Award against the aggregate number of
Shares available for granting Awards under the Plan;
(ii) Dividend Equivalents and Awards not denominated in Shares shall be counted
against the aggregate number of Shares available for granting Awards under the
Plan in such amount and at such time as the Committee shall determine under
procedures adopted by the Committee consistent with the purposes of the Plan;
and
(iii) Awards that operate in tandem with (whether granted simultaneously with or
at a different time from), or that are substituted for, other Awards or awards
under other Company plans may be counted or not counted under procedures adopted
by the Committee in order to avoid double counting.
(c) In the event that the Committee shall determine that any dividend or other
distribution (whether in the form of cash, Shares, or other securities or
property), stock split, reverse stock split, merger, reorganization,
consolidation, recapitalization, split-up, spin-off, repurchase, exchange of
shares, issuance of warrants or other rights to purchase Shares or other
securities of the Company, or other transaction or event affects the Shares such
that an adjustment is determined by the Committee to be appropriate in order to
prevent dilution or
<PAGE>6
enlargement of the benefits or potential benefits intended to be made available
under the Plan, then the Committee may: (i) make adjustments in the aggregate
number and class of shares or property which may be delivered under the Plan and
may substitute other shares or property for delivery under the Plan, including
shares of another entity which is a party to any such merger, reorganization,
consolidation or exchange of shares; and (ii) make adjustmentsin the number,
class and option price of shares or property subject to outstanding Awards and
Options granted under the Plan, and may substitute other shares or property for
delivery under outstanding Awards and Options, including shares of another
entity which is a party to any such merger, reorganization, consolidation or
exchange of shares, as may be determined to be appropriate by the Committee in
its sole discretion, provided that the number of Shares subject to any Award or
Option shall always be a whole number. The preceding sentence shall not
limit the actions which may be taken by the Committee under Section 12 of the
Plan. No adjustment shall be made with respect to Awards of Incentive Stock
Options that would cause the Plan to violate Code Section 422.
Section 5. Eligibility.
Any Employee or Outside Director shall be eligible to be selected as a
Participant. Notwithstanding any other provision of the Plan to the contrary, no
Participant may be granted an Option, Limited Right, Performance Shares, Shares
or Restricted Stock with respect to a number of Shares in any one calendar year
which, when added to the Shares subject to any other Option, Limited Right,
Performance Shares, Shares or Restricted Stock granted to such Participant in
the same fiscal year, shall exceed One Million (1,000,000) Shares. If an Option,
Limited Right, or Performance Share is canceled, the canceled Option, Limited
Right or Performance Share continues to count against the maximum number of
Shares for which an Option, Limited Right or Performance Share may be granted to
a Participant in any fiscal year. All Shares specified in this Section 5 shall
be adjusted to the extent necessary to reflect adjustments to Shares required by
Section 4(c) hereof. No Participant may be granted Performance Units in any one
fiscal year which when added to all other Performance Units granted to such
Participant in the same fiscal year shall exceed 300% of the Participant's
annual base salary as of the first day of such fiscal year (or, if later, as of
the date on which the Participant becomes an Employee); provided, however, that
no more than $1,200,000 of annual base salary may be taken into account for
purposes of determining the maximum amount of Performance Units which may be
granted in any fiscal year to any Participant.
Section 6. Stock Options.
Options may be granted under this Section 6 to Participants, other than
Outside Directors, either alone or in addition to other Awards granted under the
Plan. Options may be Incentive Stock Options or Non-Qualified Stock Options, or
a combination thereof. The Committee may condition the grant of any Incentive
Stock Option upon approval of the Plan by the Company's stockholders. Any Option
granted to a Participant under this Section 6 shall be evidenced by an Award
Agreement in such form as the Committee may from time to time approve. Any such
Option shall be subject to the following terms and conditions and to such
additional terms and conditions, not inconsistent with the provisions of the
Plan, as the Committee shall determine:
<PAGE>7
(a) Option Price. The purchase price per Share purchasable under an Option shall
be determined by the Committee but shall not be less than 100% of the Fair
Market Value of the Share on the effective date of the grant of the Option (or,
if the Committee so determines, in the case of any Option retroactively granted
in tandem with or in substitution for another Award or any outstanding Award
granted under any other plan of the Company, on the effective date of the grant
of such other Award or award under another Company plan).
(b) Option Term. The term of each Option shall be determined by the Committee,
except as provided below for Incentive Stock Options.
(c) Exercisability. Options shall be exercisable at such time or times as
determined by the Committee at or subsequent to the granting of such either
automatically or at the election of the Participant or the Committee, except as
otherwise provided in Section 12(a); provided, however, that the Committee may
condition the exercise of any Option upon approval of the Plan by the Company's
stockholders. In addition, the Committee may at any time accelerate the time at
which Options may be exercised and otherwise modify the time of exercise of the
Options.
(d) Method of Exercise. Subject to the other provisions of the Plan and any
applicable Award Agreement, the Participant may make payment of the option price
in such form or forms as the Committee shall determine, including, payment by
delivery of cash, Shares, Restricted Stock, or other consideration (including,
where permitted by law and the Committee, Awards) having a Fair Market Value on
the exercise date equal to the total option price, or by any combination of
cash, Shares, Restricted Stock and other consideration as the Committee may
specify in the applicable Award Agreement; provided, however, that if Restricted
Stock is surrendered to pay the option price, an equal number of Shares issued
as a result of the option exercise shall be subject to the same restrictions.
The Committee may also specify in the applicable Award Agreement the methods by
which the exercise price may be paid or deemed to be paid and the methods by or
forms in which Shares will be delivered or deemed to be delivered to
Participants.
(e) Incentive Stock Options. The terms of any Incentive Stock Option granted
hereunder shall comply in all respects with the provisions of Code Section 422,
or any successor provision, and any regulations promulgated thereunder. In
accordance with rules and procedures established by the Committee, the aggregate
Fair Market Value (determined as of the time of grant) of the Shares with
respect to which Incentive Stock Options held by any Participant are exercisable
for the first time by such Participant during any calendar year under the Plan
(and under any other benefit plans of the Company or of any parent or subsidiary
corporation of the Company as defined in Code Section 424), shall not exceed One
Hundred Thousand Dollars ($100,000) or, if different, the maximum limitation in
effect at the time of grant under Code Section 422, or any successor provision.
and any regulations promulgated thereunder. The option price per Share
purchasable under an Incentive Stock Option shall not be less than 100% of the
Fair Market Value of the Share on the date of grant of the Option. Each
Incentive Stock Option shall expire not later than 10 years from its date of
grant. No Incentive Stock Option shall be granted to any Participant if at the
time the Option is granted such Participant owns stock possessing more than 10%
of the total combined voting power of all classes of stock of the Company, its
parent or its subsidiaries unless (i) the option price per Share is at least
110% of the
<PAGE>8
Fair Market Value of the Share on the date of grant, and (ii) such Option by its
terms is not exercisable after the expiration of five years from the date such
Option is granted.
(f) Form of Settlement. In its sole discretion, the Committee may provide at the
time of grant that the Shares to be issued upon an Option's exercise shall be in
the form of Shares subject to restrictions as the Committee may determine, or
other similar securities, or may reserve the right to so provide after the time
of grant.
(g) Reload Options. If and to the extent the Committee expressly provides, at
the time of grant or later, that the Participant shall have the right to receive
Reload Options (as defined below) with respect to Non-Qualified Stock Options,
the Participant shall receive Reload Options in accordance with and subject to
the following terms and conditions:
(i) Grant of the Reload Option; Number of Shares; Price. Subject to paragraph
(ii) of this subsection and, except as provided in paragraph (viii) hereof, to
the availability of Shares to be optioned to the Participant under the Plan
(including the limitations set forth in Section 5 hereof), if a Participant has
an Option (the "Original Option") with reload rights and pays for the exercise
of the Original Option by surrendering Shares or Restricted Stock (whether by
means of delivering Shares or Restricted Stock previously held by the optionee
or by delivering Shares or Restricted Stock simultaneously acquired on exercise
of the Original Option), the Participant shall receive a new option ("Reload
Option") for the number of Shares or Restricted Shares so surrendered at an
option price per Share equal to the Fair Market Value of a Share on the date of
the exercise of the Original Option.
(ii) Conditions to Grant of Reload Option. A Reload Option will not be granted
if (A) the Fair Market Value of a Share on the date of exercise of the Original
Option is less than the exercise price of the Original Option, or (B) the
Participant is no longer an Employee of the Company or of an Affiliate.
(iii) Term of Reload Option. The Reload Option shall expire on the same date as
the Original Option, or at such later date as the Committee may provide.
(iv) Type of Option. The Reload Option shall be a Non-Qualified Stock Option.
(v) Additional Reload Options. Except as expressly provided by the Committee (at
the time of the grant of the Original Option or later), Reload Options shall not
include any right to subsequent Reload Options.
(vi) Date of Grant; Vesting. The date of grant of the Reload Option shall be the
date of the exercise of the Original Option. Reload Options shall be exercisable
in full beginning from the date of grant, except as otherwise provided by the
Committee.
(vii) Stock Withholding Grants of Reload Options. If and to the extent expressly
permitted by the Committee, if the other requirements of this subsection are
satisfied, and if Shares are withheld or Shares surrendered for tax withholding
pursuant to Section 16(f)
<PAGE>9
hereof, a Reload Option will be granted for the number of Shares surrendered as
payment for the exercise of the Original Option plus the number of Shares
surrendered or withheld to satisfy tax withholding.
(viii) Share Limits. Reload Options granted with respect to Original Options
paid for by delivery of Shares or Restricted Stock simultaneously acquired on
exercise of the Original Option shall be counted or not counted against or as a
reduction from the number of shares available for grant under Section 4 hereof
under procedures adopted by the Committee in order to prevent dilution or
enlargement of the benefits or potential benefits intended to be made available
under the Plan.
(ix) Other Terms and Conditions. In connection with Reload Options for officers
who are subject to Section 16 of the Exchange Act, the Committee may at any time
impose any limitations which, in the Committee's sole discretion, are necessary
or desirable in order to comply with Section 16(b) of the Exchange Act and the
rules and regulations thereunder, or in order to obtain any exemption therefrom.
Section 7. Limited Rights.
Limited Rights may be granted to Participants only with respect to an
Option granted under Section 6 hereof or a stock option granted under another
plan of the Company. Any Limited Right shall be subject to the following terms
and conditions and to such additional terms and conditions, not inconsistent
with the Plan, as the Committee shall determine. Any Limited Right related to a
Non-Qualified Stock Option may be granted at the same time such Option is
granted or at any time thereafter before exercise or expiration of such Option.
Any Limited Right related to an Incentive Stock Option must be granted at the
same time such Option is granted. A Limited Right shall terminate and no longer
be exercisable upon termination or exercise of the related Option, except that a
Limited Right granted with respect to less than the full number of Shares
covered by a related Option shall not be reduced until the exercise or
termination of the related Option exceeds the number of Shares not covered by
the Limited Right. Any Option related to any Limited Right shall no longer be
exercisable to the extent the related Limited Right has been exercised. Any
Limited Right shall be exercisable to the extent, and only to the extent, the
related Option is exercisable and only during the ninety (90) day period
immediately following a Change in Control of the Company (as defined in Section
12 hereof). The Committee may impose such other conditions or restrictions on
the exercise of any Limited Right as it deems appropriate. Subject to the terms
of the Plan and any applicable Award Agreement, a Limited Right granted under
the Plan shall confer on the holder thereof a right to receive, upon exercise
thereof, an amount equal to the excess of (i) the Fair Market Value of one Share
on the date of exercise or if greater and only with respect to any Limited Right
related to a Non-Qualified Stock Option, the highest price per Share paid in
connection with any Change in Control of the Company, over (ii) the option price
of the related Option, multiplied by the number of Shares as to which the holder
is exercising the Limited Right. The amount payable to the holder shall be paid
by the Company in cash.
<PAGE>10
Section 8. Performance Awards.
(a) Administration. Performance Awards may be granted to Participants other than
Outside Directors in the form of Performance Shares or Performance Units, either
alone or in addition to other Awards granted under the Plan. Performance Shares
or Performance Units shall be payable to, or be exercisable by, the Participant
holding such Award, in whole or in part, following achievement of one or more
performance criteria during such Performance Period as determined by the
Committee. Except as provided in Section 12, Performance Awards will be paid
only after the end of the relevant Performance Period. Performance Awards may be
paid in cash, Shares, Restricted Stock, Options, other property or any
combination thereof, in the sole discretion of the Committee at the time of
payment. Performance Awards may be paid in a lump sum or in installments
following the close of the Performance Period or, in accordance with subsection
(c) hereof, on a deferred basis. Notwithstanding the foregoing, an Award
Agreement may condition the vesting or exercise of a Performance Award on any
combination of the achievement of one or more performance criteria and/or the
completion of a specified period of service as the Committee shall determine at
the time of grant. If the Committee determines that a Performance Award should
qualify as "performance-based compensation" within the meaning of Code Section
162(m), when making such Performance Award, the Committee shall adopt
Performance Goals, certify completion of such goals and comply with any other
requirements necessary to be in compliance with the performance-based
compensation requirements of Code Section 162(m). The Committee may make the
payment of any Performance Award granted prior to approval of the Plan by the
Company's stockholders contingent upon such approval.
(b) Performance Period and Criteria. The length of the Performance Period, the
performance criteria levels to be achieved for each Performance Period, and the
amount of the Award to be distributed shall be conclusively determined by the
Committee.
(c) Deferral of Awards. At the discretion of the Committee, payment of a
Performance Award or any portion thereof may be deferred by a Participant until
such time as the Committee may establish. All such deferrals shall be
accomplished by the delivery on a form provided by the Company of a written,
irrevocable election by the Participant prior to such time payment would
otherwise be made. Further, all deferrals shall be made in accordance with
administrative guidelines established by the Committee to ensure that such
deferrals comply with all applicable requirements of the Code and its
regulations. Deferred payments shall be paid in a lump sum or installments, as
determined by the Committee. The Committee may also credit interest, at such
rates to be determined by the Committee, on cash payments that are deferred and
credit Dividend Equivalents on deferred payments denominated in the form of
Shares.
Section 9. Restricted Stock.
(a) Administration. Restricted Stock Awards may be granted to Participants other
than Outside Directors, either alone or in addition to other Awards granted
under the Plan. The granting of Restricted Stock shall take place on the date
the Committee decides to grant the Restricted Stock, or if the Restricted Stock
Award provides that the grant of Restricted Stock is conditioned upon the
achievement of performance criteria specified in the Restricted Stock
<PAGE>11
Award, on a date established by the Committee following the achievement of such
measures of performance.
A Restricted Stock Award may condition the grant of Restricted Stock
and/or the lapse of any restriction or restrictions on Restricted Stock on any
combination of the achievement of one or more performance criteria and/or the
completion of a specified period of service as the Committee shall determine at
the time the Restricted Stock Award is made. If the Committee determines that a
Restricted Stock Award should qualify as "performance-based compensation" within
the meaning of Code Section 162(m), when making Restricted Stock Awards, the
Committee shall adopt Performance Goals, certify completion of such goals and
comply with any other requirements necessary to be in compliance with the
performance-based compensation requirements of Code Section 162(m). The
Committee may make the grant of any Restricted Stock Award granted prior to
approval of the Plan by the Company's stockholders contingent upon such
approval.
(b) Registration. Any Restricted Stock issued hereunder may be evidenced in such
manner as the Committee in its sole discretion deems appropriate, including,
without limitation, book-entry registration or issuance of a stock certificate
or certificates. In the event any stock certificate is issued in respect of
shares of Restricted Stock awarded under the Plan, such certificate shall be
registered in the name of the Participant, shall be held in escrow by the
Company, and shall bear an appropriate legend referring to the terms, conditions
and restrictions applicable to such Award, substantially in the following form:
"The transferability of this certificate and shares represented
hereby are restricted pursuant to the terms and conditions (including
forfeiture) of the 1998 Omnibus Incentive Plan of Payless Cashways, Inc.
and a Restricted Stock Agreement. Copies of such Plan and Agreement are
on file at the corporate headquarters of Payless Cashways, Inc."
(c) Transfer Restrictions. Subject to the provisions of the Plan and the Award
Agreement, during the period, if any, set by the Committee, commencing with the
date of such Award for which such Participant's continued service is required
(the "Restriction Period"), and until the later of (i) the expiration of the
Restriction Period or (ii) the date the performance criteria (if any) including
Performance Goals if applicable are satisfied, the Participant shall not be
permitted to sell, assign, transfer, pledge or otherwise encumber shares of
Restricted Stock. Within these limits, the Committee may provide for the lapse
of restrictions based upon period of service in installments or otherwise and
may accelerate or waive, in whole or in part, restrictions based upon period of
service or upon performance; provided, however, that any applicable performance
criteria, including any Performance Goals if applicable, have been satisfied.
(d) Rights of Restricted Stockholder. Except as otherwise provided in this
Section 9 and the Award Agreement, the Participant shall have, with respect to
the shares of Restricted Stock, all of the rights of a stockholder of the
Company holding Shares, including the right to vote the shares and the right to
receive any dividends or other distributions. If so determined by the Committee
in the applicable Award Agreement, (i) cash dividends on shares of Restricted
Stock shall be automatically deferred and reinvested in additional Restricted
Stock, held subject
<PAGE>12
to the vesting of the underlying Restricted Stock, or held subject to meeting
performance criteria, including Performance Goals if applicable, and (ii)
dividends payable in Shares shall be paid in the form of Restricted Stock, held
subject to the vesting of the underlying Restricted Stock, or held subject to
meeting performance criteria, including Performance Goals if applicable.
(e) Lapse of Restrictions. As soon as practicable following the lapse of the
restrictions on Restricted Stock, unrestricted Shares, evidenced in such manner
as the Committee deems appropriate, shall be issued to the grantee.
(f) Forfeiture. Except as otherwise determined by the Committee at the time of
grant, upon Termination of Employment for any reason before the restriction
lapses, all shares of Restricted Stock still subject to restriction shall be
forfeited by the Participant (who shall sign any document and take any other
action required to assign such shares back to the Company) and reacquired
without further consideration by the Company.
Section 10. Outside Directors' Options.
(a) Grant of Options. The Committee may grant Options under this Section 10 to
Outside Directors, including members of the Committee. All such Options shall be
Non-Qualified Stock Options. Any Option granted to an Outside Director shall be
evidenced by an Award Agreement in such form as the Committee may from time to
time approve. The price at which each Share covered by such Options may be
purchased shall be 100% of the Fair Market Value of a Share on the date the
Option is granted.
(b) Exercise of Options. Except as set forth in this Section 10, Options shall
be exercisable at such time or times as determined by the Committee at or
subsequent to the granting of such either automatically or at the election of
the Outside Director or the Committee. In addition, the Committee may at any
time accelerate the times at which Options may be exercised and otherwise modify
the time of exercise of the Options. However, no Option shall be exercisable
more than 10 years after the date of grant. Options may be exercised by an
Outside Director: (i) during the period that the Outside Director remains a
member of the Board; (ii) for a period of one year after ceasing to be a member
of the Board by reason of death or retirement (as defined below) from the Board;
or (v) for a period of 90 days after ceasing to be a member of the Board for
reasons other than retirement, death or disability, however, only those Options
exercisable at the date the Outside Director ceases to be a member of the Board
shall remain exercisable. For purposes of this Section 10, "retire" or
"retirement" shall mean discontinuance of service as a director after the
director has reached age 60 and has at least five years or more of service on
the Board. All Options shall immediately become exercisable in the event of a
Change in Control, as hereinafter defined, except that Options shall not be
exercisable earlier than six months from the date of grant to the extent
required for exemption under Section 16 of the Exchange Act.
In the event of the death of an Outside Director or former Outside
Director, his Options shall be exercisable only to the extent that they were
exercisable at his date of death and only by the executor or administrator of
the Outside Director's estate, by the person or persons to whom the Outside
Director's rights under the Option shall pass under the Outside Director's will
or the
<PAGE>13
laws of descent and distribution, or by a beneficiary designated in
writing in accordance with Section 16(a) hereof.
(c) Payment. An Option granted to an Outside Director shall be exercisable only
upon payment to the Company of the full purchase price of the Shares with
respect to which the Option is being exercised. Payment for the Shares shall be
in United States dollars, payable in cash or by check or by delivery of Shares
having a Fair Market Value on the exercise date equal to the total option price,
or by any combination of cash and Shares.
(d) Adjustment of Options. In the event there shall be a merger, reorganization,
consolidation, recapitalization, stock dividend or other change in corporate
structure such that the Shares of the Company are changed into or become
exchangeable for a larger or smaller number of Shares, thereafter the number of
Shares subject to outstanding Options and the number of Shares subject to
Options to be granted to Outside Directors pursuant to the provisions of this
Section 10 shall be increased or decreased, as the case may be, in direct
proportion to the increase or decrease in the number of Shares of the Company by
reason of such change in corporate structure; provided, that the number of
Shares shall always be a whole number, and the purchase price per share of any
outstanding Options shall, in the case of an increase in the number of Shares,
be proportionately reduced, and in the case of a decrease in the number of
Shares, shall be proportionately increased.
Section 11. Dividend Equivalents.
Subject to the provisions of this Plan and any Award Agreement, the
recipient of an Award (including, without limitations any deferred Award), may,
if so determined by the Committee, be entitled to receive, currently or on a
deferred basis, interest or dividends, or interest or dividend equivalents, with
respect to the number of Shares covered by the Award, as determined by the
Committee, in its sole discretion, and the Committee may provide that such
amounts (if any) shall be deemed to have been reinvested in additional Shares or
otherwise reinvested.
Section 12. Change in Control.
(a) In the event of any Change in Control of the Company, as hereinafter
defined, the Committee, as constituted before such Change in Control, may, in
its sole discretion, as to any Award either at the time an Award is made
hereunder or any time thereafter, take any one or more of the following actions:
(i) provide for the purchase by the Company of any such Award, upon the
Participant's request, for an amount of cash equal to the amount that could have
been attained upon the exercise of such Award or realization of the
Participant's rights had such Award been currently exercisable or payable; (ii)
make such adjustment to any such Award then outstanding as the Committee deems
appropriate to reflect such Change in Control; or (iii) cause any such Award
then outstanding to be assumed, or new rights substituted therefor, by the
acquiring or surviving corporation after such Change in Control. In the event of
a Change of Control, there shall be an automatic acceleration of any time
periods relating to the exercise or realization of any such Award and all
performance award standards shall be deemed satisfactorily completed without any
action required by the Committee so that such Award may
<PAGE>14
be exercised or realized in full on or before a date fixed by the Committee,
except no Award shall be exercisable earlier than six months after the date
of grant to the extent required for exemption under Section 16 of the Exchange
Act. The Committee may, in its discretion, include such further provisions and
limitations in any agreement documenting such Awards as it may deem equitable
and in the best interests of the Company.
For purposes of this Plan, a "Change in Control" shall be deemed to
have occurred if:
(i) any person (as defined in Sections 13(d) and 14(d)(2) of the Exchange Act)
becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange
Act), directly or indirectly, of securities of the Company (not including in the
securities beneficially owned by such person any securities acquired directly
from the Company or its affiliates other than in connection with the acquisition
by the Company or its affiliates of a business) having 30% or more of the voting
power in the election of directors of the Company;
(ii) the occurrence within any twenty-four month period of a change in the Board
of Directors of the Company with the result that the Incumbent Members (as
defined below) do not constitute a majority of the Company's Board. The term
"Incumbent Members" shall mean the members of the Board on the date immediately
preceding the commencement of such twenty-four month period, provided that any
person becoming a director during such twenty-four month period whose election
or nomination for election was approved by a majority the directors who, on the
date of such election or nomination for election, comprised the Incumbent
Members shall be considered one of the Incumbent Members in respect of such
twenty-four month period;
(iii) the stockholders of the Company approve a merger or consolidation of the
Company or approve the issuance of voting securities of the Company in
connection with a merger or consolidation of the Company (or any direct or
indirect subsidiary of the Company), other than (A) a merger or consolidation
which would result in the voting securities of the Company outstanding
immediately prior to such merger or consolidation continuing to represent
(either by remaining outstanding or by being converted into voting securities of
the surviving entity or any parent thereof), in combination with the ownership
of any trustee or other fiduciary holding under an employee benefit plan of the
Company, at least 66 2/3% of the combined voting power of the voting securities
of the Company or such surviving entity or any parent thereof outstanding
immediately after such merger or consolidation, or (B) a merger or consolidation
effected to implement a recapitalization of the Company (or similar transaction)
in which no "person" (as defined above) is or becomes the "beneficial owner" (as
defined above), directly or indirectly, of securities of the Company (not
including in the securities beneficially owned by such person any securities
acquired directly from the Company or its subsidiaries other than in connection
with the acquisition by the Company or its subsidiaries of a business)
representing 30% or more of the voting power in the election of directors of the
Company; or
(iv) the stockholders of the Company approve a plan of complete liquidation or
dissolution of the Company or a sale, lease, exchange or other disposition of
all or substantially all of the Company's assets, other than a sale, lease,
exchange or other disposition by the Company of all or substantially all of the
Company's assets to an entity, at least 66 2/3%
<PAGE>15
of the combined voting power of the voting securities of which are owned by
"persons" (as defined above) in substantially the same proportions as their
ownership of the Company immediately prior to such sale.
Section 13. Amendments.
(a) The Plan. The Board may amend, suspend or terminate the Plan, but no
amendment, suspension or termination shall, without the consent of the
Participant, alter or impair the rights of the Participant under any award
theretofore granted. In addition, no amendment shall be effective without the
approval of stockholders if required by Section 16 of the Exchange Act or Code
Section 162(m) or Section 422 as the case may be.
(b) Awards. The Committee may amend the terms of any Award theretofore granted,
prospectively or retroactively, and may also substitute new Awards for Awards
previously granted under this Plan or for awards granted under any other
compensation plan of the Company or an Affiliate to Participants, including
without limitation previously granted Options having higher option prices, but
no such amendment or substitution shall impair the rights of any Participant
without his or her consent. Except as may provided in an Award Agreement, the
Committee may, in its sole discretion, in whole or in part, waive any
restrictions or conditions applicable to, or accelerate the vesting of, any
Award.
(c) Performance Award Criteria. The Committee shall be authorized, without the
Participant's consent, to make adjustments in Performance Award criteria or in
the terms and conditions of other Awards in recognition of events that it deems
in its sole discretion to be unusual or nonrecurring that affect the Company or
any Affiliate or the financial statements of the Company or any Affiliate, or in
recognition of changes in applicable laws, regulations or accounting principles,
whenever the Committee determines that such adjustments are appropriate in order
to prevent the dilution or enlargement of benefits or potential benefits under
the Plan.
(d) Curative Amendments. The Committee may correct any defect, supply any
omission or reconcile any inconsistency in the Plan or any Award in the manner
and to the extent it deems desirable to carry it into effect. In the event the
Company shall assume outstanding employee benefit awards or the right or
obligation to make future such awards in connection with the acquisition of
another corporation or business entity, the Committee may, in its discretion,
make such adjustments in the terms of awards under the Plan as it deems
appropriate.
Section 14. Termination of Employment and Non-Competition.
The Committee shall have full power and authority to determine whether,
to what extent and under what circumstances any Award shall be canceled or
suspended and shall promulgate rules and regulations to determine (a) what
events constitute disability, retirement, termination for an approved reason and
termination for cause for purposes of the Plan and (b) the treatment of a
Participant under the Plan in the event of his death, disability, retirement, or
termination for an approved reason. In addition, but without limitation, all
outstanding Awards to any Participant shall be canceled or forfeited if the
Participant, without the consent of the Committee, while employed by the Company
or after termination of such employment, becomes associated
<PAGE>16
with, employed by, renders services to, or owns any interest in (other than any
non-substantial interest, as determined by the Committee), any business that is
in competition with the Company or any Affiliate, or with any business in which
the Company or any Affiliate has a substantial interest as determined by the
Committee or such officers or committee of senior officers to whom the authority
to make such determination is delegated by the Committee.
Section 15. Termination of Awards under Certain Circumstances.
Unless the Participant's Award Agreement provides otherwise, all
unexercised, unearned, and/or unpaid Awards, including, but not by way of
limitation, Awards earned, but not yet paid, all unpaid dividends and Dividend
Equivalents, and all interest accrued on the foregoing shall be canceled or
forfeited, as the case may be, if (a) the Participant's employment with the
Company or an Affiliate is terminated for cause, (b) the Participant is not in
compliance with all applicable provisions of this Plan or with any Award
Agreement, or (c) the Participant, whether or not employed or serving as a
director, acts or otherwise conducts himself in a manner inimical or contrary to
the best interest of the Company or any Affiliate.
Section 16. General Provisions.
(a) Non-Assignability. No Award may be pledged or otherwise encumbered or
subject to any lien, obligation or liability of a Participant (other than to the
Company or an Affiliate), or, except for Non-Qualified Stock Options as provided
below, assigned or transferred by such Participant other than by will or the
laws or descent and distribution and shall be exercisable during the lifetime of
the Participant, only by the Participant or, if permissible under applicable
law, by the guardian or legal representative of the Participant, provided,
however, that the Participant may, pursuant to a written designation of
beneficiary filed with and approved by the Committee prior to his death,
designate a beneficiary to exercise the rights of the Participant with respect
to any Award upon the death of the Participant. Any Award of Non-Qualified Stock
Options may be transferred during the lifetime of the Participant, and may be
exercised by the transferee in accordance with the terms of the Award, but only
if and to the extent such transfers are permitted by the Committee pursuant to
the express terms of an Award Agreement and subject to any terms and conditions
which the Committee may impose on such transfers.
(b) Terms. The term of each Award shall be for such period of months or years
from the date of its grant as may be determined by the Committee; provided,
however, that in no event shall the term of any Incentive Stock Option or
Limited Right related to any Incentive Stock Option exceed a period of 10 years
from the date of its grant.
(c) Rights to Awards. No Employee, Participant, or other Person shall have any
claim to be granted any Award, and there is no obligation for uniformity of
treatment of Employees, Participants, or holders or beneficiaries of Awards.
(d) No Cash Consideration for Awards. Awards shall be granted for no cash
consideration or for such minimal cash consideration as may be required by
applicable law.
<PAGE>17
(e) Restrictions. All certificates for Shares delivered under the Plan pursuant
to any Award shall be subject to such stock-transfer orders and other
restrictions as the Committee may deem advisable under the rules, regulations,
and other requirements of the Securities and Exchange Commission, any stock
exchange or stock quotation system upon which the Shares are then listed, and
any applicable Federal or state securities law, and the Committee may cause a
legend or legends to be placed on any such certificates to make appropriate
reference to such restrictions.
(f) Withholding. The Company shall be authorized to withhold from any Award
granted, payment due or Shares or other property transferred under the Plan or
from any compensation or other amount owing to a Participant the amount of any
applicable withholding and other taxes due and payable in respect of an Award,
payment or shares or other property transferred hereunder and to take such other
action as may be necessary in the opinion of the Company to satisfy all
obligations for the payment of such taxes. The Company may require the
Participant to pay to it such tax prior to and as a condition of the making of
such payment or transfer of Shares or property under the Plan. The Committee may
allow a Participant to pay the amount of taxes due or payable in respect of an
Award by withholding from any payment of Shares due as a result of such Award,
or by permitting the Participant to deliver to the Company, Shares having a fair
market value, as determined by the Committee, equal to the amount of such taxes.
(g) No Limit on Other Compensation Arrangements. Nothing contained in this Plan
shall prevent the Company or any Affiliate from adopting other or additional
compensation arrangements.
(h) Governing Law. The validity, construction, and effect of the Plan and any
rules and regulations relating to the Plan shall be determined in accordance
with the laws of the State of Delaware and applicable Federal law.
(i) Severability. If any provision of this Plan or any Award is or becomes or is
deemed to be invalid, illegal or unenforceable in any jurisdiction, as to any
Person or Award, or would disqualify the Plan or any Award under any law deemed
applicable by the Committee, such provision shall be construed or deemed amended
to conform to applicable laws, or if it cannot be construed or deemed amended
without, in the determination of the Committee, materially altering the intent
of the Plan or the Award, such provision shall be stricken and the remainder of
the Plan and any such Award shall remain in full force and effect.
(j) No Right to Employment. The grant of an Award shall not be construed as
giving a Participant the right to be retained in the employ of the Company or
any Affiliate. Further, the Company or an Affiliate may at any time terminate
the employment of a Participant, free from any liability, or any claim under the
Plan, unless otherwise expressly provided in the Plan or in any Award Agreement.
(k) Unfunded Status of Awards; Creation of Trusts. The Plan is intended to
constitute an "unfunded" plan for incentive and deferred compensation. To the
extent than any person acquires a right to receive payments from the Company or
any Affiliate pursuant to an
<PAGE>18
Award, such right shall be no greater than the right of any unsecured general
creditor of the Company or any Affiliate; provided, however, that the
Committee may authorize the creation of trusts and deposit therein cash, Shares
or other property, or make other arrangements to meet the Company's obligations
under the Plan, and provided that such trusts or other arrangements are
consistent with the "unfunded" status of the Plan.
(l) No Fractional Shares. No fractional Shares shall be issued or delivered
pursuant to the Plan or any Award, and the Committee shall determine whether
cash, other securities, or other property shall be paid or transferred in lieu
of any fractional Shares, or whether such fractional Shares or any rights
thereto shall be canceled, terminated, or otherwise eliminated.
(m) Headings. Headings are given to the Sections and subsections of the Plan
solely as a convenience to facilitate reference. Such headings shall not be
deemed in any way material or relevant to the construction or interpretation of
the Plan or any provision thereof.
(n) Rule 16b-3 Compliance. With respect to persons subject to Section 16 of the
Exchange Act, transactions under this Plan are intended to comply with all
applicable conditions of Rule 16b-3. To the extent any provision of this Plan or
action by the Committee was not to so comply, the Committee may deem, for such
persons, such provision or action null and void to the extent permitted by law.
Section 17. Effective Date of Plan.
The Plan shall be effective as of February 17, 1998.
Section 18. Term of Plan.
No Award shall be granted pursuant to the Plan after January 15, 2008
but any Award theretofore granted may extend beyond that date.
<PAGE>1
FORM OF
EMPLOYMENT AGREEMENT
THIS AGREEMENT is made and entered into as of ___________________
between PAYLESS CASHWAYS, INC., a Delaware corporation (the "Company"), and
___________________ (the "Executive").
WHEREAS, the Company desires to employ the Executive in the capacity of
____________________________, and the Executive desires to be employed by the
Company in such capacity and on the terms and conditions set forth in this
Agreement;
NOW, THEREFORE, in consideration of the mutual covenants of the parties
herein made, it is hereby agreed:
1. Term of Agreement. The term of this Agreement shall be one year,
commencing ____________________ and ending ___________________, unless sooner
terminated as provided in Paragraph 6 of this Agreement; PROVIDED, however, that
the Agreement shall be automatically renewed for an additional term of one year,
at the end of the initial one-year term and of each succeeding one-year term,
unless either the Company or the Executive shall serve notice on the other at
least ninety (90) days prior to the expiration of the term, in accordance with
the procedures set out in Paragraph 12 of this Agreement, that the party giving
notice intends to end the Agreement at the conclusion of the then-current term.
The Company shall not be required to show Cause, and the Executive shall not be
required to show Good Reason, to require the expiration of the Agreement under
the terms of this Paragraph.
2. Employment and Duties. The Company hereby agrees to employ the
Executive, and the Executive hereby accepts employment, to perform such duties
and responsibilities of ____________________________ as are, from time to time,
assigned to the Executive by the Board of Directors or its designee. The
Executive agrees to devote full business time and effort to the diligent and
faithful performance of the Executive's duties under the direction of such
person as is designated by the Company's Board of Directors.
3. Compensation.
(a) Base Salary. As compensation for the Executive's services,
the Executive shall be paid a base salary at a minimum annual rate of
$__________ payable in equal bi-weekly installments, which salary shall be
reviewed annually and may be adjusted from time to time at the discretion of the
Board of Directors (the "Base Salary"); provided that the Base Salary shall not
be less than the amount stated in this Paragraph 3(a).
(b) Incentive Compensation. The Executive shall, in addition
to the Base Salary, also be eligible to receive incentive compensation under the
Company's Corporate Management Incentive Plan (the "CMIP"), or such other
program or plan for officers of the Company as from time to time may be in
effect, if any (the "Incentive Compensation"). The
<PAGE>2
existence and terms of any such program or plan shall be determined solely
at the discretion of the Compensation Committee of the Board of Directors.
For fiscal year 1999, the Executive's "Annual Incentive Target Percentage of
Base Compensation," as used in the CMIP, shall be _______ percent (___%) of
Base Salary.
(c) Other Benefits. The Executive shall be entitled to
participate in the Company's regular health, life, pension, vacation and
disability plans in accordance with their respective terms. The Company will
also provide employee benefits to the Executive in respect of the Executive's
employment as the Company customarily provides, from time to time, to its
officers, as described in Exhibit A attached to this Agreement. Nothing herein
shall be construed to limit the Company's discretion to amend, terminate or
otherwise modify any such plans or benefits, subject to the Executive's rights
under Paragraph 6(c)(iii) below.
4. Confidentiality, Non-Solicitation, and Non-Disparagement.
(a) Confidentiality of Proprietary Information. The Executive
agrees that, at all times, both during the Executive's employment with the
Company and after the expiration or termination thereof for any reason, the
Executive shall not divulge to any person, firm, corporation, or other entity,
or in any way use for the Executive's own benefit, except as required in the
conduct of the Company's business or as authorized in writing on behalf of the
Company, any trade secrets or confidential information (the "Proprietary
Information") obtained during the course of the Executive's employment with the
Company. The Proprietary Information includes, but is not limited to, customer
or client lists (including the names and/or positions of persons employed by
such customers or clients who play a role in the decisions of such customers or
clients concerning products or services of the type provided by the Company),
financial matters, inventory techniques and programs, Company records of
accounts, business projections, Company contracts, sales, merchandising or
marketing plans and strategies, pricing information and formulas, matters
contained in unpublished records and correspondence, planned expansion programs
(including areas of expansion and potential customer lists) and any and all
information concerning the business or affairs of the Company which is not known
by or generally available to the public. All papers and records of every kind
relating to the Proprietary Information, including any such papers and records
which shall at any time come into the possession of the Executive, shall be the
sole and exclusive property of the Company and shall be surrendered to the
Company upon termination of the Executive's employment for any reason or upon
request by the Company at any time either during or after the termination of
such employment. All information relating to or owned by customers of the
Company of which the Executive becomes aware or with which the Executive becomes
familiar through the Executive's employment with the Company shall be kept
confidential and not disclosed to others or used by the Executive directly or
indirectly except in the course of the Company's business. It is agreed that
Proprietary Information as herein described shall be protected from disclosure
under the terms of this Agreement, to the maximum extent permitted by law,
whether or not entitled to protection as a trade secret.
(b) Solicitation Prohibition. During the Executive's
employment with the Company and for a period of one (1) year after the
expiration or termination of this Agreement or of the Executive's employment
with the Company for any reason, the Executive shall not
<PAGE>3
directly or indirectly, whether as an individual for the Executive's own account
or on behalf of any other person, firm, corporation, partnership, joint venture
or entity whatsoever, solicit or endeavor to entice away from the Company any
employee who is employed by the Company. Additionally, during the Executive's
employment with the Company or for a period of one (1) year after the expiration
or termination of this Agreement or of Executive's employment with the Company
for any reason, the Executive shall not, directly or indirectly through any
other individual or entity, solicit the business of any customer of the Company,
or solicit, entice, persuade or induce any individual or entity to terminate,
reduce or refrain from forming, renewing or extending its relationship, whether
actual or prospective, with the Company.
(c) Disparagement Prohibition. The Executive acknowledges and
agrees that as a result of his position with the Company, disparaging or
critical statements made by the Executive may be uniquely detrimental to the
Company's interests and well-being. Therefore, the Executive agrees to use his
best efforts to assist the Company in promoting and preserving the good will and
other business interests of the Company. To this end, the Executive agrees to
refrain at all times, both during the Executive's employment and after the
termination thereof for any reason, from making disparaging comments or remarks
about the Company or its officers, employees, or directors.
(d) Definition of "Company". For the purposes of Paragraph 4,
the term "Company" shall mean the Company and any of its direct or indirect
parent or subsidiary organizations.
5. Covenant Not to Compete. During the Executive's employment with the
Company and for a period of one year after the expiration or termination of this
Agreement or of the Executive's employment with the Company (the "Noncompetition
Period"), if such termination is as a result of the expiration of this Agreement
under Paragraph 6(h), a termination for Good Reason by the Executive under
Paragraph 6(c), or a termination by the Company without Cause under Paragraph
6(d), the Executive agrees not to act as an owner or operator, officer or
director, employee, consultant or agent of any other person, firm, corporation,
partnership, joint venture or other entity which is engaged in the business of
building materials retailing in any state in which the Company is so engaged, or
has plans to be so engaged during the Noncompetition Period. The foregoing
provisions shall not prohibit the Executive from investing in any securities of
any corporation whose securities, or any of them, are listed on a national
securities exchange or traded in the over-the-counter market if the Executive
shall own less than one percent 1% of the outstanding voting stock of such
corporation. The Executive agrees that a breach of the covenants contained
herein will result in irreparable and continuing damage to the Company for which
there will be no adequate remedy at law, and in the event of any breach of such
agreement, the Company shall be entitled to injunctive and such other and
further relief, as may be proper, including damages, attorneys' fees, and
litigation costs.
6. Termination.
(a) Death or Disability. In the event of the Executive's death
or if the Executive should become unable to perform the essential functions of
the position of _________________________, with or without reasonable
accommodation by the Company,
<PAGE>4
this Agreement, and the Company's obligation to make further Base Salary
payments under the Agreement, shall terminate, and Executive shall not be
entitled to receive severance benefits. Executive shall be entitled to receive
any Incentive Compensation which the Executive has earned, if any, prorated
to the date of the termination of the Executive's employment by reason of death
or the date of termination, due to disability, of Executive's performance as
_________________________ under this Agreement. The Executive's rights to other
compensation and benefits shall be determined under the Company's benefit plans
and policies applicable to Executive then in effect.
(b) Termination for Cause by the Company. By following the
procedure set forth in Paragraph 6(e) the Company shall have the right to
terminate this Agreement and the employment of the Executive for "Cause" in the
event Executive:
(i) has committed a significant act of dishonesty,
deceit or breach of fiduciary duty in the performance of the
Executive's duties as an employee of the Company;
(ii) has neglected or failed to perform substantially
the duties of the Executive's employment under this Agreement,
including but not limited to an act of insubordination;
(iii) has acted or failed to act in any other way
that reflects materially and adversely upon the Company, including but
not limited to the Executive's conviction of, guilty plea, or plea of
nolo contendere to (A) any felony, or any misdemeanor involving moral
turpitude, or (B) any crime or offense involving dishonesty with
respect to the Company; or
(iv) has knowingly failed to comply with the
covenants contained in Paragraphs 4 or 5 of this Agreement.
If the employment of the Executive is terminated by the
Company for Cause, this Agreement and the Company's obligation to make further
Base Salary and Incentive Compensation payments hereunder shall thereupon
immediately terminate, and the Executive shall not be entitled to receive
severance benefits. The Executive's rights to other compensation and benefits
shall be determined under the Company's benefit plans and policies applicable to
the Executive then in effect.
(c) Termination for Good Reason by the Executive. By following
the procedure set forth in Paragraph 6(e), the Executive shall have the right to
terminate this Agreement and the Executive's employment with the Company for
"Good Reason" in the event:
(i) the Executive is not at all times a duly elected
______________________ of the Company;
(ii) there is any material reduction in the scope of
the Executive's authority and responsibility (provided, however, in the
event of any illness or injury
<PAGE>5
which prevents the Executive from performing the Executive's duties,
Good Reason shall not exist if the Company reassigns the Executive's
duties to one or more other employees until the Executive is able to
perform such duties);
(iii) there is a reduction in the Executive's Base
Salary below the minimum amount specified in Paragraph 3(a) above; a
material reduction in the Incentive Compensation opportunity of the
Executive, if any, under Paragraph 3(b) above; or a material reduction
in the other benefits to which Executive is entitled under Paragraph
3(c) above, as compared to the benefits available to Executive at the
time of execution of this Agreement.
(iv) the Company requires the Executive's principal
place of employment be relocated fifty (50) miles from its location as
of the date of this Agreement;
(v) the Company otherwise fails to perform its
material obligations under this Agreement.
If the employment of the Executive is terminated by the Executive for
Good Reason, the Executive shall be entitled to the severance benefits set forth
in Paragraph 6(f) below, but the Company's obligation to make further Base
Salary payments and incentive compensation payments shall cease on the effective
date of such termination. The Executive's rights to other compensation and
benefits shall be determined under the Company's benefit plans and policies
applicable to the Executive then in effect.
(d) Termination Without Cause or Without Good Reason. The
Company may terminate this Agreement and the Executive's employment without
Cause at any time, and in such event the Executive shall be entitled to the
severance benefits set forth in Paragraph 6(f) below. The Executive may
voluntarily terminate this Agreement and the Executive's employment without Good
Reason at any time, but in such event the Executive shall not be entitled to the
severance benefits set forth in Paragraph 6(f) below. If the Executive
voluntarily terminates this Agreement and the Executive's employment without
Good Reason, or if the Company terminates this Agreement and the Executive's
employment without Cause, then the Company's obligation to make further Base
Salary payments and Incentive Compensation payments shall cease on the effective
date of such termination. The Executive's rights to other compensation and
benefits shall be determined under the Company's benefit plans and policies
applicable to the Executive then in effect.
(e) Notice and Right to Cure. The party proposing to terminate
this Agreement and the employment of the Executive for Cause or Good Reason, as
the case may be, under Paragraph 6(b) or 6(c) above shall give written notice to
the other, specifying the reason therefor with particularity. In the case of a
termination pursuant to Paragraphs 6(b)(i), (iii) or (iv), or 6(c)(i), such
termination shall be effective immediately upon delivery of such notice. In the
case of any other proposed termination for Cause or Good Reason, as the case may
be, the notice shall be given with sufficient particularity so that the other
party will have an opportunity to correct any curable situation to the
reasonable satisfaction of the party giving the notice within
<PAGE>6
the period of time specified in the notice, which shall not be less than thirty
(30) days. If such correction is not so made or the circumstances or situation
are not curable, the party giving such notice may, within thirty (30) days after
the expiration of the time fixed to correct such situation, give written notice
to the other party that the employment is terminated as of the date of that
writing. Where the Agreement and the Executive's employment are terminated by
the Executive without Good Reason or by the Company without Cause, the
termination date shall be the date on which notification of termination shall
be mailed in accordance with Paragraph 12 of this Agreement, unless a different
termination date shall be designated by the party giving notice or agreed upon
by the Executive and the Company.
(f) Severance Benefits. If this Agreement and the Executive's
employment with the Company are terminated by reason of the Executive's death or
disability, or by the Company with Cause or by the Executive without Good Reason
then the Executive shall receive no severance benefits. If this Agreement and
the Executive's employment with the Company are terminated due to the expiration
of the Agreement, by the Company without Cause, or by the Executive for Good
Reason, then the Executive shall be entitled to the following benefits (the
"Severance Benefits"):
(i) Base Salary. The Company shall continue to pay to
the Executive the Executive's Base Salary for a period of one (1) year
after the date the Executive's employment with the Company is
terminated (the "Severance Period"), when and as such Base Salary would
have been paid, and as if the Executive continued to be employed during
such period and regardless of the death or disability of the Executive
after the date of termination.
(ii) Incentive Compensation. In the event the
Compensation Committee of the Board of Directors determines that
Incentive Compensation is to be paid in the year in which the
Executive's employment and this Agreement are terminated under
circumstances in which this Agreement provides for the payment of
Severance Benefits, then the Executive will receive Incentive
Compensation prorated for the time during which services were rendered
in the year of termination, to the extent provided by the Compensation
Committee for the calculation of Incentive Compensation for that year.
(iii) Continuation of Benefits. During the Severance
Period, the Company shall provide the Executive with medical, dental,
vision, and regular and supplemental life insurance coverage
substantially similar to the coverage which the Executive was receiving
or entitled to receive immediately prior to the date of the termination
of the Executive's employment. In addition, during the Severance
Period, the Company shall pay on behalf of the Executive the cost of
one annual physical examination and the cost of the preparation of the
Executive's federal, state and local tax returns in accordance with the
terms set out in Exhibit A. The Company shall provide such benefits to
the Executive at Company expense, subject to the same cost-sharing
provisions, if any, applicable to the Executive immediately prior to
the date of the termination of employment. Notwithstanding the
foregoing, the Executive shall not be entitled to receive such benefits
to the extent that the Executive obtains other employment which
provides comparable benefits during the Severance Period.
<PAGE>7
(iv) Outplacement Benefits. The Company, at its
expense, will provide to the Executive outplacement services, at a
maximum cost of $30,000, to be provided by an outplacement service
provider selected solely by the Company.
(v) Termination of Benefits. Notwithstanding any
other provision of this Agreement, in the event that the Executive at
any time violates the provisions of Paragraph 4(a), 4(b), 4(c), or 5 of
this Agreement, then the Company's obligations, if any, to provide base
salary continuation and other severance benefits as set out in
Paragraph 6(f) of this Agreement shall cease, and such payments and
benefits shall immediately cease.
(g) Change of Control. Subject to the Executive's compliance
with the terms and conditions of this Agreement, if during the term of the
Agreement the Executive's employment is terminated without Cause as a result of
a Change of Control (as defined below) of the Company, and if the Executive is
not offered a comparable position by the Company, then the Severance Period
shall be extended to the second anniversary of the date of the termination of
employment, and the Executive shall be entitled to receive continued payments of
Base Salary during the second year of the Severance Period. All Severance
Benefits other than continued payments of Base Salary shall cease on the first
anniversary of the termination of employment in the event of a Change of
Control. For purposes of this Paragraph 6(g), a Change of Control shall be
deemed to have occurred if:
(i) any "person" (as defined in Sections 13(d) and
14(d)(2) of the Exchange Act) become the "beneficial owner" (as defined
in Rule 13d-3 under the Exchange Act), directly or indirectly, of
securities of the Company (not including in the securities beneficially
owned by such person any securities acquired directly from the Company
or its affiliates other than in connection with the acquisition by the
Company or its affiliates of a business) having 30% or more of the
voting power in the election of directors of the Company;
(ii) the occurrence within any twenty-four month
period of a change in the Board of Directors of the Company with the
result that the Incumbent Members (as defined below) do not constitute
a majority of the Company's Board of Directors. The term "Incumbent
Members" shall mean the members of the Board on the date immediately
preceding the commencement of such twenty-four month period, provided
that any person becoming a director during such twenty-four month
period whose election or nomination for election was approved by a
majority of the directors who, on the date of such election or
nomination for election, comprised the Incumbent Members shall be
considered one of the Incumbent Members in respect of such twenty-four
month period;
(iii) the stockholders of the Company approve a
merger or consolidation of the Company or approve the issuance of
voting securities of the Company in connection with a merger or
consolidation of the Company (or direct or indirect subsidiary of the
Company), other than (A) a merger or consolidation which
<PAGE>8
would result in the voting securities of the Company outstanding
immediately prior to such merger or consolidation continuing to
represent (either by remaining outstanding or by being converted into
voting securities of the surviving entity or any parent thereof), in
combination with the ownership of any trustee or other fiduciary
holding under an employee benefit plan of the Company, at least 66 2/3%
of the combined voting power of the voting securities of the Company
or such surviving entity or any parent thereof outstanding immediately
after such merger or consolidation, or (B) a merger or consolidation
effected to implement a recapitalization of the Company (or similar
transaction) in which no "person" (as defined above) is or becomes the
"beneficial owner" (as defined above), directly or indirectly, of
securities of the Company (not including in the securities beneficially
owned by such person any securities acquired directly from the Company
or its subsidiaries other than in connection with the acquisition by
the Company or its subsidiaries of a business) representing 30% or more
of the voting power in the election of directors of the Company; or
(iv) the stockholders of the Company approve a plan a
complete liquidation or dissolution of the Company or a sale, lease,
exchange or other disposition of all or substantially all of the
Company's assets, other than a sale, lease, exchange or other
disposition by the Company of all or substantially all of the Company's
assets to an entity, at least 66 2/3% of the combined voting power of
the voting securities of which are owned by "persons" (as defined
above) in substantially the same proportion as their ownership of the
Company immediately prior to such sale.
(h) Expiration of Term of Agreement. At the expiration of the
term of this Agreement as defined in Paragraph 1 above, if the Agreement has not
been previously terminated under Paragraph 6(a), (b), (c) or (d) of this
Agreement, all duties and obligations of the parties under this Agreement,
except those set out in Paragraphs 4, 5 and 6(f), when applicable, shall cease.
(i) Survival of Certain Provisions. Notwithstanding
the expiration or termination of this Agreement, and the Executive's
employment with the Company for any reason under this Agreement, the
provisions of Paragraphs 4, 5 and 6(f), when applicable, to the extent
provided therein, survive any such termination and shall be binding
upon the Executive and the Company in accordance with the provisions of
Paragraphs 4, 5 and 6(f).
7. Arbitration. Except as otherwise provided in this Paragraph, the
parties hereby agree that any dispute arising under this Agreement or any claim
for breach or violation of any provision of this Agreement shall be submitted to
arbitration, pursuant to the National Rules for the Resolution of Employment
Disputes of the American Arbitration Association ("AAA"), to a single arbitrator
selected by mutual agreement of the parties or, if the parties do not mutually
agree on the arbitrator, in accordance with the rules of the AAA. The award
determination of the arbitrator shall be final and binding upon the parties.
Either party shall have the right to bring an action in any court of competent
jurisdiction to enforce this Paragraph and to enforce any arbitrator's award
rendered pursuant to this Paragraph. The venue for all proceedings in
arbitration under this provision, and for any judicial proceedings related to
the arbitration, shall
<PAGE>9
be in Kansas City, Missouri. Nothing in this Paragraph, however, shall prevent
the Company from seeking injunctive relief to preserve its rights under Para-
graph 4 or 5 of this Agreement.
8. Business Expenses. The Company shall reimburse the Executive for
entertainment and travel expenses related to the Company's business in
accordance with the policies of the Company applicable to the Executive on the
date of this Agreement, subject to the right of the Company to modify its
general policies relating to expense reimbursement for employees.
9. Severability. If any one or more of the provisions of this Agreement
shall be held invalid or unenforceable, the remaining provisions shall remain
valid and enforceable to the maximum extent permitted by law.
10. Entire Agreement. This Agreement contains a statement of all
agreements and understandings between the Executive and the Company on the
subject matters covered by the Agreement, and it replaces and supersedes all
prior contracts and agreements between the Executive and the Company concerning
such matters.
11. Binding Effect. This Agreement shall be binding upon and inure to
the benefit of the personal representatives, heirs and assigns of the Executive
and to any successors in interest and assigns of the Company.
12. Notices. All notices required or permitted to be given hereunder
shall be registered or certified mail addressed to the respective parties at
their addresses set forth below:
To the Executive: ____________________________
____________________________
____________________________
To the Company: Payless Cashways, Inc.
Two Pershing Square
2300 Main, P. 0. Box 419466
Kansas City, MO 64141-0466
Attn: Vice President - Human Resources
Blackwell Sanders Peper Martin LLP
Two Pershing Square
2300 Main, Suite 1000
Kansas City, MO 64108
Attn: Gary Gilson
or such other address as a party hereto may notify the other in writing.
13. Applicable Law. This Agreement, or any portion thereof, shall be
interpreted in accordance with the laws of the State of Missouri.
<PAGE>10
14. Assignment. The rights and obligations of the Company under this
Agreement shall inure to the benefit of and shall be binding upon the successors
and assigns of the Company. Executive may not assign any of his rights or
delegate any of his duties or obligations under this Agreement without the
Company's express written consent.
15. Non-Waiver Provision. The failure of either party of this Agreement
to insist upon strict adherence to any term of this Agreement, or to object to
any failure to comply with any provision of this Agreement, shall not (a)
constitute or operate as a waiver of that terms or provision, (b) estop that
party from enforcing that term or provision, or (c) preclude that party from
enforcing that term or provision or any other term or provision. The receipt of
a party to this Agreement of any benefit from this Agreement shall not effect a
waiver or estoppel of the right of that party to enforce any provision of this
Agreement.
16. Golden Parachute Savings Provision. If, in the absence of this
provision, any amount received or to be received by the Executive pursuant to
this Agreement would be subject to the "Excise Tax" imposed on "excess parachute
payments" by Section 4999 of the Internal Revenue Code of 1986 or any
corresponding provision of any later Federal tax law, the Company shall, in its
reasonable discretion, reduce the amounts payable to the largest amount that
will result in elimination of any Excise Tax liability.
IN WITNESS WHEREOF, the parties have duly executed this Agreement as of
the day and year first written above.
[INDIVIDUAL] PAYLESS CASHWAYS, INC.
By:___________________________
Name: ________________________
Title: _______________________
<PAGE>11
Schedule for Exhibit 10.4
The following executive officers of Payless Cashways, Inc. have entered
into an Amended and Restated Employment Agreement with Payless Cashways, Inc.,
dated as of December 1, 1998, in substantially the form hereto:
<TABLE>
<CAPTION> Annual Incentive Target
Base Percentage of Base
Name Title Salary Compensation
- ---- ----- ------ ------------
<S> <C> <C> <C>
Millard E. Barron President and Chief Executive Officer $450,000 75%
Stanley K. Boyd Senior Vice President - Store Operations $275,000 50%
Richard G. Luse Senior Vice President - Finance, Chief $225,000 50%
Financial Officer
Kelly R. Abney Vice President - Logistics, Replenishment $207,000 50%
and Facilities
James L. Deats Vice President - Information Systems $175,000 50%
Shawn J. Hepinstall Vice President - Merchandising $160,000 50%
Louise R. Iennaccaro Vice President - Human Resources $135,000 40%
David J. Krumbholz Vice President - Professional Business $212,000 50%
Timothy R. Mertz Vice President - Treasury $160,000 40%
</TABLE>
<PAGE>1
INDEMNIFICATION AGREEMENT
This Agreement is between Payless Cashways, Inc. and ___________.
In this Agreement, "Payless," "we" or "us" refers to Payless Cashways, Inc.
and "you" refers to ________________. The glossary attached as Exhibit "A"
defines certain other capitalized terms used in this Agreement.
1 . Date.
This Agreement is February ___, 1999.
2. Purpose of the Agreement.
We desire to attract and retain your services as a Payless director or
officer. We recognize, however, that you might be concerned because directors
and officers are sometimes named as parties in expensive litigation. To help
alleviate that concern and to induce you to serve, we agree to indemnify you for
certain expenses potentially resulting from such litigation. We also agree to
use reasonable efforts to maintain directors' and officers' insurance for your
benefit.
3. Agreement to Serve.
You agree to serve or to continue to serve as Payless' _____________
until you are no longer duly appointed, elected or qualified or until you
resign.
4. Directors' and Officers' Insurance.
We agree to use reasonable efforts to maintain one or more enforceable
policies of directors' and officers' insurance for your benefit. The insurance
will provide coverage in amounts which our Board of Directors determines to be
reasonable. Our obligation to maintain insurance ends when you are no longer
serving Payless in your present capacity and there is no reasonable possibility
that someone will sue you based on your prior service to Payless in that
capacity. Our obligation to maintain insurance will also cease if such insurance
is not reasonably available or if our Board of Directors determines that the
cost of providing the insurance exceeds its benefits.
5. Agreement to Indemnify.
Subject to the limitations set forth in Section 7 of this Agreement, we
agree to indemnify you for your expenses resulting from a threatened, pending or
completed Proceeding, including any Proceeding by or in the right of Payless, if
you meet the following requirements:
- You are (or at the time in question were) serving as our Agent,
or as the Agent of another entity at our request;
<PAGE>2
- You acted in good faith and in a manner you reasonably
believed to be in (or not opposed to) our best interests;
- You had no reason to believe your conduct was unlawful
(if the Proceeding against you is criminal); and
- Delaware law does not prohibit us from indemnifying you.
6. Advancement of Expenses.
Subject to the limitations set forth in Section 7 of the Agreement and
subject to the following conditions, we will advance all costs and expenses you
reasonably incur in connection with the investigation, defense, settlement or
appeal of any Proceeding upon receipt from you of:
- Your written affirmation of your good faith belief that you have
met the standard of conduct necessary for indemnification set
forth in Section 5 of this Agreement; and
- Your undertaking (or an undertaking on your behalf) to repay all
amounts so advanced if a court having final jurisdiction
determines that you are not entitled to indemnification for such
expenses under this Agreement or otherwise.
7. Limitation of Indemnity.
Notwithstanding anything to the contrary contained in Section 5,
Section 6 or any other section of this Agreement, we will not indemnify you or
advance expenses in connection with a Proceeding which you initiated unless our
Board of Directors authorized the Proceeding (or any part thereof). We also will
not indemnify you:
- to the extent that payment is made to you or on your behalf
under a valid and collectible insurance policy;
- to the extent that you receive payment other than under this
Agreement;
- with respect to directors' acts or omissions for which our
Certificate of Incorporation may not limit liability under
Delaware law; or
- if a court having final jurisdiction determines in a final
decision that such indemnification is not lawful.
<PAGE>3
8. Notification of Right to Indemnification.
You agree to notify us promptly after your receipt of notice that a
Proceeding has been brought (or is threatened to be brought) against you. If
your failure to notify us promptly prejudices us in our defense of a Proceeding,
we will be relieved of liability under this Agreement to the extent of the
prejudice.
9. Notice to Insurer.
If we have directors' and officers' liability insurance in effect at
the time we receive notice of a Proceeding from you, we will give prompt notice
to the insurer in accordance with the requirements of the insurance policy. We
will take all necessary or desirable action to cause the insurer to pay all
amounts owed under the terms of the policy.
10. Determination of Right to Indemnification.
Subject to the limitations set forth in Section 7 of this Agreement, we
agree to indemnify you if you meet the requirements for indemnification set
forth in Section 5 of this Agreement. We will determine whether you meet those
requirements using one of the following three methods:
- by a majority vote of directors who are not parties to the
Proceeding (regardless of whether there are enough such directors
to constitute a quorum);
- by Independent Legal Counsel selected by directors who are not
parties to the Proceeding; or
- by vote of our stockholders, if there are no directors who are
not parties to the Proceeding.
If Independent Legal Counsel determines your entitlement to indemnification
under this Section 10, we will pay all reasonable fees and expenses incurred by
such counsel in connection with such determination.
The persons determining your entitlement to indemnification will
presume that you are entitled to indemnification. The termination of any
Proceeding by judgment, order, settlement or conviction, or upon a plea of nolo
contendere or the equivalent, will not create a presumption that you did not act
in good faith and in a manner you believed to be in (or not opposed to) our best
interests. Such a termination also will not create a presumption that you had
reasonable cause to believe that your conduct was unlawful.
Following our determination of your entitlement to indemnification,
our Secretary or another corporate officer will notify you in writing of such
determination. If we determine that you are not entitled to indemnification, you
may pursue the remedies provided by Section 14 of this Agreement.
<PAGE>4
11. Payment of Indemnification.
If we determine that you are entitled to indemnification, we will pay
all costs and expenses you reasonably incurred in connection with the Proceeding
in question. In addition, we will pay all expenses you reasonably incurred in
cooperating with the persons responsible for determining your right to
indemnification, regardless of whether we determine that you are entitled to
indemnification.
Our obligations to make payments under this Agreement are not subject
to diminution by set off, counterclaim, abatement or otherwise. However, you
will not be released from any liability or obligation that you may owe us,
whether under this Agreement or otherwise.
12. Assumption of Defense.
If we are required to pay the costs of any Proceeding brought against
you, we shall have the right to assume the defense of such Proceeding, with
counsel approved by you, upon delivery to you of written notice of our election
to assume the defense. Notwithstanding the foregoing, however, we shall not have
the right to assume your defense in any Proceeding brought by or in the right of
Payless or as to which you have reasonably concluded that there is a conflict of
interest between you and us in the conduct of the defense.
After we have delivered notice to you that we intend to assume the
defense of a Proceeding, you will have the right to employ separate counsel at
your expense. We will not be liable to you under this Agreement for any fees of
counsel you subsequently incur with respect to the Proceeding, unless:
- We previously have authorized you to employ separate counsel at
our expense;
- You reasonably have concluded that there is a conflict of
interest between you and us in the conduct of your defense; or
- We have failed to employ counsel to assume your defense in such
Proceeding.
13. Cooperation and Settlement of Claim.
You agree to give us such information and cooperation as we may
reasonably request in defense of any claim or threat of a claim.
You agree that we are not obligated to indemnify you under this
Agreement for any amounts you pay to settle any action or claim without our
prior written consent. We agree not to settle any action or claim in any manner
that will impose any penalty or limitation on you without your prior written
consent.
Each party to this Agreement agrees not to unreasonably withhold
consent to any proposed settlement. If either party refuses to agree to a
proposed settlement acceptable to the other party, Payless will retain
Independent Legal Counsel reasonably acceptable to you for the
<PAGE>5
purpose of determining whether the proposed settlement is reasonable under the
circumstances. Payless will pay all reasonable fees and expenses incurred by
Independent Legal Counsel in connection with such determination. If Independent
Legal Counsel determines that the proposed settlement is reasonable under all
the circumstances, the party advocating the settlement may consummate the
settlement without the consent of the other party.
14. Your Remedies.
If we fail to honor our obligations under Section 6 of this Agreement,
or if we detainee that you are not entitled to indemnification under this
Agreement, you may seek (a) an adjudication in an appropriate court in the State
of Delaware or in any other court of competent jurisdiction, or (b) an award in
arbitration to be conducted by a single arbitrator under the rules of the
American Arbitration Association, for the purpose of enforcing your rights under
this Agreement. However, you may not seek such an adjudication or arbitration
later than ISO days following the earlier of (x) the date of notice of a
determination that you are not entitled to indemnification, or (y) the date 60
days after we receive your request for indemnification.
Any judicial proceeding or arbitration commenced under this Section 14
shall be conducted de novo and without presumption that you are not entitled to
indemnification.
If the court or arbitrator determines that you are entitled to
indemnification, we shall be bound by such determination, unless:
- You have misstated a material fact or omitted a material fact
necessary to make your statements in connection with the request
for indemnification not misleading; or
- Applicable law prohibits us from indemnifying you.
In addition, we will pay your reasonable expenses incurred in successfully
establishing your right to indemnification or advancement of expenses in any
action (or settlement thereof) under this Section 14.
We shall be precluded from asserting in any judicial proceeding or
arbitration commenced under this Section 14 that the procedures and presumptions
set forth in this Agreement are not enforceable. We agree to stipulate in any
such court or before any such arbitrator that we are bound by all of the
provisions of this Agreement.
<PAGE>6
15. Notice.
All notices, requests, demands and other communications relating to
this Agreement shall be in writing and shall be deemed to be duly given if (a)
delivered by hand and receipted for by the party to whom the notice or
communication was directed, or (b) mailed by certified or registered mail with
postage prepaid, on the third business day after the date on which it was so
mailed:
if to you, to:
________________________
________________________
________________________
or to such other address as you furnish us, and
if to Payless, to:
Payless Cashways, Inc.
Two Pershing Square
2300 Main
Kansas City, MO 64108
Attention: Secretary/Assistant Secretary
With a copy to:
Blackwell Sanders Peper Martin LLP
2300 Main Street, Suite 1000
Kansas City, MO 64108
Attention: Gary D. Gilson
or to such other address as we furnish you.
16. Severability.
If a court of competent jurisdiction determines that any portion of the
Agreement is unenforceable, we will nevertheless indemnify you to the full
extent permitted by the enforceable portions of the Agreement. The invalidity or
unenforceability of any provision(s) of this Agreement will not affect the
enforceability of the Agreement's other provisions.
17. Modification and Waiver.
Any supplement, modification or amendment to this Agreement will be
binding only if both parties have executed it.
<PAGE>7
If either party waives any of the provisions of this Agreement, such
waiver will be effective only as to the particular provision and matter
expressly waived.
18. Continuation of Indemnity.
Our obligations under this Agreement shall continue during the period in which
(a) you are (or have consented to be) an Agent of Payless, or (b) are serving as
an Agent of another corporation, partnership, joint venture, trust or other
enterprise at our request. Our obligations shall also continue for as long as
you are subject to any possible claim or threatened, pending or competed
Proceeding by reason of your service in such capacity.
19. Binding Effect.
This Agreement binds us and our successors and assigns. This Agreement
inures to the benefit of you and your heirs, assigns and personal
representatives.
20. Non-Exclusivity.
The indemnification to which you are entitled under this Agreement is
not exclusive of any other indemnification to which you are or may be entitled.
21. Subrogation Rights.
If we pay any amounts under this Agreement, we will be subrogated to
the extent of such payment to your rights of recovery against any person or
organization. You agree to execute all papers required and to do everything that
may be reasonably necessary to secure such rights for us.
22. Agreement to Supersede.
This Agreement supersedes any other prior written indemnification
agreement between you and us.
23. Governing Law.
This Agreement shall be construed, enforced and governed in accordance
with the laws of the State of Delaware applicable to contracts made and to be
performed in that state.
24. Counterparts.
The parties may execute any number of counterparts of this Agreement,
each of which will be an original.
<PAGE>8
25. Headings.
The headings of the paragraphs in this Agreement are for convenience
only. They do not constitute part of the Agreement and do not affect the
construction of it.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK;
SIGNATURE PAGE FOLLOWS]
<PAGE>9
IN WITNESS WHEREOF, The parties have executed this Agreement as of the
day and year first above written.
PAYLESS CASHWAYS, INC.
_______________________________
By:____________________________
Title:_________________________
[INDIVIDUAL]
_______________________________
<PAGE>
CORPORATE MANAGEMENT
INCENTIVE PLAN
TABLE OF CONTENTS
TOPIC PAGE
Plan Objectives.......................................................1
Plan Features
Eligibility Requirements.....................................2
Target Incentive Award.......................................2
Incentive Award Determination.........................................3
Plan Procedures.......................................................4
Incentive Award Distribution..........................................6
Plan Administration...................................................6
December 1998
<PAGE>1
CORPORATE MANAGEMENT
INCENTIVE PLAN
PLAN OBJECTIVES
Compensation is a critical factor in attracting, retaining and motivating
management personnel. Incentive compensation is a vital component of the total
compensation package. The philosophy of an incentive plan combined with base
compensation creates an effective total compensation program that is essential
to the overall long-term success of our Company.
The plan objectives are to:
- Recognize and reward superior performance for the achievement of
a critical performance objective, the achievement of Earnings
- Before Interest, Taxes & Depreciation (EBITD) at a specified
level.
- Provide a competitive total compensation package.
- Promote a sense of team effort in which all management personnel
share in the rewards of superior performance.
<PAGE>2
CORPORATE MANAGEMENT
INCENTIVE PLAN
ELIGIBILITY REQUIREMENTS
To be eligible for participation in the Corporate Management Incentive Plan, you
must be a regular, full-time employee, grade 508 or above. You may also
participate in the plan if you are a regular, full time employee performing the
duties of Field Auditor. In addition, you must:
- be continuously employed by the Company throughout the incentive
period,
- have acceptable overall performance and not engage in any
behavior, which would be grounds for termination during the entire
incentive period and the period up to distribution.
Employees begin participation in the plan on their date of hire or promotion
into an eligible position.
TARGET INCENTIVE AWARD
The target incentive percentage multiplied by the employee's actual base
compensation earned during the incentive period reflects the participant's
target incentive award. The target percentage for Corporate Management is shown
below:
<TABLE>
<CAPTION>
Annual Incentive Target
Salary Grade % of Base Compensation
------------ ----------------------
<S> <C>
508 12.0%*
509 14.0%
510 16.0%
511 18.0%
512 24.0%
513 40.0%
514 40.0%
515 50.0%
516 50.0%
517 50.0%
518 75.0%
<FN>
* Also applies to Field Auditors.
</FN>
</TABLE>
The target incentive award will remain unchanged for the balance of the
incentive period unless those conditions outlined in the Plan Procedures occur.
(See Plan Procedures beginning on page 4). Actual base compensation paid during
the year will be used in calculating earned awards.
<PAGE>3
INCENTIVE PLAN
INCENTIVE AWARD DETERMINATION
The incentive award under the plan will be earned based upon achievement of
EBITD at a specified level. Shown below is the award schedule.
<TABLE>
<CAPTION>
% of Budgeted Earned
EBITD EBITD
Attained Award Percent
---------- -------------
<S> <C>
90% 50%
91% 55%
92% 60%
93% 65%
94% 70%
95% 75%
96% 80%
97% 85%
98% 90%
99% 95%
100% 100%
101% 105%
102% 110%
103% 115%
104% 120%
105% 125%
106% 130%
107% 135%
108% 140%
109% 145%
110% 150%
Greater than 110%* Greater than 150%
<FN>
*For the CEO, grade 518, the schedule will continue in similar increments for
performance above 110% with no cap.
</FN>
</TABLE>
SAMPLE PAYOUT CALCULATION
Actual Base x Target Incentive x Earned EBITD = Incentive
Compensation Percent Award Percent Payment
<PAGE>4
CORPORATE MANAGEMENT
INCENTIVE PLAN
PLAN PROCEDURES
Prorated awards shall occur in accordance with the following guidelines.
1. New Hires.
Employees hired into an eligible position will be eligible for
incentive pay on their date of hire. Earned incentive awards are based
on the plan formula and the actual base compensation earned in the
eligible position during the performance period.
2. Promoted Into Eligible Position.
Employees promoted into an eligible position will be eligible for
incentive pay on their job begin date. Earned incentive awards are
based on the plan formula and the actual base compensation earned in
the eligible position during the performance period.
3. Promoted From One Eligible Position to Another Eligible Position.
If an employee is promoted into a position which has a different
formula for determining the target incentive award, the old formula
will be calculated on the actual base compensation earned in the former
position, and the new formula will be calculated on the actual base
compensation earned in the new position.
4. Reclassification.
If an employee's current position is reclassified and assigned to a new
grade in the Payless Cashways' job classification program, the target
incentive award will be adjusted in accordance with the procedures for
a promotion, if assigned to a higher grade or for a demotion, if
assigned to a lower grade.
5. Transfer.
Employees who transfer between locations will be eligible for a
prorated incentive based on the actual base compensation earned at each
location during the performance period and the fiscal year end
performance against budget for each location.
6. Demotion.
If an employee is demoted into a position which has a different formula
for determining the target incentive award, the old formula will be
calculated on the actual base compensation earned in the former
position and the new formula will be calculated on the actual base
compensation earned in the new position.
<PAGE>5
CORPORATE MANAGEMENT
INCENTIVE PLAN
PLAN PROCEDURES (Cont'd.)
An eligible employee who is demoted to a position which is not eligible
for participation in the plan will receive a prorated award based on
the plan formula and the actual base compensation earned during the
performance period.
7. Interrupted Service.
If an employee's service is interrupted during the plan year, for a
period in excess of 90 days due to short or long term disability and/or
other approved leaves of absence, he/she shall receive, if earned, an
incentive award, which has been prorated based on the plan formula and
the actual base compensation earned during the plan year or fiscal
quarter(s) plus first 90 days of leave.
The following guidelines apply in cases of employee separation:
1. Involuntary Termination.
An employee in the plan who, during the performance period, is
involuntarily terminated for such reasons as facility closing or
reduction in force, shall be ineligible for any incentive payments for
the current performance period.
An employee in the plan who, at any time prior to distribution, is
involuntarily terminated for performance deficiencies shall be
ineligible for any incentive payments.
2. Termination for Violation of Company Policy.
An employee in the plan who, at any time prior to distribution, is
involuntarily terminated or resigns in lieu of involuntary termination
for violation of Company policy shall be ineligible for any incentive
payments.
3. Voluntary Termination.
An employee in the plan who terminates voluntarily during the
performance period shall be ineligible for any incentive payments for
the current performance period.
<PAGE>6
CORPORATE MANAGEMENT
INCENTIVE PLAN
INCENTIVE AWARD DISTRIBUTION
Distribution of earned incentive awards shall be made by February 15 following
the end of the plan year.
Awards are issued by check and are subject to applicable government withholding
taxes. Participant elected benefit deductions, such as MoneyBuilder will be
taken from incentive award payments.
Incentive Pay Discrepancies
Errors in the calculation of an employee's incentive award must be reported to
the Compensation Department within 30 days of receipt. All corrected amounts
will be added to the employee's next regularly scheduled paycheck.
PLAN ADMINISTRATION
This plan is established as of the first day of the fiscal year of 1999,
November 29, 1998, and continues each fiscal year unless modified by appropriate
company action.
Payless Cashways, Inc. reserves the right to amend or terminate the plan.
Administration of the Corporate Management Incentive Plan will be under the
direction of the Vice President - Human Resources. The Vice President - Human
Resources, will resolve questions that may arise relating to the interpretation
or administration of the plan.
<PAGE>1
"It is our mission at Payless Cashways, Inc. to be the building materials and
home improvement supplier of first choice for the professional builder, remodel
and repair contractor, institutional buyer, and project-oriented consumer. Our
team will leverage our merchandising expertise and vendor partnerships to
provide professional quality assortments and superior customer service while
growing revenue, earnings and stockholder value."
<PAGE>2
Dear Stockholder:
As the Non-Executive Chairman of the new Board of Directors of Payless Cashways,
Inc., I report to you on our first full year of operation. Payless emerged from
protection under Chapter 11 of the United States Bankruptcy Code on December 2,
1997. A new Board of Directors of experienced, successful and enthusiastic
individuals went to work on your behalf. Donald E. Roller, a member of the
Board, agreed to serve as Acting Chief Executive Officer and a search began for
a permanent President/Chief Executive Officer. Mr. Roller continued in that role
through June 1998, making good progress as the Board and senior management
worked to reduce expense, establish controls, and reexamine the strategy. We
thank him for his excellent work.
Millard E. Barron joined the Company in June 1998 as the President and Chief
Executive Officer of Payless Cashways, Inc. He is a person of remarkable
capacity, both as a merchant and as a driving force behind the rebirth of the
Company. With over thirty years of experience in retail with Hill's Department
Stores, WAL-MART, and Hudson's Bay Company (Zeller's), he brings a wealth of
knowledge, experience and well-honed customer-focus. His energy, enthusiasm,
determination, and customer-focused/merchandise-driven approach is transforming
the Company. Payless Cashways, an industry leader with a long and proud past,
needed such a retail leader to drive its recovery toward financial health and
prosperity. He has the confidence of the Board, and he is proving to be the
right person for this critical role.
In addition to Millard Barron, Don Roller and me, the Board of Directors
includes H. D. (Harry) Cleberg, President/Chief Executive Officer of Farmland
Industries, Inc.; David G. Gundling, President/Chief Executive Officer of
Hagemeyer Foods N.A., Inc.; Max D. Hopper, Principal of Max D. Hopper
Associates, Inc.; and Peter M. Wood, Former Managing Director of J.P. Morgan &
Co., Incorporated. David M. Chamberlain, Chairman of Genesco, Inc., made the
decision to step down as a Director due to other obligations. His guidance was
extraordinarily helpful in his tenure on the Board, and we thank him for
serving. This is an exceptional group of successful business executives, each
with an individual, proven record of accomplishment in his own professional
career. They bring experience in the building materials industry, finance,
marketing, technology and turnaround situations. They have met tirelessly during
this past year, actively addressing the issues facing the Company.
As a Board, we understand that sustained growth in sales and earnings is the
fundamental key to improving stockholder value. We believe that progress is
being made as evidenced by the Company recording three quarters of net income in
1998. Millard Barron has undertaken the difficult tasks of reshaping his senior
staff, addressing relationship issues with vendors, motivating associates,
eliminating impaired assets where necessary, assigning accountabilities and
creating a clear vision of future success for Payless as a premier supplier to
the professional customer. We expect the Company to grow in 1999.
We thank you for your patience and support during this time of transition. The
Board is engaged, committed to success, and resolute about improving outcomes
for Payless Cashways and for you.
/s/ Peter G. Danis
Peter G. Danis
Non-Executive Chairman of the Board
Dear Stockholder:
When I joined Payless Cashways, Inc. in June of 1998, I was excited about the
Company, the heritage, the people, the market niche position and the business
opportunity. As I write to you, I am happy to report that I am even more excited
now about our Company position and potential for the future.
During the second half of 1998, my primary focus has been in several key areas.
They included:
1) Stabilizing the organization,
2) Turning the sales and earnings momentum,
3) Assembling an effective senior management team and structure, and
4) Communications, communications, communications.
We also developed and implemented a corporate mission statement and a cultural
core values statement, both of which appear in this annual report. I have found
the traditional and most basic ethics and practices of our Company to be very
solid, grounded in integrity, honesty, and fairness. I believe we have in place
the right kind of foundation upon which we can build a growing, profitable
company in the future.
<PAGE>3
Stabilizing the organization has involved a myriad of activities ranging from
gaining control of all company expenses, to reducing non-performing inventory
and eliminating unproductive, impaired assets. I believe that positive earnings
results in the last three quarters of the year demonstrate good progress in
these areas and a very positive directional change. And, we also did, in fact,
turn the sales momentum from a low point in the second quarter of a 13.2%
same-store sales decrease to a 1.1% same-store sales decrease in the fourth
quarter. Of course, we will never be happy with decreases and are committed to
same-store sales increases for 1999. However, the trend is encouraging,
particularly in sales with the Pro customer where we were up 9% in same-store
sales for the fourth quarter.
I am also pleased to report that our Company is populated with wonderfully
talented and dedicated people throughout the organization up to and including
our Board of Directors. We have assembled a strong new senior management team,
for the most part from within the Company, as only I and our new Vice President
of Information Systems, Jim Deats, come from outside the Company. And,
throughout the chain-of-leadership, we have restructured where appropriate to
ensure that the Payless corporate pyramid has our customers and our store
associates at the top and everybody else supporting and focusing on them.
Also, first, last, and always, I am committed to continuous, proactive,
effective communications, both within our organization and with all other key
constituencies. Our Company is going through an incredible amount of necessary
internal change and, at the same time, we have many external relationships that
we must repair, improve and leverage to our benefit in the future. We will
continue to over-communicate as appropriate as we move the Company in our new
direction. Our amazing associates, clearly our most important asset, require and
deserve to be well trained and well informed. Our vendors, our lenders, and you,
our stockholders, also have been very supportive and, again, require and deserve
to be well informed. Our Company needs the positive leverage that effective
communication can provide.
This past year represented a turn-around year for Payless Cashways. While we
are only in the early stages of reinventing ourselves, the worst is behind us.
We now have loyal associates and customers, increasing vendor support, and
continued financial support from our lenders. Through an intense, thorough,
ongoing, almost fanatical focus on our customers, we will continue to change
and reorganize everything we do around the objectives we set. By moving to be a
merchandising-driven, customer-focused company and raising all standards of
execution, we will begin to grow market share again. Our strategy to be the
premier supplier of goods and services to our Pro builder, remodeling, repair
and property maintenance professionals is in place and already showing positive
results. Our full-line, drive-through lumberyards, and "hardware store"
showrooms are well positioned for the Pro and, at the same time, provide a
unique, desirable, solution-oriented shopping experience for our many
project-oriented do-it-yourself customers, who also happen to enjoy shopping
where the Pro shops. Our extensive customer service expertise, combined with
many value-added services, provide an attractive overall package to support our
more than 800,000 customers who shop our stores in an average week.
As we look forward to 1999, we have allocated a capital expenditure budget of
nearly $60 million to provide the tools and improvements necessary to fuel our
growth. We are investing $7 million in technology to improve our inventory
productivity and to provide timely, effective decision-support information for
our merchants. We will use $14 million to purchase ten previously leased stores,
and an additional $19 million is earmarked for investments that will improve our
capabilities to service the Pro, including potential acquisitions of retail
operations and/or manufacturing facilities, store remodels and new stores. The
remainder will fund routine capital expenditures needed to maintain our stores
and distribution centers.
I am delighted to have the opportunity to lead the new team at Payless Cashways.
It is my commitment that our Company become profitable again and that we enhance
stockholder value. In closing, to our associates, I say, thank you for all that
you do for our customer. To our vendors, I say, come on in and let's grow
profitably together. And, to our lenders and our stockholders, I say, thank you
for your continued support. We will be successful.
/s/ Millard E. Barron
Millard E. Barron
President and Chief Executive Officer
<PAGE>
[Page 4 through 8 of the original document, which contained text and
pictures, have been omitted from the EDGAR filing.]
<PAGE>9
Payless Cashways, Inc.
Board of Directors
Peter G. Danis +
Non-executive Chairman of the Board
Payless Cashways, Inc.
Former Chief Executive Officer
Boise Cascade Office Products Corporation
Millard E. Barron
President and Chief Executive Officer
Payless Cashways, Inc.
H. D. Cleberg * @
President and Chief Executive Officer
Farmland Industries, Inc.
David G. Gundling + #
President and Chief Executive Officer
Hagemeyer Foods N.A., Inc.
Max D. Hopper @ #
Principal
Max D. Hopper Associates, Inc.
Donald E. Roller + #
Former Executive Vice President
North American Gypsum USG Corporation
Peter M. Wood * @
Former Managing Director
J. P. Morgan & Co., Incorporated
* Member of Audit Committee
+ Member of Compensation Committee
@ Member of Corporate Governance and
Nominating Committee
# Member of Finance Committee
Officers
Millard E. Barron
President and Chief Executive Officer
Payless Cashways, Inc.
Stanley K. Boyd
Senior Vice President - Store Operations
Richard G. Luse
Senior Vice President - Finance and
Chief Financial Officer
Kelly R. Abney
Vice President - Logistics, Replenishment and Facilities
James L. Deats
Vice President - Information Systems
Renae G. Gonner
Vice President - Marketing and Advertising
Shawn J. Hepinstall
Vice President - Merchandising
Louise R. Iennaccaro
Vice President - Human Resources
David J. Krumbholz
Vice President - Professional Business
Ronald D. Long
Vice President - Merchandising Display and Productivity
Timothy R. Mertz
Vice President - Treasury
Kenneth G. Frank, Jr.
Regional Vice President
Dennis R. Knowles
Regional Vice President
David L. Wenman
Regional Vice President
<PAGE>10
<TABLE>
Payless Cashways, Inc.
QUARTERLY STATEMENTS OF OPERATIONS (unaudited)
In thousands, except per share amounts
<CAPTION>
Reorganized Company
---------------------------------------------------------------
First Second Third Fourth
Fiscal Year Ended November 28, 1998 Quarter Quarter Quarter Quarter
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Income
Net sales $ 394,271 $ 505,919 $ 523,508 $ 483,164
Other income 789 991 908 310
---------------------------------------------------------------
395,060 506,910 524,416 483,474
Costs and expenses
Cost of merchandise sold 291,909 374,971 393,021 360,886
Selling, general and administrative 112,170 112,196 112,382 110,188
Special charges 5,584 -- 837 1,000
Provision for depreciation and amortization 8,312 8,855 7,835 8,137
Interest expense 10,235 9,915 8,994 8,018
---------------------------------------------------------------
428,210 505,937 523,069 488,229
---------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAXES (33,150) 973 1,347 (4,755)
Federal and state income taxes (8,188) 241 332 (5,603)
----------------------------------------------------------------
NET INCOME (LOSS) $ (24,962) $ 732 $ 1,015 $ 848
===============================================================
Weighted average common shares outstanding 20,000 20,000 20,000 20,000
---------------------------------------------------------------
Net income (loss) per common share-basic $ (1.25) $ 0.04 $ 0.05 $ 0.04
==============================================================
Weighted average common and dilutive
common equivalent shares outstanding 20,000 20,111 20,004 20,034
---------------------------------------------------------------
Net income (loss) per common share-diluted $ (1.25) $ 0.04 $ 0.05 $ 0.04
==============================================================
<FN>
A lower-than-anticipated rate of inflation decreased the LIFO inventory
provision, after tax, by $1.7 million in the fourth quarter. Special charges
($3.4 million after tax) reflected in the first quarter consist of costs related
to the elimination of staff at the Company's headquarters and regional
administrative centers. Special charges were also recorded in the third and
fourth quarter ($0.5 million and $0.6 million, respectively, after tax) in
connection with store closings. In addition, third and fourth quarter cost of
merchandise sold reflect inventory write-downs ($0.8 million and $2.0 million,
respectively, after tax) in connection with these store closings. The fourth
quarter income tax benefit includes a $3.8 million tax benefit to reflect the
effect of a fourth quarter revision of the effective tax rate on the first three
quarters.
</FN>
</TABLE>
<PAGE>11
<TABLE>
Payless Cashways, Inc.
QUARTERLY STATEMENTS OF OPERATIONS (unaudited) (cont'd.)
In thousands
<CAPTION>
Predecessor Company
--------------------------------------------------------------
First Second Third Fourth
Fiscal Year Ended November 29, 1997 Quarter Quarter Quarter Quarter
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Income
Net sales $ 487,550 $ 661,191 $ 632,107 $ 504,433
Other income 1,205 1,264 1,191 1,274
---------------------------------------------------------------
488,755 662,455 633,298 505,707
Costs and expenses
Cost of merchandise sold 348,247 483,093 478,038 367,280
Selling, general and administrative 138,407 151,147 148,166 121,097
Reorganization items -- -- 5,121 20,334
Fresh-start revaluation -- -- -- 355,559
Special charges -- -- 13,056 --
Asset impairment charges -- -- 60,483 --
Provision for depreciation and amortization 12,804 13,037 12,768 12,501
Interest expense 16,055 16,274 14,663 14,259
---------------------------------------------------------------
515,513 663,551 732,295 891,030
---------------------------------------------------------------
LOSS BEFORE INCOME TAXES (26,758) (1,096) (98,997) (385,323)
Federal and state income taxes (18,623) 12,133 (33,595) (50,321)
----------------------------------------------------------------
LOSS BEFORE EXTRAORDINARY ITEMS (8,135) (13,229) (65,402) (335,002)
Extraordinary items, net of income taxes -- -- -- 133,176
---------------------------------------------------------------
NET LOSS $ (8,135) $ (13,229) $ (65,402) $ (201,826)
================================================================
<FN>
In connection with its Chapter 11 filing on July 21, 1997, discussed at Note B
to the Financial Statements, the Company recorded reorganization items in the
third and fourth quarters ($3.2 million and $12.5 million after tax,
respectively). The Company also adopted fresh-start accounting, discussed at
Note C to the Financial Statements, as of November 29, 1997, as a result of its
emergence from bankruptcy under its plan of reorganization effective date,
December 2, 1997. Fresh-start revaluation charges, after tax, were $312.1
million. An extraordinary gain of $138.2 million after tax related to the
discharge of debt pursuant to the consummation of the Plan was recorded in the
fourth quarter. In addition, an extraordinary charge of $5.0 million after tax
related to the early extinguishment of debt was also recorded in the fourth
quarter. A lower-than-anticipated rate of inflation decreased the LIFO inventory
provision, after tax, by $3.0 million in the fourth quarter. Special charges
($8.1 million after tax) reflected in the third quarter consist of costs
associated with the closing of 29 stores. Third quarter cost of merchandise sold
reflects an inventory write-down ($6.6 million after tax) in connection with
these store closings. The Company also recorded an asset impairment charge
($43.9 million after tax) in the third quarter.
</FN>
</TABLE>
<PAGE>12
Payless Cashways, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
The following discussion of the Company's financial condition and results of
operations should be read in conjunction with the Financial Statements and notes
thereto included elsewhere in this Annual Report to Stockholders. The Company
has implemented the required accounting for entities emerging from bankruptcy
under Chapter 11, Title 11 of the United States Code ("Chapter 11") in
accordance with the American Institute of Certified Public Accountants'
Statement of Position 90-7 ("SOP 90-7"), "Financial Reporting by Entities in
Reorganization Under the Bankruptcy Code" ("fresh-start reporting") and
reflected the effects of such adoption in the balance sheet as of November 29,
1997. Under fresh-start reporting, the balance sheet of November 29, 1997,
became the opening balance sheet of the Reorganized Company. The financial
statements of the Predecessor Company prior to November 29, 1997, are not
comparable in material respects to the financial statements of the Reorganized
Company.
<TABLE>
Operating Data
<CAPTION>
Reorganized |
Company | Predecessor Company
-------------------- | ---------------------------
Fiscal Year Ended | Fiscal Year Ended
-------------------- | ---------------------------
percent of net sales Nov. 28, |Nov. 29, Nov. 30,
1998 | 1997 1996
---------------------|----------------------------
<S> <C> | <C> <C>
Net sales....................................................... 100.0 % | 100.0 % 100.0 %
Other income.................................................... 0.1 | 0.2 0.3
Cost of merchandise sold........................................ 74.5 | 73.4 72.1
Selling, general and administrative............................. 23.4 | 24.4 23.3
Reorganization items............................................ -- | 1.1 --
Fresh-start revaluation......................................... -- | 15.6 --
Special charges................................................. 0.4 | 0.6 0.3
Asset impairment charges........................................ -- | 2.6 2.3
Provision for depreciation and amortization..................... 1.7 | 2.2 2.1
Interest expense................................................ 2.0 | 2.7 2.3
Interest income................................................. -- | -- (0.2)
---------------------|----------------------------
Loss before income taxes........................................ (1.9) | (22.4) (1.9)
|
Federal and state income taxes.................................. (0.7) | (4.0) (1.2)
---------------------|----------------------------
Loss before extraordinary items................................. (1.2) | (18.4) (0.7)
|
Extraordinary items............................................. -- | 5.8 --
---------------------|----------------------------
Net loss........................................................ (1.2) % | (12.6) % (0.7) %
=====================|============================
</TABLE>
Sales
Net sales for fiscal 1998 decreased 16.6% in total from fiscal 1997 and 7.3% on
a same-store basis. Same-stores are those open one full year. Both 1998 and 1997
were 52-week years. Management believes continuing competitive pressure and the
lingering effects of the Chapter 11 filing contributed to sales declines
throughout 1998, although same-store sales have improved steadily in the last
three quarters of 1998--from a 13.2% decrease in the second quarter, to a 6.7%
decrease in the third quarter, to
<PAGE>13
a 1.1% decrease in the fourth quarter. On a same-store basis, sales to
professional customers were flat, while sales from the consumer side of the
business decreased 13.7% in fiscal 1998.
Net sales for fiscal 1997, a 52-week year, decreased 13.5% from fiscal 1996, a
53-week year. On a 52-week basis, net sales for fiscal year 1997 decreased 11.9%
compared to fiscal 1996. Same-store sales, on a 52-week basis, decreased by 6.6%
for fiscal 1997. Net sales for 1997 reflect continuing competitive pressure and,
in the second half, the disruption in the supply of product and the erosion of
customer confidence caused by the Chapter 11 filing. On a same-store basis,
sales to professional customers increased 0.2%, while sales from the consumer
side of the business decreased 11.9% in fiscal 1997.
The Company closed four stores during 1998. Twenty-four stores were closed
during the third quarter of 1997 (one of which had been announced in fiscal
1996), and an additional six stores were closed in the fourth quarter. The
Company closed six stores in early fiscal 1996 and another eight stores in the
fourth quarter of 1996. Closed stores accounted for $34.4 million and $269.2
million of sales in 1998 and 1997, respectively.
Costs and Expenses
The cost of merchandise sold, as a percent of sales, was 74.5% in fiscal 1998,
73.4% in fiscal 1997, and 72.1% in fiscal 1996. Third and fourth quarter 1998
inventory write-downs of $4.4 million, related to the closing of eight
underperforming stores, was 0.2% of sales for fiscal 1998. Likewise, a
third-quarter inventory write-down of $10.7 million, related to the closing of
29 underperforming stores, was 0.5% of sales for fiscal 1997. Excluding the
effects of inventory write-downs related to store closings, the increase in cost
of merchandise sold as a percent of sales during 1998 was primarily due to more
competitive pricing designed to regain customer traffic lost during the Chapter
11 period of 1997. The decrease in gross margins during 1997, excluding the
effect of inventory write-downs, was primarily due to competitive pressure and
the growth in sales to the professional customer whose merchandise purchases
include a higher percentage of commodity goods at margin rates somewhat lower
than the Company's average. The disruption in the supply of product resulting
from the Chapter 11 filing caused some increase in cost of goods sold due to
purchasing product from secondary sources at higher costs. Cost of merchandise
sold in fiscal 1998, 1997, and 1996 benefited from a $2.4 million, a $0.7
million, and a $3.2 million LIFO credit, respectively, related to liquidations
of LIFO inventories and deflation.
Selling, general and administrative expenses, as a percent of sales, were 23.4%,
24.4%, and 23.3% for fiscal 1998, 1997 and 1996, respectively. The 1998
reductions in selling, general and administrative expenses, both in dollars and
as a percent of sales, were primarily the result of closed stores, as well as
initiatives undertaken in 1998 to reduce store as well as corporate level
personnel costs. The increase as a percent of sales for fiscal 1997 was due
primarily to lower sales. The 1997 decrease in dollars was due primarily to
savings from the store closings, discussed above.
In connection with its Chapter 11 filing, the Company recorded reorganization
items of $25.5 million during fiscal 1997. Additional details on the
reorganization items are set forth in Note I to the Financial Statements. The
Company also recorded fresh-start revaluation charges of $355.6 million in
fiscal 1997. See Note C to the Financial Statements for more details on
fresh-start reporting and these related charges.
A special charge of $5.6 million ($3.4 million after tax) was recorded in the
first quarter of 1998 for severance costs related to the elimination of staff at
the Company's home office and regional administrative centers. In addition,
special charges of $0.8 million ($0.5 million after tax) and $1.0 million ($0.6
million after tax) were recorded in the third and fourth quarters of 1998,
respectively, in connection with the closing of three and five underperforming
stores, respectively. A special charge of $13.1 million ($8.1 million after
tax), primarily a cash charge, was recorded in the third quarter of fiscal 1997
to reflect real estate disposal and severance costs related to the closing of 29
underperforming stores as part of the Company's reorganization under Chapter 11.
A special charge of $8.2 million ($5.0 million after tax), primarily a cash
charge, was recorded in the third quarter of fiscal 1996 to reflect future store
rentals and real estate disposal costs related to the closing of nine
underperforming stores. Additional details on the special charges are set forth
in Note K to the Financial Statements.
<PAGE>14
The Company recorded an asset impairment charge of $60.5 million ($43.9 million
after tax) and $59.7 million ($44.6 million after tax) in the third quarters of
1997 and 1996, respectively. Primarily because the environment for building
materials retailing continued to be increasingly competitive, the Company first
conducted its review in the third quarter of 1996 and determined certain assets
were impaired. In the third quarter of 1997, the Company again conducted a
review of underperforming stores and determined that certain additional assets
were impaired, including assets related to 29 stores, which the Company closed.
The asset impairment charges were recorded after considering current and
expected future operating cash flows for certain stores together with the
proceeds the Company could expect to receive upon the sale of these assets.
Additional details on the asset impairment charges are set forth in Note J to
the Financial Statements. The Company will continue to review assets for
impairment, particularly given the ongoing competitive environment for building
materials retailing.
The provision for depreciation and amortization for fiscal 1998 decreased
compared to fiscal 1997 primarily because goodwill was written off and assets
were written down in fresh-start reporting related to the Company's emergence
from reorganization under Chapter 11. In addition, assets were removed from
service in connection with the store closings mentioned above. The decrease in
the provision for depreciation and amortization for fiscal 1997 compared to
fiscal 1996 was also primarily due to assets removed from service in connection
with store closings.
Interest expense decreased $24.1 million to $37.2 million in fiscal 1998
compared to fiscal 1997 due primarily to lower levels of debt resulting from the
cancellation of indebtedness in connection with the Chapter 11 reorganization.
Interest expense increased $0.8 million to $61.3 million in fiscal 1997 compared
to fiscal 1996 due primarily to higher interest rates. Interest expense for
fiscal 1997 would have increased an additional $5.7 million had certain debt not
been compromised by the Chapter 11 filing. The Company also recorded interest
income of $4.9 million ($2.9 million after tax) in the third quarter of 1996,
related to a pending tax refund arising out of recent legislation and a
settlement with the Internal Revenue Service ("IRS").
The effective tax rate for fiscal 1998 was different from the 35% statutory rate
primarily because of state income taxes. The effective tax rates for fiscal 1997
and 1996 differed from the 35% statutory rate primarily due to the effect of
goodwill amortization and the write-off of goodwill, both of which are
non-deductible for income tax purposes. In addition, for fiscal 1996, the
effective tax rate was significantly affected by the tax benefit related to
income tax legislation and an IRS settlement. On August 20, 1996, the Small
Business Job Protection Act of 1996 was signed into law. Certain provisions of
this legislation clarified the Tax Reform Act of 1986 and made retroactively tax
deductible certain costs and expenses previously recorded by the Company without
any related tax benefit. In addition, during 1996, the Company settled with the
IRS regarding several tax issues. As a result, the Company recorded a tax
benefit of $23.7 million and related interest income, discussed above.
Net Income (Loss)
The Company had losses before extraordinary items of $22.4 million in 1998
compared to $421.8 million in 1997 and $19.1 million in 1996. The 1998 loss
before extraordinary items reflects the special charges for severance and store
closings, discussed above. The 1997 loss before extraordinary items reflects
reorganization items, fresh-start revaluation charges, store closing charges,
and an asset impairment charge, all discussed above. The 1996 loss before
extraordinary item reflects store closing charges, an asset impairment charge, a
federal income tax benefit and related interest income, all discussed above.
Excluding the non-routine items recorded during fiscal 1998, 1997 and 1996, net
loss for 1998 and 1997 would have been $14.9 million and $35.5 million,
respectively, and net income for 1996 would have been $7.4 million.
<PAGE>15
<TABLE>
Comparative Operating Data
<CAPTION>
Reorganized Company | Predecessor Company
------------------------------------|------------------------------------------------------------------
Fiscal Year Ended | Fiscal Year Ended
|------------------------------------------------------------------
November 28, 1998 | November 29, 1997 November 30, 1996
------------------------------------|---------------------------------- ------------------------------
In thousands Pro Forma Historical | Pro Forma Historical Pro Forma Historical
(Excluding (Including | (Excluding (Including (Excluding (Including
Non-Routine Non-Routine | Non-Routine Non-Routine Non-Routine Non-Routine
Items) Items) | Items) Items) Items) Items)
---------------- ---------------- | --------------- -------------- --------------- ---------------
<S> <C> <C> | <C> <C> <C> <C>
Net sales and other income $ 1,906,862 $ 1,906,862 | $ 2,290,215 $ 2,290,215 $ 2,650,905 $ 2,650,905
Income (loss) from |
operations before |
interest, depreciation |
and amortization $ 46,577 $ 42,137 | $ 65,433 $ (399,813) $ 134,552 $ 60,824
Net income (loss) $ (14,913) $ (22,367) | $ (35,451) $ (288,592) $ 7,428 $ (19,078)
</TABLE>
New Accounting Pronouncements
In June of 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). This statement establishes accounting and
reporting standards for derivative instruments and all hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities at their fair market values. Accounting for changes in the fair
value of a derivative depends on its designation and effectiveness. For
derivatives that qualify as effective hedges, the change in fair value will have
no impact on earnings until the hedged item affects earnings. For derivatives
that are not designated as hedging instruments, or for the ineffective portion
of a hedging instrument, the change in fair value will affect current period
earnings. The Company will adopt SFAS 133 during the first quarter of fiscal
2000 and does not presently believe that it will have a significant effect on
the results of its operations or cash flows.
Effects of Inflation
The Company experienced slight deflation in its non-lumber inventories during
fiscal 1998 and fiscal 1997. Approximately 80% of the Company's inventory is
valued using the LIFO inventory accounting method; therefore, current costs are
reflected in the cost of merchandise sold, rather than in inventory balances.
Market Risk
The Company's most significant market risk exposure is changing interest rates.
To manage this potential risk, the Company may use interest rate swap agreements
to limit the effect of increases in the interest rates on variable debt by
fixing the rate without the exchange of the underlying principal or notional
amount. Net amounts paid or received are added to or deducted from interest
expense in the period accrued. The table below provides information about the
Company's variable rate debt obligations and presents principal cash flows and
related weighted average interest rates by expected maturity dates. The Company
does not hold or issue derivative instruments for trading purposes.
Expected Principal Due on Weighted
Maturity Date Variable Rate Debt Average Interest Rate
In thousands
1999 $ 10,921 7.52%
2000 10,000 7.73%
2001 10,000 7.73%
2002 221,806 7.85%
2003 4,000 5.25%
Thereafter 89,809 5.25%
----------- -----
Total $ 346,536 7.13%
=========== =====
Fair Value $ 346,536 7.13%
=========== =====
To reduce the impact of changes in the interest rates, the Company has an
interest rate swap agreement under which it pays a 6-9/16% fixed rate of
interest quarterly through December 1, 1999 in exchange for quarterly receipt of
LIBOR on a $36 million notional amount.
Petition For Relief Under Chapter 11
While the Company had sufficient liquidity to fund its current operations, the
operating performance of the Company during the second quarter of fiscal 1997,
which
<PAGE>16
was well below the Company's expectations, led management to conclude that it
was unlikely that the Company would be able to comply with the covenants
contained in its principal credit agreements at the end of the 1997 fiscal year.
In the course of the Company's subsequent negotiations with its senior lenders
to restructure its debt and after considering with its financial adviser,
Houlihan Lokey Howard & Zukin, all other alternatives, including the sale of the
Company and liquidation, the Company concluded that a Chapter 11 proceeding
provided the best approach for a comprehensive financial restructuring of the
Company. This action was intended to improve the Company's competitive position
by establishing a more appropriate capital structure to operate the business in
this period of unprecedented competitive pressure after a decade of dealing with
a highly leveraged balance sheet, which had limited capital expenditures.
On July 21, 1997, the Company filed a voluntary petition to reorganize under
Chapter 11 and filed a plan of reorganization for its emergence from Chapter 11
(the "Plan" or "Plan of Reorganization") as well as a Disclosure Statement. The
Company operated its business as a debtor-in-possession, subject to the
jurisdiction of the Court, while pursuing its reorganization plan to restructure
the Company's capitalization. The Chapter 11 filing resulted in an automatic
stay of the commencement or prosecution of claims against the Company that arose
before the petition date.
The Disclosure Statement and Plan were subsequently amended on September 5,
1997, and modified on October 9, 1997. On October 10, 1997, the Court determined
that the Disclosure Statement contained adequate information to permit a
creditor to make an informed decision about the Plan. The Company's impaired
creditors and equity security holders accepted the Plan, the Court confirmed the
Plan on November 19, 1997, and, after the satisfaction of a number of
conditions, the Plan became effective December 2, 1997 (the "Effective Date").
For a summary description of the Plan, see Note B to Notes to Financial
Statements.
Financing Activities
On August 13, 1998, the Company amended its 1997 Credit Agreement to modify
various covenants, including required minimum cash flow (defined as earnings
before interest, taxes, depreciation, and amortization, "EBITDA"), and maximum
debt to EBITDA. These covenants are detailed in Note D to the Financial
Statements. Subsequent to fiscal year end 1998, the Company entered into
preliminary discussions with new, as well as existing, lenders regarding
restructuring a major portion of its 1997 Credit Agreement. This action is
intended to improve the Company's operating flexibility through elimination of
certain of its current restrictive covenants.
As a result of the Chapter 11 filing on July 21, 1997, borrowings under the
revolving credit facility of the Prior Credit Agreement, defined below, were no
longer available to the Company. During the period from July 21, 1997 through
December 2, 1997, the Company utilized debtor-in-possession financing which
consisted of a $125 million revolving credit facility (the "DIP Agreement"). On
or prior to the Effective Date, the Company paid all amounts outstanding under
the DIP Agreement and the Prior Credit Agreement with cash, New Common Stock and
new notes under the 1997 Credit Agreement. The 1997 Credit Agreement includes
term loans of $283.1 million and a $150 million revolving credit facility with a
$40 million letters-of-credit sublimit. In accordance with the Plan of
Reorganization, on the Effective Date, the Company's mortgage loan, secured by
certain real estate, was retired and replaced with a new mortgage loan secured
by the same real estate, and the Company's senior subordinated notes were
terminated and canceled. Holders of these subordinated notes hold general
unsecured claims under the Plan. On the Effective Date, the Company also issued
a note for $16 million, secured by three store facilities, in settlement of the
secured portion of the claims arising from a lease agreement involving five
store facilities. The note contained prepayment provisions that allowed the
Company to prepay the note by certain dates at various discounts. On February
26, 1998, the Company borrowed an additional $13 million under the mortgage loan
and prepaid this note in full.
At November 28, 1998, the Company had approximately $347.6 million of
indebtedness. The Company expects from time to time to incur additional seasonal
indebtedness.
The Year 2000 Issue
The Year 2000 issue is the result of computer programs being written using two
digits rather than four digits to define the applicable year. Any programs that
have time-
<PAGE>17
sensitive software may recognize a date using "00" as the year 1900 rather
than the Year 2000. This could result in system failure or miscalculations.
The Company has completed an assessment of the impact of the Year 2000 on its
computer systems, both hardware and software, and has developed a plan to timely
address the Year 2000 issue. Systems that interact with customers and that focus
on the core business functions of buying, selling and accounting have been given
the highest priority. Some of the Company's current systems are being renovated
and others are being replaced with Year 2000-compliant systems. All renovation
code and system replacements are being unit-tested as they are completed.
Integrated full-system testing will begin in the first quarter of 1999 and is
expected to continue through the third quarter of 1999. Code renovation is 99%
complete as of January 1, 1999. All core business systems requiring replacement
will be complete by mid-1999. The Company has spent approximately $3 million, to
date, in the execution of the Year 2000 plan and estimates that expenditures to
complete execution of the Year 2000 plan will range from $2 million to $3
million. Most of such expenditures are being charged to expense as incurred. The
Company currently believes that it will complete all phases of the plan without
any material adverse consequences to its business, operations, or financial
condition.
All non-information technology, which contains or might contain imbedded
software chips that utilize a date function, such as distribution conveyance
systems, security systems, climate controls, and other electronic devices used
in daily business operations, have been inventoried and assessed. All
non-compliant systems are being upgraded and tested as compliant versions become
available. This work is expected to continue throughout 1999.
The Company is in the process of assessing the extent to which the Company is
vulnerable to the failure of significant suppliers and other third parties to
remediate their own Year 2000 issues. The Company expects that this assessment
will be completed by April 1999 and believes testing of interfaces with business
partners and vendors will continue through 1999. The Company does not anticipate
the cost of Year 2000 compliance by suppliers to be passed on to the Company.
However, there can be no assurances that failure to address the Year 2000 issue
by a third party on whom the Company's systems rely would not have a material
adverse effect on the Company.
As testing and assessment of third parties is completed, the Company intends to
develop contingency plans for possible Year 2000 problems. The costs of the
Company's Year 2000 project and the date on which it will be completed are based
on management's best estimates. However, there can be no assurance that these
estimates will be achieved and actual results could differ materially from those
anticipated.
Liquidity and Capital Resources
The Company's principal source of cash is from operations. Cash provided by
operating activities was $49.2 million for fiscal 1998, compared to $32.0
million for fiscal 1997 and $32.4 million for fiscal 1996. The 1998 increase in
cash provided by operating activities was primarily due to lower 1998 interest
costs resulting from the cancellation of indebtedness in connection with the
Chapter 11 reorganization. Cash provided by operating activities in 1997
benefited from the compromise and extinguishment of general unsecured claims,
including trade accounts payable, pursuant to the Plan of Reorganization that
would have otherwise required cash. During fiscal 1998 and 1997, the Company
used cash of approximately $4.2 million and $14.3 million, respectively, in
operating activities related to the execution of the 1997, 1996 and 1995
restructuring plans and $10.2 million in fiscal 1998 for costs related to the
Chapter 11 filing. In addition, the Company used $5.7 million in fiscal 1998 to
pay severance costs related to the elimination of staff at the Company's
headquarters and regional administrative centers and to effect the store
closings announced in September 1998.
Borrowings are available under the 1997 Credit Agreement to supplement cash
generated by operations. At November 28, 1998, $94.4 million was available for
borrowing. Working capital was $196.2 million and $258.4 million at the end of
fiscal 1998 and fiscal 1997, respectively. The current ratio was 2.08 to 1 and
2.15 to 1 at the end of fiscal 1998 and fiscal 1997, respectively. The primary
reasons for the decrease in working capital and the current ratio was decreased
merchandise inventory. The Company's inventory levels are at the lowest levels
during the seasonally low sales months of December through February and are at
the highest levels during the peak selling months of
<PAGE>18
May through September. During the peak period, inventory is financed by cash
from operations and trade accounts payable. During the winter months, inventory
is financed by cash from operations, trade accounts payable and borrowings under
the 1997 Credit Agreement, as needed. The Company believes that cash generated
from operations and borrowings under the 1997 Credit Agreement will adequately
meet its working capital needs, debt service and other obligations that will
become due in fiscal 1999.
During fiscal 1998, the Company's primary investing activities were capital
expenditures principally for the renovation of existing stores and additional
equipment. The 1997 Credit Agreement governs the amount of capital expenditures
that can be made, and the permitted levels of capital expenditures in the future
are as follows: $52.1 million in 1999; $41.2 million in 2000; $51.3 million in
2001; and $52.3 million in 2002. The Company spent approximately $23.3 million,
$62.9 million and $41.7 million in fiscal 1998, 1997 and 1996, respectively, for
renovation of existing stores and additional equipment. In 1997 and 1996 the
Company's capital expenditures also included expenditures for strategic
initiatives, including the acquisition of a door and trim manufacturer in
Phoenix, AZ, during January 1996. For fiscal 1998, the Company ceased spending
for strategic initiatives while it analyzed its competitive positioning in the
market and related capital expenditures. For fiscal 1997 and 1996, the Company
shifted its emphasis from new store openings to initiatives that further address
the needs of the professional and do-it-yourself customers. During fiscal 1996,
in support of the professional customer, the Company completed the acquisition
of the manufacturer mentioned above and expanded the manufacturing capability of
one of its existing door plants. During 1998 and 1997, the Company sold 26 and
eight real estate properties, respectively, related to stores previously closed
for approximately $41.6 million and $14.3 million, respectively, of cash
proceeds. Sale of closed store properties will continue in fiscal 1999. During
the first quarter of 1996, the Company sold a distribution center in connection
with the 1995 restructuring plan, providing approximately $11.9 million of cash
proceeds. The Company leased one new store in 1996, which it opened in 1997. In
addition, the Company purchased and opened an existing store facility during
1997. In fiscal 1998, the Company also received $5.8 million from the surrender
of certain life insurance policies related to a terminated benefit plan. The
Company's approximately $60 million 1999 capital expenditure budget consists
primarily of the purchase of ten previously leased stores, described at Note H
to the Financial Statements, improved technology, and investments to improve the
Company's capabilities to service the Pro customer, including acquisitions of
retail operations and manufacturing facilities, store remodels and expansions,
and/or new stores. Capital expenditures in 1999 will be financed with funds
generated from operations, sales of real estate, and borrowings under the 1997
Credit Agreement.
The Company's most significant financing activity is and will continue to be the
retirement of indebtedness. As a result of the Company's reorganization under
Chapter 11, the indebtedness of the Company was reduced significantly in fiscal
1997 as described above in "Financing Activities" and in Notes B, C, and D to
the Financial Statements. Although the Company's consolidated indebtedness is
and will continue to be substantial, management believes that, based upon its
analysis of the Company's financial condition, the cash flow generated from
operations during the past 12 months and the expected results of operations in
the future, cash flow from operations and borrowing availability under the 1997
Credit Agreement should provide sufficient liquidity to meet all cash
requirements for the next 12 months without additional financing, subject to the
possible adverse impact of loan covenants described below. As a result of the
Chapter 11 filing, trade creditors significantly shortened credit terms. The
Company believes that progress with regard to lengthening terms and
reestablishing trade credit is continuing, but availability of trade credit
cannot be assured. The 1997 Credit Agreement contains a number of financial
covenants with which the Company must comply. Certain of these covenants are
detailed in Note D to the Financial Statements. As discussed in "Financing
Activities", the Company amended its 1997 Credit Agreement to modify various
covenants during fiscal 1998. Management currently expects that it will achieve
compliance with these covenants throughout 1999; however, factors beyond
management's control, including competitive conditions, economic conditions,
supplier support, lumber prices, and weather, could cause noncompliance. If
compliance with these covenants is not achieved, the Company may be
<PAGE>19
required to renegotiate its existing covenants with lenders or to refinance
borrowings. Success in achieving any such renegotiations or refinancing, or the
specific terms thereof, including interest rates, capital expenditure limits or
borrowing capacity, cannot be assured. If the Company fails to achieve
compliance with these covenants or, in the absence of such compliance, if the
Company fails to amend such financial covenants on terms favorable to the
Company, the Company may be in default under such covenants. If such default
occurred, it would permit acceleration of its debt under the 1997 Credit
Agreement which, in turn, would permit acceleration of substantially all of the
Company's other long-term debt.
Subsequent to fiscal year end 1998, the Company entered into preliminary
discussions with new, as well as existing, lenders regarding restructuring a
major portion of its 1997 Credit Agreement. This action is intended to improve
the Company's operating flexibility through elimination of certain of its
current restrictive covenants. In addition, the current commercial and consumer
credit contracts will not be renewed after November 1999. Approximately 40% of
the Company's fiscal 1998 sales were made pursuant to these programs. The
Company is in discussions with other providers and believes that it will secure
an alternative provider prior to termination of the current programs, although
the Company's ability to secure an alternative provider or the terms of any such
agreement cannot be assured. If the Company were unable to secure replacement
providers for these services, it would be in default under the 1997 Credit
Agreement. Commercial credit is a key component of the services the Company
offers to the professional customer, and the Company believes that this
transition creates an opportunity to enhance customer satisfaction.
Forward-Looking Statements
Statements above in the letters to Stockholders and in the subsections entitled
"Costs and Expenses," "New Accounting Pronouncements," "The Year 2000 Issue,"
and "Liquidity and Capital Resources," such as "unlikely", "intend",
"estimated", "believe", "expect", "anticipate" and similar expressions which are
not historical are forward-looking statements that involve risks and
uncertainties. Such statements include, without limitation, the Company's
expectation as to future performance.
Such forward-looking statements are made pursuant to the safe harbor provisions
of the Private Securities Litigation Reform Act of 1995. There are certain
important factors that could cause results to differ materially from those
anticipated by the forward-looking statements made above. Investors are
cautioned that all forward-looking statements involve risks and uncertainty.
Among the factors that could cause actual results to differ materially are the
following: competitor activities; stability of customer demand; stability of the
work force; supplier support; consumer spending and debt levels; interest rates;
housing activity; lumber prices; product mix; growth of certain market segments;
weather; an excess of retail space devoted to the sale of building materials;
the success of the Company's strategy; and success of the Company's remediation
for the Year 2000 issue. Additional information concerning these and other
factors is contained in the Company's Securities and Exchange Commission
filings, including but not limited to the Form 10-K, copies of which are
available from the Company without charge or on the Company's web site,
payless.cashways.com.
<PAGE>20
Payless Cashways, Inc.
<TABLE>
STATEMENTS OF OPERATIONS
<CAPTION>
Reorganized | Predecessor
Company | Company
-------------------|--------------------------------------
Fiscal Year Ended | Fiscal Year Ended
|--------------------------------------
November 28, | November 29, November 30,
In thousands, except per share amounts 1998 | 1997 1996
- -----------------------------------------------------------------------------------------|--------------------------------------
<S> <C> | <C> <C>
Income |
Net sales $ 1,906,862 | $ 2,285,281 $ 2,642,829
Other income--Note A 2,998 | 4,934 8,076
------------------|--------------------------------------
1,909,860 | 2,290,215 2,650,905
Costs and expenses |
Cost of merchandise sold 1,420,787 | 1,676,658 1,906,734
Selling, general and |
administrative--Notes G and H 446,936 | 558,817 615,466
Reorganization items--Note I -- | 25,455 --
Fresh-start revaluation--Note C -- | 355,559 --
Special charges--Note K 7,421 | 13,056 8,184
Asset impairment charges--Note J -- | 60,483 59,697
Provision for depreciation and amortization 33,139 | 51,110 55,016
Interest expense (contractual interest of |
$66,973 in 1997)--Note D 37,162 | 61,251 60,488
Interest income--Note F -- | -- (4,900)
---------------------------------------------------------
1,945,445 | 2,802,389 2,700,685
---------------------------------------------------------
|
LOSS BEFORE INCOME TAXES (35,585) | (512,174) (49,780)
|
Federal and state income taxes--Note F (13,218) | (90,406) (30,702)
---------------------------------------------------------
|
LOSS BEFORE EXTRAORDINARY ITEMS (22,367) | (421,768) (19,078)
|
Extraordinary items, net of income taxes--Notes C and D -- | 133,176 --
---------------------------------------------------------
|
NET LOSS $ (22,367) | $ (288,592) $ (19,078)
=========================================================
|
Weighted average common shares outstanding 20,000 |
------------------|
Net loss per common share-basic and diluted--Notes A and E $ (1.12) |
===================
<FN>
See notes to financial statements
</FN>
</TABLE>
<PAGE>21
Payless Cashways, Inc.
<TABLE>
BALANCE SHEETS
<CAPTION>
Reorganized Company
----------------------------------
November 28, November 29,
In thousands 1998 1997
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 1,950 $ 11,961
Merchandise inventories--Notes A and D 349,452 414,882
Prepaid expenses and other current assets 17,506 14,705
Income taxes receivable--Note F 1,338 32,232
Deferred income taxes--Note F 8,026 8,665
----------------------------------
TOTAL CURRENT ASSETS 378,272 482,445
OTHER ASSETS
Real estate held for sale--Notes A and J 14,144 48,562
Deferred financing costs--Notes A and D 3,319 2,600
Other 6,897 14,316
LAND, BUILDINGS AND EQUIPMENT--Notes A and D
Land and land improvements 99,402 98,390
Buildings 225,426 219,244
Equipment 39,114 35,048
Automobiles and trucks 8,439 2,196
Construction in progress 5,487 8,540
Allowance for depreciation and amortization (32,146) --
----------------------------------
TOTAL LAND, BUILDINGS AND EQUIPMENT 345,722 363,418
----------------------------------
$ 748,354 $ 911,341
==================================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt--Note D $ 11,068 $ 9,354
Trade accounts payable 52,325 75,583
Salaries, wages and bonuses 24,298 29,051
Accrued vacation expense 12,045 13,035
Other accrued expense--Notes G, J and K 66,727 73,656
Taxes, other than income taxes 13,275 20,999
Income taxes payable--Note F 2,350 2,362
----------------------------------
TOTAL CURRENT LIABILITIES 182,088 224,040
LONG-TERM DEBT, less portion classified as current
liability--Note D 336,557 424,031
NON-CURRENT LIABILITIES
Deferred income taxes--Note F 47,142 58,788
Other--Note G 21,134 20,682
STOCKHOLDERS' EQUITY--Notes A, B, D and E
Common Stock, $.01 par value, 50,000,000 shares authorized,
20,000,000 shares issued 200 200
Additional paid-in capital 183,600 183,600
Accumulated deficit (22,367) --
----------------------------------
TOTAL STOCKHOLDERS' EQUITY 161,433 183,800
----------------------------------
COMMITMENTS AND CONTINGENCIES--Notes G, H, and L
$ 748,354 $ 911,341
==================================
<FN>
See notes to financial statements
</FN>
</TABLE>
<PAGE>22
Payless Cashways, Inc.
<TABLE>
STATEMENTS OF CASH FLOWS
<CAPTION>
Reorganized | Predecessor
Company | Company
-------------------|-----------------------------------
Fiscal Year Ended | Fiscal Year Ended
|-----------------------------------
November 28, | November 29, November 30,
In thousands 1998 | 1997 1996
- --------------------------------------------------------------------------------------------|-----------------------------------
<S> <C> | <C> <C>
|
Cash Flows from Operating Activities |
Net loss $ (22,367) | $ (288,592) $ (19,078)
Adjustments to reconcile net loss |
to net cash provided by operating activities: |
Depreciation and amortization 33,139 | 51,110 55,016
Asset impairment charges--Note J -- | 60,483 59,697
Deferred income taxes (11,007) | (72,237) (12,270)
Non-cash reorganization items--Note I -- | 2,481 --
Non-cash interest 829 | 5,031 2,534
Non-cash extraordinary items--Notes C and D -- | (133,176) --
Fresh-start revaluation--Notes B and C -- | 355,559 --
Special charges--Note K 7,421 | 13,056 8,184
Other 452 | (1,467) 1,337
Changes in assets and liabilities: |
Decrease (increase) in merchandise inventories 65,430 | 7,462 (6,406)
(Increase) decrease in prepaid expenses |
and other current assets (901) | 6,926 (4,763)
Decrease (increase) in income taxes receivable 30,882 | (14,505) (15,200)
(Decrease) increase in trade accounts payable (23,258) | 44,252 (37,953)
(Decrease) increase in other current liabilities (31,380) | (4,359) 1,349
-------------------|-----------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 49,240 | 32,024 32,447
|
Cash Flows from Investing Activities |
Additions to land, buildings and equipment (23,349) | (61,925) (40,117)
Proceeds from sale of land, buildings and equipment 43,987 | 18,775 14,709
Acquisition of business, excluding working capital: |
Land, buildings and equipment -- | -- (193)
Purchase price in excess of net assets acquired -- | (1,015) (1,360)
Decrease (increase) in other assets 7,419 | (1,745) 1,435
-------------------|-----------------------------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 28,057 | (45,910) (25,526)
|
Cash Flows from Financing Activities |
Net (payments) proceeds related to revolving credit |
facility--Note D (2,000) | 62,386 28,000
Principal payments on long-term debt--Note D (83,760) | (32,795) (31,092)
Fees and financing costs paid in connection with debt |
refinancing--Notes A and D (1,548) | (3,365) (3,670)
Other -- | (804) (694)
-------------------|-----------------------------------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (87,308) | 25,422 (7,456)
-------------------|-----------------------------------
|
Net (decrease) increase in cash and cash equivalents (10,011) | 11,536 (535)
Cash and cash equivalents, beginning of period 11,961 | 425 960
-------------------|-----------------------------------
Cash and cash equivalents, end of period $ 1,950 | $ 11,961 $ 425
===================|===================================
<FN>
See notes to financial statements
</FN>
</TABLE>
<PAGE>23
Payless Cashways, Inc.
<TABLE>
STATEMENTS OF STOCKHOLDERS' EQUITY
<CAPTION>
Preferred Common Additional Adjustment for
Stock Stock Paid-in Minimum Pension Accumulated
In thousands $1.00 Par Value $.01 Par Value Capital Liability Deficit Total
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at November 25, 1995 $ 40,600 $ 399 $ 487,083 $ -- $ (219,919) $ 308,163
Net loss for the year (19,078) (19,078)
Sale of Voting Common Stock under
stock option plan 1 463 464
Tax benefit from stock option
exercises--Note F (24) (24)
Restricted Stock -- 206 206
----------------------------------------------------------------------------------
Balance at November 30, 1996 $ 40,600 $ 400 $ 487,728 $ -- $ (238,997) $ 289,731
Net loss for the year (288,592) (288,592)
Restricted Stock -- 131 131
Issuance of Voting Common Stock
under Director Deferred
Compensation Plan -- 17 17
Conversion of Non-Voting Class A
Common Stock to Voting Common
Stock--Note E -- --
Minimum pension liability
adjustment--Note G (1,287) (1,287)
Eliminate predecessor equity accounts
in connection with fresh start
reporting--Note C (40,600) (400) (487,876) 1,287 527,589 --
Issuance of New Common
Stock pursuant to Plan of
Reorganization--Notes B, C and E 200 183,600 183,800
----------------------------------------------------------------------------------
Balance at November 29, 1997 $ -- $ 200 $ 183,600 $ -- $ -- $ 183,800
Net loss for the year (22,367) (22,367)
----------------------------------------------------------------------------------
Balance at November 28, 1998 $ -- $ 200 $ 183,600 $ -- $ (22,367) $ 161,433
==================================================================================
<FN>
See notes to financial statements
</FN>
</TABLE>
<PAGE>24
Payless Cashways, Inc.
NOTES TO FINANCIAL STATEMENTS
Note A-Summary of Significant Accounting Policies
Description of Business: The Company is engaged in only one line of
business--the retail sale of building materials and supplies. At November 28,
1998, the Company operated 161 stores in 20 states located in the Midwest,
Southwest, Pacific Coast, and Rocky Mountain areas. The Company's primary
customers include professionals and project-oriented do-it-yourselfers. In
recent years, the building materials retailing industry has experienced
increased levels of competition as several national chains have expanded their
operations.
Fresh-Start Reporting: The Company has implemented the required accounting for
entities emerging from bankruptcy in accordance with the American Institute of
Certified Public Accountants' Statement of Position 90-7 ("SOP 90-7"),
"Financial Reporting by Entities in Reorganization Under the Bankruptcy Code,"
and reflected the effects of such adoption in the balance sheet as of November
29, 1997. Under fresh-start reporting, the balance sheet of November 29, 1997,
became the opening balance sheet of the Reorganized Company. The financial
statements of the Predecessor Company are not comparable in material respects to
the financial statements of the Reorganized Company. Accordingly, a vertical
line is shown to separate financial information of the Predecessor Company and
the Reorganized Company.
Use of Estimates and Other Uncertainties: In preparing the financial statements
in conformity with generally accepted accounting principles, management has made
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
The Company's future results could be adversely affected by a number of factors,
including: competitive pressure on sales and pricing from well-capitalized
warehouse-format home centers; the Company's ability to effectively execute its
business strategy; weather conditions; consumer spending and debt levels;
interest rates; housing activity, including existing-home turnover and new-home
construction; lumber prices; product mix; sales of real estate held for sale;
and growth of certain market segments.
Merchandise Inventories: Inventories are stated at the lower of cost
(approximately 80% at last-in, first-out method, and the remainder at first-in,
first-out method) or market. Had the first-in, first-out method been used for
all inventories, the carrying value of these inventories would have decreased
approximately $2.4 million at November 28, 1998. At November 29, 1997,
inventories were reported at fair market value pursuant to fresh-start
accounting as described at Note C. In 1998 the liquidation of LIFO inventories
increased cost of merchandise sold and, therefore, increased the loss before
income taxes by $0.4 million. In 1997 the liquidation of LIFO inventories
decreased cost of merchandise sold and, therefore, decreased the losses before
income taxes by $0.9 million.
Property and Depreciation: Provisions for depreciation of land improvements,
buildings and equipment are computed primarily by the straight-line method over
the estimated useful lives of the assets or the terms of the related leases,
which range from three to 39 years.
The accompanying 1996 statements of operations reflect $2.3 million as other
income related to an insurance reimbursement for lost profits and settlement
proceeds in excess of net book value for buildings and equipment destroyed in a
fire loss.
Deferred Financing Costs: Deferred financing costs are being amortized over
the respective borrowing terms using the interest method.
Cost in Excess of Net Assets Acquired: Prior to fresh-start reporting at
November 29, 1997, the cost in excess of the fair value of net assets acquired
(goodwill) was amortized using the straight-line method over 40 years. When
facts and circumstances indicate potential impairment, the Company evaluates the
recoverability of asset carrying values, including associated goodwill, using
estimates of undiscounted future cash flows over remaining asset lives. When
impairment is indicated, any impairment loss is measured by the excess of
carrying values over fair values. The Company
<PAGE>25
adopted Statement of Financial Accounting Standards No. 121 (SFAS 121),
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of," in the third quarter of fiscal 1996. See Note J.
Earnings Per Common Share: Basic earnings per common share has been computed
based on the weighted-average number of common shares outstanding during the
period. Dilutive earnings per common share is computed based on the
weighted-average number of common shares plus potential common shares
outstanding during the period, when dilutive, consisting of certain stock
options. Given the net loss reported for the fiscal year ended November 28,
1998, the impact of considering such stock options would be antidilutive.
Earnings per common share has not been computed for the Predecessor Company
because, as described at Note B, Old Preferred Stock and Old Common Stock were
canceled on the Plan Effective Date. Presentation of earnings per common share
based on Predecessor Company average shares outstanding would therefore not be
meaningful. New Common Stock was not outstanding during fiscal years 1997 and
1996.
Income Taxes: Deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
applied to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date.
Pensions and Other Postretirement Benefit Plans: Effective November 28, 1998,
the Company adopted Statement of Financial Accounting Standards No. 132 (SFAS
132), "Employers' Disclosures about Pensions and Other Postretirement Benefits".
The provisions of SFAS 132 revise employers' disclosures about pension and other
postretirement benefit plans. SFAS 132 does not change the measurement or
recognition of these plans. It standardized the disclosure requirements for
pensions and other postretirement benefits to the extent practicable.
Statement of Cash Flows: For purposes of the statement of cash flows, the
Company considers investments in debt instruments with original maturities of
three months or less to be cash equivalents.
During fiscal 1998, 1997 and 1996, federal and state income tax refunds, net of
payments, were $32.9 million, $0.6 million and $8.8 million, respectively.
Cash paid for interest, net of interest capitalized, was $35.2 million, $55.4
million, and $62.2 million during fiscal 1998, 1997, and 1996, respectively.
Sale of Receivables: The Company sells its commercial credit accounts to a
third-party administrator pursuant to an agreement. A substantial portion of the
Company's commercial credit sales are to remodelers and contractors. Under the
agreement, the Company pays a servicing fee and assumes the credit risk. At
November 28, 1998, and November 29, 1997, the outstanding balance of commercial
credit accounts sold to the third-party administrator was approximately $95.6
million and $87.5 million, respectively. The Company has provided a reserve of
$5.9 million at November 28, 1998, and November 29, 1997, respectively, which is
believed to adequately cover its credit risk related to these accounts.
Under a third-party administrative servicing agreement for the Company's
private-label charge card program, charge card accounts are sold to the
administrator and the Company assumes no credit risk.
Real Estate Held for Sale: Real estate held for sale, consisting primarily of
closed store facilities, is reflected at the lower of cost less accumulated
depreciation or estimated fair value less cost to sell.
Advertising Costs: Advertising costs, which are expensed as incurred, aggregated
$23.2 million, $27.5 million and $26.0 million for fiscal 1998, 1997 and 1996,
respectively.
Fair Value of Financial Instruments: Based on the borrowing rates currently
available to the Company for debt issuances with similar terms and maturities,
the fair value of long-term debt including the current portion is approximately
$347.6 million and $433.4 million at November 28, 1998,
<PAGE>26
and November 29, 1997, respectively. The Company believes the carrying amounts
of cash and cash equivalents, trade receivables, trade accounts payable and
accrued expenses are a reasonable estimate of their fair value.
Derivative Financial Instruments: Premiums paid for purchased interest rate cap
agreements are amortized to interest expense over the term of the agreement.
Unamortized premiums are included in deferred financing costs in the balance
sheets. If amounts were received under the cap agreement, they would be
reflected as a reduction of interest expense. Amounts received or paid under the
interest rate swap agreement discussed at Note H have been reflected as a
reduction or increase of rent expense prior to fresh-start accounting.
At November 29, 1997, the premiums paid for purchased interest rate cap
agreements were fully amortized. The estimated amount the Company would have had
to pay at November 28, 1998, and November 29, 1997, to cancel or transfer the
agreements to other parties, was approximately $0.7 million.
Accounting Period: The Company's fiscal year ends on the last Saturday in
November. Fiscal years 1998 and 1997 consisted of 52 weeks each and fiscal year
1996 consisted of 53 weeks.
Note B-Reorganization and Emergence From Chapter 11
On July 21, 1997 (the "Petition Date"), the Company commenced a reorganization
case (the "Case") by filing a voluntary petition for relief under Chapter 11,
Title 11 of the United States Code ("Chapter 11") in the U.S. Bankruptcy Court
for the Western District of Missouri in Kansas City (the "Court").
While the Company had sufficient liquidity to fund its current operations, the
operating performance of the Company during the second quarter of fiscal 1997,
which was well below the Company's expectations, led management to conclude that
it was unlikely that the Company would be able to comply with the covenants
contained in its principal credit agreements at the end of fiscal 1997. In the
course of the Company's subsequent negotiations with its senior lenders to
restructure its debt, and after considering all other alternatives with its
financial adviser, Houlihan Lokey Howard & Zukin, including the sale of the
Company and liquidation, the Company concluded that a Chapter 11 proceeding
provided the best approach for a comprehensive financial restructuring of the
Company.
On the Petition Date, the Company filed a Disclosure Statement and a Plan of
Reorganization with the Court. The Disclosure Statement and the Plan were
subsequently amended on September 5, 1997, and modified on October 9, 1997. The
Plan of Reorganization, as amended and modified, is referred to herein as the
"Plan" or "Plan of Reorganization." The following summary of the Plan omits
certain information set forth in the Plan. Any statements contained herein
concerning the Plan are not necessarily complete, and in each such instance
reference is made to the Plan. On November 19, 1997, the Court confirmed the
Plan and after the satisfaction of a number of conditions, the Plan became
effective December 2, 1997 (the "Effective Date").
Under the Plan, the Company reincorporated as a Delaware corporation and
canceled outstanding shares of common and preferred stock and issued
approximately 20,000,000 shares of newly reorganized Payless Cashways, Inc. (the
"Reorganized Company") common stock (the "New Common Stock"), as described
below.
The Plan generally provided for the following: (I) The secured bank group under
the credit agreement in existence at the Petition Date (the "Prior Credit
Agreement"), on or prior to the Effective Date, received (a) payment of accrued
interest, fees and expenses, (b) Net Cash Proceeds (as defined in the Plan) from
the sale of certain collateral securing the Prior Credit Agreement and the
collection of certain promissory notes pledged to the secured bank group, (c)
their allocable portion of $283.1 million of new term loans and (d) 10,730,671
shares of New Common Stock (approximately 54% of the shares of the newly
reorganized Company), of which 460,000 shares were distributed to the lenders
providing a $150 million revolving credit facility to supply post-emergence
working capital financing in consideration for their commitment to provide
<PAGE>27
such facility. See Note D for a description of the term loans and the revolving
credit facility (together, the "1997 Credit Agreement"). (II) On the Effective
Date, UBS Mortgage Finance, Inc. ("UBS"), the holders of notes under a mortgage
loan in existence at the Petition Date, received new notes pursuant to a new
mortgage loan. See Note D for a description of the new mortgage loan. (III)
Unsecured claims against the Company by vendors and suppliers for goods
delivered and services rendered prior to the Petition Date, claims in respect of
the 9-1/8% senior subordinated notes, contingent unliquidated claims and claims
for damage arising from the rejection by the Company pursuant to Section 365 of
the Bankruptcy Code of executory contracts and unexpired leases (collectively,
"General Unsecured Claims") are receiving their pro rata share of 8,269,329
shares of New Common Stock or approximately 41% of the shares of the newly
reorganized Company. The remaining shares of New Common Stock are held for
future distributions to holders of General Unsecured Claims, pending the final
resolution of disputed claims. (IV) The holder of issued and outstanding shares
of existing preferred stock ("Old Preferred Stock") received 600,000 shares of
New Common Stock (approximately 3% of the shares of the newly reorganized
Company). (V) Holders of issued and outstanding shares of existing common stock
("Old Common Stock") are receiving their pro rata share of 400,000 shares of New
Common Stock (approximately 2% of the shares of the newly reorganized Company)
upon surrender of their Old Common Stock. In addition, any stock options
relating to outstanding Old Preferred Stock and Old Common Stock were canceled
on the Effective Date.
Fractional shares of New Common Stock will not be issued to creditors or
stockholders in connection with the Plan. In addition, no distribution of less
than $5.00 will be made for fractional share interests. As a result of these
provisions, many holders of Old Common Stock received no distribution of stock
or cash under the Plan.
On July 21, 1997, the Company also announced its plan to close 29 stores and to
eliminate approximately 15% of the staff at the Company's headquarters and
regional administrative centers. The Court subsequently approved such plan on
August 6, 1997.
See Notes I, J, and K for a description of related charges recorded in the third
quarter of 1997.
Note C-Fresh Start Reporting
On December 2, 1997, the Company emerged from bankruptcy. In accordance with SOP
90-7, the Company adopted fresh-start reporting. For accounting purposes, the
Effective Date was deemed to be November 29, 1997.
In fresh-start reporting, an aggregate value of $183.8 million was assigned to
the Company's New Common Stock. Management established this value with the
assistance of its financial advisors. This valuation considered the Company's
expected future performance, relevant industry and economic conditions, and
analyses and comparisons with comparable companies.
The reorganization value of the Company has been allocated to the Reorganized
Company's assets and liabilities in a manner similar to the purchase method of
accounting for a business combination. Management obtained valuations from
independent third parties which, along with other market and related information
and analyses, were utilized in assigning fair values to assets and liabilities.
<PAGE>28
A summary of the impact of the Plan and the related fresh-start adjustments is
presented below:
<TABLE>
<CAPTION>
November 29, 1997
------------------------------------------------------------------------------------------
Predecessor Discharge of Fresh-Start Other Reorganized
Company Indebtedness (a) Adjustments (b) Adjustments (c) Company
---------------- ---------------- ------------------ ----------------- --------------
<S> <C> <C> <C> <C> <C>
Current Assets:
Cash and cash equivalents $ 11,961 $ $ $ $ 11,961
Merchandise inventories 391,548 23,334 414,882
Prepaid expenses and
other current assets 15,702 (997) 14,705
Income taxes receivable 29,705 2,527 32,232
Deferred income taxes 24,070 (9,448) (5,957) 8,665
----------------- ---------------- ------------------ ----------------- ------------
Total Current Assets 472,986 (6,921) 16,380 -- 482,445
Other Assets:
Real estate held for sale 37,078 11,484 48,562
Cost in excess of net
assets acquired 265,949 (265,949) --
Deferred financing costs 8,690 (7,590) 1,500 2,600
Other 14,663 (347) 14,316
Land, Buildings and Equipment, net 456,736 (93,318) 363,418
----------------- ---------------- ------------------ ----------------- ------------
TOTAL ASSETS $ 1,256,102 $ (14,511) $ (330,250) $ -- $ 911,341
================= ================ ================== ================= ============
Current Liabilities:
Current portion of long-term debt $ 492,930 $ $ (483,576) $ $ 9,354
Trade accounts payable 54,203 21,380 75,583
Other current liabilities 128,755 7,986 136,741
Income taxes payable 8,711 (6,349) 2,362
------------------- ---------------- ------------------ ----------------- ------------
Total Current Liabilities 684,599 21,380 (481,939) -- 224,040
Long-Term Debt -- 424,031 424,031
Non-Current Liabilities:
Deferred income taxes 16,961 84,928 (43,101) 58,788
Other 24,272 (3,590) 20,682
------------------- ---------------- ------------------ ----------------- ------------
Total Non-Current Liabilities 41,233 84,928 (46,691) -- 79,470
Liabilities Subject to Compromise 351,381 (329,990) (21,391) --
Stockholders' Equity:
Old Preferred Stock 40,600 (40,600) --
Old Common Stock 400 (400) --
New Common Stock -- 83 117 200
Additional paid-in capital 487,876 75,912 107,688 (487,876) 183,600
Adjustment for minimum pension
liability (1,287) 1,287 --
Accumulated deficit (348,700) 133,176 (312,065) 527,589 --
------------------- ---------------- ------------------ ----------------- ------------
Total Stockholders' Equity 178,889 209,171 (204,260) -- 183,800
------------------- ---------------- ------------------ ----------------- ------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 1,256,102 $ (14,511) $ (330,250) $ -- $ 911,341
=================== ================ ================== ================= ============
</TABLE>
<PAGE>29
(a) To record the discharge of indebtedness pursuant to the Plan and to
write-off deferred financing costs related to the early extinguishment of
certain predecessor company debt; see Note D. The discharge of indebtedness
relates to all general unsecured claims, as described in Note B. It
includes the elimination and, in certain cases, the reclassification of the
liabilities subject to compromise related to these claims, the issuance of
New Common Stock in settlement of unsecured claims, and the related tax
effect of these transactions. The excess of indebtedness eliminated over
the estimated fair value of securities issued in settlement of claims is
reflected as an extraordinary gain of $232.6 million ($138.2 million after
tax) in the accompanying 1997 statement of operations.
(b) To record transactions with the secured creditors and holders of Old Common
Stock and Old Preferred Stock, as described at Note B, and to adjust assets
and liabilities to fair values.
Transactions include the extinguishment of old debt; the issuance of new
debt and New Common Stock; the reclassification of accrued interest to
principal and the reclassification of debt between current and non-current,
based upon debt agreement terms.
Significant elements of the fair value adjustments to assets and
liabilities are summarized below:
-Adjustment to reflect inventories at current market value
-Adjustments to write-up real estate held for sale to fair market value
-Adjustment to eliminate cost in excess of net assets acquired
-Adjustments to eliminate accumulated depreciation and to write-down land,
buildings, and equipment to fair market value
-Adjustments to reflect liabilities at fair market value including: the
reversal of unrecognized prior service costs and unrecognized gains and
losses on the Company's pension and post-retirement benefit plans
(see also Note G); the write-off of deferred rent liabilities due to
lease amendments and terminations; and the elimination of insurance
accruals covered by bank letters of credit
-Adjustments to deferred and currently payable tax accounts to record
the tax effect of all fresh-start reporting adjustments
Fresh-start adjustments of $355.6 million ($312.1 million net of tax) are
reflected as fresh-start revaluation charges in the accompanying 1997
statement of operations.
(c) To record the elimination of the Old Preferred Stock, Old Common Stock, and
predecessor company additional paid-in-capital and accumulated deficit
after reflecting the adjustments at (a) and (b) above.
Note D--Long-Term Debt
Long-term debt consisted of the following:
In thousands 1998 1997
------------------------
1997 Credit Agreement, secured by
inventory, certain real estate,
and equipment,variable interest
rate, payablein varying amounts
through 2002 $ 251,458 $ 317,133
Mortgage loan, secured by
certain real estate, variable
interest rate, payable in varying
amounts through 2004 95,078 102,010
Note payable, secured by certain
real estate, variable interest rate,
payable in 2002 -- 13,000
Other senior debt, 11% to 12%,
payable in varying amounts
through 2004 1,089 1,242
-------------------------
347,625 433,385
Less portion classified
as current liability (11,068) (9,354)
-------------------------
$ 336,557 $ 424,031
=========================
The 1997 Credit Agreement includes term loans of $283.1 million and a $150
million revolving credit facility with a $40 million letters-of-credit sublimit.
At November 28, 1998, there were combined borrowings under the agreement of
$251.5 million as well as outstanding standby letters of credit of $17.9 million
and outstanding documentary letters of credit of $5.7 million. The Company had
$94.4 million available for borrowing under this agreement at November 28, 1998.
The term loans require annual principal payments of $10 million beginning
September
<PAGE>30
15, 1998, with final maturity on November 30, 2002. The revolving credit
facility matures on May 31, 2002. In addition, the Company will be required to
repay borrowings under the 1997 Credit Agreement with proceeds of certain
collateral sales and certain other transactions and with 65% of excess cash
flow, as defined. The effect of these provisions is generally to require that
substantially all cash flows not applied to the repayment of other indebtedness
or permitted capital expenditures are to be applied to the repayment of
borrowings under the 1997 Credit Agreement. The loans bear interest at
fluctuating rates of either the alternate base rate (7.75% at November 28, 1998)
plus 1-1/2% per annum or LIBOR (5.14% at November 28, 1998) plus 2-1/2% per
annum. The 1997 Credit Agreement is secured by substantially all merchandise
inventories, certain real estate including second priority liens on all real
estate pledged to other creditors, and substantially all the equipment of the
Company.
The 1997 Credit Agreement contains a number of covenants, including, but not
limited to, minimum cash flow (defined as earnings before interest, taxes,
depreciation, and amortization, "EBITDA"), a maximum debt to EBITDA ratio, and
limitations on capital expenditures and capitalized leases. The Company is also
prohibited from incurring additional indebtedness, with certain limited
exceptions, and making dividend, redemption and certain other payments on its
capital stock. The 1997 Credit Agreement also contains certain customary
financial covenants and events of default for financing of this type, including
a change of control covenant. Compliance with the minimum cash flow and the
maximum debt to EBITDA covenants is determined on a rolling-four-quarter basis.
On August 13, 1998, the Company amended its 1997 Credit Agreement to modify
various covenants, including required minimum cash flow and maximum debt to
EBITDA. For the fiscal year ended November 28, 1998, actual EBITDA was $46.6
million and the ratio of debt to EBITDA was 7.5 to 1. The Company was in
compliance with all of its debt covenants as of November 28, 1998. The
measurements for those covenants, as amended, over the remaining term of the
1997 Credit Agreement, are as follows:
Fiscal Quarter Minimum Cash Flow Maximum Debt to
Ending (EBITDA) EBITDA
- --------------- ----------------- ---------------
November 1998 44,600,000 9.0 to 1
February 1999 47,400,000 9.8 to 1
May 1999 44,300,000 10.5 to 1
August 1999 44,900,000 10.2 to 1
November 1999 59,000,000 7.5 to 1
February 2000 78,800,000 5.6 to 1
May 2000 87,000,000 4.9 to 1
August 2000 95,700,000 4.2 to 1
November 2000 101,000,000 3.7 to 1
February 2001 103,000,000 4.0 to 1
May 2001 106,200,000 3.9 to 1
August 2001 109,100,000 3.6 to 1
November 2001 113,400,000 3.3 to 1
February 2002 113,700,000 3.7 to 1
May 2002 113,100,000 3.7 to 1
August 2002 115,800,000 3.4 to 1
The Company's mortgage loan is secured by certain real estate having a net book
value of approximately $218.9 million at November 28, 1998. The mortgage loan
bears interest at LIBOR plus 4% per annum and interest is paid monthly. Annual
principal payments of $4 million are required beginning December 2, 1998, with
final maturity on December 2, 2004. Prepayments are required when collateral is
sold and such prepayments have been applied as a credit toward the scheduled
annual payments.
The early extinguishment of the Prior Credit Agreement and the prior mortgage
loan, part of the Plan of Reorganization described at Note B, resulted in an
extraordinary charge of approximately $5.0 million, net of tax, in the
accompanying 1997 statement of operations.
On the Effective Date, in settlement of the secured portion of the claims
arising from a lease agreement involving five store facilities, described at
Note H, the Company issued a note for $16 million. The note contained prepayment
provisions that allowed the Company to prepay the note by certain dates at
various discounts. On February 26, 1998, the Company borrowed an additional $13
million under the mortgage loan and prepaid this note in full.
<PAGE>31
Scheduled maturities of long-term debt, including sinking fund requirements,
are:
In thousands
1999 $ 11,068
2000 10,165
2001 10,185
2002 222,013
2003 4,232
Thereafter 89,962
--------------
$ 347,625
==============
Note E--Stockholders' Equity
The Company has the authority to issue 50,000,000 shares of New Common Stock,
$.01 par value. Each outstanding share of New Common Stock is entitled to one
vote on each matter on which stockholders are entitled to vote. As discussed at
Note B, the Company canceled existing shares of Old Preferred Stock and Old
Common Stock and issued approximately 20,000,000 shares of New Common Stock on
or about the Effective Date.
All classes of Old Common Stock were substantially identical except for voting
rights. Shares of Non-Voting Class A Common Stock were convertible at the option
of the holder, subject to certain restrictions, into a like number of shares of
Voting Common Stock. During fiscal 1997, 2,250,000 outstanding shares of
Non-Voting Class A Common Stock were converted into a like number of shares of
Voting Common Stock under this right of conversion. As described at Note B,
holders of Old Common Stock received approximately 2% of the shares of New
Common Stock issued under the Plan.
The Old Preferred Stock was 100% owned by Masco Capital Corporation, an
affiliate of one of the Company's suppliers. As described at Note B, holders of
Old Preferred Stock received approximately 3% of the shares of New Common Stock
issued under the Plan. The terms of the Old Preferred Stock provided for
dividends at an annual rate of 8% until 2008 (at which time the rate increased)
on a cumulative basis, whether or not declared. Each share of Preferred Stock
was generally entitled to 5.9994 votes on all matters on which holders of Common
Stock were entitled to vote.
The Payless Cashways 1998 Omnibus Incentive Plan (the "Incentive Plan") was
established January 15, 1998, to attract and retain outstanding individuals in
certain key positions. The Incentive Plan provides for the grant of incentive
stock options, non-qualified stock options, stock appreciation rights,
restricted stock awards and performance awards. There are 2,400,000 shares of
Common Stock reserved for issuance under the Incentive Plan, subject to
adjustment as provided by the Incentive Plan. The exercise price for any stock
options will be at least 100% of the fair market value of the Common Stock at
the date of grant.
The fair value of each option grant is estimated on the date of the grant using
the Black-Scholes option-pricing model. For options granted in fiscal 1998, the
following assumptions were used to price the options: no dividend yield;
expected volatility of 144 percent; risk-free interest rate of 5.04 percent; and
an expected life of eight years. The weighted-average fair value of options
granted during fiscal 1998 was $2.40 per share. The options granted to date vest
ratably over four years.
The following is a summary of the Incentive Plan:
1998 Omnibus Incentive Plan
--------------------------------
Number Weighted-Average
Of Shares Exercise Price
-------------- ----------------
Fiscal Year 1998: In thousands
Options granted 2,360 $ 2.49
Options exercised -- --
Options forfeited (240) 3.13
--------------------------------
Options outstanding at
November 28, 1998 2,120 $ 2.41
================================
Options exercisable at
November 28, 1998 -- $ --
================================
<PAGE>32
The following table summarizes information about stock options at November 28,
1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------------------------------- ---------------------------------
Number Weighted-Average Number
Range of Outstanding Remaining Weighted -Average Exercisable Weighted-Average
Exercise Prices at 11/28/98 Contractual Life Exercise Price at 11/28/98 Exercise Price
--------------- ---------------- ---------------- ----------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C>
$0.875 -$2.938 810,000 9.74 $1.49 -- $--
$2.969 -$3.031 1,310,000 9.21 $2.98 -- $--
-------------- ---------------- ---------------- ----------------- ---------------- ----------------
$0.875 -$3.031 2,120,000 9.41 $2.41 -- $--
============== ================ ================ ================= ================ ================
</TABLE>
As permitted under Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123"), the Company applies APB
No. 25 and related interpretations in accounting for the Incentive Plan.
However, pro forma disclosure, as if the Company adopted the fair-value-based
method of measurement for stock-based compensation plans under SFAS 123, is
presented below.
Had compensation cost for the Company's grants for stock-based compensation
plans been determined using the fair value method under SFAS 123, the Company's
pro forma net loss, and net loss per common share for fiscal 1998 would
approximate the amounts below (in thousands, except per share data):
Fiscal Year Ended
November 28, 1998
-----------------------------
As Reported Pro Forma
------------ ----------
Net loss $ (22,367) $ (22,896)
Net loss per common share $ (1.12) $ (1.14)
Prior to the Plan of Reorganization, the Company had adopted a deferred
compensation plan (the "Director Deferred Comp Plan") and an option plan (the
"Director Option Plan") for the benefit of non-employee directors. The Director
Deferred Comp Plan was terminated effective as of the Petition Date and options
outstanding and unexercised under the Director Option Plan were canceled on the
Effective Date.
In order to attract and retain outstanding individuals in certain key positions,
the Company had established the Payless Cashways 1992 Incentive Stock Program
(the "Stock Program") and the 1988 Payless Cashways, Inc. Employee Stock Plan
(the "Stock Plan"). Options outstanding and unexercised under both the Stock
Program and the Stock Plan were canceled on the Effective Date. Approximately
40,000 shares of Restricted Stock outstanding and unvested under the Stock
Program vested on the Effective Date.
Note F-Income Taxes
For the year ended November 28, 1998, an income tax benefit of $13.2 million was
recorded. The Company has federal net operating loss carryforwards totaling
$74.5 million which expire through fiscal 2015 and federal tax credit
carry-forwards totaling $17.3 million which begin to expire in fiscal 2006 and
expire over an indefinite period. The Company believes, based upon future
earnings coupled with recognition of existing taxable temporary differences,
that it is more likely than not, that the Company will be able to utilize tax
benefits accumulated through November 28, 1998, in future periods.
Income taxes for the year ended November 29, 1997, were allocated to loss before
extraordinary items, and to extraordinary items related to the discharge of debt
pursuant to the consummation of the Plan and for the early extinguishment of
debt; see Note D. The income tax benefit allocated to the loss before
extraordinary items was $90.4 million; the income tax expense allocated to the
extraordinary items was $91.8 million. Included in the income tax benefit
allocated to the loss before extraordinary items are income tax benefits of
$43.5 million resulting from the fresh-start revaluation; see Note C. The income
tax expense allocated to the extraordinary items of
<PAGE>33
$91.8 million was comprised of $2.5 million current tax benefit related to the
early extinguishment of debt and $94.3 million tax expense related to the
discharge of debt which resulted in deferred tax balance changes from the
write-down of the tax basis of fixed assets in accordance with the Internal
Revenue Code of 1986, as amended.
For the year ended November 30, 1996, an income tax benefit of $30.7 million was
recorded. On August 20, 1996, the Small Business Job Protection Act of 1996 was
signed into law. Certain provisions of this Act clarify the Tax Reform Act of
1986 and make retroactively tax deductible certain costs and expenses previously
recorded by the Company without any related tax benefit. In addition, the
Company settled with the Internal Revenue Service regarding several tax issues.
As a result, the Company recorded a tax benefit of $23.7 million and related
interest income of $4.9 million ($2.9 million after tax) in the third quarter of
1996. This tax benefit includes recoverable income taxes of $10.0 million and
non-cash tax benefits of $13.7 million. A debit of $24,000 to additional paid-in
capital reflected the tax effect of excess expense recognized for financial
reporting purposes over the tax deduction for employee stock options.
Income tax expense (benefit) attributable to the income (loss) before
extraordinary items consisted of the following:
In thousands
1998 1997 1996
---------------------------------------
Currently receivable
Federal $ (959) $ (17,169) $ (18,901)
State (1,252) (1,000) 469
---------------------------------------
(2,211) (18,169) (18,432)
Deferred
Federal $ (10,124) $ (63,129) $ (11,534)
State (883) (9,108) (736)
---------------------------------------
(11,007) (72,237) (12,270)
---------------------------------------
$ (13,218) $ (90,406) $ (30,702)
=======================================
The differences between actual income tax expense and the amount computed by
applying the statutory federal income tax rate to the loss before income taxes
and extraordinary items were as follows:
1998 1997 1996
---------------------------
Federal statutory rate (35.0)% (35.0)% (35.0)%
State income taxes,
net of federal tax benefit (3.9) (2.0) (1.5)
Amortization and write-off
of goodwill -- 20.1 22.7
Benefit from new law and
tax settlements -- (1.8) (47.6)
Permanent tax differences 0.5 0.7 0.4
Difference between statutory
and carry-back tax rates -- 0.3 --
Other 1.3 -- (0.7)
---------------------------
(37.1)% (17.7)% (61.7)%
===========================
<PAGE>34
The tax effects of temporary differences and tax credits that give rise to
significant portions of the deferred tax assets and deferred tax liabilities are
as follows:
<TABLE>
<CAPTION>
In thousands 1998 1997
-------------------------------------
<S> <C> <C>
Deferred tax assets:
Tax credit and net operating loss carry-forwards $ 47,097 $ 30,981
Insurance reserves 7,990 10,322
Retirement, deferred compensation, restricted stock
and stock option plans 9,719 8,651
Post-retirement benefits 7,069 6,656
Vacation reserves 3,764 3,968
Reserves for bad debts 2,155 2,800
Lease liability 1,366 2,615
Other 7,978 8,971
-------------------------------------
Total deferred tax assets 87,138 74,964
Less valuation allowance 7,981 7,981
-------------------------------------
Net deferred tax assets 79,157 66,983
-------------------------------------
Deferred tax liabilities:
Land, buildings and equipment (96,637) (90,835)
Inventory basis difference (19,100) (19,441)
Other (2,536) (6,830)
-------------------------------------
Total deferred tax liabilities (118,273) (117,106)
-------------------------------------
Net deferred tax liability $ (39,116) $ (50,123)
=====================================
</TABLE>
Note G--Pension and Other Postretirement Benefit Plans
The Company has a non-contributory defined benefit pension plan covering
substantially all full-time employees. Benefits under the plan are based on
years of service and an employee's average compensation. The Company's funding
policy is to contribute annually the amount actuarially determined to provide
the plan with sufficient assets to meet future benefit payment requirements.
Assets of the pension plan are maintained in trust funds.
Effective July 21, 1997, the Company terminated a supplemental pension plan
covering certain of its officers. The plan was an unfunded, non-contributory
defined benefit pension plan. Benefits under the plan were based on years of
service, age and the employees' average compensation. The supplemental pension
plan was terminated as part of the Plan of Reorganization. Net pension costs for
the supplemental pension plan were $0.9 million in 1997 and $1.3 million in
1996.
A curtailment gain of $0.2 million and $37,000 was recorded in the year ended
November 29, 1997, for pension benefits and other benefits, respectively. These
gains were recorded as a result of the closing of 29 stores and are included in
special charges in the accompanying 1997 statements of operations; see Note K.
The Company wrote off $15.9 million and recognized a $531,000 gain for pension
benefits and other benefits, respectively, related to the write-off of
unrecognized prior service cost and unrecognized net loss from past experience
different from that assumed as part of the fresh-start revaluation in the
accompanying 1997 statement of operations; see Note C.
At November 29, 1997, an additional minimum liability of $1.6 million was
recorded to reflect the excess of the unfunded accumulated benefit obligation
over accrued pension costs. This amount, along with a corresponding asset of
$0.3 million and a charge to additional paid-in-capital of $1.3 million were
eliminated in applying fresh-start reporting; see Note C.
The Company has certain unfunded post-retirement defined benefit plans that
provide health and life insurance benefits for retirees and eligible dependents.
The health plan is contributory and contains cost-sharing features such as
deductibles and coinsurance.
<PAGE>35
The following provides a reconciliation of benefit obligations, plan assets and
funded status of the plans:
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
-------------------------- --------------------------
In thousands 1998 1997 1998 1997
-------------------------- --------------------------
<S> <C> <C> <C> <C>
Change in Benefit Obligation
Benefit obligation at beginning of year $ 76,693 $ 57,098 $ 16,689 $ 13,968
Service cost-benefits earned during the period 4,915 4,190 701 636
Interest cost 5,254 4,256 1,134 1,019
Plan participants' contributions -- -- 166 90
Curtailments -- (958) -- (690)
Fresh-start accounting adjustment -- 295 -- 86
Actuarial (gain) loss 804 17,182 (289) 2,334
Benefits paid (5,868) (5,370) (970) (754)
-------------------------- --------------------------
Benefit obligation at end of year 81,798 76,693 17,431 16,689
-------------------------- --------------------------
Change in Plan Assets
Fair value of plan assets at beginning of year 54,260 48,993 -- --
Actual return on plan assets 1,540 7,042 -- --
Employer contributions 3,814 3,458 -- --
Plan participants' contributions -- -- -- --
Fresh-start accounting adjustment -- 137 -- --
Benefits paid (5,868) (5,370) -- --
-------------------------- --------------------------
Fair value of plan assets at end of year 53,746 54,260 -- --
-------------------------- --------------------------
Funded status (28,052) (22,433) (17,431) (16,689)
Unrecognized net actuarial (gain) loss 3,754 -- (289) --
Unrecognized prior service cost -- -- -- --
-------------------------- --------------------------
Accrued benefit cost included in other accrued expenses
and/or non-current liabilities $ (24,298) $ (22,433) $ (17,720) $(16,689)
========================== ==========================
</TABLE>
In fiscal 1998, 1997, and 1996, the health-care cost trend rate was assumed to
decrease gradually to 5.9% by the year 2001 and remain at that level thereafter.
The effect of a 1.0% annual increase in these assumed health-care cost trend
rates would increase the November 28, 1998, accumulated post-retirement benefit
obligation by $954,000 and the aggregate of the service and interest cost
components of net periodic post-retirement benefit cost for the fiscal year
ended November 28, 1998, by $62,000. The effect of a 1.0% annual decrease in
these assumed health-care cost trend rates would decrease the November 28, 1998,
accumulated post-retirement benefit obligation by $822,000 and the aggregate of
the service and interest cost components of net periodic post-retirement benefit
cost for the fiscal year ended November 28, 1998, by $57,000.
The accumulated benefit obligation was $68.4 million and $62.4 million at
November 28, 1998, and November 29, 1997, respectively.
<PAGE>36
<TABLE>
Components of Net Periodic Benefit Cost
<CAPTION>
In thousands Pension Benefits Other Benefits
----------------------------------------- ----------------------------------------
1998 1997 1996 1998 1997 1996
----------------------------------------- ----------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Service cost - benefits earned
during the period $ 4,915 $ 4,190 $ 4,548 $ 701 $ 636 $ 642
Interest cost 5,254 4,256 3,983 1,134 1,019 1,084
Expected return on plan assets (4,490) (4,139) (8,167) -- -- --
Amortization of prior service cost -- 119 5,074 -- 37 47
Amortization of unrecognized loss -- -- -- -- (99) --
------------------------------------------ -----------------------------------------
Net periodic post-retirement
benefit cost $ 5,679 $ 4,426 $ 5,438 $ 1,835 $1,593 $ 1,773
========================================== =========================================
</TABLE>
<TABLE>
Weighted Average Assumptions
<CAPTION>
In thousands Pension Benefits Other Benefits
-------------------------------------------- -----------------------------------------
1998 1997 1996 1998 1997 1996
-------------------------------------------- -----------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Discount rate 6.75% 7.00% 7.50% 6.75% 7.00% 7.50%
Expect return on plan assets 8.50% 8.50% 8.50% --% --% --%
Rate of increase in future
compensation levels 5.00% 6.00% 5.00% --% --% --%
Healthcare cost trend rate --% --% --% 6.70% 7.10% 7.60%
</TABLE>
In addition, the Company has sponsored several defined contribution plans. Under
the Payless Cashways, Inc. Employee Savings Plan, which covers substantially all
employees, the Company contributed an amount equal to a percentage of the amount
contributed by employees into the plan. The aggregate contributions to all
defined contribution plans were $2.1 million, $2.8 million, and $3.1 million in
1998, 1997, and 1996, respectively.
Note H--Leases
The Company leases certain stores and other facilities under non-cancelable
operating leases. Aggregate minimum future rentals under non-cancelable
operating leases for the next five years are: 1999 -- $14,884,000; 2000 --
$12,872,000; 2001 -- $11,071,000; 2002 -- $7,995,000; 2003 -- $4,752,000;
thereafter -- $15,020,000. Rental expense under operating leases was $20.8
million, $29.3 million and $30.6 million for 1998, 1997, and 1996, respectively.
On December 31, 1998, the Company entered into an agreement to purchase ten
locations previously under operating lease agreements. The $14.4 million
purchase is expected to be completed during the first half of fiscal 1999.
Aggregate minimum future rentals for these stores have been included above
through January 31, 1999, in accordance with the terms of the agreement.
During 1995, the Company entered into an agreement providing for the operating
lease of five stores, including a new store that opened in 1997. Under the Plan
of Reorganization, the Company acquired three of the stores and issued a note
payable to the lessor as described at Note D.
Rental payments under this lease varied with the level of interest rates. To
reduce the impact of changes in the interest rates related to this lease, the
Company, during 1995, entered into an interest rate swap agreement under which
it pays a 6-9/16% fixed rate of interest quarterly through December 1, 1999, in
exchange for quarterly receipt of LIBOR on $36 million. The Company's liability
with respect to the remaining term of this interest rate swap agreement,
estimated to be $0.4 million and $0.7 million at November 28, 1998, and November
29, 1997, respectively, was accrued in fresh-start accounting.
<PAGE>37
Note I--Reorganization Items
In connection with its Chapter 11 filing on July 21, 1997, discussed at Note B,
reorganization items of $25.5 million are reflected in the 1997 statement of
operations. Reorganization items for this period consisted of professional fees
and case administrative expenses of $17.6 million, the write-off of deferred
financing costs of $2.5 million, retention bonuses of $5.7 million, and interest
income of $0.3 million.
Note J--Asset Impairment Charges
The Company recorded an asset impairment charge of $60.5 million ($43.9 million
after tax) and $59.7 million ($44.6 million after tax) in the third quarters of
1997 and 1996, respectively. The asset impairment charges were recorded after
considering current and expected future operating cash flows for certain stores
together with the proceeds the Company could expect to receive upon the sale of
these assets.
The Company adopted SFAS 121 in 1996. Primarily because the environment for
building materials retailing has continued to be increasingly competitive, the
Company first conducted its review in the third quarter of 1996 and determined
certain assets were impaired. In the third quarter of 1997, the Company again
conducted a review of underperforming stores and determined that certain
additional assets were impaired, including assets related to twenty-nine stores
which the Company determined to close (see Note K). These assets included
certain real estate, including future store lease obligations, and associated
goodwill which is attributable to those assets and which was established in 1988
as part of the Company's leveraged buyout.
In 1997 as a result of the impairment charge, certain real estate carrying
values were reduced $28.8 million, goodwill was reduced $18.7 million and a
$13.0 million liability for future store lease payments was recorded. In 1996 as
a result of the impairment charge, goodwill was reduced $22.4 million, certain
real estate carrying values were reduced $25.7 million and a $11.6 million
liability for future store lease payments, net of $6.0 million in amounts the
Company estimated to be recoverable, was recorded.
The Company will continue to review assets for impairment, particularly given
the ongoing competitive environment for building materials retailing.
Note K--Special Charges
The Company recorded special charges of $5.6 million ($3.4 million after tax) in
the first quarter of fiscal 1998 for severance costs related to the elimination
of staff at the Company's home office and regional administrative centers.
Special charges of $0.8 million ($0.5 million after tax) and $1.0 million ($0.6
million after tax) were recorded in the third and fourth quarters of fiscal
1998, respectively, in connection with the closing of three and five
underperforming stores, respectively. These are primarily cash charges. One of
the eight stores was closed at November 28, 1998, and the other seven will close
during the first half of fiscal 1999. In connection with these same store
closings, the Company recorded inventory write-downs of $1.3 million ($0.8
million after tax) and $3.1 million ($2.0 million after tax) in cost of
merchandise sold during the third and fourth quarters of fiscal 1998,
respectively.
Historical financial data for the closing of the 8 stores is as follows for the
fiscal years presented:
In thousands 1998 1997 1996
---------------------------------
Net sales $ 60,103 $ 67,809 $ 76,872
Net operating income (loss) $ (4,027) $ (114) $ 2,801
The fiscal 1998 special charge includes:
<TABLE>
<CAPTION>
Amount Amount
Charged Utilized Through Reserve at
In millions 1998 Nov. 28, 1998 Nov. 28, 1998
--------------------------------------------------------------
<S> <C> <C> <C>
Real estate disposal costs $ 0.7 $ 0.1 $ 0.6
Severance costs 5.6 5.6 --
Other costs 1.1 -- 1.1
--------------------------------------------------------------
$ 7.4 $ 5.7 $ 1.7
==============================================================
</TABLE>
<PAGE>38
A special charge of $13.1 million ($8.1 million after tax), primarily a cash
charge, was recorded in the third quarter of fiscal 1997 in connection with the
closing of 29 stores as part of the Company's reorganization under Chapter 11.
All 29 stores were closed prior to November 29, 1997. In addition, the Company
recorded an inventory write-down of $10.7 million ($6.6 million after tax),
included in cost of merchandise sold, in connection with the store closings.
Historical financial data for the closing of the 29 stores is as follows for the
fiscal years presented:
In thousands 1997 1996
--------------------------
Net sales $ 209,898 $ 328,541
Net operating income (loss) $ (9,153) $ 5,990
The fiscal 1997 special charge includes:
<TABLE>
<CAPTION>
Amount Amount Reclass From
Charged Utilized Through 1995 & 1996 Reserve at
In millions 1997 Nov. 28, 1998 Reserve Nov. 28, 1998
----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Real estate disposal costs $ 6.8 $ 7.5 $ 3.4 $ 2.7
Severance costs 6.3 6.3 -- --
---------------------------------------------------------------------
$ 13.1 $ 13.8 $ 3.4 $ 2.7
=====================================================================
</TABLE>
A special charge of $8.2 million ($5.0 million after tax), primarily a cash
charge, was recorded in the third quarter of fiscal 1996 in connection with the
closing of nine under-performing stores. Eight of the nine stores were closed at
November 30, 1996, and the remaining store was closed in fiscal 1997. The
Company also recorded an inventory write-down of $5.8 million ($3.5 million
after tax), included in cost of merchandise sold, in connection with the store
closings.
Historical financial data for the closing of the nine stores is as follows for
the fiscal years presented:
In thousands 1996
-----------
Net sales $ 63,088
Net operating loss $ (7,636)
The fiscal 1996 special charge includes:
<TABLE>
<CAPTION>
Discharge of
Amount Amount Reclass Indebtedness
Charged Utilized Through 1996 Reserve in Fresh-Start Reserve at
In millions 1996 Nov. 28, 1998 to 1997 Reserve Accounting Nov. 28, 1998
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Future store rentals $ 3.7 $ 1.3 $ -- $ (2.4) $ --
Real estate disposal costs 4.5 3.3 (1.2) -- --
---------------------------------------------------------------------------------------
$ 8.2 $ 4.6 $ (1.2) $ (2.4) $ --
=======================================================================================
</TABLE>
<PAGE>39
Note L--Litigation
The Company is a defendant in a lawsuit brought in connection with a reduction
in force pursuant to a January 1994 restructuring. The suit asserted a variety
of claims including federal and state securities fraud claims, alleged
violations of the Racketeer Influenced and Corrupt Organizations Act ("RICO"),
federal and state claims of age discrimination, alleged violations of the
Employment Retirement Income Security Act of 1974, and various state law claims
including, but not limited to, fraudulent misrepresentation allegations. A
ruling has been entered on the Company's motion to dismiss the majority of
pending claims, substantially narrowing plaintiffs' legal claims by dismissing
some age discrimination counts, all federal securities counts and RICO counts
except one each, and all state law counts related to an alleged partnership. The
plaintiffs' motion for class certification has been denied on all claims except
the age discrimination claims. The court granted the plaintiffs' motion for
class certification of certain age discrimination claims. As a result of this
ruling, eight additional individuals chose to participate in the age claims
asserted in this suit. Each of the parties has conducted discovery pursuant to
the court's scheduling order and discovery plan. The lawsuit was formally stayed
pursuant to the automatic stay issued by the Bankruptcy Court following the
voluntary Chapter 11 reorganization filing on July 21, 1997. During the Chapter
11 reorganization, plaintiffs timely filed proofs of claim, including a
purported claim on behalf of the potential Age Discrimination in Employment Act
opt-in class, for an aggregate of $37 million, which was limited by the
Bankruptcy Court to a maximum of $22 million. The case has been returned to the
United States District Court for the Southern District of Iowa for resolution
with mediation scheduled for April 1999 and a trial date currently set for July
1999. Any recovery for the plaintiffs against the Company would be treated as a
general unsecured claim entitling the plaintiffs to their pro rata share of
8,269,329 shares of New Common Stock reserved for such claims.
The Company denies any and all claimed liability and is vigorously defending
this litigation, but is unable to estimate a potential range of monetary
exposure, if any, to the Company or to predict the likely outcome of this
matter.
- --------------------------------------------------------------------------------
[KPMG LLP Letterhead]
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Payless Cashways, Inc.:
We have audited the accompanying balance sheets of Payless Cashways, Inc. as of
November 28, 1998 and November 29, 1997 and the related statements of
operations, stockholders' equity, and cash flows for each of the fiscal years in
the three-year period ended November 28, 1998. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosure in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Payless Cashways, Inc. as of
November 28, 1998 and November 29, 1997 and the results of its operations and
its cash flows for each of the fiscal years in the three-year period ended
November 28, 1998, in conformity with generally accepted accounting principles.
As discussed in Note B to the financial statements, the financial statements
reflect the application of fresh-start reporting as of November 29, 1997 and,
therefore, are not comparable in all respects to the financial statements for
periods prior to such date. As discussed in Note J to the financial statements,
the Company adopted Statement of Financial Accounting Standards No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of, in fiscal 1996.
/s/ KPMG LLP
Kansas City, Missouri
January 15, 1999
<PAGE>40
Payless Cashways, Inc.
<TABLE>
FIVE-YEAR FINANCIAL SUMMARY
<CAPTION>
Reorganized |
Company | Predecessor Company
----------------------------|------------------------------------------------------------
In thousands, except per share |
amounts, percentages and ratios 1998 1997 | 1997 1996 1995 1994
- ----------------------------------------------------------------------|------------------------------------------------------------
<S> <C> <C> | <C> <C> <C> <C>
Net sales and other income (a) $ 1,909,860 $ N/A | $2,290,215 $ 2,650,905 $ 2,685,670 $ 2,733,182
Cost of merchandise sold 1,420,787 N/A | 1,676,658 1,906,734 1,912,620 1,918,674
Selling, general and administrative 446,936 N/A | 558,817 615,466 619,589 594,024
Reorganization items (b) -- N/A | 25,455 -- -- --
Fresh-start revaluation (b) -- N/A | 355,559 -- -- --
Special charges (c) 7,421 N/A | 13,056 8,184 153,667 --
Asset impairment charges (d) -- N/A | 60,483 59,967 -- --
Depreciation and amortization 33,139 N/A | 51,110 55,016 60,356 58,692
Interest expense 37,162 N/A | 61,251 60,488 61,067 65,571
Interest income (e) -- N/A | -- 4,900 -- --
-----------------------------|------------------------------------------------------------
Income (loss) before income taxes (35,585) N/A | (512,174) (49,780) (121,629) 96,221
Federal and state income taxes (e) (13,218) N/A | (90,406) (30,702) (4,911) 41,808
-----------------------------|------------------------------------------------------------
Income (loss) before equity in loss of |
joint venture and extraordinary item -- N/A | (421,768) (19,078) (116,718) 54,413
Equity in loss of joint venture (f) -- N/A | -- -- (11,831) (2,281)
Extraordinary item (g) -- N/A | 133,176 -- -- (7,243)
-----------------------------|------------------------------------------------------------
Net income (loss) (22,367) $ N/A | $ (288,592) $ (19,078) $ (128,549) $ 44,889
=============================|============================================================
|
Current ratio 2.08 2.15 | N/A 1.41 1.29 1.45
Working capital $ 196,184 $ 258,405 | N/A $ 131,004 $ 98,400 $ 139,128
Total assets $ 748,354 $ 911,341 | N/A $ 1,293,118 $ 1,344,436 $ 1,495,882
Long-term debt $ 336,557 $ 424,031 | N/A $ 618,667 $ 608,627 $ 654,131
Stockholders' equity $ 161,433 $ 183,800 | N/A $ 289,731 $ 308,163 $ 435,865
Capital expenditures $ 23,349 $ N/A | $ 62,940 $ 41,670 $ 67,281 $ 81,906
Income from operations before interest, |
depreciation and amortization (h) $ 46,577 $ N/A | $ 65,433 $ 134,552 $ 153,461 $ 220,484
</TABLE>
(a) Net sales and other income include gains of $2.3 million in 1996 related to
settlements of 1995 fire losses and gains of $5.9 million in 1994 related
to settlements of 1993 flood losses.
(b) In connection with its Chapter 11 filing on July 21, 1997, discussed at
Note B, the Company recorded reorganization items in 1997. The Company also
adopted fresh-start accounting, discussed at Note C, as of November 29,
1997, as a result of its emergence from bankruptcy under its plan of
reorganization effective date, December 2, 1997.
(c) In 1998, special charges consisted of costs associated with the elimination
of staff at the Company's headquarters and regional administration centers
and the closing of eight stores. Special charges for 1997 and 1996
consisted of costs associated with the closing of 29 stores and nine
stores, respectively. Special charges for 1995 consisted of restructure
costs associated with the closing of six stores, the sale of a distribution
center and the reorientation of several stores to concentrate on the
professional customer.
(d) Asset impairment charges for 1997 and 1996 consist of a reduction of
goodwill and certain real estate carrying values, net of amounts estimated
to be recoverable, and the recording of a liability for future store lease
payments. The Company adopted SFAS 121 in 1996.
(e) During 1996, the Company recorded a federal income tax benefit of $23.7
million and related interest income of $4.9 million pursuant to legislation
and a settlement with the Internal Revenue Service.
(f) During 1995, the Company recorded an $8.0 million loss on the sale of its
Mexican joint venture investment.
(g) During 1997, the Company recorded a $5.0 million charge, after tax, related
to the early extinguishment of debt and a $138.2 million extraordinary
gain, after tax, related to debts discharged in its Chapter 11
reorganization. During 1994, the extraordinary items also represent losses
on early extinguishment of debt.
(h) Income from operations before interest, depreciation and amortization is
utilized by the Company as a measure for managing cash flow in its
day-to-day operations. The amounts are before the reorganization items,
fresh-start revaluation, special charges and asset impairment charges.
Inventory write-downs in 1998, 1997 and 1996 of $4.4 million, $10.7 million
and $5.8 million, respectively, related to the closing of eight, 29 and
nine underperforming stores, respectively, are also excluded.
<PAGE>41
Payless Cashways, Inc.
<TABLE>
FIVE-YEAR OPERATIONAL SUMMARY
<CAPTION>
Reorganized |
Average sales per facility, number Company | Predecessor Company
of customers, gross square feet and -------------|-------------------------------------------------------------------
retail square feet are in thousands 1998 | 1997 1996 (a) 1995 1994
- ------------------------------------------------------------|-------------------------------------------------------------------
<S> <C> | <C> <C> <C> <C>
|
Number of retail facilities 161 | 164 192 206 202
Average same-store sales per facility $ 11,711 | $ 12,600 $ 13,107 $ 13,114 $ 13,716
Number of customers 42,741 | 50,743 56,736 59,685 60,812
Average sales per customer $ 44.61 | $ 45.04 $ 45.81 $ 44.91 $ 44.77
Number of employees 10,930 | 12,782 16,664 18,122 18,406
Average sales per employee $ 171,316 | $ 162,099 $ 152,228 $ 147,894 $ 147,778
Gross square feet (total) 14,491 | 15,550 17,578 19,453 18,730
Retail square feet (inside) 5,251 | 5,334 6,209 6,740 6,468
Sales per retail square foot $ 356.59 | $ 388.44 $ 408.56 $ 397.65 $ 420.53
Percent increase (decrease) in same- |
store sales (7.3)% | (6.6)% (2.5)% (4.5)% 3.3%
<FN>
(a) Fiscal 1996 was a 53-week year. All 1996 data has been computed on a 52-week basis.
</FN>
</TABLE>
- --------------------------------------------------------------------------------
Payless Cashways, Inc.
RESPONSIBILITY FOR FINANCIAL STATEMENTS
The financial statements of Payless Cashways, Inc. have been prepared by
management in accordance with generally accepted accounting principles and
necessarily include amounts based on management's judgment and best estimates.
The presentation, integrity and consistency of the financial statements are the
responsibility of management.
The financial statements have been audited by KPMG LLP, independent auditors.
Their responsibility is to audit the Company's financial statements in
accordance with generally accepted auditing standards and to express their
opinion on these statements with respect to fairness of presentation of the
Company's financial position, results of operations and cash flows.
To fulfill its responsibilities, management has developed a system of internal
controls designed to provide reasonable assurance that assets are safeguarded,
transactions are executed in accordance with management's authorizations and
financial records provide a reliable basis for preparing financial statements
and other data. Management believes the controls in place are sufficient to
provide this reasonable assurance. The controls include careful selection and
training of qualified personnel, appropriate division of responsibilities,
communication of written policies and procedures throughout the Company and a
program of internal audits.
The Board of Directors, through its Audit Committee composed of Directors who
are neither officers nor employees of the Company, is responsible for the
maintenance of a strong control environment and quality financial reporting. The
Board, on the recommendation of the Audit Committee, selects and engages the
independent auditors. The Audit Committee meets periodically with management,
the independent auditors and internal auditors to discuss the results of both
independent and internal audits, the adequacy of internal controls and financial
reporting matters. The independent auditors and the internal auditors have
direct access to the Audit Committee without the presence of management, when
deemed appropriate.
/s/ Millard E. Barron /s/ Richard G. Luse
Millard E. Barron Richard G. Luse
President and Chief Executive Officer Senior Vice President-Finance and
Chief Financial Officer
<PAGE>42
Payless Cashways, Inc.
DISTRIBUTION CENTERS
Chandler, Arizona
Sacramento, California
Denver, Colorado
Indianapolis, Indiana
Kansas City, Missouri
Sedalia, Missouri
Lake Dallas, Texas
STORE LOCATIONS
Arizona
Phoenix 4, Tucson 3
California
Bakersfield 2, Fresno 2, Modesto 1,
Redding 1, Sacramento 6, Visalia 1
Colorado
Boulder 1, Colorado Springs 3,
Denver 13, Greeley 1
Illinois
Quincy 1, Silvis 1, Springfield 1
Indiana
Anderson 1, Bloomington 1, Indianapolis 5, Kokomo 1,
Lafayette 1, Muncie 1
Iowa
Altoona 1, Cedar Rapids 1, Coralville 1, Davenport 2,
Des Moines 2, Fort Dodge 1, Sioux City 1, Waterloo 1
Kansas
Elwood 1, Kansas City 5, Lawrence 1, Salina 1, Topeka 1,
Wichita 2
Kentucky
Florence 1, Lexington 1, Louisville 3
Minnesota
Minneapolis/St. Paul 8
Missouri
Columbia 1, Kansas City 5,
Springfield 1, St. Joseph 1
Nebraska
Lincoln 2, Omaha 2
Nevada
Las Vegas 4, Reno 1, Sparks 1
New Mexico
Albuquerque 1, Santa Fe 1
Ohio
Dayton 2, Cincinnati 6, Findlay 1,
Huber Heights 1, Lima 1, Springfield 1
<PAGE>43
Oklahoma
Norman 1, Oklahoma City 2, Tulsa 2
Oregon
Eugene 1, Salem 1
Tennessee
Memphis 3
Texas
Abilene 1, Amarillo 1, Austin 3,
College Station 1, Conroe 1,
Dallas/Ft. Worth 13, Longview 1,
Lubbock 2, Sherman 1, Texarkana 1,
Tyler 1, Waco 1
<PAGE>44
Payless Cashways, Inc.
STOCKHOLDER INFORMATION
As of the July 21, 1997, Chapter 11 filing date, Payless Cashways' Old Common
Stock ceased trading on the New York Stock Exchange (ticker symbol PCS), was
subsequently delisted and began trading over-the-counter (ticker symbol PYLSQ).
On December 2, 1997, the Effective Date for the Company's Plan of
Reorganization, the Company canceled Old Common Stock and Old Preferred Stock
and began issuing shares of New Common Stock (ticker symbol PCSH) which is
trading on the over-the-counter bulletin board. Therefore, the required
information presented below with respect to the Old Common Stock for fiscal 1997
is not meaningful and has not been converted to the current trading price of the
New Common Stock. The number of registered holders of the Company's New Common
Stock at November 28, 1998, was 4,636. No cash dividends have been declared on
either Old or New Common Stock since 1988. Certain of the Company's debt
instruments contain restrictions on the declaration and payment of dividends on,
or the making of any distribution to the holders of, or the acquisition of, any
shares of Common Stock.
New Common Stock Old Common Stock
1998 1997
- ----------------------------- ------------------------- ------------------------
Price range of Common Stock High Low High Low
- ----------------------------- ------------ ------------ ------------ -----------
First quarter 3.875 1.000 2.500 1.125
Second quarter 5.250 2.531 2.125 1.375
Third quarter 3.188 1.125 1.750 0.130
Fourth quarter 1.938 0.781 0.360 0.053
Copies of the Payless Cashways, Inc. Form 10-K for fiscal 1998, filed with the
Securities and Exchange Commission, are available without charge. To obtain a
copy, please write to:
Payless Cashways, Inc.
Investor Relations
P.O. Box 419466
Kansas City, MO 64141-0466
(Web site: payless.cashways.com)
Annual Meeting - April 21, 1999, 10:00 a.m. Independent Auditors
Kansas City Marriott Downtown KPMG LLP
200 West 12th Street Kansas City, MO
Kansas City, MO
Registrar and Transfer Agent Telephone Number of
UMB Bank, n.a. Payless Cashways, Inc. is
Kansas City, MO (816) 234-6000
(816) 860-7786
<PAGE>1
Exhibit 23.1
[KPMG LLP Letterhead]
Auditors' Consent
The Board of Directors
Payless Cashways, Inc.:
We consent to incorporation by reference in the registration statement (No.
333-70557) on Form S-8 of Payless Cashways, Inc. of our report, dated
January 15, 1999, relating to the balance sheets of Payless Cashways, Inc.
as of November 28, 1998 and November 29, 1997, and the related statements
of operations, stockholders' equity, and cash flows for each of the fiscal
years in the three-year period ended November 28, 1998, and the related
schedule, which report appears in the November 28, 1998 annual report on
Form 10-K of Payless Cashways, Inc. Our report refers to the application of
fresh start reporting as of November 29, 1997. In addition, our report
refers to the Company's adoption of Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets to
Be Disposed Of", in fiscal 1996.
/s/ KPMG LLP
Kansas City, Missouri
February 25, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the November
28, 1998, financial statements and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> NOV-28-1998
<PERIOD-END> NOV-28-1998
<CASH> 1950
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 349452
<CURRENT-ASSETS> 378272
<PP&E> 377868
<DEPRECIATION> (32146)
<TOTAL-ASSETS> 748354
<CURRENT-LIABILITIES> 182088
<BONDS> 336557
0
0
<COMMON> 200
<OTHER-SE> 161233
<TOTAL-LIABILITY-AND-EQUITY> 748354
<SALES> 1906862
<TOTAL-REVENUES> 1909860
<CGS> 1420787
<TOTAL-COSTS> 1420787
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 37162
<INCOME-PRETAX> (35585)
<INCOME-TAX> (13218)
<INCOME-CONTINUING> (22367)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (22367)
<EPS-PRIMARY> (1.12)
<EPS-DILUTED> (1.12)
</TABLE>
