<PAGE>1
UNITED STATES
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 27, 1999
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.)
800 NW Chipman Road, Suite 5900
P.O. Box 648001
Lee's Summit, Missouri 64064-8001
(Address of Principal Executive Offices) (Zip Code)
(816) 347-6000
(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. / X /
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 14, 2000, was
$47,193,430.
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 20,000,000 shares of
Common Stock, $.01 par value, outstanding as of February 14, 2000.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Annual Proxy Statement for the Annual Meeting of
Stockholders to be held April 19, 2000 -- Part III.
<PAGE>2
PART I
Item 1. BUSINESS.
General
Payless Cashways, Inc. ("Payless" or the "Company") is the fourth
largest retailer of building materials and home improvement products in the
United States as measured by sales. The Company operates 150 building materials
stores, excluding a store that is 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 builder, remodel and repair contractor, institutional
buyer, and project-oriented do-it-yourself customer with a dominant selection of
quality products and services needed to build, improve, and maintain home,
business, farm or ranch properties at competitive prices. The Company's
merchandise assortment in each store currently averages approximately 31,000
items in the following categories: lumber, plywood and building materials;
millwork; farm and ranch products; tools; hardware and housewares; electrical
and plumbing products; paint; lighting; home decor; kitchens; decorative
plumbing and bath; heating, ventilating and cooling (HVAC); apparel; and
seasonal items. The Company believes that the combination of a full-line
lumberyard, an attractive hardware store/showroom offering, a deep 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 focus is on the professional customer.
Professionals ("Pros") include professional builders, remodel and repair
contractors, and institutional buyers. The Company also serves do-it-yourselfers
("DIY-ers") who enjoy shopping "where the Pros shop" for both project-oriented
projects and for convenience items. With a full-line lumberyard, a complete
hardware store and outstanding customer service, the Company is well positioned
to grow. The Company's 1999 revenues were approximately 54% from sales to the
Pro customer and 46% from sales to the DIY customer.
During the peak selling months of May through September, inventory is
financed by cash from operations and trade accounts payable. During the
seasonally low sales months of December through February, inventory is financed
by cash from operations, trade accounts payable and borrowings under the 1999
Credit Agreement, as needed. An average Payless store currently carries
approximately $2.0 million of inventory, and during fiscal 1999, sales at
Payless stores averaged approximately $12.0 million per store.
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 may 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.
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.
<PAGE>3
Business Strategy
Objectives
The Company's principal objectives are to:
1) increase market share in the professional segment,
2) maintain a substantial share of business with the project-oriented DIY
segment,
3) continue to improve its balance sheet, and
4) grow revenue, earnings and stockholder value.
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 deep 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 customer's 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. These sales people work from the
contractor sales offices and serve by phone customers who do not require job
site presence. In certain markets, this activity has been centralized by
establishing call-centers. The Company also has national account managers who
target businesses, often with geographically dispersed sites, that utilize large
amounts of building materials and improvement products for repair and
maintenance, new construction projects, and insurance rehabilitation work.
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 Pro's 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 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.
Strategic Initiatives
The Company's ongoing market research regarding the Pro indicates that,
while the Company has established significant business with this group,
substantial growth opportunities remain. 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 these
customers, the Company has planned to attract and retain more large-volume
accounts whose business is often job-site direct.
The Company is also planning to utilize its e-commerce strategy to
generate sales using the Internet. The evolution of e-commerce provides the
Company many additional opportunities to interact with customers and increase
sales. The Company believes it is already strategically positioned to take
advantage of this evolving convergence of "bricks and clicks" and is well
positioned to provide order fulfillment with its under-utilized sourcing and
distribution capabilities to deliver its goods and services on a nation-wide
basis. The Company intends to roll out an Internet-based special order system
throughout its stores in the second half of fiscal 2000, followed by e-catalogs
of category-specific products and service offerings.
<PAGE>4
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 owns and operates three facilities that
manufacture doors and trim products and a plant that manufactures 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 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 make up about 46% 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-through lumberyards, consistent in-stock position, all
the products needed to complete a project and a well merchandised shopping
environment 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
the Company's locations on a regular basis, and the Company intends, as a
convenience to that customer, to identify and stock items that may otherwise be
purchased elsewhere. These products are also appealing to the project-oriented
do-it-yourselfer who likes to shop where the Pro shops.
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 1999, 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, building materials,
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, paneling, ceiling
tiles, 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, heating and cooling products,
housewares, and work apparel.
Showroom - Interior and exterior lighting, bathroom fixtures and
vanities, kitchen cabinets, flooring, and wallcoverings.
During the last three fiscal years, the three product classifications
accounted for the following percentages of Payless' sales:
1999 1998 1997
---- ---- ----
Lumberyard 53% 51% 51%
Hardware 37 38 35
Showroom 10 11 14
---- ---- ----
100% 100% 100%
==== ==== ====
Payless addresses its primary target customers through a mix of
targeted mailings, special customer events, and newspaper advertising.
Additionally, the Company participates in or hosts a variety of Pro-focused
events, national trade association shows, and conferences. During fiscal 1999,
the Company's expenditures on all forms of marketing, net of vendor program
allowances, totaled approximately $20.0 million or 1.1% of sales.
<PAGE>5
Store Management and Personnel
Payless coordinates the operation of its 150 building materials stores
through 150 Store Managers, each of whom reports directly to one of 17 District
Managers who in turn reports to one of two Regional Vice Presidents/Managers.
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/Managers have been promoted from
within Payless or from within the stores Payless has acquired. In addition, the
Company continues to attract new talented store management from the retail
industry. 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
customer service, product knowledge, selling skills, and systems and procedures.
Formal classroom training sessions are supplemented with product clinics and
special assignments.
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 store support center to manage the
purchasing, movement, and marketing of product lines.
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 one to three times 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 Sedalia
distribution center serves all 150 stores with some or all of their
distribution-center-sourced replenishment, utilizing computerized receiving,
storage and selection technology. The other six distribution centers handle
commodity products and bulky manufactured products such as tubs, paneling and
ceiling tile, operating with manual storage and selection systems. The
manufacturing locations assemble pre-hung doors, customized windows, engineered
roof and floor trusses, wall and floor panels, and stair systems.
In fiscal 1999, 53% 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.
Payless purchases substantially all of its merchandise from
approximately 3,100 suppliers, no one of which accounted for more than 5% of the
Company's purchases during fiscal 1999.
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 27.0% in fiscal 1999, 27.1% in fiscal 1998,
and 28.3% in fiscal 1997. Purchases under the Company's commercial credit
program as a percentage of sales represented 37.7% in fiscal 1999, 34.8% in
fiscal 1998, and 32.7% in fiscal 1997.
The Company's private-label credit card program and commercial credit
program are administered by a third-party administrator. In the fourth quarter
of fiscal 1999, the Company entered into new agreements with a new third-party
administrator to service the Company's credit programs. The Company expects to
process approximately $800 million in annual sales under these agreements and
incur savings in excess of $6 million in fees on an annualized basis. Under the
new agreements, the costs of the credit programs represent a fixed percentage
fee of charge sales. In addition, the Company substantially absorbs the cost of
commercial accounts written-off. Accounts written off (net of recoveries) under
the commercial credit program for the last three fiscal years were
approximately: $10.9 million or 1.61% of net commercial credit sales for 1999,
$4.0 million or 0.6% of net commercial credit sales for 1998, and $9.8 million
or 1.3% of net commercial sales for 1997.
<PAGE>6
In addition to the traditional commercial program, effective with the
conversion to the new third-party administrator, the Company began offering a
business revolving charge account as an alternative for commercial customers.
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 while reducing costs.
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, distributors who market
primarily to commercial and professional users, and, with regard to remodel and
repair contractors and industrial buyers, the Company competes with national
chains. 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 there are three
national chains larger than Payless, its size and capabilities give Payless
significant advantages over the many smaller distributors in the highly
fragmented retail building materials industry. Payless' competition varies by
geographical area, Payless continues to differentiate itself by targeting the
professional customer and the project-oriented DIY-er. Payless offers a
full-line lumberyard, a deep mix of high quality products, high levels of
customer service by knowledgeable employees and a well merchandised shopping
environment.
Employees
At November 27, 1999, Payless employed approximately 10,000 persons,
approximately 29% 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 1% being represented by
a union.
_______________
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. These statements are based on the current plans and
expectations of the Company and 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 successful
implementation of an Internet ordering system; the success of the Company's
strategy, including its e-commerce opportunities; and successful completion of
the new credit service agreement implementation.
<PAGE>7
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.
Principal Occupation and
Name Age Five-Year Employment History
- -------------------- ------- -----------------------------------------------
Millard E. Barron.........50 President and Chief Executive Officer of
First elected a director: Payless since June 1998; President of Zellers,
1998 Inc. and Executive Vice President of Hudson's
Bay Company from September 1996 to February
1998; Senior Vice President and Chief Operating
Officer of the International Division of Wal-
Mart Stores, Inc.from August 1994 to September
1996; Vice President - Operations of Wal-Mart
Stores, Inc. from November 1992 to August 1994;
and currently a Director of American Homestar
Corporation.
David J. Krumbholz........45 Senior Vice President - Store Operations of
Payless since February 2000; Vice President-
Store Operations of Payless from August 1999 to
February 2000; Vice President - Professional
Business of Payless from July 1998 to August
1999; and Regional Vice President of Payless
from August 1988 to July 1998. Mr. Krumbholz
joined Payless in January 1976.
Edward L. Zimmerlin.......53 Senior Vice President - Merchandising and
Marketing of Payless since March 1999; Vice
President-General Manager of B B M bed, bath &
more, a division of Hudson's Bay Company, from
February 1998 to February 1999; Vice
President-Hardlines of Zellers, a division of
Hudson's Bay Company, from June 1997 to
February 1998; Executive Vice President -
Merchandising and Advertising of Homeplace
Stores from May 1996 to March 1997; and Senior
Vice President - Merchandising and Marketing of
Family Dollar Stores from February 1995 to
April 1996.
Kelly R. Abney............45 Vice President - Logistics 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.......... 51 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...........37 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.
Louise R. Iennaccaro......55 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.
Ronald D. Long............43 Vice President - Merchandising-Building
Products since August 1999; Vice President -
Merchandising Display and Productivity of
Payless from August 1998 to August 1999; 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..........48 Acting Chief Financial Officer of Payless since
December 1999; Vice President - Treasury of
Payless since September 1998; Director of Tax
and Risk Management of Payless from December
1995 to September 1998; and Tax Director of
Payless from October 1987 to December 1995.
<PAGE>8
Item 2. PROPERTIES.
The Company's 150 building materials stores, excluding a store that
is currently in the process of closing, are located in the following states:
Number of Stores
----------------
Arizona................... 9 Missouri.................. 8
California................ 13 Nebraska.................. 4
Colorado.................. 18 Nevada.................... 6
Illinois.................. 3 New Mexico................ 2
Indiana................... 8 Ohio...................... 11
Iowa...................... 10 Oklahoma.................. 5
Kansas.................... 11 Oregon.................... 2
Kentucky.................. 5 Tennessee................. 3
Minnesota................. 5 Texas..................... 27
Payless owns 138 of its store facilities and 130 of the 150 sites on
which such stores are located. The remaining 12 facilities and 20 sites are
leased. The leases provide for various terms. Mortgages or deeds of trust on 139
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' 150 stores has an average total selling space of approximately
179,000 square feet consisting of 32,000 square feet of indoor display space and
147,000 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.
During fiscal 1999, two stores were opened and 12 stores were closed.
One and two stores were opened during fiscal years 1998 and 1997, respectively,
and four and 30 stores were closed, respectively.
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. Three of the Company's manufacturing locations are
owned and one is leased. Mortgages or deeds of trust on three manufacturing
parcels secure existing indebtedness. The Sedalia, Missouri, distribution center
is a 592,000 square foot facility, while the other six distribution centers
average 143,000 square feet of warehouse space on an average of 16 acres.
A substantial portion of the administrative, purchasing, advertising,
accounting and information system functions is centralized at Payless' store
support center in Lee's Summit, Missouri, a suburb of Kansas City. Payless
leases its store support center under a lease expiring on October 31, 2009. The
store support center occupies approximately 156,000 square feet of a
single-story building.
See also "Strategic Initiatives," and "Distribution and Suppliers" in
Item 1, above.
Item 3. LEGAL PROCEEDINGS.
There are presently no material legal proceedings to which Payless is a
party or of which any of its property is the subject.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
<PAGE>9
PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
Payless Cashways, Inc. Common Stock is traded on the over-the-counter
bulletin board (ticker symbol PCSH). The number of registered holders of the
Company's Common Stock at November 27, 1999, was 4,852. No cash dividends have
been declared on the 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.
1999 1998
-----------------------------------------------------------------------
Price range of High Low High Low
Common Stock
-----------------------------------------------------------------------
First quarter 2.688 1.188 3.875 1.000
Second quarter 2.531 1.375 5.250 2.531
Third quarter 2.438 1.562 3.188 1.125
Fourth quarter 2.000 1.281 1.938 0.781
Item 6. SELECTED FINANCIAL DATA.
<TABLE>
FIVE-YEAR FINANCIAL SUMMARY
<CAPTION>
In thousands, except per share Reorganized Company | Predecessor Company
amounts, percentages and ratios ------------------------------------------|-----------------------------------------------
1999 1998 1997 | 1997 1996 1995
- -----------------------------------------------------------------------------------|-----------------------------------------------
<S> <C> <C> <C> | <C> <C> <C>
Net sales and other income (a) $ 1,813,347 $ 1,909,860 $ N/A| $ 2,290,215 $ 2,650,905 $ 2,685,670
Cost of merchandise sold 1,333,968 1,420,787 N/A| 1,676,658 1,906,734 1,912,620
Selling, general and administrative 420,382 443,031 N/A| 555,745 611,357 616,775
Reorganization items (b) -- -- N/A| 25,455 -- --
Fresh-start revaluation (b) -- -- N/A| 355,559 -- --
Special charges (credits), |
net (c) and (d) (4,315) 7,421 N/A| 73,539 68,151 153,667
Depreciation and amortization 40,167 37,044 N/A| 54,182 59,125 63,170
Interest expense 35,763 37,162 N/A| 61,251 60,488 61,067
Interest income (e) -- -- N/A| -- 4,900 --
------------------------------------------|-----------------------------------------------
Income (loss) before income taxes (12,618) (35,585) N/A| (512,174) (49,780) (121,629)
Federal and state income taxes (e) (5,211) (13,218) N/A| (90,406) (30,702) (4,911)
------------------------------------------|-----------------------------------------------
Income (loss) before equity in loss of |
joint venture and extraordinary item (7,407) (22,367) N/A| (421,768) (19,078) (116,718)
Equity in loss of joint venture (f) -- -- N/A| -- -- (11,831)
Extraordinary items (g) (729) -- N/A| 133,176 -- --
------------------------------------------|-----------------------------------------------
Net income (loss) $ (8,136) $ (22,367) $ N/A| $ (288,592) $ (19,078) $ (128,549)
==========================================|===============================================
|
Net loss per common share-basic and |
diluted $ (0.41) $ (1.12) N/A|
Weighted average common |
shares outstanding 20,000 20,000 N/A|
Current ratio 2.53 2.09 2.15| N/A 1.41 1.29
Working capital $ 225,737 $ 197,226 $ 258,405| N/A $ 131,004 $ 98,400
Total assets $ 728,391 $ 747,312 $ 911,341| N/A $ 1,293,118 $ 1,344,436
Long-term debt $ 374,154 $ 336,557 $ 424,031| N/A $ 618,667 $ 608,627
Stockholders' equity $ 153,297 $ 161,433 $ 183,800| N/A $ 289,731 $ 308,163
Capital expenditures $ 47,213 $ 26,864 $ N/A| $ 65,601 $ 43,985 $ 70,706
Income from operations before interest, |
depreciation and amortization (h) $ 62,847 $ 50,482 $ N/A| $ 68,505 $ 138,661 $ 156,275
<FN>
(a) Net sales and other income include gains of $2.3 million in 1996 related to
settlements of 1995 fire 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 1999, special charges consisted of costs associated with the closing of
six stores and the elimination of administrative staff; special credits
consisted of a curtailment gain as a result of freezing benefits under the
Company's pension plan. Special charges for 1998 consisted of costs
<PAGE>10
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.
(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 1999 and 1997, the Company recorded a $0.7 million and $5.0 million
charge, after tax, related to the early extinguishment of debt,
respectively, and a $138.2 million extraordinary gain, after tax, related
to debts discharged in its Chapter 11 reorganization during 1997.
(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 special charges and asset
impairment charges, reorganization items, and fresh-start revaluation.
Inventory write-downs in 1999, 1998, 1997 and 1996 of $3.4 million, $4.4
million, $10.7 million and $5.8 million, respectively, related to the
closing of five, eight, 29 and nine underperforming stores, respectively,
are also excluded. Income from operations before interest, depreciation
and amortization is presented because it is a widely accepted financial
indicator used by certain investors and analysts to analyze and compare
companies on the basis of operating performance. As presented, this
indicator may not be comparable to similarly titled measures reported by
other companies and may not necessarily be an accurate means of comparison
between all companies, since not all companies necessarily calculate this
indicator in an identical manner. Income from operations before interest,
depreciation and amortization is not intended to represent cash flows for
the period or funds available for management's discretionary use. Nor has
it been represented as an alternative to operating income as an
indicator of operating performance and should not be considered in
isolation or as a substitute for measures of performance prepared in
accordance with generally accepted accounting principles.
</FN>
</TABLE>
<TABLE>
FIVE-YEAR OPERATIONAL SUMMARY
<CAPTION>
Average sales per facility, number
of customers, gross square feet and Reorganized Company | Predecessor Company
retail square feet are in thousands ---------------------------------|-------------------------------------------------
1999 1998 | 1997 1996 (a) 1995
- --------------------------------------------------------------------------------|-------------------------------------------------
<S> <C> <C> | <C> <C> <C>
|
Number of retail facilities 151 161 | 164 192 206
Average same-store sales per facility $ 11,975 $ 11,711 | $ 12,600 $ 13,107 $ 13,114
Number of customers 38,769 42,741 | 50,743 56,736 59,685
Average sales per customer $ 46.72 $ 44.61 | $ 45.04 $ 45.81 $ 44.91
Number of employees 10,146 10,930 | 12,782 16,664 18,122
Average sales per employee $ 174,740 $ 171,316 | $ 162,099 $ 152,228 $ 147,894
Gross square feet (total) 14,080 14,491 | 15,550 17,578 19,453
Retail square feet (inside) 4,854 5,251 | 5,334 6,209 6,740
Sales per retail square foot $ 365.25 $ 356.59 | $ 388.44 $ 408.56 $ 397.65
Percent decrease in same-store sales (0.8)% (7.3)% | (6.6)% (2.5)% (4.5)%
<FN>
(a) Fiscal 1996 was a 53-week year. All 1996 data has been computed on a
52-week basis.
</FN>
</TABLE>
<PAGE>11
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF 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 found beginning at page F-1 in this Form 10-K. 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>
| Predecessor
Reorganized Company | Company
-------------------------------|--------------------
Fiscal Year Ended | Fiscal Year Ended
-------------------------------|--------------------
percent of net sales Nov. 27, Nov. 28, | Nov. 29,
1999 1998 | 1997
-------------------------------|--------------------
<S> <C> <C> | <C>
|
Net sales....................................................... 100.0 % 100.0 % | 100.0 %
Other income.................................................... 0.1 0.1 | 0.2
Cost of merchandise sold........................................ 73.6 74.5 | 73.4
Selling, general and administrative............................. 23.2 23.2 | 24.3
Special charges (credits), net.................................. (0.2) 0.4 | 3.2
Reorganization items............................................ -- -- | 1.1
Fresh-start revaluation......................................... -- -- | 15.6
Provision for depreciation and amortization..................... 2.2 1.9 | 2.3
Interest expense................................................ 2.0 2.0 | 2.7
Loss before income taxes........................................ (0.7) (1.9) | (22.4)
|
Federal and state income taxes.................................. (0.3) (0.7) | (4.0)
Loss before extraordinary items................................. (0.4) (1.2) | (18.4)
|
Extraordinary items............................................. -- -- | 5.8
Net loss........................................................ (0.4) % (1.2) % | (12.6) %
</TABLE>
Sales
Net sales for fiscal 1999 decreased 0.8% on a same-store basis from
fiscal 1998 and decreased 5.0% in total. Same-stores are those open one full
year. The sales decrease, in total, is a result of closing 12 stores in fiscal
1999 and four stores in fiscal 1998 whose sales were $38.4 million and $120.1
million for fiscal 1999 and 1998, respectively. On a same-store basis, sales to
professional customers increased 7.3%, while sales to the do-it-yourself
customer declined by 9.0%. Same-store sales for the second half of the year were
negatively impacted by competitive pressures, particularly from store closing
activities related to a major competitor, and falling wood prices. To address
the decrease in same-store sales to do-it-yourself customers, the Company
intends to improve its assortments and in-stock position.
Net sales for fiscal 1998 decreased 16.6% in total from fiscal 1997 and
7.3% on a same-store basis. The sales decrease, in total, is a result of closing
four stores in fiscal 1998 and 30 stores in fiscal 1997 whose sales were $34.4
million and $269.2 million for fiscal 1998 and 1997, respectively. 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 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.
<PAGE>12
Costs and Expenses
The cost of merchandise sold, as a percent of sales, was 73.6% in
fiscal 1999, 74.5% in fiscal 1998, and 73.4% in fiscal 1997. Inventory
write-downs related to store closings of $3.9 million, $4.4 million, and $10.7
million for fiscal 1999, 1998 and 1997, respectively, was 0.2%, 0.2% and 0.5% of
sales, respectively. Excluding the effects of inventory write-downs related to
store closings, the decrease in cost of merchandise sold as a percent of sales
during 1999 was primarily due to improved product acquisition costs and reduced
promotional activities. 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. Cost of
merchandise sold in fiscal 1999, 1998, and 1997 benefited from a $0.9 million,
$2.4 million, and a $0.7 million LIFO credit, respectively, related to
liquidations of LIFO inventories and deflation.
Selling, general and administrative expenses, as a percent of sales,
were 23.2%, 23.2%, and 24.3% for fiscal 1999, 1998, and 1997, respectively. The
1999 reductions in selling, general and administrative expenses, in dollars,
were primarily the result of closed stores. 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.
During the second quarter of 1999, a non-cash curtailment gain of $10.6
($6.2 million after tax) was recorded in connection with freezing the Company's
non-contributory defined benefit plan. Special charges of $5.2 million ($3.1
million after tax) and $1.1 million ($0.6 million after tax) were recorded in
the second and fourth quarters of 1999, respectively, in connection with the
closing of five stores and the closing of an additional store as well as the
elimination of administrative staff, respectively. A special charge of $5.6
million ($3.5 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 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. The Company also recorded an asset
impairment charge of $60.5 million ($43.9 million after tax) in the third
quarter of 1997. The Company included in its review of impaired assets
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. The Company will
continue to review assets for impairment, particularly given the ongoing
competitive environment for building materials retailing. Additional details on
the special charges are set forth in Note J to the Financial Statements.
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.
The provision for depreciation and amortization for fiscal 1999
increased compared to fiscal 1998 primarily due to a $3.1 million ($1.8 million
after tax) depreciation charge for accelerated depreciation on certain leasehold
improvements and assets related to closed stores. 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 store
closings mentioned above.
Interest expense decreased to $35.8 million in fiscal 1999 compared to
$37.2 million in fiscal 1998 due primarily to lower borrowing levels in 1999
and, to some extent, lower rates in 1999. Interest expense decreased $24.1
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.
The effective tax rates for fiscal 1999 and 1998 were different from
the 35% statutory rate primarily because of state income taxes. The effective
tax rates for fiscal 1997 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.
<PAGE>13
Net Income (Loss)
The Company had losses before extraordinary items of $7.4 million in
1999 compared to $22.4 million in 1998 and $421.8 million in 1997. The 1999 loss
before extraordinary items reflects special charges for store closings, a
special credit related to the freezing of the defined benefit pension plan, and
accelerated depreciation, discussed above. 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. Excluding the non-routine items recorded during
fiscal 1999, 1998, and 1997, net loss for these years would have been $5.8
million, $14.9 million and $35.5 million, respectively.
<TABLE>
Comparative Operating Data
<CAPTION>
Reorganized Company | Predecessor Company
----------------------------------------------------------------------|---------------------------------
Fiscal Year Ended | Fiscal Year Ended
----------------------------------------------------------------------|---------------------------------
November 27, 1999 November 28, 1998 | November 29, 1997
----------------------------------- ----------------------------------|---------------------------------
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 $ 1,811,365 $ 1,811,365 $ 1,906,862 $ 1,906,862 | $ 2,290,215 $ 2,290,215
Income (loss) from operations |
before interest, depreciation |
and amortization $ 62,847 $ 58,997 $ 50,482 $ 46,042 | $ 68,505 $ (396,741)
Net income (loss) $ (5,837) $ (8,136) $ (14,913) $ (22,367) | $ (35,451) $ (288,592)
</TABLE>
Financing Activities
On November 17, 1999, the Company completed a three-year $260 million
revolving secured loan agreement with a new lender (the "1999 Credit
Agreement"). A portion of the proceeds was used to retire the existing revolving
credit facility and to reduce its existing term loan (the "1997 Credit
Agreement"). These payments allowed the Company to secure an amendment to the
1997 Credit Agreement that removed all current and future financial performance
covenants, thereby improving its operating flexibility. Also, semi-annual
principal payments on the remainder of the 1997 Credit Agreement term loan were
deferred to the year 2001. The 1999 Credit Agreement and the 1997 Credit
Agreement are described in more detail in Note D to the Financial Statements.
At November 27, 1999, and November 28, 1998, the Company had
approximately $377.4 million and $347.6 million, respectively, of indebtedness.
The Company expects from time to time to incur additional seasonal indebtedness.
Liquidity and Capital Resources
The Company's principal source of cash is from operations. Cash used in
operating activities was $2.4 million in fiscal 1999, compared to cash provided
by operating activities of $53.1 million for fiscal 1998, and $35.1 million for
fiscal 1997. The 1999 decrease in cash from operating activities was primarily
caused by decreased other current liabilities due to store closings. 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 1999, 1998, and
1997, the Company used cash of approximately $1.9 million, $12.5 million, and
$14.2 million, respectively, in operating activities related to special charges.
In fiscal 1998, the Company used cash of $10.2 million for costs related to the
Chapter 11 filing. Additionally, $5.7 million of cash was used 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 1999 Credit Agreement to supplement
cash generated by operations. At November 27, 1999, $35.0 million was available
for borrowing. Working capital was $225.7 million and $197.2 million at the end
of fiscal 1999 and 1998, respectively. The current ratio was 2.53 to 1 and 2.09
to 1 at the end of fiscal 1999 and 1998, respectively. The primary reasons for
the increase in working capital and the current ratio was decreased other
current liabilities. During the peak selling months of May through September,
inventory is financed by cash from operations and trade accounts payable. During
the seasonally low sales months of December through February, inventory is
financed by cash from operations, trade accounts payable and borrowings under
the 1999 Credit Agreement, as needed.
During fiscal 1999 and 1998, the Company's primary investing activities
were capital expenditures principally for the renovation of existing stores and
additional equipment. The Company spent approximately $47.2 million, $26.9
million, and $65.6 million in fiscal 1999, 1998, and 1997, respectively, for
<PAGE>14
renovation of existing stores, additional equipment and software. Fiscal 1999
expenditures also include those for improved technology as well as the second
quarter purchase of ten previously leased stores for approximately $14.4
million. For fiscal 1998, the Company ceased spending for strategic initiatives
while it analyzed its competitive positioning in the market and related capital
expenditures. During 1999 and 1998, the Company sold 17 and 26 real estate
properties, respectively, related to stores previously closed for approximately
$20.9 million and $41.6 million of cash proceeds, respectively, which were
applied to outstanding debt. Sale of closed store properties will continue in
fiscal 2000. 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 $29.0 million 2000 capital expenditure budget
consists primarily of improved technology, 30 to 35 store remodels, new stores,
additional manufacturing capabilities and routine maintenance. Capital
expenditures in 2000 will be financed with funds generated from operations,
sales of real estate, and borrowings under the 1999 Credit Agreement.
The Company's most significant financing activity is and will continue
to be the retirement of indebtedness. The Company's consolidated indebtedness is
and will continue to be substantial. Management believes that cash flow
generated from operations, borrowings available under the 1999 Credit Agreement,
and other lease financing sources should provide sufficient liquidity to meet
all cash requirements for the next 12 months. 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.
Petition For Relief Under Chapter 11
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 Plan became effective December 2, 1997
(the "Effective Date").
For a summary description of the Plan, see Note B to the Financial Statements.
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
2001 and does not presently believe that it will have a significant effect on
its financial statements.
Effects of Inflation
The Company experienced slight deflation in its non-lumber inventories
during fiscal 1999, 1998, and 1997. Approximately 79% 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.
The Year 2000 Issue
The Year 2000 issue was the result of computer programs being written using two
digits rather than four digits to define the applicable year. Any programs that
have time-sensitive software may have recognized a date using "00" as the year
1900 rather than the year 2000. If not remedied, this could have resulted in
system failure or miscalculations.
The Company assessed the impact of the Year 2000 on its computer
systems, both hardware and software, and developed a plan to timely address the
Year 2000 issue. The Company spent approximately $4.7 million in the execution
of the Year 2000 plan. Most of such expenditures were charged to expense as
incurred. To date there have been no material adverse consequences, nor does the
Company believe that there will be any future material adverse consequences to
the Company's business, operations, or financial condition from the Year 2000
issue. 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, will not have a
material adverse effect on the Company.
<PAGE>15
Forward-Looking Statements
Statements above in the subsections entitled "Sales," "Costs and
Expenses," "Liquidity and Capital Resources," "New Accounting Pronouncements,"
and "The Year 2000 Issue," 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. These statements
are based on the current plans and expectations of the Company and 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 successful implementation of an Internet ordering system; the success of the
Company's strategy, including its e-commerce opportunities; and successful
completion of the new credit service agreement implementation. Additional
information concerning these and other factors is contained in the Company's
Securities and Exchange Commission filings, copies of which are available from
the Company without charge or on the Company's web site,
www.payless.cashways.com.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT 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
2000 $ 3,100 10.48 %
2001 10,000 8.11 %
2002 282,801 8.67 %
2003 -- -- %
2004 80,586 10.48 %
----------- --------
Total $ 376,487 9.06 %
=========== =========
Fair Value $ 376,487 9.06 %
=========== =========
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The independent auditors' report, financial statements, and notes
thereto are listed in the Index to Financial Statements and Financial Statement
Schedule at page F-1 of this report and begin on page F-2.
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
2000 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.
<PAGE>16
Item 11. EXECUTIVE COMPENSATION.
The information required by this item is incorporated herein by
reference to the Registrant's Proxy Statement for the 2000 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 2000 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 2000 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.
14 (a) (1) Financial Statements.
The financial statements and notes thereto are listed in the Index to
Financial Statements and Financial Statement Schedule on page F-1 of this report
and begin on page F-2.
14 (a) (2) Financial Statement Schedule.
The financial statement schedule is listed in the Index to Financial
Statements and Financial Statement Schedule on page F-1 of this report and is
found on page F-23.
14 (a) (3) Exhibits.
Exhibits are as set forth in the Index to Exhibits on page E-1 of this
report.
14 (b) Reports on Form 8-K.
The Registrant has filed one report on Form 8-K during the quarter
ended November 27, 1999. The report was dated November 17, 1999, and contained
Item 5, Other Events, and Item 7, Financial Statements and Exhibits. No
financial statements were filed with this report.
14 (c) Exhibits.
Exhibits are as set forth in the Index to Exhibits on page E-1 of this
report.
14 (d) Financial Statement Schedule.
The financial statement schedule is listed in the Index to Financial
Statements and Financial Statement Schedule on page F-1 of this report and is
found on page F-23.
<PAGE>17
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 16, 2000
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 16, 2000
Director
(Principal Executive Officer)
/s/Peter G. Danis
Peter G. Danis Non-Executive Chairman of the February 16, 2000
Board
/s/H. D. Cleberg
H. D. Cleberg Director February 16, 2000
/s/David G. Gundling
David G. Gundling Director February 16, 2000
/s/Max D. Hopper
Max D. Hopper Director February 16, 2000
/s/Donald E. Roller
Donald E. Roller Director February 16, 2000
/s/Peter M. Wood
Peter M. Wood Director February 16, 2000
/s/Timothy R. Mertz
Timothy R. Mertz Vice President-Treasury February 16, 2000
and Acting Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
</TABLE>
<PAGE>F-1
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
FINANCIAL STATEMENTS:
Independent Auditors' Report. F-2
Management's Letter re Responsibility for Financial Statements F-3
Statements of Operations--fiscal years ended November 27, 1999,
November 28, 1998, and November 29, 1997. F-4
Balance Sheets--November 27, 1999, and November 28, 1998. F-5
Statements of Cash Flows--fiscal years ended November 27, 1999,
November 28, 1998, and November 29, 1997. F-6
Statements of Stockholders' Equity--fiscal years ended November 27, 1999,
November 28, 1998, and November 29, 1997. F-7
Notes to Financial Statements. F-8
FINANCIAL STATEMENT SCHEDULE:
II - Valuation and Qualifying Accounts. F-23
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>F-2
[Letterhead of KPMG LLP]
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Payless Cashways, Inc.:
We have audited the accompanying balance sheets of Payless Cashways, Inc. as of
November 27, 1999 and November 28, 1998 and the related statements of
operations, stockholders' equity, and cash flows for each of the fiscal years in
the three-year period ended November 27, 1999. In connection with our audits of
the financial statements, we have also audited the financial statement schedule
for each of the years in the three-year period ended November 27, 1999. These
financial statements and financial statement schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and financial statement schedule 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 27, 1999 and November 28, 1998 and the results of its operations and
its cash flows for each of the fiscal years in the three-year period ended
November 27, 1999, in conformity with generally accepted accounting principles.
Also in our opinion, the related 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 C 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.
/S/ KPMG LLP
January 14, 2000
<PAGE>F-3
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.
<PAGE>F-4
<TABLE>
STATEMENTS OF OPERATIONS
<CAPTION>
Reorganized | Predecessor
Company | Company
--------------------------------------|--------------------
Fiscal Year Ended |Fiscal Year Ended
--------------------------------------|--------------------
November 27, November 28, | November 29,
In thousands, except per share amounts 1999 1998 | 1997
- -------------------------------------------------------------------------------------------------------------|--------------------
<S> <C> <C> | <C>
|
Income |
Net sales $ 1,811,365 $ 1,906,862 | $ 2,285,281
Other income 1,982 2,998 | 4,934
--------------------------------------|--------------------
1,813,347 1,909,860 | 2,290,215
Costs and expenses |
Cost of merchandise sold 1,333,968 1,420,787 | 1,676,658
Selling, general and |
administrative--Notes G and H 420,382 443,031 | 555,745
Special (credits) charges, net--Notes G and J (4,315) 7,421 | 73,539
Reorganization items--Note I -- -- | 25,455
Fresh-start revaluation--Note C -- -- | 355,559
Provision for depreciation and amortization 40,167 37,044 | 54,182
Interest expense (contractual interest of |
$66,973 in 1997)--Note D 35,763 37,162 | 61,251
--------------------------------------|--------------------
1,825,965 1,945,445 | 2,802,389
--------------------------------------|--------------------
|
LOSS BEFORE INCOME TAXES (12,618) (35,585) | (512,174)
|
Federal and state income taxes--Note F (5,211) (13,218) | (90,406)
--------------------------------------|--------------------
|
LOSS BEFORE EXTRAORDINARY ITEMS (7,407) (22,367) | (421,768)
|
Extraordinary items, net of income taxes--Notes C and D (729) -- | 133,176
--------------------------------------|--------------------
|
NET LOSS $ (8,136) $ (22,367) | $ (288,592)
======================================|====================
|
Weighted average common shares outstanding 20,000 $ 20,000 |
--------------------------------------|
|
Loss per common share before extraordinary item-basic and diluted $ (0.37) $ (1.12) |
|
Extraordinary items, net of income taxes (0.04) -- |
--------------------------------------|
|
Net loss per common share-basic and diluted--Notes A and E $ (0.41) $ (1.12) |
======================================|
</TABLE>
See notes to financial statements
<PAGE>F-5
<TABLE>
BALANCE SHEETS
<CAPTION>
Reorganized Company
-----------------------------------
November 27, November 28,
In thousands 1999 1998
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 1,111 $ 1,950
Merchandise inventories--Notes A and D 349,332 349,452
Prepaid expenses and other current assets 22,013 17,506
Income taxes receivable--Note F 679 1,338
Deferred income taxes--Note F -- 8,026
-----------------------------------
TOTAL CURRENT ASSETS 373,135 378,272
OTHER ASSETS
Real estate held for sale--Notes A and J 8,851 13,102
Deferred financing costs--Notes A and D 3,944 3,319
Other 1,549 1,677
LAND, BUILDINGS, EQUIPMENT AND SOFTWARE--Notes A and D
Land and land improvements 100,741 99,402
Buildings 225,945 225,426
Equipment 46,865 39,114
Capitalized software 19,382 7,367
Automobiles and trucks 11,916 8,439
Construction in progress 2,963 5,487
Allowance for depreciation and amortization (66,900) (34,293)
-----------------------------------
TOTAL LAND, BUILDINGS, EQUIPMENT AND SOFTWARE 340,912 350,942
-----------------------------------
$ 728,391 $ 747,312
===================================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt--Note D $ 3,265 $ 11,068
Trade accounts payable 51,480 52,325
Salaries, wages and bonuses 11,899 12,253
Accrued vacation expense 9,471 12,045
Accrued pension expense--Note G 14,765 24,298
Other accrued expense--Notes G and J 40,732 53,432
Taxes, other than income taxes 11,778 13,275
Income taxes payable--Note F 1,851 2,350
Deferred income taxes--Note F 2,157 --
-----------------------------------
TOTAL CURRENT LIABILITIES 147,398 181,046
LONG-TERM DEBT, less portion classified as current
liability--Note D 374,154 336,557
NON-CURRENT LIABILITIES
Deferred income taxes--Note F 31,263 47,142
Other--Note G 22,279 21,134
STOCKHOLDERS' EQUITY--Notes A, B 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 (30,503) (22,367)
-----------------------------------
TOTAL STOCKHOLDERS' EQUITY 153,297 161,433
-----------------------------------
COMMITMENTS AND CONTINGENCIES--Notes G and H
$ 728,391 $ 747,312
===================================
</TABLE>
See notes to financial statements
<PAGE>F-6
<TABLE>
STATEMENTS OF CASH FLOWS
<CAPTION>
Reorganized | Predecessor
Company | Company
------------------------------------|----------------------
Fiscal Year Ended | Fiscal Year Ended
------------------------------------|----------------------
November 27, November 28, | November 29,
In thousands 1999 1998 | 1997
- -------------------------------------------------------------------------------------------------------------|----------------------
<S> <C> <C> | <C>
|
Cash Flows from Operating Activities |
Net loss $ (8,136) $ (22,367) | $ (288,592)
Adjustments to reconcile net loss |
to net cash provided by operating activities: |
Depreciation and amortization 40,167 37,044 | 54,182
Deferred income taxes (5,696) (11,007) | (72,237)
Non-cash interest 2,079 829 | 5,031
Special charges (credits), net--Note J (4,315) 7,421 | 73,539
Non-cash extraordinary items--Notes C and D 729 -- | (133,176)
Non-cash reorganization items--Note I -- -- | 2,481
Fresh-start revaluation--Notes B and C -- -- | 355,559
Other 392 452 | (1,467)
Changes in assets and liabilities: |
Decrease in merchandise inventories 120 65,430 | 7,462
(Increase) decrease in prepaid expenses |
and other assets (4,507) (901) | 6,926
Decrease (increase) in income taxes receivable 659 30,882 | (14,505)
(Decrease) increase in trade accounts payable (845) (23,258) | 44,252
Decrease in other current liabilities (23,096) (31,380) | (4,359)
------------------------------------|----------------------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES (2,449) 53,145 | 35,096
|
Cash Flows from Investing Activities |
Additions to land, buildings, equipment and software (47,213) (26,864) | (65,601)
Proceeds from sale of land, buildings and equipment 22,457 43,987 | 18,775
Acquisition of business, excluding working capital: |
Purchase price in excess of net assets acquired -- -- | (1,015)
Decrease (increase) in other assets 128 7,029 | (1,141)
------------------------------------|----------------------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES (24,628) 24,152 | (48,982)
|
Cash Flows from Financing Activities |
Net (payments) proceeds related to revolving credit |
facility--Note D 251,386 (2,000) | 62,386
Principal payments on long-term debt--Note D (221,592) (83,760) | (32,795)
Fees and financing costs paid in connection with debt |
refinancing--Notes A and D (3,433) (1,548) | (3,365)
Other (123) -- | (804)
------------------------------------|----------------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 26,238 (87,308) | 25,422
------------------------------------|----------------------
|
Net (decrease) increase in cash and cash equivalents (839) (10,011) | 11,536
Cash and cash equivalents, beginning of period 1,950 11,961 | 425
------------------------------------|----------------------
Cash and cash equivalents, end of period $ 1,111 $ 1,950 | $ 11,961
====================================|======================
</TABLE>
See notes to financial statements
<PAGE>F-7
<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 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
Net loss for the year (8,136) (8,136)
----------------------------------------------------------------------------------------
Balance at November 27, 1999 $ -- $ 200 $ 183,600 $ -- $ (30,503) $ 153,297
========================================================================================
</TABLE>
See notes to financial statements
<PAGE>F-8
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 27,
1999, the Company operated 151 stores in 18 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 79% 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 $3.3 million and $2.4 million at November 27, 1999, and November
28, 1998, respectively.
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.
Provisions for amortization of capitalized software costs are computed by the
straight-line method over the estimated useful lives of the assets, which range
from two to 10 years. During 1999 and 1998, the Company capitalized software of
$12.0 million and $3.5 million, respectively, and amortized $3.4 million, $3.9
million and $3.1 million of capitalized software expense for 1999, 1998 and
1997, respectively. Accumulated amortization was $5.4 million and $2.1 million
at November 27, 1999 and November 28, 1998, respectively.
Deferred Financing Costs: Deferred financing costs are being amortized over the
respective borrowing terms using the interest method.
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of: The
Company accounts for long-lived assets in accordance with the provisions of
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of."
This Statement requires that long-lived assets and certain identifiable
intangibles be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceed the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying amount or fair value less costs to
sell.
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 years ended November 27,
1999 and November 28, 1998, the impact of considering such stock options would
be antidilutive.
<PAGE>F-9
Earnings per common share have 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 year 1997.
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.
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 1999, 1998, and 1997, federal and state income tax refunds, net of
payments, were $0.2 million, $32.9 million, and $0.6 million, respectively.
Cash paid for interest, net of interest capitalized, was $36.3 million, $35.2
million, and $55.4 million during fiscal 1999, 1998, and 1997, 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 27, 1999, and November 28, 1998, the outstanding balance of commercial
credit accounts sold to the third-party administrator was approximately $102.4
million and $95.6 million, respectively. The Company has provided a reserve of
$3.8 million and $5.9 million at November 27, 1999, and November 28, 1998,
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
$20.0 million, $23.2 million, and $27.5 million for fiscal 1999, 1998, and 1997,
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
$377.4 million and $347.6 million at November 27, 1999, and November 28, 1998,
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.
Accounting Period: The Company's fiscal year ends on the last Saturday in Nov-
ember. Fiscal years 1999, 1998 and 1997 consisted of 52 weeks each.
Reclassifications: Certain reclassifications have been made to the 1998 and
1997 financial statements to conform to the 1999 presentation.
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").
<PAGE>F-10
On the Petition Date, the Company filed a Disclosure Statement and a Plan of
Reorganization (the "Plan") with the Court. The Plan, as amended, 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 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.
See Notes I and J 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>F-11
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 ASSET $ 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
=================== ================ ================== ================= ===============
<FN>
(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
<PAGE>F-12
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.
</FN>
</TABLE>
Note D--Long-Term Debt
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
In thousands 1999 1998
------------------------------------
<S> <C> <C>
1999 Credit Agreement, secured by inventory and
certain real estate, variable interest rate,
payable in varying amounts through 2002 $ 183,386 $ --
1997 Credit Agreement, secured by certain real
estate and equipment, variable interest rate,
payable in varying amounts through 2002 109,415 251,458
Mortgage loan, secured by certain real estate,
variable interest rate, payable in varying
amounts through 2004 83,686 95,078
Other senior debt, 11% to 12%, payable in varying
amounts through 2004 932 1,089
------------------------------------
377,419 347,625
Less portion classified as current liability (3,265) (11,068)
------------------------------------
$ 374,154 $ 336,557
====================================
</TABLE>
In November 1999, the Company entered into a new $260 million revolving credit
facility with a $35 million letters-of-credit sublimit (the "1999 Credit
Agreement"). A portion of the proceeds was used to retire the existing revolving
credit facility and to reduce the term loan under the 1997 Credit Agreement,
described below. At November 27, 1999, there were borrowings under the agreement
of $183.4 million as well as outstanding stand-by letters of credit of $17.5
million. The Company had $35.0 million available for borrowing under this
agreement at November 27, 1999. This facility matures on November 17, 2002. The
loans bear interest at
<PAGE>F-13
fluctuating rates of either the Prime Rate (8.25% at November 27, 1999), as
defined, plus 3/4% per annum or the Euro Dollar Rate (6.48% at November 27,
1999), as defined, plus 2-3/4% per annum. The 1999 Credit Agreement is secured
by substantially all merchandise inventories and certain real estate, including
second priority liens on all real estate pledged to other creditors. Under the
1999 Credit Agreement, the Company is prohibited from incurring additional
indebtedness, with certain limited exceptions, and making dividend, redemption
and certain other payments on its capital stock. The 1999 Credit Agreement
contains certain customary operational covenants and events of default for
financing of this type as well as a minimum net worth covenant set at $135
million for the term of the agreement.
The 1997 Credit Agreement currently includes only term loans as a result of
payments, described above, that occurred in November 1999. The early
extinguishment of this debt resulted in an extraordinary charge of approximately
$0.7 million, net of tax, in the accompanying 1999 statement of operations. The
term loans require semiannual principal payments of $5 million beginning May 15,
2001, with final maturity on November 30, 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. The loans bear interest
at fluctuating rates of either the alternate base rate (8.50% at November 27,
1999) plus 1-1/2% per annum or LIBOR (5.61% at November 27, 1999) plus 2-1/2%
per annum. The 1997 Credit Agreement is secured by certain real estate,
including second priority liens on all real estate pledged to other creditors,
and substantially all the equipment of the Company.
In connection with the November 1999 prepayment of the 1997 Credit Agreement,
this agreement was amended to eliminate all financial performance covenants.
Under the 1997 Credit Agreement, the Company is 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 contains certain customary operational covenants and events of default
for financing of this type, including a change of control covenant.
The Company's mortgage loan is secured by certain real estate having a net book
value of approximately $194.4 million at November 27, 1999. The mortgage loan
bears interest at LIBOR plus 4% per annum and interest is paid monthly. Annual
principal payments of $4 million are required, 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.
Scheduled maturities of long-term debt, including sinking fund requirements,
are:
In thousands
2000 $ 3,265
2001 10,185
2002 283,008
2003 232
2004 80,723
Thereafter 6
---------------
$ 377,419
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. Holders of Old Common Stock and Old Preferred Stock
received approximately 2% and 3%, respectively, of the shares of New Common
Stock issued under the Plan. 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 a right of conversion.
<PAGE>F-14
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 1999 and
1998, the following assumptions were used to price the options: no dividend
yield; expected volatility of 123% and 144%, respectively; risk-free interest
rate of 6.64%and 5.04%, respectively; and an expected life of eight years. The
weighted-average fair value of options granted during fiscal 1999 and 1998 was
$1.55 per share and $2.40 per share, respectively. The options granted to date
vest ratably over four years.
The following is a summary of the Incentive Plan:
<TABLE>
<CAPTION>
Number Weighted-Average
of Shares Exercise Price
-----------------------------------------
In thousands
<S> <C> <C>
Fiscal Year 1999:
Options granted 555 $ 1.65
Options exercised -- --
Options forfeited (450) 2.56
-----------------------------------------
Options outstanding at November 27, 1999 2,225 $ 2.19
=========================================
Options exercisable at November 27, 1999 481 $ 2.44
=========================================
Fiscal Year 1998:
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 -- $ --
=========================================
</TABLE>
The following table summarizes information about stock options at November 27,
1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------------------------------- ---------------------------------------------
<S> <C> <C> <C> <C> <C>
Number Weighted-Average Number
Range of Outstanding Remaining Weighted -Average Exercisable Weighted-Average
Exercise Prices at 11/27/99 Contractual Life Exercise Price at 11/27/99 Exercise Price
- ------------------ ----------------- ----------------- ------------------ --------------------- --------------------
$0.88 - $1.94 1,130,000 9.28 $1.46 143,750 $1.27
$2.50 - $3.03 1,095,000 8.25 $2.95 337,500 $2.94
- ------------------ ----------------- ----------------- ------------------ --------------------- --------------------
$0.88 - $3.03 2,225,000 8.77 $2.19 481,250 $2.44
================== ================= ================= ================== ===================== ====================
</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 1999 and 1998 would
approximate the amounts below:
<TABLE>
<CAPTION>
Fiscal Year Ended
------------------------------------------------------------------------
In thousands, except per share data November 27, 1999 November 28, 1998
---------------------------------- -----------------------------------
As Reported Pro Forma As Reported Pro Forma
----------------- -------------- ------------------- --------------
<S> <C> <C> <C> <C>
Net loss $ (8,136) $ (8,673) $ (22,367) $ (22,896)
Net loss per common share $ (0.41) $ (0.43) $ (1.12) $ (1.14)
</TABLE>
<PAGE>F-15
Note F-Income Taxes
Income taxes for the year ended November 27, 1999, were allocated to loss before
extraordinary items, and to extraordinary items related to the early
extinguishment of debt. See Note D. The income tax benefit allocated to the loss
before extraordinary items was $5.2 million and the income tax benefit allocated
to the extraordinary item was $0.5 million. The Company has federal net
operating loss carry-forwards totaling $84.9 million, which expire through
fiscal 2019, and federal tax credit carry-forwards totaling $17.9 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 27, 1999, in
future periods.
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
$77.6 million, which expire through fiscal 2018, and federal tax credit
carry-forwards totaling $17.3 million, which begin to expire in fiscal 2006 and
expire over an indefinite period.
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 $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.
Income tax expense (benefit) attributable to the income (loss) before
extraordinary items consisted of the following:
In thousands 1999 1998 1997
-------------------------------------------
Currently receivable
Federal $ -- $ (959) $ (17,169)
State -- (1,252) (1,000)
-------------------------------------------
-- (2,211) (18,169)
Deferred
Federal (4,545) (10,124) (63,129)
State (666) (883) (9,108)
-------------------------------------------
(5,211) (11,007) (72,237)
-------------------------------------------
$ (5,211) $ (13,218) $ (90,406)
===========================================
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:
<TABLE>
<CAPTION>
1999 1998 1997
------------------------------------------
<S> <C> <C> <C>
Federal statutory rate (35.0)% (35.0)% (35.0)%
State income taxes, net of federal tax benefit (3.6) (3.9) (2.0)
Permanent tax differences (1.9) 0.5 0.7
Amortization and write-off of goodwill -- -- 20.1
Benefit from new law and tax settlements -- -- (1.8)
Difference between statutory and carry-back tax rates -- -- 0.3
Other (0.8) 1.3 --
------------------------------------------
(41.3)% (37.1)% (17.7)%
==========================================
</TABLE>
<PAGE>F-16
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 1999 1998
-------------------------------------
<S> <C> <C>
Deferred tax assets:
Tax credit and net operating loss carry-forwards $ 51,850 $ 47,097
Insurance reserves 6,088 7,990
Retirement benefits 5,906 9,719
Post-retirement benefits 7,264 7,069
Vacation reserves 2,959 3,764
Reserves for bad debts 1,909 2,155
Lease liability -- 1,366
Other 4,134 7,978
-------------------------------------
Total deferred tax assets 80,110 87,138
Less valuation allowance 6,909 7,981
-------------------------------------
Net deferred tax assets 73,201 79,157
-------------------------------------
Deferred tax liabilities:
Land, buildings and equipment (79,711) (96,637)
Inventory basis difference (20,766) (19,100)
Other (6,144) (2,536)
-------------------------------------
Total deferred tax liabilities (106,621) (118,273)
-------------------------------------
Net deferred tax liability $ (33,420) $ (39,116)
=====================================
</TABLE>
The decrease in the valuation allowance of approximately $1.1 million relates
primarily to adjustment of recorded net operating loss carryforwards upon
examination of the Company's prior period federal tax returns.
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.
The Company recorded a $10.6 million ($6.2 million after tax) non-cash
curtailment gain in connection with its non-contributory defined benefit pension
plan. Benefits under the pension plan were frozen effective June 17, 1999. The
curtailment gain is included in special (credits) charges, net, in the
accompanying 1999 statement of operations; see Note J.
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.
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 J.
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>F-17
Effective for participants retiring after November 30, 1999, the Company changed
the plan structure to eliminate life insurance benefits for retirees and to
eliminate the Company's subsidy of premiums on health insurance for retirees.
The following provides a reconciliation of benefit obligations, plan assets and
funded status of the plans:
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
-------------------------- --------------------------
In thousands 1999 1998 1999 1998
-------------------------- --------------------------
<S> <C> <C> <C> <C>
Change in Benefit Obligation
Benefit obligation at beginning of year $ 81,798 $ 76,693 $ 17,431 $ 16,689
Service cost-benefits earned during the period 2,662 4,915 411 701
Interest cost 5,012 5,254 987 1,134
Plan participants' contributions -- -- 136 166
Curtailments (10,590) -- -- --
Plan structure changes -- -- (6,980) --
Actuarial (gain) loss (17,452) 804 (2,004) (289)
Benefits paid (5,246) (5,868) (827) (970)
-------------------------- --------------------------
Benefit obligation at end of year 56,184 81,798 9,154 17,431
-------------------------- --------------------------
Change in Plan Assets
Fair value of plan assets at beginning of year 53,746 54,260 -- --
Actual return on plan assets 8,116 1,540 -- --
Employer contributions 2,068 3,814 -- --
Benefits paid (5,246) (5,868) -- --
-------------------------- --------------------------
Fair value of plan assets at end of year 58,684 53,746 -- --
-------------------------- --------------------------
Funded status 2,500 (28,052) (9,154) (17,431)
Unrecognized net actuarial (gain) loss (17,265) 3,754 (2,293) (289)
Unrecognized prior service cost -- -- (6,762) --
-------------------------- --------------------------
Accrued benefit cost included in other accrued expenses
and/or non-current liabilities $ (14,765) $ (24,298) $ (18,209) $(17,720)
========================== ==========================
</TABLE>
In fiscal 1999, 1998, and 1997, 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 27, 1999 and November 28, 1998, accumulated
post-retirement benefit obligation by $0.7 million and $1.0 million,
respectively, and the aggregate of the service and interest cost components of
net periodic post-retirement benefit cost for the fiscal years ended November
27, 1999 and November 28, 1998, by $71,000 and $62,000, respectively. The effect
of a 1.0% annual decrease in these assumed health-care cost trend rates would
decrease the November 27, 1999 and November 28, 1998, accumulated
post-retirement benefit obligation by $0.7 million and $0.8 million,
respectively, and the aggregate of the service and interest cost components of
net periodic post-retirement benefit cost for the fiscal years ended November
27, 1999 and November 28, 1998, by $67,000 and $57,000, respectively.
The accumulated benefit obligation was $62.1 million and $68.4 million at
November 27, 1999 and November 28, 1998, respectively.
<TABLE>
Components of Net Periodic Benefit Cost
<CAPTION>
In thousands Pension Benefits Other Benefits
-------------------------------------------- ----------------------------------------------
1999 1998 1997 1999 1998 1997
-------------------------------------------- ----------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Service cost - benefits earned
during the period $ 2,752 $4,915 $ 4,190 $ 411 $ 701 $ 636
Interest cost 5,012 5,254 4,256 987 1,134 1,019
Expected return on plan assets (4,638) (4,490) (4,139) -- -- --
Amortization of prior service cost -- -- 119 (218) -- 37
Amortization of unrecognized loss -- -- -- -- -- (99)
-------------------------------------------- ----------------------------------------------
Net periodic post-retirement
benefit cost $ 3,126 $5,679 $ 4,426 $1,180 $1,835 $1,593
============================================ =============================================
</TABLE>
<PAGE>F-18
<TABLE>
Weighted Average Assumptions
<CAPTION>
In thousands Pension Benefits Other Benefits
-------------------------------------------- ----------------------------------------------
1999 1998 1997 1999 1998 1997
-------------------------------------------- ----------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Discount rate 8.00% 6.75% 7.00% 8.00% 6.75% 7.00%
Expect return on plan assets 9.50% 8.50% 8.50% --% --% --%
Rate of increase in future
compensation levels 2.00%(a) 5.00% 6.00% --% --% --%
Healthcare cost trend rate --% --% --% 6.30% 6.70% 7.10%
<FN>
(a) Assumed 2.00% for 1999 and, since the pension plan was frozen as of
June 17, 1999, no further assumptions on salary are needed.
</FN>
</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 $1.9 million, $2.1 million and $2.8 in 1999,
1998 and 1997, 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: 2000 -- $13.8 million; 2001 --
$12.3 million; 2002 -- $10.2 million; 2003 -- $7.2 million; 2004 -- $5.8
million; thereafter -- $24.0 million. Rental expense under operating leases was
$14.4 million, $20.8 million, and $29.3 million for 1999, 1998, and 1997,
respectively.
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, which expired December 1, 1999, under which it
paid a 6-9/16% fixed rate of interest quarterly, in exchange for quarterly
receipt of LIBOR on $36 million. The fair value of this interest rate swap
agreement was estimated to be $0.0 million and $0.4 million at November 27,
1999, and November 28, 1998, respectively.
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--Special Charges
Included in special charges is a credit of $10.6 million ($6.2 million after
tax) recorded in the second quarter of fiscal 1999 for a non-cash curtailment
gain in connection with freezing the Company's non-contributory defined benefit
pension plan; see Note G. Also included in special charges are costs related to
store closures and asset impairment charges discussed below.
Store closing charges of $1.5 million ($0.9 million after tax) were recorded in
the second quarter of fiscal 1999 in connection with the closing of five stores.
All five stores were closed in the fourth quarter. In addition, the Company
recorded an additional $0.8 million ($0.5 million after tax) in the fourth
quarter of fiscal 1999 in connection with the closing of one store. Included in
this amount is approximately $0.6 ($0.4 million after tax) million for severance
related to approximately 20 administrative employees at the Company's store
support center. In connection with these store closings, the Company recorded
inventory write-downs of $3.4 million ($2.0 million after tax) and $0.5 million
($0.3 million after tax) in cost of merchandise sold for the second and fourth
quarters of fiscal 1999, respectively. The related store exit plans are expected
to be completed during fiscal year 2000 and the remaining accruals are expected
to be fully utilized.
<PAGE>F-19
Historical financial data for the closing of the six stores is as follows for
the fiscal years presented:
In thousands 1999 1998 1997
---------------------------------
Net sales $ 28,138 $ 46,093 $ 60,780
Net operating loss $ 3,991 $ 1,783 $ 562
The fiscal 1999 special charge includes:
<TABLE>
<CAPTION>
Amount Amount
Charged Paid Through Accrual at
In millions 1999 Nov. 27, 1999 Nov. 27, 1999
--------------------------------------------------------------
<S> <C> <C> <C>
Severance $ 0.6 $ -- $ 0.6
Other costs 1.7 1.0 0.7
---------------------------------------------------------------
$ 2.3 $ 1.0 $ 1.3
===============================================================
</TABLE>
The Company recorded special charges of $5.6 million ($3.5 million after tax) in
the first quarter of fiscal 1998 for severance costs related to the elimination
of approximately 70 administrative employees at the Company's store support and
regional administrative centers. Special charges of $0.1 million ($0.1 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 stores, respectively. One of the eight stores was closed at
November 28, 1998, and the other seven were closed during the first half of
fiscal 1999. In connection with these store closings, the Company recorded
inventory write-downs of $1.3 million ($0.8 million after tax) and $3.1 million
($1.9 million after tax) in cost of merchandise sold during the third and fourth
quarters of fiscal 1998, respectively. The related store exit plans are expected
to be completed during fiscal year 2000 and the remaining accruals are expected
to be fully utilized.
Historical financial data for the closing of the eight stores is as follows for
the fiscal years presented:
In thousands 1998 1997
-------------------------------
Net sales $ 60,103 $ 67,809
Net operating loss $ 4,027 $ 114
The fiscal 1998 special charge includes:
<TABLE>
<CAPTION>
Amount Amount
Charged Paid Through Accrual at
In millions 1998 Nov. 27, 1999 Nov. 27, 1999
--------------------------------------------------------------
<S> <C> <C> <C>
Severance costs $ 5.6 $ 5.6 $ --
Other costs 1.1 0.9 0.2
---------------------------------------------------------------
$ 6.7 $ 6.5 $ 0.2
===============================================================
</TABLE>
A special charge of $6.3 million ($5.2 million after tax) 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 ($8.8 million after tax), included in cost of
merchandise sold, in connection with the store closings. The related store exit
plans were completed by November 27, 1999.
Historical financial data for the closing of the 29 stores is as follows for the
fiscal years presented:
In thousands 1997
--------------
Net sales $ 209,898
Net operating loss $ 9,153
In connection with the above store closings, the Company recorded asset
impairment charges pursuant to SFAS 121 of $4.0 million ($2.3 after tax) in
1999, $0.7 million ($0.4 million after tax) in 1998 and $67.3 million ($55.4
million after tax) in 1997. These
<PAGE>F-20
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 based upon an appraisal.
During 1997, primarily because the environment for building materials retailing
continued to be increasingly competitive, the Company 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 above). 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. Accordingly, 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.
The Company will continue to review assets for impairment, particularly given
the ongoing competitive environment for building materials retailing.
<PAGE>F-21
Note K--Quarterly Financial Data (unaudited)
<TABLE>
<CAPTION>
In thousands, except per share amounts
First Second Third Fourth
Fiscal Year Ended November 27, 1999 Quarter Quarter Quarter Quarter
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Income
Net sales $ 391,873 $ 492,728 $ 492,160 $ 434,604
Other income 345 719 523 395
----------------------------------------------------------------
392,218 493,447 492,683 434,999
Costs and expenses
Cost of merchandise sold 285,939 366,713 362,217 319,099
Selling, general and administrative 106,517 108,683 108,052 97,130
Special charges (credits), net -- (5,400) -- 1,085
Provision for depreciation and amortization 8,936 9,223 10,563 11,445
Interest expense 8,612 8,909 8,636 9,606
----------------------------------------------------------------
410,004 488,128 489,468 438,365
----------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAXES (17,786) 5,319 3,215 (3,366)
Federal and state income taxes (7,826) 2,503 1,502 (1,390)
----------------------------------------------------------------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM (9,960) 2,816 1,713 (1,976)
Extraordinary item, net of income taxes -- -- -- 729
----------------------------------------------------------------
NET INCOME (LOSS) $ (9,960) $ 2,816 $ 1,713 $ (2,705)
================================================================
Weighted average common shares outstanding 20,000 20,000 20,000 20,000
----------------------------------------------------------------
Income (loss) per common share
before extraordinary item-basic $ (0.50) $ 0.14 $ 0.09 $ (0.10)
Extraordinary item, net of income taxes -- -- -- 0.04
----------------------------------------------------------------
Net income (loss) per common share-basic $ (0.50) $ 0.14 $ 0.09 $ (0.14)
================================================================
Weighted average common and dilutive
common equivalent shares outstanding 20,000 20,156 20,170 20,000
----------------------------------------------------------------
Income (loss) per common share
before extraordinary item-diluted $ (0.50) $ 0.14 $ 0.09 $ (0.10)
Extraordinary item, net of income taxes -- -- -- 0.04
----------------------------------------------------------------
Net income (loss) per common share-diluted $ (0.50) $ 0.14 $ 0.09 $ (0.14)
================================================================
</TABLE>
A lower-than-anticipated rate of inflation decreased the LIFO inventory
provision, after tax, by $0.8 million in the fourth quarter. A special credit
($6.2 million after tax) recorded in the second quarter reflects a pension
benefit curtailment gain recorded as a result of freezing benefits under the
Company's pension plan. Special charges were recorded in the second and fourth
quarter ($3.1 million and $0.6 million, respectively, after tax) in connection
with store closings and the elimination of administrative staff. In addition,
second and fourth quarter cost of merchandise sold reflects inventory
write-downs ($2.0 million and $0.3 million, respectively, after tax) in
connection with these store closings. Accelerated depreciation on certain
leasehold improvements and assets related to closed stores was recorded in the
third and fourth quarter ($0.6 million and $1.2 million, respectively, after
tax). An extraordinary charge ($0.7 million after tax) related to the early
extinguishment of debt was recorded in the fourth quarter.
<PAGE>F-22
<TABLE>
<CAPTION>
In thousands, except per share amounts
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 111,427 111,456 111,667 108,481
Special charges 5,584 -- 837 1,000
Provision for depreciation and amortization 9,055 9,595 8,550 9,844
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
================================================================
</TABLE>
A lower-than-anticipated rate of inflation decreased the LIFO inventory
provision, after tax, by $1.7 million in the fourth quarter. Special charges
($3.5 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 $1.9 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.
<PAGE>F-23
<TABLE>
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
<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 27, 1999:
Reserve for Inventory Shrink
and Obsolescence................. $ 11,892 $ 21,667 $ 22,150 $ 11,409
Reserves for Special Charges..... $ 1,100 $ 2,235 $ 1,912 $ 1,513
Reserve for Bad Debt............. $ 5,881 $ 8,848 $ 10,960 $ 3,769
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 $ 6,700 $ 12,476 $ 1,100
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..... $ 7,637 $ 13,437 $ 14,198 $ 6,876
Reserve for Bad Debt............. $ 5,740 $ 6,765 $ 6,626 $ 5,879
</TABLE>
<PAGE>E-1
INDEX TO 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).
2.2 Agreement and Plan of Merger in connection with the Reincor-
poration 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(a) Amendment to Bylaws of the Company.
3.1(b) 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 ex-
ceeding ten percent (10%) of the total assets of the Registrant
will be furnished to the Commission upon request.
4.1 Loan and Security Agreement dated November 17, 1999, by and among
Payless and Congress Financial Corporation (Central), as Lender
and Agent for Lenders (incorporated by reference to Exhibit 4.2
filed as part of Payless' Current Report on Form 8-K dated
November 17, 1999).
4.2(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).
4.2(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).
4.2(c) Second amendment to Amended and Restated Credit Agreement dated
November 17, 1999, 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' Current Report on Form 8-K dated November 17, 1999).
4.3(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).
4.3(b) First Amendment to Amended and Restated Loan Agreement dated
February 26, 1998, by and among Payless and UBS Mortgage Finance,
Inc (incorporated by reference to Exhibit 4.2(d) filed as part of
Payless' Annual Report on Form 10-K for the year ended November
28, 1998).
10.1* Amended and Restated Payless Cashways, Inc. 1998 Omnibus Incentive
Plan effective February 17, 1999 (incorporated by reference to
Exhibit 10.1 filed as part of Payless' Annual Report on Form 10-K
for the year ended November 28, 1998).
10.2* Form of Employment Agreement between Payless and certain executive
officers.
10.3* Form of Indemnification Agreement between Payless and various
officers and directors.
<PAGE>E-2
10.4* Payless Cashways, Inc. Store Support Center Management Bonus Plan,
dated as of December 1999.
10.5* 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).
23.1 Consent of KPMG LLP.
27.1 Financial data schedule.
* Represents a management contract or a compensatory plan or arrangement.
<PAGE>1
PAYLESS CASHWAYS, INC.
AMENDMENTS TO THE
AMENDED AND RESTATED BYLAWS
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 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.
<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.
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
<PAGE>2
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.
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
<PAGE>3
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 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.
<PAGE>4
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 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.
<PAGE>5
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.
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.
<PAGE>6
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 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
<PAGE>7
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.
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
<PAGE>8
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 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.
<PAGE>9
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.
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
<PAGE>10
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.
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
<PAGE>11
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
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
<PAGE>12
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 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
<PAGE>13
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.
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.
<PAGE>14
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.
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.
<PAGE>15
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>1
EXHIBIT 10.2
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
Paragraph 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 10.2
The following executive officers of Payless Cashways, Inc. have entered
into an employment agreement with Payless Cashways, Inc., in substantially the
form hereto:
<TABLE>
<CAPTION> Annual Incentive
Base Target Percentage of
Name Title Salary Base Compensation
- -------------------- ---------------------------------------- -------- --------------------
<S> <C> <C> <C>
Millard E. Barron President and Chief Executive Officer $550,000 75%
Edward L. Zimmerlin Senior Vice President - Merchandising $225,000 50%
and Marketing
Kelly R. Abney Vice President - Logistics and Facilities $212,000 50%
James L. Deats Vice President - Information Systems $180,000 50%
Renae G. Gonner Vice President - Merchandising and $145,000 40%
Marketing
Louise R. Iennaccaro Vice President - Human Resources $145,000 40%
David J. Krumbholz Vice President - Store Operations $225,000 50%
Ronald D. Long Vice President - Merchandising $200,000 40%
Timothy R. Mertz Vice President - Treasury, Treasurer $165,000 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 date of 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;
- You acted in good faith and in a manner you reasonably believed to
be in (or not opposed to) our best interests;
<PAGE>2
- 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.
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
<PAGE>3
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.
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.
<PAGE>4
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 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 determine 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 180 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.
<PAGE>5
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.
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
<PAGE>6
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.
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.
<PAGE>7
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.
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>8
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>9
Exhibit "A"
Glossary
"Agent"
"Agent" means:
- any person who is or was a director, officer, employee, agent or
fiduciary of Payless or a subsidiary of Payless; or
- any person who is or was serving as a director, officer, employee,
agent or fiduciary of another corporation, partnership, joint
venture, trust or other enterprise or entity (including service
with respect to an employee benefit plan), if such service is or
was at the request of, or for the convenience of, or to represent
the interests of, Payless or a subsidiary of Payless.
"Expenses"
"Expenses" are all direct and indirect costs of any type or nature
which you actually and reasonably incur in connection with the investigation,
defense or appeal of a Proceeding or establishing or enforcing a right to
indemnification under the Agreement, Delaware corporation law or otherwise.
"Expenses" include, without limitation, all attorneys' fees and related
disbursements, other out-of-pocket costs and reasonable compensation for time
spent by you for which you are not otherwise compensated by us or any third
party. "Expenses" also include all judgments, fines, and Employee Retirement
Income Security Act excise taxes or penalties.
"Independent Legal Counsel"
"Independent Legal Counsel" means a law firm, a member of a law firm,
or an independent practitioner that is experienced in matters of corporation law
and does not have a conflict of interest (under applicable standards of
professional conduct) in representing either Payless or you in an action to
determine your rights under this Agreement.
"Proceeding"
"Proceeding" means any threatened, pending or completed action, suit or
other proceeding, whether civil, criminal, administrative, investigative or of
another type to which you are a party or are threatened to be made a party, or
are otherwise involved, including involvement as a witness.
STORE SUPPORT CENTER MANAGEMENT
BONUS PLAN
TABLE OF CONTENTS
TOPIC PAGE
Plan Objectives.......................................................1
Plan Features
Eligibility Requirements.....................................2
Target Bonus Award...........................................2
Award Determination & Schedule........................................3
Sample Payout Calculation.............................................3
Plan Administration
Plan Procedures..............................................4
Bonus Payment Distribution...................................6
<PAGE>1
STORE SUPPORT CENTER MANAGEMENT
BONUS PLAN
PLAN OBJECTIVES
Compensation is a critical factor in attracting, retaining and motivating
management personnel. Variable compensation is a vital component of the total
compensation package. The philosophy of a bonus 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 performance for the achievement of a critical
performance objective, the Company's achievement of Earnings
Before Interest, Taxes, Depreciation & Amortization (EBITDA) 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.
This plan is established as of the first day of the fiscal year of 2000,
November 28, 1999, 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 Store Support Center Management Bonus 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>2
STORE SUPPORT CENTER MANAGEMENT
BONUS PLAN
ELIGIBILITY REQUIREMENTS
To be eligible for participation in the Store Support Center Management Bonus
Plan, you must be a regular, full-time associate, grade 508 or above. You may
also participate in the plan if you are a regular, full time associate
performing the duties of Field Auditor. In addition, you must:
- - be employed by the Company through the end of the fiscal year,
- - have acceptable overall performance and not engage in any
behavior, which would be grounds for termination during the entire
fiscal year and the period up to distribution of the bonus
payment.
Associates begin participation in the plan on their date of hire or promotion
into an eligible position.
TARGET BONUS AWARD
The target bonus percentage multiplied by the associate's actual base
compensation earned during the fiscal year reflects the participant's target
bonus award. The target percentage for Store Support Center Management is shown
below:
Annual Bonus Target
Salary Grade % of Base Compensation
------------ ----------------------
508 10.0%
509 12.0%
510 14.0%
511 16.0%
512 20.0%
513 40.0%
514 40.0%
515 50.0%
516 50.0%
517 50.0%
518 75.0%
* Also applies to Field Auditors.
The target bonus award will remain unchanged for the balance of the fiscal year
unless those conditions outlined in the Plan Procedures occur. (See Plan
Procedures beginning on page 4). Actual base compensation paid during the fiscal
year will be used in calculating earned awards.
<PAGE>3
STORE SUPPORT CENTER MANAGEMENT
BONUS PLAN
AWARD DETERMINATION & SCHEDULE
The bonus award will be earned based upon the Company's achievement of EBITDA at
a specified level. Shown below is the award schedule.
% of Budgeted Earned
EBITDA EBITDA
Attained Award Percent
-------- -------------
90% 50%
91% 55%
92% 60%
93% 65%
94% 70%
95% 75%
96% 80%
97% 85%
98% 90%
99% 95%
100% 100%
*For the CEO, grade 518, the schedule will continue in similar increments for
performance above 100% with no cap.
SAMPLE PAYOUT CALCULATION
Actual Base x Target Bonus x Earned EBITDA= Bonus
Compensation Percent Award Percent Payment
<PAGE>4
STORE SUPPORT CENTER MANAGEMENT
BONUS PLAN
PLAN PROCEDURES
Prorated awards shall occur in accordance with the following guidelines.
1. New Hire.
An associate hired into an eligible position will be eligible for a
bonus on his/her date of hire. Earned awards are based on the plan
formula and the actual base compensation earned in the eligible
position during the fiscal year.
2. Promoted Into Eligible Position.
An associate promoted into an eligible position will be eligible for a
bonus on the date of his/her new job. Earned awards are based on the
plan formula and the actual base compensation earned in the eligible
position during the fiscal year.
3. Promoted From One Eligible Position to Another Eligible Position.
If an associate is promoted into a position, which has a different
formula for determining the target bonus, then the old formula will be
calculated on the actual base compensation earned in the former
position. Likewise, the new formula will be calculated on the actual
base compensation earned in the new position.
4. Reclassification.
If an associate's current position is reclassified and assigned to a
new grade in the Payless Cashways' job classification program, then the
target bonus percentage will be adjusted. This would occur in
accordance with the procedures for a promotion, if the associate has
been assigned to a higher grade or for a demotion, if assigned to a
lower grade.
5. Transfer.
Associates who transfer between locations will be eligible for a
prorated bonus based on the actual base compensation earned at each
location during the fiscal year and the fiscal year end performance
against budget for each location.
6. Demotion.
If an associate is demoted into a position which has a different
formula for determining the target bonus percentage, then the old
formula will be calculated on the actual base compensation earned in
the former position. Subsequently, the new formula will be calculated
on the actual base compensation earned in the new position.
<PAGE>5
STORE SUPPORT CENTER MANAGEMENT
BONUS PLAN
PLAN PROCEDURES (Cont'd.)
An eligible associate 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 in
the eligible position during the fiscal year.
7. Interrupted Service.
If an associate's service is interrupted during the fiscal year, for a
period in excess of 90 days, due to short or long term disability
and/or other approved leaves of absence, then he/she shall receive, if
earned, a prorated bonus payment. This payment will be prorated based
on the plan formula and the actual base compensation earned during the
fiscal year plus first 90 days of leave.
The following guidelines apply in cases of an associate's separation:
1. Involuntary Termination.
An associate in the plan who, during the fiscal year, is involuntarily
terminated for such reasons as facility closing or reduction in force,
shall be ineligible for any bonus payments for the current fiscal year.
An associate in the plan who, at any time prior to distribution, is
involuntarily terminated for performance deficiencies shall be
ineligible for any bonus payments.
2. Termination for Violation of Company Policy.
An associate 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 bonus
payments.
3. Voluntary Termination.
An associate in the plan who terminates voluntarily after the end of
the fiscal year shall be eligible for a bonus payment, if earned.
However, if the associate terminates during the fiscal year, he/she
shall be ineligible for any bonus payments for the current fiscal year.
<PAGE>6
STORE SUPPORT CENTER MANAGEMENT
BONUS PLAN
BONUS PAYMENT DISTRIBUTION
Distribution of earned bonus payments shall be made by February 15 following the
end of the fiscal year.
Bonus payments are issued by check and are subject to applicable government
withholding taxes. Participant elected benefit deductions, such as MoneyBuilder
will be taken from the payment.
Bonus Payment Discrepancies
Errors in the calculation of an associate's bonus payment must be reported to
the Compensation Department within 30 days of receipt. All corrected amounts
will be added to the associate's next regularly scheduled paycheck.
<PAGE>1
[Letterhead of KPMG LLP]
Accountant's Consent
The Board of Directors
Payless Cashways, Inc.:
We consent to the incorporation by reference in the registration statement
(No. 333-70557) on Form S-8 of Payless Cashways, Inc. of our report dated
January 14, 2000, relating to the balance sheets of Payless Cashways, Inc.
as of November 27, 1999 and November 28, 1998, the related statements of
operations, stockholders' equity, and cash flows for each of the years in
the three-year period ended November 27, 1999, and all related schedules,
which report appears in the November 27, 1999 annual report on Form 10-K
of Payless Cashways, Inc. Our report refers to the application of
freshstart reporting as of November 29, 1997.
/S/ KPMG LLP
February 23, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the November
27, 1999, 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-27-1999
<PERIOD-END> NOV-27-1999
<CASH> 1111
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 349332
<CURRENT-ASSETS> 373135
<PP&E> 407812
<DEPRECIATION> (66900)
<TOTAL-ASSETS> 728391
<CURRENT-LIABILITIES> 147398
<BONDS> 374154
0
0
<COMMON> 200
<OTHER-SE> 153097
<TOTAL-LIABILITY-AND-EQUITY> 728391
<SALES> 1811365
<TOTAL-REVENUES> 1813347
<CGS> 1333968
<TOTAL-COSTS> 1333968
<OTHER-EXPENSES> 456234
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 35763
<INCOME-PRETAX> (12618)
<INCOME-TAX> (5211)
<INCOME-CONTINUING> (7407)
<DISCONTINUED> 0
<EXTRAORDINARY> (729)
<CHANGES> 0
<NET-INCOME> (8136)
<EPS-BASIC> (0.41)
<EPS-DILUTED> (0.41)
</TABLE>
