-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, L82uj/QxOz8pfXmxEeG6FSN9y4wG8EcZnBtYF6uo5YNVMX15zC0TJRIQlaoRhIjl +76gLTYFxdDhlCgezx/+GA== 0000076744-00-000002.txt : 20000225 0000076744-00-000002.hdr.sgml : 20000225 ACCESSION NUMBER: 0000076744-00-000002 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19991127 FILED AS OF DATE: 20000224 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PAYLESS CASHWAYS INC CENTRAL INDEX KEY: 0000076744 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-LUMBER & OTHER BUILDING MATERIALS DEALERS [5211] IRS NUMBER: 420945849 STATE OF INCORPORATION: DE FISCAL YEAR END: 1130 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-08210 FILM NUMBER: 552046 BUSINESS ADDRESS: STREET 1: 800 NW CHIPMAN ROAD STREET 2: P O BOX 648001 CITY: LEES SUMMIT STATE: MO ZIP: 64064-8001 BUSINESS PHONE: 8163476000 10-K 1 FORM 10-K NOVEMBER 27, 1999 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. 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. 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. 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. 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. 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. 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. 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. 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. FIVE-YEAR FINANCIAL SUMMARY
In thousands, except per share Reorganized Company | Predecessor Company amounts, percentages and ratios ------------------------------------------|----------------------------------------------- 1999 1998 1997 | 1997 1996 1995 - -----------------------------------------------------------------------------------|----------------------------------------------- | 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 (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 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.
FIVE-YEAR OPERATIONAL SUMMARY
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 - --------------------------------------------------------------------------------|------------------------------------------------- | | 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)% (a) Fiscal 1996 was a 53-week year. All 1996 data has been computed on a 52-week basis.
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. Operating Data
| Predecessor Reorganized Company | Company -------------------------------|-------------------- Fiscal Year Ended | Fiscal Year Ended -------------------------------|-------------------- percent of net sales Nov. 27, Nov. 28, | Nov. 29, 1999 1998 | 1997 -------------------------------|-------------------- | | 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) %
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. 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. 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. Comparative Operating Data
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) ---------------- ---------------- ------------------ ---------------|---------------- --------------- | 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)
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 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. 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. 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. 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.
Signature Title Date --------------------------- --------------------------------------- ----------------- /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)
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. 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 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. F-4 STATEMENTS OF OPERATIONS
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 - -------------------------------------------------------------------------------------------------------------|-------------------- | | 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) | ======================================|
See notes to financial statements F-5 BALANCE SHEETS
Reorganized Company ----------------------------------- November 27, November 28, In thousands 1999 1998 - ------------------------------------------------------------------------------------------------------------------------- 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 ===================================
See notes to financial statements F-6 STATEMENTS OF CASH FLOWS
Reorganized | Predecessor Company | Company ------------------------------------|---------------------- Fiscal Year Ended | Fiscal Year Ended ------------------------------------|---------------------- November 27, November 28, | November 29, In thousands 1999 1998 | 1997 - -------------------------------------------------------------------------------------------------------------|---------------------- | | 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 ====================================|======================
See notes to financial statements F-7 STATEMENTS OF STOCKHOLDERS' EQUITY
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 - ------------------------------------------------------------------------------------------------------------------------------ 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 ========================================================================================
See notes to financial statements 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. 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"). 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. F-11 A summary of the impact of the Plan and the related fresh-start adjustments is presented below:
November 29, 1997 ------------------------------------------------------------------------------------------- Predecessor Discharge of Fresh-Start Other Reorganized Company Indebtedness (a) Adjustments (b) Adjustments (c) Company ----------------- ---------------- ------------------ ----------------- --------------- 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 =================== ================ ================== ================= =============== (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 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.
Note D--Long-Term Debt Long-term debt consisted of the following:
In thousands 1999 1998 ------------------------------------ 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 ====================================
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 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. 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:
Number Weighted-Average of Shares Exercise Price ----------------------------------------- In thousands 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 -- $ -- =========================================
The following table summarizes information about stock options at November 27, 1999:
Options Outstanding Options Exercisable ----------------------------------------------------------- --------------------------------------------- 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 ================== ================= ================= ================== ===================== ====================
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:
Fiscal Year Ended ------------------------------------------------------------------------ In thousands, except per share data November 27, 1999 November 28, 1998 ---------------------------------- ----------------------------------- As Reported Pro Forma As Reported Pro Forma ----------------- -------------- ------------------- -------------- Net loss $ (8,136) $ (8,673) $ (22,367) $ (22,896) Net loss per common share $ (0.41) $ (0.43) $ (1.12) $ (1.14)
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:
1999 1998 1997 ------------------------------------------ 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)% ==========================================
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:
In thousands 1999 1998 ------------------------------------- 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) =====================================
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. 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:
Pension Benefits Other Benefits -------------------------- -------------------------- In thousands 1999 1998 1999 1998 -------------------------- -------------------------- 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) ========================== ==========================
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. Components of Net Periodic Benefit Cost
In thousands Pension Benefits Other Benefits -------------------------------------------- ---------------------------------------------- 1999 1998 1997 1999 1998 1997 -------------------------------------------- ---------------------------------------------- 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 ============================================ =============================================
F-18 Weighted Average Assumptions
In thousands Pension Benefits Other Benefits -------------------------------------------- ---------------------------------------------- 1999 1998 1997 1999 1998 1997 -------------------------------------------- ---------------------------------------------- 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% (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.
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. 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:
Amount Amount Charged Paid Through Accrual at In millions 1999 Nov. 27, 1999 Nov. 27, 1999 -------------------------------------------------------------- Severance $ 0.6 $ -- $ 0.6 Other costs 1.7 1.0 0.7 --------------------------------------------------------------- $ 2.3 $ 1.0 $ 1.3 ===============================================================
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:
Amount Amount Charged Paid Through Accrual at In millions 1998 Nov. 27, 1999 Nov. 27, 1999 -------------------------------------------------------------- Severance costs $ 5.6 $ 5.6 $ -- Other costs 1.1 0.9 0.2 --------------------------------------------------------------- $ 6.7 $ 6.5 $ 0.2 ===============================================================
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 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. F-21 Note K--Quarterly Financial Data (unaudited)
In thousands, except per share amounts First Second Third Fourth Fiscal Year Ended November 27, 1999 Quarter Quarter Quarter Quarter - -------------------------------------------------------------------------------------------------------------------------------- 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) ================================================================
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. F-22
In thousands, except per share amounts First Second Third Fourth Fiscal Year Ended November 28, 1998 Quarter Quarter Quarter Quarter - -------------------------------------------------------------------------------------------------------------------------------- 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 ================================================================
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. F-23 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS (In thousands)
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 - ----------------------------------------------------------------------------------------------------------------------------------- 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
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. 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. EX-3 2 AMENDEMNT TO BYLAWS OF THE COMPANY 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. EX-3 3 AMENDED & RESTATED BYLAWS OF THE COMPANY 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 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 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. 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. 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. 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 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 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. 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 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 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 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 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. 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. 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. EX-10 4 FORM OF EMPLOYMENT AGREEMENT 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 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 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, 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 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 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. 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 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 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. 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: _______________________ 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:
Annual Incentive Base Target Percentage of Name Title Salary Base Compensation - -------------------- ---------------------------------------- -------- -------------------- 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%
EX-10 5 FORM OF INDEMNIFICATION AGREEMENT 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; 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 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. 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. 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 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. 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] 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] ------------------------------ 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. EX-10 6 MANAGEMENT BONUS PLAN 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 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. 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. 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 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. 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. 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. EX-23 7 CONSENT OF KPMG LLP 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 EX-27 8 FINANCIAL DATA SCHEDULE
5 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. 1000 12-MOS NOV-27-1999 NOV-27-1999 1111 0 0 0 349332 373135 407812 (66900) 728391 147398 374154 0 0 200 153097 728391 1811365 1813347 1333968 1333968 456234 0 35763 (12618) (5211) (7407) 0 (729) 0 (8136) (0.41) (0.41)
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