-----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, D8+peloVfFM9YKvPMe44Q80Q2SvIUvSNnIgATa5BCFC8UPIF3smJjUMdNxrVXV0D KK96AufRSDyrAajmrvJ1LQ== 0000076744-01-000005.txt : 20010224 0000076744-01-000005.hdr.sgml : 20010224 ACCESSION NUMBER: 0000076744-01-000005 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20001125 FILED AS OF DATE: 20010221 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: 1550962 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 0001.txt 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 25, 2000 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 regis- trant 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 13, 2001, was $19,238,690. 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 13, 2001. DOCUMENTS INCORPORATED BY REFERENCE: Portions of the Annual Proxy Statement for the Annual Meeting of Stock- holders to be held April 18, 2001 -- 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 128 retail building materials stores, (excluding 22 locations which were closed in January of 2001) and 5 Builders Resource wholesale facilities in 17 states located in the Midwestern, Southwestern, Pacific Coast, and Rocky Mountain areas. The stores operate under the names Payless Cashways Building Materials, Furrow Building Materials, Lumberjack Building Materials, Hugh M. Woods Building Materials, Knox Lumber, Contractor Supply and PCI Builders Resource. 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 retail store currently averages approximately 27,000 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); work 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 retail outlets from most competitors. Additionally, the Builders Resource wholesale locations utilize the Company's existing Distribution center sites and manufacturing facilities to better serve the professional builder market segment. The Company's primary focus is on the professional customer. Professionals ("Pros") include professional builders, remodel and repair contractors, and institutional buyers. In their retail stores 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 compete. The Company's 2000 revenues were approximately 57% from sales to the Pro customer and 43% from sales to the DIY customer. The Company's business is somewhat seasonal with the peak selling months being May through September, and the lower sales months occurring in December through February. Because of this seasonality, the Company builds inventory in the lower sales months in anticipation of the peak selling season. This inventory build is financed by trade accounts payable and borrowings under the 1999 Credit Agreement and a seasonal credit facility overline, as needed. An average Payless store currently carries approximately $1.8 million of inventory, and during fiscal 2000, sales at Payless stores averaged approximately $10.0 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 financial 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 tailored product assortment, a full array of services and outside sales force, position each outlet to supply local Pros and national professional customers. A specialized and separate 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 outside sales representatives are managed and directed by 17 Market Sales Managers who provide a uniform approach to personnel selection, training and sales activities. 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 retail stores offer 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 their retail locations. 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 5 Builders Resource wholesale locations leverage the Company's existing Distribution channels as well as the dedicated outside sales force to better serve the professional builder market segment. The Company is currently implementing systems to utilize its e-commerce strategy to generate sales and increase customer service. The evolution of e-commerce provides the Company additional opportunities to interact with customers and increase sales. The Company believes it is strategically positioned to take advantage of this evolving convergence of "bricks and clicks". 4 Development is complete that will provide Internet or phone order fulfillment through currently under-utilized distribution channels to provide nationwide product sourcing and delivery. The Company has deployed a web-based special order procurement system to all of its locations and is developing the ability to create category specific e-catalogs. The Company has also partnered with select Internet firms to provide their customers with the ability to order products and delivery services via the Internet. Additionally, the Company has developed its own wireless communications applications to provide customers greater accessibility to its store locations and the Store Support Center. Manufacturing capabilities have been added in certain markets to better serve the needs of professional customers. The Company recognizes significant opportunity in this area and owns and operates four 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 builder and remodeler and plans to continue developing these 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 43% 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. In the retail locations, 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 certain related items that might 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 2000, Payless' full-line retail stores sold a broad range of building material products, currently averaging approximately 27,000 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, work apparel, interior and exterior lighting, bathroom fixtures and vanities, kitchen cabinets, flooring, and wallcoverings. During the last three fiscal years, these product classifications accounted for the following percentages of Payless' sales:
2000 1999 1998 ---- ---- ---- Lumberyard 53 % 53 % 51 % Hardware 47 47 49 ---- ---- ---- 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. In fiscal 2000 the Company shifted it's marketing emphasis from a mass advertising format to a targeted marketing approach. 5 Consequently , during fiscal 2000, the Company's expenditures on all forms of marketing, net of vendor program allowances, totaled approximately $8.9 million or 0.6% of sales, versus $20.0 million or 1.1% of sales during fiscal 1999. Store Management and Personnel Payless coordinates the operation of its 128 retail building materials stores through 128 Store Managers, each of whom reports directly to one of 19 District Managers who in turn reports to one of three Regional Vice Presidents/Managers. Supervision and control over the individual stores are facilitated by means of detailed operating reports and regular store visits. 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. In addition to the retail operations staff, a dedicated outside sales group, managed and directed by 17 Market Sales Managers, coordinates sales to the professional market segment. 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 leveraged for 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. A new global integrated purchasing system was implemented in fiscal 2000, which management believes will greatly improve inventory efficiency and replenishment. Distribution and Suppliers The Company operates a total of seven distribution centers and five 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 128 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 to all retail and wholesale locations. The manufacturing locations assemble pre-hung doors, customized windows, engineered roof and floor trusses, wall and floor panels, and stair systems. In fiscal 2000, 52% of merchandise was channeled through the distribution centers for redistribution to individual stores. This benefits the Company in the areas of product cost, 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 2000. Credit The Company offers credit to both its DIY and Pro customers. Purchases under national credit cards and the Company's private-label credit card program as a percentage of sales represented 27.1% in fiscal 2000, 27.0% in fiscal 1999, and 27.1% in fiscal 1998. Purchases under the Company's commercial credit program as a percentage of sales represented 38.8% in fiscal 2000, 37.7% in fiscal 1999, and 34.8% in fiscal 1998. The Company's private-label credit card program and commercial credit program are administered through agreements with a third-party administrator. Under these agreements, the costs of the credit programs represent a fixed percentage fee of charge sales. In addition, the Company substantially absorbs the cost of uncollectible commercial accounts. Accounts written off (net of recoveries) 6 under the commercial credit program for the last three fiscal years were approx- imately: $6.2 million or 1.1% of net commercial credit sales for 2000, $10.9 million or 1.6% of net commercial credit sales for 1999, and $4.0 million or 0.6% of net commercial sales for 1998. In addition to the traditional commercial program, the Company offers 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 management believes that this option 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, retail and wholesale distributors who market primarily to commercial and professional users. With regard to remodel and repair contractors and industrial buyers, the Company competes with local and 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 a few national chains larger than Payless, its size and capabilities give Payless significant advantages over the hundreds of smaller distributors in the highly fragmented retail building materials industry. Payless' competition varies by geographical area, and the Company 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 in the retail stores, and market competitive pricing and service tailored to the professional builders business needs at the Builders Resource wholesale facilities. Employees At November 25, 2000, Payless employed approximately 8,100 persons, 19% of whom were part-time, although the number of employees fluctuates seasonally. Management believes that employee relations are satisfactory. Less than 1% of Payless' employees are 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; interest rates; stability of customer demand; stability of the work force; supplier and lender support; consumer spending and debt levels; new and existing housing activity; commodity prices-specifically lumber and wallboard; customer and product mix; growth of certain market segments; weather; an excess of retail space devoted to the sale of building materials; and the success of the Company's strategy, including its e-commerce opportunities. 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.........51 President and Chief Executive Officer First elected a director: of Payless since June 1998; President 1998 of Zellers, 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; and currently a director of American Homestar Corpo- ration. Frank Chambers............56 Executive Vice President-Professional Business Development of Payless since March 2000; Vice President - Corporate Sales of Moores Lumber and Building Supplies, Inc. from September 1999 to February 2000; Vice President-Mergers and Acquisitions of Pelican Companies, Inc. from May 1995 to June 1998; Pres- ident of Builders Warehouse from Jan- uary 1994 to April 1995; Senior Vice President-Operations of Central Trac- tor Farm and Family from January 1993 to December 1993 and Senior Vice Pres- ident - Operations of Wickes Lumber, Inc.from January 1990 to January 1993. David J. Krumbholz........46 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 Janu- ary 1976. Edward L. Zimmerlin.......54 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 Adver- tising 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. Richard B. Witaszak.......40 Senior Vice President - Finance and Chief Financial Officer of Payless since April 2000; Executive Vice Pres- ident - Finance and Chief Financial Officer of Fred's Inc. from May 1996 to March 2000; Executive Vice Presi- dent - Finance and Operations of A.E. Cevite Inc. from October 1990 to April 1996; Manager-Financial Reporting of J.P. Industries, Inc. from July 1989 to September 1990; Audit Manager of Coopers & Lybrand from January 1985 to June 1989. Kelly R. Abney............46 Vice President - Logistics and Facil- ities of Payless since June 1998; Vice President - Distribution and Trans- portation of Payless from February 1997 to June 1998; and Vice President - Logistics of Pamida from September 1994 to February 1997. 8 James L. Deats............52 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 Im- ports, Inc. from September 1990 to February 1997. Renae G. Gonner...........38 Vice President - Marketing and Adver- tising of Payless since October 1998; Director of Advertising and Marketing Communications of Payless from July 1996 to October 1998; and Creative Services Manager of Payless from No- vember 1993 to July 1996. Mr. H. D. Cleberg, a Director of the Company, is Ms. Gonner's father. Louise R. Iennaccaro......56 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. James P. Fitzpatrick......56 Vice President - Merchandise Plan- ning and Control of Payless since December 2000; Consultant to Payless from May 2000 to November 2000; Sr. Vice President-Merchandise Planning and Control of Hills Department Stores from February 1997 to April 1999; and Vice President-Hardlines Replenishing of Montgomery Ward, Inc. from Nov- ember 1995 to January 1997. Kenneth D. Kuehn..........50 Vice President - Professional Sales of Payless since April 2000; Vice Presi- dent - Sales and Marketing of Wickes Lumber, Inc. from January 1998 to March 2000; and District Vice Presi- dent of Wickes Lumber, Inc. from Octo- ber 1995 to December 1997. Dennis R. Knowles.........36 Regional Vice President - Store Opera- tions of Payless since July 1998; Dis- trict Manager of Payless from January 1998 to June 1998; and Group Store Di- rector of Payless from June 1994 to December 1997. Mr. Knowles joined Pay- less in January 1982. Steven J. Schultz.........40 Regional Vice President - Store Oper- ations of Payless since June 2000; Re- gional Executive of Payless from July 1999 to May 2000; District Manager of Payless from July 1996 to June 1999; and Director of Store Operations of Payless from December 1992 to June 1996. Mr. Schultz joined Payless in January 1977. 9 Item 2. PROPERTIES. - ------- ----------- The Company's 128 building materials stores are located in the following states: Number of Stores Arizona................... 4 Missouri.................. 8 California................ 12 Nebraska.................. 4 Colorado.................. 18 Nevada.................... 6 Illinois.................. 3 New Mexico................ 3 Indiana................... 6 Ohio...................... 6 Iowa...................... 10 Oklahoma.................. 5 Kansas.................... 11 Tennessee................. 1 Kentucky.................. 4 Texas..................... 23 Minnesota................. 4 Payless owns 120 of its store facilities and 112 of the 128 sites on which such stores are located. The remaining 8 facilities and 16 sites are leased. The leases provide for various terms. Mortgages or deeds of trust on 139 store parcels or sites held as real estate for resale secure existing indebtedness. The 5 Builders Resource wholesale facilities are located at Distribution center and manufacturing facility sites that are described below. 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. Builders Resource wholesale operations are primarily located at existing distribution centers or manufacturing sites in established markets. 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' 128 retail 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 retail store has an average of 51,000 square feet of warehouse space. The average Payless store occupies approximately nine acres of land. During the fourth quarter of fiscal 2000, 22 underperforming stores began a closing process that was completed in January of 2001. Twelve and four stores were closed during fiscal years 1999 and 1998, respectively, and two and one stores were opened, respectively. No retail locations were opened in fiscal 2000. 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. The Company 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. 10 PART II Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MAT- TERS. - ------- ------------------------------------------------------------------------ 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 25, 2000, was 4,781. 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.
2000 1999 ------------------------ ------------------------- ------------------------- Price range of High Low High Low Common Stock ------------------------ ------------ ------------ ------------ ------------ First quarter 2.88 1.28 2.69 1.19 Second quarter 3.25 1.66 2.53 1.38 Third quarter 1.84 1.22 2.44 1.56 Fourth quarter 1.53 1.10 2.00 1.28
Item 6. SELECTED FINANCIAL DATA. - ------- ------------------------ FIVE-YEAR FINANCIAL SUMMARY
Reorganized Company | Predecessor Company In thousands, except per share ------------------------------------------------------------------------------------------- amounts, percentages and ratios 2000 1999 1998 1997 | 1997 1996 - ------------------------------------------------------------------------------------------------------------------------------------ Net sales $ 1,492,783 $ 1,811,365 $ 1,906,862 $ N/A |$ 2,285,281 $ 2,642,829 Cost of merchandise sold 1,098,527 1,333,968 1,420,787 N/A | 1,676,658 1,906,734 ------------------------------------------------------------------------------------------- Gross Profit 394,256 477,397 486,075 N/A | 608,623 736,095 Selling, general and administrative 340,474 420,382 443,031 N/A | 555,745 611,357 Reorganization items (a) -- -- -- N/A | 25,455 -- Fresh-start revaluation (a) -- -- -- N/A | 355,559 -- Special charges (credits), net (b) and (c) 20,400 (4,315) 7,421 N/A | 73,539 67,881 Other Income (2,064) (1,982) (2,998) N/A | (4,934) (8,076) Depreciation and amortization 30,067 40,167 37,044 N/A | 54,182 59,125 ------------------------------------------------------------------------------------------- Operating Income 5,379 23,145 1,577 N/A | (450,923) 5,808 Interest expense 41,552 35,763 37,162 N/A | 61,251 60,488 Interest income (d) -- -- -- N/A | -- (4,900) ------------------------------------------------------------------------------------------- Income (loss) before income taxes (36,173) (12,618) (35,585) N/A | (512,174) (49,780) Federal and state income taxes (15,622) (5,211) (13,218) N/A | (90,406) (30,702) ------------------------------------------------------------------------------------------- Income (loss) before extraordinary item (20,551) (7,407) (22,367) N/A | (421,768) (19,078) Extraordinary item (e) -- (729) -- N/A | 133,176 -- ------------------------------------------------------------------------------------------- Net loss $ (20,551) $ (8,136) $ (22,367) $ N/A |$ (288,592) $ (19,078) =========================================================================================== | Net loss per common share-basic and | diluted $ (1.03) $ (0.41) (1.12) N/A | Weighted average common shares outstanding 20,000 20,000 20,000 N/A | Current ratio 2.52 2.81 2.40 2.39 | N/A 1.44 Working capital $ 200,432 $ 240,502 $ 221,524 $ 280,838 |$ N/A $ 136,754 Total assets $ 677,658 $ 728,391 $ 747,312 $ 911,341 |$ N/A $ 1,293,118 Long-term debt $ 363,432 $ 374,154 $ 336,557 $ 424,031 |$ N/A $ 618,667 Stockholders' equity $ 132,746 $ 153,297 $ 161,433 $ 183,800 |$ N/A $ 289,731 Capital expenditures $ 22,647 $ 47,213 $ 26,864 $ N/A |$ 65,601 $ 43,985 Income from operations before interest, depreciation and amortization (f) $ 67,646 $ 62,847 $ 50,482 $ N/A |$ 68,505 $ 138,661 (a) In connection with its Chapter 11 filing on July 21, 1997, the Company recorded reorganization items in 1997. The Company also adopted fresh-start accounting, as of November 29, 1997, as a result of its emergence from bankruptcy under its plan of reorganization effective date, December 2, 1997. 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 11 November 29, 1997, became the opening balance sheet of the Reorganized Company. Fresh Start Reporting resulted in material changes to the Consolidated Balance Sheet, including valuation of assets and liabilities at fair market value and valuation of equity based on the appraised reorganization value of the ongoing business. 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. (b) In 2000, special charges consisted of restructure costs associated with the closing of 22 stores and administrative staff elimination costs. 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 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. (c) 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. (d) 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. (e) 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. (f) 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 reflected in cost of merchandise sold in 2000, 1999, 1998, 1997 and 1996 of $11.8 million, $3.4 million, $4.4 million, $10.7 million and $5.8 million, respectively, related to the closing of 22, 5, 8, 29 and 9 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 Reorganized Company | Predecessor Company of customers, gross square feet and ------------------------------------------------------------------------------------- retail square feet are in thousands 2000 (a) 1999 1998 | 1997 1996(b) - ------------------------------------------------------------------------------------------------------------------------------------ Number of retail facilities 150 151 161 | 164 192 Average same-store sales per facility $ 9,952 $ 11,975 $ 11,711 | $ 12,600 $ 13,107 Number of customers 31,646 38,769 42,741 | 50,743 56,736 Average sales per customer $ 47.17 $ 46.72 $ 44.61 | $ 45.04 $ 45.81 Number of employees 8,089 10,146 10,930 | 12,782 16,664 Average sales per employee $ 184,545 $ 174,740 $ 171,316 | $ 162,099 $ 152,228 Gross square feet (total) 14,080 14,080 14,491 | 15,550 17,578 Retail square feet (inside) 4,854 4,854 5,251 | 5,334 6,209 Sales per retail square foot $ 307.54 $ 365.25 $ 356.59 | $ 388.44 $ 408.56 Percent decrease in same-store sales (15.1)% (0.8)% (7.3)% | (6.6)% (2.5)% (a) Includes 22 stores in the process of closing at November 25, 2000. Does not include 5 Builders Resource facilities that were in various stages of start-up at November 25, 2000. (b) Fiscal 1996 was a 53-week year. All 1996 data has been computed on a 52- week basis.
12 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. Operating Data
Fiscal Year Ended ------------------------------------------------------- Nov. 25, Nov. 27, Nov. 28, 2000 1999 199 -------------------------------------------------------- percent of net sales Net sales....................................................... 100.0 % 100.0 % 100.0 % Cost of merchandise sold........................................ 73.6 73.6 74.5 ---- ---- ---- Gross Profit.................................................... 26.4 26.4 25.5 Selling, general and administrative............................. 22.8 23.2 23.2 Other income.................................................... (0.1) (0.1) (0.1) Special charges (credits), net.................................. 1.3 (0.2) 0.4 Provision for depreciation and amortization..................... 2.0 2.2 1.9 ---- ---- ---- Operating Income................................................ 0.4 1.3 0.1 Interest expense................................................ 2.8 2.0 2.0 ---- ---- ---- Loss before income taxes........................................ (2.4) (0.7) (1.9) Federal and state income taxes.................................. (1.0) (0.3) (0.7) ---- ---- ---- Loss before extraordinary item ................................. (1.4) (0.4) (1.2) Extraordinary item ............................................. -- -- -- Net loss........................................................ (1.4) % (0.4) % (1.2) % ==== ==== ====
Sales Net sales for fiscal 2000 decreased 15.1% on a same-store basis from fiscal 1999 and decreased 17.6% in total. Same-stores are those open one full year. On a same-store basis, sales to professional customers decreased 9.9%, while sales to the do-it-yourself customer declined by 21.2%. Same-store sales for the last nine months of the year were negatively impacted by a dramatic decline in commodity prices (primarily lumber and wallboard). The relative commodity price indices declined approximately 17% during fiscal 2000, and, based on the product mix, approximately 35% of the Company's inventory was adversely impacted. The Company believes that rising interest rates during fiscal 2000 also contributed to the decline in professional sales, although the Company is not able to estimate the amount of such impact. Additionally, the Company transitioned from a mass advertising format to a targeted marketing approach in fiscal 2000, which had a significant negative influence on sales to do-it-yourself customers. The Company has a number of initiatives planned during 2001 such as increased focus on pneumatic tools and concrete accessories and products that are designed to significantly increase Pro sales. Net sales for fiscal 1999 decreased 0.8% on a same store basis from fiscal 1998 and decreased 5.0% in total. 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 a slight decrease in commodity prices. 13 Costs and Expenses The cost of merchandise sold, as a percent of sales, was 73.6% in fiscal 2000, 73.6% in fiscal 1999, and 74.5% in fiscal 1998. Inventory write-downs related to store closings were $11.8 million, $3.9 million, and $4.4 million for fiscal 2000, 1999 and 1998, respectively, which was 0.8%, 0.2% and 0.2% 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 2000 was primarily due to lower product acquisition costs and improvements in inventory loss controls. Also excluding the effects of inventory write-downs related to store closings, the decrease in cost of merchandise sold during 1999 was mostly due to reduced promotional activity and lower product acquisition costs. Cost of merchandise sold in fiscal 2000, 1999, and 1998 benefited from a $0.2 million, $0.9 million, and a $2.4 million LIFO credit, respectively, related to liquidations of LIFO inventories and deflation. Selling, general and administrative expenses, as a percent of sales, were 22.8%, 23.2%, and 23.2% for fiscal 2000, 1999, and 1998, respectively. The 2000 reductions in selling, general and administrative expenses, in dollars, and as a percent of sales were primarily the result of initiatives undertaken in 2000 to reduce store as well as corporate overhead and personnel costs. Additionally, curtailment of the Company's non-contributory defined benefit plan in fiscal 1999 resulted in a reduction of $3.1 million in general expense in fiscal 2000. Insurance expense in 2000 was favorably impacted by a change in estimate in liability reserves for worker's compensation claims, as a result of settlements with insurance carriers. The approximate effect of this change was a $1.9 million reduction in selling, general and administrative expense. The 1999 reductions in selling, general and administrative expenses, in dollars, were primarily the result of closed stores. In the fourth quarter of 2000 the Company recorded a special charge of $20.4 million ($12.8 million after tax) in connection with the closing of 22 stores and the reduction of administrative staff. 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 reduction 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 reduction 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. 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 G to the Financial Statements. The provision for depreciation and amortization for fiscal 2000 decreased compared to fiscal 1999 partially because of accelerated depreciation charges of $3.1 million recorded in 1999 on certain leasehold improvements and assets related to closed stores. Additionally, the Company reassessed lives of certain classes of fixed assets during the second quarter of fiscal 2000. The approximate effect of this change in estimate on the fiscal 2000 expense was a $3.0 million reduction in the provision for depreciation and amortization. The remaining decline in the provision for depreciation and amortization in fiscal 2000 related to assets removed from service in connection with the store closings mentioned above. Interest expense increased to $41.6 million in fiscal 2000 compared to $35.8 million in 1999 primarily due to higher borrowing rates in 2000 and to a lesser extent higher borrowing levels in 2000. 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. The effective tax rates for fiscal 2000, 1999 and 1998 were different from the 35% federal statutory rate primarily because of state income taxes. 14 Net Income (Loss) The Company had losses before extraordinary items of $20.6 million in 2000 compared to $7.4 million in 1999 and $22.4 million in 1998. The 2000 loss before extraordinary items reflects special charges for store closings and administrative reductions and non-recurring inventory write-downs for the same closed stores, discussed above. The 1999 loss before extraordinary items reflects special charges for store closings, non-recurring inventory write-downs, 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. Excluding the non-routine items recorded during fiscal 2000, 1999, and 1998, net loss for these years would have been $0.7 million, $5.8 million, and $14.9 million, respectively. Comparative Operating Data
Fiscal Year Ended ------------------------------------------------------------------------------------------------------------------ November 25, 2000 November 27, 1999 November 28, 1998 ------------------------------------- ------------------------------------- ------------------------------------- In thousands Pro Forma Historical Pro Forma Historical Pro Forma Historical (Excluding (Including (Excluding (Including (Excluding (Including Non-Routine Items) Non-Routine Items) Non-Routine Items) Non-Routine Items) Non-Routine Items) Non-Routine Items) ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ Net sales and other income $1,492,783 $1,492,783 $1,811,365 $1,811,365 $1,906,862 $1,906,862 Income (loss) from operations before interest, deprecia- tion and amortization $ 67,646 $ 35,446 $ 62,847 $ 58,997 $ 50,482 $ 46,042 Net income (loss) $ (652) $ (20,551) $ (5,837) $ (8,136) $ (14,913) $ (22,367)
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 term loan 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 B to the Financial Statements. At November 25, 2000, and November 27, 1999, the Company had approximately $373.6 million and $377.4 million, respectively, of indebtedness. The Company expects from time to time to incur additional seasonal indebtedness. On January 31, 2001, the Company seasonally expanded its revolving line of credit with supplemental loan participation from a third party. On January 31, borrowing availability under the Company's $260 million existing line of credit increased by 5% for a six-month time period. This additional participation of $15.0 million by the aforementioned third party as part of the 1999 Credit Agreement will support the 5% advance rate increase through July 31, 2001. Liquidity and Capital Resources - ------------------------------- The Company's principal source of cash is from operations. Cash provided by operating activities was $21.7 million in fiscal 2000 compared to cash used in operating activities of $2.4 million for fiscal 1999, and cash provided by operating activities of $53.1 million for fiscal 1998. The 2000 increase in cash provided by operating activities was primarily due to decreases in merchandise inventories. The 1999 decrease in cash from operating activities was primarily caused by decreased other current liabilities due to store closings. The 1998 contribution of cash provided by operating activities was primarily due to decreases in merchandise inventories and income tax refunds. During 2000, 1999, and 1998, the Company used cash of approximately $5.6 million, $1.9 million, and $12.5, 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 reduction 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 January 26, 2001, $5.0 million was available for borrowing. Working capital was $200.4 million and $240.5 million at the end of fiscal 2000 and 1999, respectively. The current ratio was 2.52 to 1 and 2.81 to 1 at the end of fiscal 2000 and 1999, respectively. The primary reasons for the decrease in working capital and the current ratio were decreases in merchandise inventories. The Company's business is seasonal, with the winter months being the lowest sales months and the spring/summer months being the strongest sales period. As such, the Company typically generates a loss during the first quarter, and requires additional borrowings to fund operations, as well as to finance inventory build in anticipation of the peak-selling season. Accordingly, 15 the Company's liquidity is mostly dependent on its ability to secure seasonal borrowings during the slow months, and its ability to generate sufficient sales to repay these borrowings during its peak-selling season. During the first two months of the first quarter of 2001, the Company has experienced a softening in its sales compared to the same months of the first quarter of fiscal 2000. This softness is attributable to three primary factors: significant commodity deflation, unusually adverse weather conditions in various parts of the country, and some degree of general industry economic slowdown. While management does not believe this softening will persist throughout the balance of fiscal 2001, the Company's liquidity position and its ability to comply with covenants contained in its loan agreements and to service its future obligations could be impacted if these conditions become more severe. During fiscal 2000 and 1999, the Company's primary investing activities were capital expenditures principally for the renovation of existing stores and additional equipment. The Company spent approximately $22.6 million, $47.2 million, and $26.9 million in fiscal 2000, 1999, and 1998, respectively, for renovation of existing stores, additional equipment and software. Fiscal 1999 expenditures also include those for improved technology as well as the purchase of ten previously leased stores for approximately $14.4 million. During 2000 and 1999, the Company sold 5 and 17 real estate properties, respectively, related to stores previously closed for approximately $6.5 million and $20.9 million of cash proceeds, respectively, which were used to reduce outstanding debt. Sale of closed store properties will continue in fiscal 2001. Based on current real estate contracts and estimates, the Company expects to receive approximately $30.0 million in fiscal 2001 as a result of sales from these properties. The proceeds of these sales will be used to retire existing indebtedness (see notes B and G to the Financial Statements). 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 $10.0-$15.0 million 2001 capital expenditure target consists primarily of improved technology, 10 to 15 store remodels, additional manufacturing capabilities and routine maintenance. Capital expenditures in 2001 will be financed with funds generated from operations. The Company's most significant financing activity is and will continue to be the retirement of indebtedness. The Company's 2001 target reduction for debt is in excess of $100 million. 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, targeted reductions in working capital, and other lease financing sources will provide sufficient liquidity to meet all cash requirements for the next 12 months. New Accounting Pronouncements - ----------------------------- In June of 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("FAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). This statement, as amended by FAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities- an Amendment of FASB Statement No. 133", 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 FASB has delayed the effective date of implementing the standard until January 1, 2001, and therefore the Company will not be required to adopt SFAS 133 until the first quarter of fiscal 2001. The Company does not presently expect that it will have a significant effect on its financial statements. In September 2000, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities", which replaces SFAS 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities". This standard revises the methods for accounting for securitizations and other transfers of financial assets and collateral as outlined in SFAS 125, and requires certain additional disclosures. For transfers and servicing of financial assets and extinguishments of liabilities, this standard will be effective for transfers occurring after March 31, 2001. However, for disclosure regarding securitizations and collateral, as well as recognition and reclassification of collateral, this standard will be effective for fiscal years ending after December 15, 2000. The Company is currently evaluating the impact of the adoption of this standard. The Company does not presently believe that the adoption of this standard will have a material effect on its financial position or results of operation. Effects of Inflation - -------------------- Significant deflation in lumber and wallboard inventory occurred in fiscal 2000. This inventory is consistently valued at the lower of cost or market. The Company experienced slight deflation in its non-lumber inventories during fiscal 2000, 1999, and 1998. Approximately 78% 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. 16 Forward-Looking Statements - -------------------------- Statements above in the subsections entitled "Sales," "Costs and Expenses," "Liquidity and Capital Resources," and "New Accounting Pronouncements," such as "unlikely", "intend", "estimated", "believe", "expect", "anticipate", "target" 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 and lender support; consumer spending and debt levels; interest rates; new and existing housing activity; commodity prices-specifically lumber and wallboard; customer and product mix; growth of certain market segments; weather; an excess of retail space devoted to the sale of building materials; and the success of the Company's strategy. 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. 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 2001 $ 10,000 9.18% 2002 285,904 9.48% 2003 -- --% 2004 76,906 10.62% ----------- ----- Total $ 372,810 9.72% =========== ===== Fair Value $ 372,810 9.72% =========== =====
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 AN FINANCIAL DISCLOSURE. - ------- ----------------------------------------------------------------------- None. PART III Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. - -------- --------------------------------------------------- 17 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 2001 Annual Meeting of Stockholders to be filed pursuant to Regulation 14A. The required information as to executive officers is set forth in Part I hereof. Item 11. EXECUTIVE COMPENSATION. - -------- ----------------------- The information required by this item is incorporated herein by reference to the Registrant's Proxy Statement for the 2001 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 2001 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 2001 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. No reports on form 8-K were filed by the Company during the quarter ended November 25, 2000. 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. 18 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 20, 2001 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 20, 2001 Director (Principal Executive Officer) /s/Peter G. Danis ---------------------- Peter G. Danis Non-Executive Chairman of the February 20, 2001 Board /s/H. D. Cleberg ---------------------- H. D. Cleberg Director February 20, 2001 /s/David G. Gundling ---------------------- David G. Gundling Director February 20, 2001 /s/Max D. Hopper ---------------------- Max D. Hopper Director February 20, 2001 /s/Donald E. Roller ---------------------- Donald E. Roller Director February 20, 2001 /s/Peter M. Wood ---------------------- Peter M. Wood Director February 20, 2001 /s/Richard B. Witaszak ---------------------- Richard B. Witaszak Senior Vice President-Finance February 20, 2001 and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)
19 INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE FINANCIAL STATEMENTS: Independent Auditors' Report. F-2 Management's Letter regarding Responsibility for Financial Statements F-3 Statements of Operations--fiscal years ended November 25, 2000, November 27, 1999, and November 28, 1998. F-4 Balance Sheets--November 25, 2000, and November 27, 1999. F-5 Statements of Cash Flows--fiscal years ended November 25, 2000, November 27, 1999, and November 28, 1998. F-6 Statements of Stockholders' Equity--fiscal years ended November 25, 2000, Novem- ber 27, 1999, and November 28, 1998. 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. 20 INDEPENDENT AUDITORS' REPORT The Board of Directors Payless Cashways, Inc.: We have audited the accompanying balance sheets of Payless Cashways, Inc. as of November 25, 2000 and November 27, 1999 and the related statements of operations, stockholders' equity, and cash flows for each of the fiscal years in the three-year period ended November 25, 2000. 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 25, 2000. 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 auditing standards generally accepted in the United States of America. 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 25, 2000 and November 27, 1999 and the results of its operations and its cash flows for each of the fiscal years in the three-year period ended November 25, 2000, in conformity with accounting principles generally accepted in the United States of America. 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. KPMG LLP January 12, 2001, except as to Note I, which is as of January 31, 2001 21 RESPONSIBILITY FOR FINANCIAL STATEMENTS The financial statements of Payless Cashways, Inc. have been prepared by management in accordance with accounting principles generally accepted in the United States of America 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 auditing standards generally accepted in the United States of America 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. 22 STATEMENTS OF OPERATIONS
Fiscal Year Ended --------------------------------------------------------- November 25, November 27, November 28, In thousands, except per share amounts 2000 1999 1998 - ------------------------------------------------------------------------------------------------------------------------------- Net sales $ 1,492,783 $ 1,811,365 $ 1,906,862 Cost of merchandise sold 1,098,527 1,333,968 1,420,787 -------------------------------------------------------- Gross Profit 394,256 477,397 486,075 Selling, general and administrative expenses--Notes E and F 340,474 420,382 443,031 Other income (2,064) (1,982) (2,998) Special charges (credits), net--Notes E and G 20,400 (4,315) 7,421 Provision for depreciation and amortization 30,067 40,167 37,044 ------------------------------------------------------- OPERATING INCOME 5,379 23,145 1,577 Interest Expense 41,552 35,763 37,162 ------------------------------------------------------- LOSS BEFORE INCOME TAXES (36,173) (12,618) (35,585) Federal and state income taxes--Note D (15,622) (5,211) (13,218) -------------------------------------------------------- LOSS BEFORE EXTRAORDINARY ITEMS (20,551) (7,407) (22,367) Extraordinary item , net of income taxes--Note B -- (729) -- ------------------------------------------------------- NET LOSS $ (20,551) $ (8,136) $ (22,367) ======================================================== Weighted average common shares outstanding 20,000 20,000 20,000 -------------------------------------------------------- Loss per common share before extraordinary items-basic and diluted $ (1.03) $ (.37) $ (1.12) Extraordinary item , net of income taxes -- (.04) -- -------------------------------------------------------- Net loss per common share-basic and diluted--Notes A and C $ (1.03) $ (.41) (1.12) ======================================================== See notes to financial statements
23 BALANCE SHEETS
----------------------------------- November 25, November 27, In thousands 2000 1999 - ------------------------------------------------------------------------------------------------------------------------- ASSETS CURRENT ASSETS Cash and cash equivalents $ 1,485 $ 1,111 Merchandise inventories--Notes A and B 311,489 349,332 Prepaid expenses and other current assets 19,246 22,013 Income taxes receivable--Note D -- 679 ---------------------------------- TOTAL CURRENT ASSETS 332,220 373,135 OTHER ASSETS Real estate held for sale--Notes A and G 3,785 8,851 Deferred financing costs--Notes A and B 3,051 3,944 Other 3,090 1,549 LAND, BUILDINGS, EQUIPMENT AND SOFTWARE--Notes A and B Land and land improvements 101,099 100,741 Buildings 235,894 225,945 Equipment 51,820 46,865 Capitalized software 27,056 19,382 Automobiles and trucks 12,369 11,916 Construction in progress 2,733 2,963 Allowance for depreciation and amortization (95,459) (66,900) ---------------------------------- TOTAL LAND, BUILDINGS, EQUIPMENT AND SOFTWARE 335,512 340,912 ---------------------------------- $ 677,658 $ 728,391 ================================== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Current portion of long-term debt--Note B $ 10,181 $ 3,265 Trade accounts payable 38,633 51,480 Salaries, wages and bonuses 11,541 21,370 Other accrued expenses--Notes E and G 55,000 40,732 Taxes, other than income taxes 9,996 11,778 Income taxes payable--Note D 927 1,851 Deferred income taxes--Note D 5,510 2,157 ---------------------------------- TOTAL CURRENT LIABILITIES 131,788 132,633 LONG-TERM DEBT, less portion classified as current liability--Note B 363,432 374,154 NON-CURRENT LIABILITIES Deferred income taxes--Note D 12,288 31,263 Other--Note E 37,404 37,044 STOCKHOLDERS' EQUITY--Notes A, B, and C 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 (51,054) (30,503) ---------------------------------- TOTAL STOCKHOLDERS' EQUITY 132,746 153,297 ---------------------------------- COMMITMENTS AND CONTINGENCIES--Notes B, E, F and G $ 677,658 $ 728,391 ================================== See notes to financial statements
24 STATEMENTS OF CASH FLOWS
Fiscal Year Ended --------------------------------------------------------- November 25, November 27, November 28, In thousands 2000 1999 1998 - --------------------------------------------------------------------------------------------------------------------------------- Cash Flows from Operating Activities Net loss $ (20,551) $ (8,136) $ (22,367) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization 30,067 40,167 37,044 Deferred income taxes (15,622) (5,696) (11,007) Non-cash interest 1,371 2,079 829 Special charges (credits), net--Note G 20,400 (4,315) 7,421 Non-cash extraordinary item --Note B -- 729 -- Other (3,051) 392 452 Changes in assets and liabilities: Decrease in merchandise inventories 37,843 120 65,430 (Increase) decrease in prepaid expenses and other assets 2,767 (4,507) (901) Decrease in income taxes receivable 679 659 30,882 Decrease in trade accounts payable (12,847) (845) (23,258) Decrease in other current liabilities (19,352) (23,096) (31,380) ------------------------------------------------------ NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES 21,704 (2,449) 53,145 Cash Flows from Investing Activities Additions to land, buildings, equipment and software (22,647) (47,213) (26,864) Proceeds from sale of land, buildings and equipment 8,170 22,457 43,987 Decrease (increase) in other assets (1,541) 128 7,029 ------------------------------------------------------ NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES (16,018) (24,628) 24,152 Cash Flows from Financing Activities Net (payments) proceeds related to revolving credit facility--Note B 6,470 251,386 (2,000) Principal payments on long-term debt--Note B (10,276) (221,592) (83,760) Fees and financing costs paid in connection with debt refinancing--Notes A and B (478) (3,433) (1,548) Other (1,028) (123) -- ------------------------------------------------------ NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (5,312) 26,238 (87,308) ------------------------------------------------------ Net (decrease) increase in cash and cash equivalents 374 (839) (10,011) Cash and cash equivalents, beginning of period 1,111 1,950 11,961 ------------------------------------------------------ Cash and cash equivalents, end of period $ 1,485 $ 1,111 $ 1,950 ====================================================== See notes to financial statements
25 STATEMENTS OF STOCKHOLDERS' EQUITY
Common Additional Stock Paid-in Accumulated In thousands $.01 Par Value Capital Deficit Total - ----------------------------------------------------------------------------------------------- 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 =================================================== Net loss for the year (20,551) (20,551) --------------------------------------------------- Balance at November 25, 2000 $ 200 $183,600 $ (51,054) $ 132,746 =================================================== See notes to financial statements
26 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. The Company operates 128 retail building materials stores, excluding 22 locations which were closed in January of 2001, and 5 Builders Resource facilities in 17 states located in the Midwestern, Southwestern, Pacific Coast, and Rocky Mountain areas. At November 25, 2000, the Company operated 151 stores in 18 states. 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. The reorganization value of the Company was 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. Because of the application of fresh start reporting, the financial statements for periods after reorganization are not comparable in all respects to the financial statements prior to the 1997 reorganization. Use of Estimates and Other Uncertainties: In preparing the financial statements in conformity with accounting principles generally accepted in The United States of America, 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; availability of capital; 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 78% 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 $3.5 million and $3.3 million at November 25, 2000, and November 27, 1999, 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 2000 and 1999, the Company capitalized software of $7.7 million and $12.0 million, respectively, and amortized $3.1 million, $3.4 million and $3.9 million of capitalized software expense for 2000, 1999 and 1998, respectively. Accumulated amortization was $8.5 million and $5.4 million at November 25, 2000 and November 27, 1999, respectively. Provisions for depreciation of major store remodels are computed by the straight-line method over the estimated useful lives of the assets which are primarily 7 years, except for additions to buildings for which the useful lives range from 7 to 39 years. During 2000 and 1999, the Company capitalized major remodels of $6.2 million and $1.7 million, respectively. Internal labor costs capitalized related to these remodels were approximately $2.0 million and $0.7 million for fiscal 2000 and 1999, respectively. The Company reassessed lives of certain classes of fixed assets during the second quarter of fiscal 2000. The approximate effect of this change in estimate on the fiscal 2000 expense was a $3.0 million reduction in the provision for depreciation and amortization. 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 27 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 25, 2000 and November 27, 1999, the impact of considering such stock options would be antidilutive. 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 2000, federal and state tax payments, net of refunds were $0.3 million. In fiscal 1999, and 1998, federal and state income tax refunds, net of payments, were $0.2 million, and $32.9 million, respectively. Cash paid for interest was $40.7 million, $36.3 million, and $35.2 million during fiscal 2000, 1999, and 1998, respectively. Sale of Receivables: The Company sells its commercial credit accounts to a third-party administrator pursuant to an agreement which expires in 2004. 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 25, 2000, and November 27, 1999, the outstanding balance of commercial credit accounts sold to the third-party administrator was approximately $91.0 million and $102.4 million, respectively. In fiscal year 2000, there was an acceleration in the timing of the repurchase of delinquent commercial credit accounts receivable from a new third party administrator, which was in accordance with the recourse provision of the new agreement. As a result, the fiscal 2000 financial statements reflect certain changes in estimates relating to the recourse provision of the new agreement. At November 25, 2000, included in other current assets were $4.8 million of accounts receivable that are associated with expected recoveries resulting from this change in repurchasing of accounts. The Company has also provided a reserve of $1.5 million and $3.8 million at November 25, 2000 and November 27, 1999, respectively, which is believed to adequately cover its credit risk on the remaining outstanding portfolio of accounts receivable that have not been repurchased. 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 $8.9 million, $20.0 million, and $23.2 million for fiscal 2000, 1999, and 1998, respectively, net of vendor allowances. 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 $373.6 million and $377.4 million at November 25, 2000, and November 27, 1999, 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. Accounting Period: The Company's fiscal year ends on the last Saturday in Novem- ber. Fiscal years 2000, 1999 and 1998 consisted of 52 weeks each. Reclassifications: Certain reclassifications have been made to the 1999 an 1998 financial statements to conform to the 2000 presentation. 28 Note B--Long-Term Debt Long-term debt consisted of the following:
In thousands 2000 1999 ---------------------------------- 1999 Credit Agreement, secured by inventory and certain real estate, variable interest rate, payable in varying amounts through 2002 $ 189,856 $ 183,386 1997 Credit Agreement, secured by certain real estate and equipment, variable interest rate, payable in varying amounts through 2002 106,048 109,415 Mortgage loan, secured by certain real estate, variable interest rate, payable in varying amounts through 2004 76,906 83,686 Other senior debt, 11% to 12%, payable in varying amounts through 2004 803 932 ---------------------------------- 373,613 377,419 Less portion classified as current liability (10,181) (3,265) ---------------------------------- $ 363,432 $ 374,154 ==================================
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 25, 2000, there were borrowings under the agreement of $189.9 million as well as outstanding stand-by letters of credit of $16.5 million. The Company had $5.0 million available for borrowing under this agreement as of January 26, 2001. This facility matures on November 17, 2002. The loans bear interest at fluctuating rates of either the Prime Rate (9.50% at November 25, 2000), as defined, plus 3/4% per annum or the Euro Dollar Rate (6.48% at November 25, 2000), as defined, plus 2-3/4% per annum. The 1999 Credit Agreement is secured by substantially all merchandise inventories and certain real estate. 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 adjusted net worth covenant set at $135 million for the term of the agreement. The minimum adjusted net worth covenant excludes the effects of certain non-cash charges and credits. The cumulative amount of such non-cash charges at November 25, 2000 was $11.6 million. See Note I for a description of the terms of a seasonal expansion to the 1999 Credit Agreement, which was consummated on January 31, 2001. 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 25, 2000) plus 1-1/2% per annum or LIBOR (6.62% at November 25, 2000) 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 29 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 and bears interest at LIBOR plus 4% per annum with interest 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. Because of the aforementioned prepayments, no mandatory principal payments on the mortgage loan are due until maturity in 2004. Scheduled maturities of long-term debt, including sinking fund requirements, are: In thousands 2001 $ 10,181 2002 286,111 2003 232 2004 77,089 ------------- $ 373,613 Note C--Stockholders' Equity The Company has the authority to issue 50,000,000 shares of Common Stock, $.01 par value. Each outstanding share of Common Stock is entitled to one vote on each matter on which stockholders are entitled to vote. The Payless Cashways 1998 Omnibus Incentive Plan (the "Incentive Plan") was established January 15, 1998, to attract and retain outstanding individuals in certain key positions. The Incentive Plan provides for the grant of incentive stock options, non-qualified stock options, stock appreciation rights, restricted stock awards and performance awards. There are 3,000,000 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 2000, 1999 and 1998, the following assumptions were used to price the options: no dividend yield; expected volatility of 112%, 123% and 144%, respectively; risk-free interest rate of 5.82%, 6.64% and 5.04%, respectively; and an expected life of eight years. The weighted-average fair value of options granted during fiscal 2000, 1999 and 1998 was $1.34 per share, $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 In thousands, except per share data
2000 1999 1998 --------------------------------------------------------------------------------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Options Price Options Price Options Price --------------------------------------------------------------------------------------- Outstanding at beginning of year 2,225 $2.19 2,120 $2.41 --- --- Options granted 720 1.84 555 1.65 2,360 $2.49 Options exercised --- --- --- --- --- --- Options forfeited (426) 2.14 (450) 2.56 (240) 3.13 -------------------------------------------------------------------------------------- Outstanding at end of year 2,519 $2.10 2,225 $2.19 2,120 $2.41 ====================================================================================== Exercisable at end of year 858 $2.29 481 $2.44 --- --- ======================================================================================
30 The following table summarizes information about stock options at November 25, 2000:
Options Outstanding Options Exercisable -------------------------------------------------------- ------------------------------------ Number Weighted-Average Number Range of Outstanding Remaining Weighted -Average Exercisable Weighted-Average Exercise Prices at 11/25/00 Contractual Life Exercise Price at 11/25/00 Exercise Price ----------------- -------------- ---------------- ----------------- ------------ ---------------- $0.88 - $1.94 1,313,750 8.80 $1.39 352,500 $1.33 $2.44 - $3.03 1,205,000 7.66 $2.87 505,000 2.96 ----------------- -------------- ---------------- ----------------- ------------ ---------------- $0.88 - $3.03 2,518,750 8.25 $2.10 857,500 $2.29 ================= ============== ================ ================= ============ ================
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 2000, 1999, and 1998 would approximate the amounts below: In thousands, except per share data
Fiscal Year Ended --------------------------------------------------------------------------------------- November 25, 2000 November 27, 1999 November 28, 1998 ------------------- ---------------------- ----------------------- As Pro As Pro As Pro Reported Forma Reported Forma Reported Forma --------- --------- -------- -------- --------- -------- Net loss $(20,551) $(21,128) $(8,136) $(8,673) $(22,367) $(22,896) Net loss per common share $ (1.03) $ (1.06) $ (.41) $ (.43) $ (1.12) $ 1.14)
31 Note D--Income Taxes For the year ended November 25, 2000, an income tax benefit of $15.6 million was recorded. The Company has federal net operating loss carry-forwards totaling $93.8 million, which expire through fiscal 2020, and federal tax credit carry-forwards totaling $19.3 million, which begin to expire in fiscal 2006 and expire over an indefinite period. The Company believes, based upon future earnings coupled with recognition of existing taxable temporary differences, that it is more likely than not, that the Company will be able to utilize tax benefits accumulated through November 25, 2000, in future periods. 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 B. 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. Income tax expense (benefit) attributable to the income (loss) before extraordinary item consisted of the following: In thousands 2000 1999 1998 ------------------------------------------- Currently receivable Federal $ -- $ -- $ (959) State -- -- (1,252) ------------------------------------------ -- -- (2,211) Deferred Federal (13,836) (4,545) (10,124) State (1,786) (666) (883) ------------------------------------------ (15,622) (5,211) (11,007) ------------------------------------------ $ (15,622) $ (5,211) $ (13,218) ========================================== 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:
2000 1999 1998 -------------------------------------- Federal statutory rate (35.0)% (35.0)% (35.0)% State income taxes, net of federal tax benefit (3.2) (3.6) (3.9) Permanent tax differences (0.8) (1.9) 0.5 Reduction in valuation allowance (3.5) -- -- Other (0.7) (0.8) 1.3 -------------------------------------- (43.2)% (41.3)% (37.1)% ======================================
32 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 2000 1999 ---------------------------------- Deferred tax assets: Tax credit and net operating loss carry-forwards $ 56,778 $ 51,850 Insurance reserves 815 6,088 Retirement benefits 5,102 5,906 Post-retirement benefits 6,361 7,264 Vacation reserves 2,074 2,959 Reserves for bad debts 598 1,909 Closed store reserves 9,763 2,111 Other 1,736 2,023 ---------------------------------- Total deferred tax assets 83,227 80,110 Less valuation allowance 5,640 6,909 ---------------------------------- Net deferred tax assets 77,587 73,201 ---------------------------------- Deferred tax liabilities: Land, buildings and equipment (60,266) (79,711) Inventory basis difference (24,310) (20,766) Other (10,809) (6,144) ---------------------------------- Total deferred tax liabilities (95,385) (106,621) ---------------------------------- Net deferred tax liability $ (17,798) $ (33,420) ==================================
The decrease in the valuation allowance of approximately $1.3 million in fiscal 2000 relates primarily to adjustment of recorded net operating loss carryforwards upon examination of the Company's prior period federal tax returns. Note E--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. During 1999, 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 G. 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. 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. 33 The following provides a reconciliation of benefit obligations, plan assets and funded status of the plans:
Pension Benefits Other Benefits -------------------------- ------------------------- In thousands 2000 1999 2000 1999 -------------------------- ------------------------- Change in Benefit Obligation Benefit obligation at beginning of year $ 56,184 $ 81,798 $ 9,154 $ 17,431 Service cost-benefits earned during the period -- 2,662 -- 411 Interest cost 4,428 5,012 587 987 Plan participants' contributions -- -- 188 136 Curtailments -- (10,590) -- -- Plan structure changes -- -- -- (6,980) Actuarial (gain) loss 1,678 (17,452) (90) (2,004) Benefits paid (5,013) (5,246) (977) (827) ------------------------- ------------------------ Benefit obligation at end of year 57,277 56,184 8,862 9,154 ------------------------- ------------------------ Change in Plan Assets Fair value of plan assets at beginning of year 58,684 53,746 -- -- Actual return on plan assets 11,181 8,116 -- -- Employer contributions 127 2,068 -- -- Benefits paid (5,013) (5,246) -- -- ------------------------- ------------------------ Fair value of plan assets at end of year 64,979 58,684 -- -- ------------------------- ------------------------ Funded status 7,702 2,500 (8,862) (9,154) Unrecognized net actuarial (gain) loss (20,456) (17,265) (1,967) (2,293) Unrecognized prior service cost -- -- (6,326) (6,762) ------------------------- ------------------------ Accrued benefit cost included in other accrued expenses and/or non-current liabilities $ (12,754) $ (14,765) $ (17,155) $ (18,209) ========================= ========================
In fiscal 2000, the cost trend rate was adjusted upward to 10.0% based on current medical inflationary trends. In 1999, and 1998, 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 25, 2000 and November 27, 1999, accumulated post-retirement benefit obligation by $0.5 million and $0.7 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 25, 2000 and November 27, 1999, by $40,000 and $71,000, respectively. The effect of a 1.0% annual decrease in these assumed health-care cost trend rates would decrease the November 25, 2000 and November 27, 1999, accumulated post-retirement benefit obligation by $0.5 million and $0.7 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 25, 2000 and November 27, 1999, by $38,000 and $67,000, respectively. The accumulated benefit obligation was $57.3 million and $56.1 million at November 25, 2000 and November 27, 1999, respectively.
Components of Net Periodic Benefit Cost In thousands Pension Benefits Other Benefits -------------------------------------------- ----------------------------------------- 2000 1999 1998 2000 1999 1998 -------------------------------------------- ----------------------------------------- Service cost - benefits earned during the period $ -- $ 2,752 $ 4,915 $ -- $ 411 $ 701 Interest cost 4,428 5,012 5,254 587 987 1,134 Expected return on plan assets (6,313) (4,638) (4,490) -- -- -- Amortization of prior service cost -- -- -- (436) (218) -- Amortization of unrecognized loss -- -- -- (228) -- -- -------------------------------------------- ----------------------------------------- Net periodic post-retirement benefit cost $ (1,885) $ 3,126 $ 5,679 $ (77) $ 1,180 $ 1,835 ============================================ =========================================
34 Weighted Average Assumptions In thousands
Pension Benefits Other Benefits -------------------------------------------- ----------------------------------------- 2000 1999 1998 2000 1999 1998 -------------------------------------------- ----------------------------------------- Discount rate 8.00% 8.00% 6.75% 8.00% 8.00% 6.75% Expect return on plan assets 9.50% 9.50% 8.50% --% --% --% Rate of increase in future compensation levels (a)% 2.00% 5.00% --% --% --% Healthcare cost trend rate --% --% --% 10.00% 6.30% 6.70% (a) 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 $1.6 million, $1.9 million and $2.1 in 2000, 1999 and 1998, respectively. Note F--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: 2001 -- $12.7 million; 2002 -- $10.9 million; 2003 -- $7.1 million; 2004 -- $5.8 million; 2005 -- $5.2 million; thereafter -- $18.1 million. Rental expense under operating leases was $12.9 million, $14.4 million, and $20.8 million for 2000, 1999, and 1998, respectively. Note G--Special Charges In fiscal 2000, the Company recorded a special charge of $20.4 million ($11.6 million after tax) in connection with the closing of 22 stores and the elimination of administrative staff. Included in this charge are approximately $8.6 million of future lease commitments and $3.1 million of write-downs for fixed asset disposals. Also included in this amount is approximately $0.7 million for severance related to administrative employees at the Company's store support center. In connection with these store closings, the Company recorded inventory write-downs of $11.8 million ($7.4 million after tax) in cost of merchandise sold for the fourth quarter of fiscal 2000. All 22 stores were closed as of January 30, 2001. The related store exit plans are expected to be completed during fiscal year 2001 and the remaining accruals are expected to be fully utilized, except for certain future lease commitments. In January of 2001, approximately $33.0 million was transferred to real estate held for resale from property, plant and equipment related to these store closures. Historical financial data for the closing of the 22 stores is as follows for the fiscal years presented: In thousands 2000 1999 1998 -------------------------------------------- Net sales $ 151,568 $ 189,468 $ 204,393 Operating (loss) income $ (1,826) $ 540 $ 4,347 The fiscal 2000 special charge includes:
Amount Amount Charged Paid Through Accrual at In millions 2000 Nov. 25, 2000 Nov. 25, 2000 -------------------------------------------------------------- Severance $ 2.5 $ 1.0 $ 1.5 Other costs 17.9 3.2 14.7 -------------------------------------------------------------- $ 20.4 $ 4.2 $ 16.2 ==============================================================
35 Included in 1999 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 D. 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 million ($0.4 million after tax) for severance related to 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. Historical financial data for the closing of the six stores is as follows for the fiscal years presented: In thousands 1999 1998 --------------------- Net sales $ 28,138 $ 46,093 Operating loss $ 3,991 $ 1,783 The fiscal 1999 special charge includes: Amount Amount Charged Paid Through Accrual at In millions 1999 Nov. 25, 2000 Nov. 25, 2000 --------------------------------------------------------- Severance $ 0.6 $ 0.6 $ -- Other costs 1.7 1.7 -- --------------------------------------------------------- $ 2.3 $ 2.3 $ -- ========================================================= 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 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. Historical financial data for the closing of the eight stores is as follows for the fiscal years presented: In thousands 1998 ----------- Net sales $ 60,103 Net operating loss $ 4,027 The fiscal 1998 special charge includes: Amount Amount Charged Paid Through Accrual at In millions 1998 Nov. 27, 1999 Nov. 25, 2000 -------------------------------------------------------- Severance costs $ 5.6 $ 5.6 $ -- Other costs 1.1 1.1 -- -------------------------------------------------------- $ 6.7 $ 6.7 $ -- ======================================================== The Company will continue to review assets for impairment, particularly given the ongoing competitive environment for building materials retailing. 36 Note H--Quarterly Financial Data (unaudited) In thousands, except per share amounts
First Second Third Fourth Fiscal Year Ended November 25, 2000 Quarter Quarter Quarter Quarter - ------------------------------------------------------------------------------------------------------------------------------- Net sales $ 347,113 $ 421,730 $ 391,815 $ 332,125 Cost of merchandise sold 249,706 311,818 284,866 252,137 ------------------------------------------------------------ Gross Profit 97,407 109,912 106,949 79,988 Selling, general and administrative 93,629 88,994 84,169 73,682 Other income (464) (871) (403) (326) Special charges 194 384 563 19,259 Provision for depreciation and amortization 8,936 6,137 7,605 7,389 -------------------------------------------------------------- OPERATING INCOME (LOSS) (4,888) 15,268 15,015 (20,016) Interest expense 10,086 10,636 10,606 10,224 --------------------------------------------------------------- INCOME (LOSS) BEFORE INCOME TAXES (14,974) 4,632 4,409 (30,240) Federal and state income taxes (9,732) 3,398 2,056 (11,344) ---------------------------------------------------------------- NET INCOME (LOSS) $ (5,242) $ 1,234 $ 2,353 $ (18,896) =============================================================== Weighted average common shares outstanding 20,000 20,000 20,000 20,000 --------------------------------------------------------------- Net income (loss) per common share-basic $ (.26) $ 0.06 $ 0.12 $ (0.94) =============================================================== Weighted average common and dilutive common equivalent shares outstanding 20,000 20,224 20,082 20,000 --------------------------------------------------------------- Net income (loss) per common share-diluted $ (.26) $ 0.06 $ 0.12 $ (0.94) ===============================================================
Special charges ($0.1 million after tax) reflected in the first quarter consist of costs related to the impairment of assets related to store closings. Special charges were also recorded in the second, and third quarter ($0.1 million, and $0.3 million, respectively, after tax) in connection with asset impairments and elimination of administrative staff. The Company reassessed the useful lives of certain classes of fixed assets during the second quarter. The approximate effect of this change in estimate was a reduction of $1.6 million in the provision for depreciation and amortization in the second quarter. The fourth quarter includes a benefit of approximately $1.7 million relating to the change in estimated bad debt risk on the accelerated repurchase of accounts receivable (see Note A). A special charge was recorded in the fourth quarter ($12.0 million after tax) related to the closing of 22 stores. In addition, the fourth quarter cost of merchandise sold reflects inventory write-downs ($7.4 million after tax) in connection with these store closings. The fourth quarter income tax benefit includes a $1.7 million decrease in tax benefit to reflect the effect of a fourth quarter revision of the effective tax rate on the first three quarters. 37 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 Cost of merchandise sold 285,939 366,713 362,217 319,099 ------------------------------------------------------------ Gross Profit 105,934 126,015 129,943 115,505 Selling, general and administrative 106,517 108,683 108,052 97,130 Other income (345) (719) (523) (395) Special charges (credits), net -- (5,400) -- 1,085 Provision for depreciation and amortization 8,936 9,223 10,563 11,445 -------------------------------------------------------------- OPERATING INCOME (9,174) 14,228 11,851 6,240 Interest expense 8,612 8,909 8,636 9,606 --------------------------------------------------------------- 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. 38 Note I--Subsequent Events On January 31, 2001, the Company seasonally expanded its revolving line of credit with supplemental loan participation from a third party. On January 31, borrowing availability under the Company's $260 million existing line of credit increased by 5% for a six-month time period. This additional participation of $15.0 million by the aforementioned third party as part of the 1999 Credit Agreement will support the 5% advance rate increase through July 31, 2001. The seasonal overline bears interest at 12.0% per annum and requires payment of certain monthly fees. The seasonal overline agreement also requires maintenance of certain monthly minimum fixed charge coverage ratios. 39 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 25, 2000: Reserve for Inventory Shrink and Obsolescence................. $ 11,409 $ 12,254 $ 16,859 $ 6,804 Reserves for Special Charges..... $ 1,513 $ 20,400 $ 5,759 $ 16,154 Reserve for Bad Debt............. $ 3,769 $ 11,042 $ 13,350 $ 1,461 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
40 E-2 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 Merge in connection with the Reincorpora- tion from Iowa to Delaware (incorporated by reference to Exhibit 2.2 filed as part of Payless' Current Report on Form 8-K dated December 2, 1997). 3.1 Amended and Restated Bylaws of the Company (incorporated by ref- erence to Exhibit 3.2(b)filed as part of Payless' Annual Report on Form 10-K for the year ended November 27, 1999). 3.2 Certificate of Incorporation (incorporated by reference to Exhibit 4.1 filed as part of Payless' Current Report on Form 8-K dated December 2, 1997). 4.0 Long-term debt instruments of the Registrant in amounts not exceeding ten percent (10%) of the total assets of the Registrant will be furnished to the Commission upon request. 4.1 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). 4.1(a) First amendment to Loan and Security Agreement dated January 31, 2001, by and among Payless and Congress Financial Corporation (Central), as Lender and Agent for Lenders 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(a)* 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). 10.1(b)* Amendment to the Amended and Restated Payless Cashways, Inc. 1998 Omnibus Incentive Plan effective October 18, 2000. 41 10.2(a)* Form of Employment Agreement (Form A) between Payless and certain executive officers. 10.2(b)* Form of Employment Agreement (Form B) between Payless and certain executive officers. 10.3* Form of Indemnification Agreement between Payless and various officers and directors (incorporated by reference to Exhibit 10.3 filed as part of Payless' Annual Report on Form 10-K for the year ended November 27, 1999). 10.4* Payless Cashways, Inc. Store Support Center Management Bonus Plan, dated as of December 1999 (incorporated by reference to Exhibit 10.4 filed as part of Payless' Annual Report on Form 10-K for the year ended November 27, 1999). 10.5* Payless Cashways, Inc. Supplemental Disability Plan (incorpo- rated 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. [FN] * Represents a management contract or a compensatory plan or arrangement. EX-4.1(A) 2 0002.txt 1 Exhibit 4.1(a) AMENDMENT NO. 1 TO LOAN AND SECURITY AGREEMENT AMENDMENT NO. 1 TO LOAN AND SECURITY AGREEMENT ("Amendment No. 1"), dated as of January 31, 2001, by and among Payless Cashways, Inc. ("Borrower"), Congress Financial Corporation (Central), an Illinois corporation ("Congress"; and together with any other signatory hereto designated as a "Lender" or any assignee of any Lender, each individually, a "Lender" and, collectively, "Lenders"), and Congress, as agent for Lenders (in such capacity "Agent"). All capitalized terms used herein (including the recitals hereto) shall have the respective meanings assigned thereto in the Loan Agreement unless otherwise defined herein. W I T N E S S E T H: WHEREAS, Agent, Lenders and Borrower have entered into certain financing arrangements pursuant to the Loan and Security Agreement ("Agreement") dated November 17, 1999 by and among Lenders, Agent and Borrower (and as amended hereby, and as the same may have heretofore been or may hereafter be further amended, modified, supplemented, extended, renewed, restated or replaced, the "Loan Agreement"); and WHEREAS, Borrower has requested that (a) Congress, in its capacity as a Lender, agree to make a certain Supplemental Loan to Borrower, and (b) Agent and Lenders amend and modify certain provisions set forth in the Loan Agreement in addition to the Loans to which Borrower would otherwise be entitled pursuant to the Loan Agreement; and WHEREAS, Agent and Lenders are, subject to the terms and conditions contained herein, willing to agree to make such Supplemental Loan to Borrower, and to effect such amendments; and WHEREAS, by this Amendment No. 1, Agent and Required Lenders desire and intend to evidence such amendments. NOW, THEREFORE, in consideration of the foregoing, and the respective agreements, warranties and covenants contained herein, the parties hereto agree, covenant and warrant as follows: SECTION 1. AMENDMENTS. Subject to the conditions to effectiveness of this Amendment No. 1 set forth in Section 3 hereof, the parties hereto agree as follows: 1.1 The definition of "Loans" in Section 1 of the Loan Agreement is hereby amended to add the words "and the Supplemental Loan" immediately after the words "Revolving Loans" appearing at the end of such definition. 1.2 Section 1 of the Loan Agreement is hereby amended to include each of the following new definitions in alphabetical order: 2 (a) "Amendment No. 1" shall mean Amendment No.1 to Loan and Security Agree- ment, dated as of January 31, 2001, by and among Borrower, Agent and Supplemen- tal Loan Lender. (b) "Applicable Recovery Percentage" shall be equal to the following per- centages during the following periods:
Period Percentage ------ ---------- Supplemental Loan Effective Date to March 10, 2001..................... 90.95% March 11, 2001 to March 25, 2001........... 90.60% March 26, 2001 to June 15, 2001............ 90.00% June 16, 2001 to June 29, 2001............. 89.30% June 30, 2001 to July 13, 2001............. 88.30% July 14, 2001 to July 31, 2001............. 87.30% August 1, 2001 and thereafter.............. 86.00%
(c) "Bankruptcy Code" shall mean the United States Bankruptcy Code, being Title 11 of the United States Code as enacted in 1978, as the same has heretofore been amended, recodified, modified or supplemented (d) "EBITDA" shall mean, for any period, the net income (loss) of Borrower and its Subsidiaries on a consolidated basis for such period determined in accordance with GAAP, plus interest expense, income tax expense, amortization expense, depreciation expense and any non-cash extraordinary losses and minus any extraordinary gains, in each case, of Borrower and its Subsidiaries on a consolidated basis for such period determined in accordance with GAAP to the extent included in the determination of such net income (loss). (e) "Enforcement Action" shall mean the commencement by Agent, on behalf of the Lenders, of any action to foreclose on the security interests or liens of Agent, on behalf of the Lenders, in all or any material portion of the Collateral, or the commencement of any action to take possession of all or any material portion of the Collateral or the commencement of any legal proceedings or actions against or with respect to all or any portion of the Collateral. (f) "Excluded Portion" shall have the meaning set forth in Section 2A.3(c) herein. (g) "Financing Order" shall mean any financing order and such other orders relating thereto or authorizing the granting of credit by Agent and Lenders to Borrower, as a debtor in possession or the use of cash collateral, on an emergency, interim or final basis pursuant to Sections 363 and/or 364 of the 3 Bankruptcy Code as may be issued or entered by any court of competent jurisdiction in any Insolvency Case. with respect to the Borrower. (h) "Insolvency Case" shall mean, as to any person, any of the following: (i) any case or proceeding with respect to such person under the U.S. Bankruptcy Code, or any other Federal, State or other bankruptcy, insolvency, reorganization or other law affecting creditors' rights or any other or similar proceedings seeking any stay, reorganization, arrangement, composition or readjustment of all or substantially all of the obligations and indebtedness of such person or (ii) any proceeding seeking the appointment of any receiver, trustee, administrator, liquidator, custodian or other insolvency official with similar powers with respect to such person or all or substantially all of its assets or (iii) any proceeding for liquidation, dissolution or other winding up of the business of such person or (iv) any general assignment for the benefit of creditors or any general marshaling of all or substantially all of the assets of such person. (i) "Insolvency Event" shall mean the commencement of an Insolvency Case by or against the Borrower. (j) "July 13th Mandatory Prepayment" shall mean $2,000,000 if Supplemental Loan Lender makes the First Installment and $4,000,000 if the Supplemental Loan Lender makes the First Installment and the Second Installment. (k) "June 15th Mandatory Prepayment" shall mean $1,000,000 if Supplemental Loan Lender makes the First Installment and $2,000,000 if the Supplemental Loan Lender makes the First Installment and the Second Installment. (l) "June 29th Mandatory Prepayment" shall mean $1,500,000 if Supplemental Loan Lender makes the First Installment and $3,000,000 if the Supplemental Loan Lender makes the First Installment and the Second Installment. (m) "Net Availability" shall mean the amount, as determined by Agent, calculated at any time, equal to: (i) an amount equal the Revolving Loans and Letter of Credit Accommodations which would be available to the Borrower based on the lending formulas (subject to the deduction from availability of any Availability Reserves then in effect as determined by Agent) set forth in Section 2.1 of the Loan Agreement as amended by Amendment No. 1 minus (ii) the sum of the amount of all then outstanding and unpaid Revolving Loans and Letter of Credit Accommodations. (n) "Net Recovery Value" shall mean the appraised value of Eligible Inventory, with such appraised value determined on a "going out of business" basis, net of liquidation expenses, by an appraiser acceptable to each of Agent, Supplemental Loan Lender and its financial participant. The appraised value shall be based on the most recent such appraisal obtained by Agent, Supplemental Loan Lender and/or its financial participant, or by Borrower, at the request of Agent or Supplemental Loan Lender, from time to time during the term of this Agreement. 4 (o) "Priority Event" shall mean (i) prior to the occurrence of an Insolvency Event, the occurrence of any one or more of the following: (A) an Event of Default and the acceleration by Agent, on behalf of the Lenders, of all of the Obligations by demanding payment therefor or (B) an Event of Default and the taking of any Enforcement Action by Agent, on behalf of the Lenders (provided that any Priority Event occurring prior to an Insolvency Event shall cease constituting a Priority Event as of the occurrence of any Insolvency Event if any or all of Agent or the Lenders continue funding Loans or providing Letter of Credit Accommodations or other financial accommodations (whether pursuant to the Financing Agreements or otherwise) or consent to the use of cash collateral after the occurrence of an Insolvency Event); or (ii) after the occurrence of an Insolvency Event, the occurrence of any one or more of the following: (A) the failure of the Agent and/or the Lenders to provide any Loans, Letter of Credit Accommodations or any other financial accommodations to the Borrower after such Insolvency Event, whether pursuant to the Financing Agreements or otherwise or pursuant to a consensual cash collateral arrangement with the Borrower, (B) the termination or nonrenewal pursuant to a Financing Order of (1) any commitment of the Agent and/or the Lenders to provide Loans, Letter of Credit Accommodations or other financial accommodations (whether pursuant to the Financing Agreements or otherwise) or (2) any consensual cash collateral arrangement between the Borrower and the Lenders, (C) the entry of an order of the Bankruptcy Court pursuant to Section 363 of the Bankruptcy Code authorizing the sale of all or substantially all of Borrower's assets and properties, or (D) the entry of an order of the Bankruptcy Court pursuant to Section 362 of the Bankruptcy Code vacating the automatic stay and authorizing Agent to commence foreclosure or enforcement proceedings against substantially all of Borrower's assets and properties. (p) "Second Installment Funding Date" shall have the meaning set forth in Section 2A.1 herein. (q) "Supplemental Loan" shall have the meaning set forth in Section 2A.1 herein. (r) "Supplemental Loan Effective Date" shall have the meaning set forth in Section 3.1 herein. (s) "Supplemental Loan Event of Default" shall have the meaning set forth in Section 2A.6 herein. (t) "Supplemental Loan Lender" shall mean Congress Financial Corporation (Central), as a Lender in its individual capacity, together with its successors and assigns. "Supplemental Loan Lender" shall not include any Lender other than Congress Financial Corporation (Central). Supplemental Loan Lender shall be deemed to be a Lender under the Loan Agreement but Supplemental Loan Lender (i) will have no commitments, obligations, interests or any rights whatsoever with respect to any (A) Revolving Loans under Section 2.1 herein or otherwise or Letter of Credit Accommodations under Section 2.2 herein or otherwise or (B) interest or fees, except for the interest, fees and other amounts owing to Supplemental Loan Lender under any circumstances under the terms of the Supplemental Loan Letter Agreement and (ii) will not be a Lender under the 5 definitions of "Commitment Percentage", "Pro-Rata Share", or "Required Lenders" or under the provisions of Section 2.4 or Section 6.8 herein. (u) "Supplemental Loan Obligations" shall mean all Obligations with respect to the Supplemental Loan, whether arising under this Agreement, under the Supplemental Loan Letter Agreement or any other Financing Agreement relating to the Supplemental Loan. (v) "Supplemental Loan Rate" shall have the meaning as set forth in the Supplemental Loan Letter Agreement. (w) "Supplemental Loan Repayment Date" shall mean July 31, 2001. (x) "Supplemental Loan Letter Agreement" shall mean that certain Supplemental Loan Letter Agreement dated as of January 31, 2001 among Supplemental Loan Lender, Agent and Borrower. 1.3 Section 2.1(a) of the Loan Agreement is hereby amended to add the following proviso immediately before the period appearing at the end of such section: ; provided, however, that while any Supplemental Loan Obligations shall be outstanding, in no event shall the aggregate amount of outstanding Revolving Loans and Letter of Credit Accommodations when added to the aggregate amount of the Supplemental Loan then outstanding exceed at any given time the lesser of (i) the difference of (A) 71.3% of the Cost of Eligible Inventory minus (B) any Availability Reserves, and (ii) the difference of (A) the Applicable Recovery Percentage of the Net Recovery Value of Eligible Inventory minus (B) any Availability Reserves. 1.4 The Loan Agreement is hereby amended by adding immediately after Sec- tion 2 thereof, the following new Section 2A thereto: SECTION 2A. SUPPLEMENTAL LOAN. 2A.1 Supplemental Loan. Subject to the terms and conditions contained herein, in addition to the Revolving Loans under Section 2.1 of the Loan Agreement, as a one time financial accommodation to Borrower, Supplemental Loan Lender shall make, subject to the terms and conditions contained herein, a supplemental loan to Borrower in the principal amount of $15,000,000 (the "Supplemental Loan"). At the option of the Supplemental Loan Lender, the Supplemental Loan shall be made in two (2) installments as follows: the first (1st) installment in the principal amount of $7,500,000 (the "First Installment") shall be made on the Supplemental Loan Effective Date and the second (2nd) installment in the principal amount of $7,500,000 (the "Second Installment") shall be made on or before the date which is seven (7) Business Days after the 6 Supplemental Loan Effective Date (the "Second Installment Funding Date"). Borrower shall have no right to receive, and Supplemental Loan Lender shall have no obligation to make whatsoever, the Second Installment if, as of the Second Installment Funding Date, an Event of Default exists. The Supplemental Loan shall constitute part of the Obligations and shall be secured by all of the Collateral. Except for the making of the Supplemental Loan as set forth in this Section 2A.1, Borrower shall have no right to request and Supplemental Loan Lender shall have no obligation to make any additional loans or advances to Borrower under this Section 2A.1 and any repayments of the Supplemental Loan shall not be subject to any readvance to or reborrowing by Borrower. For the purposes of Section 2.1 of the Loan Agreement, the aggregate principal amount of the Loans, the aggregate outstanding principal amount of the Supplemental Loan and the Letter of Credit Accommodations outstanding at any time shall not exceed the Maximum Credit. 2A.2 Interest. The Supplemental Loan shall bear interest at the Supplemental Loan Rate and shall be payable in accordance with the terms of the Supplemental Loan Letter Agreement. 2A.3 Repayment. (a) Subject to the provisions of Section 2A.3 (b) below, Borrower shall repay the principal amount of the Supplemental Loan, together with all accrued but unpaid interest, fees and other Supplemental Loan Obligations, in full, in immediately available funds on the Supplemental Loan Repayment Date. (b) Notwithstanding anything to the contrary contained in Section 2A.3 (a) above or any other section of this Loan Agreement, from and after the occurrence and during the continuance of a Priority Event, Agent, for itself and the other Lenders, and the Supplemental Loan Lender hereby agree that the Obligations shall be repaid as follows: first, all Obligations (other than (i) the Supplemental Loan Obligations, (ii) any Excluded Por- tion and (iii) and any early termination fee payable in accor- dance with Section 13.1 (c) of the Loan Agreement) shall be repaid in full, in cash or other immediately available funds, in such order and manner as Agent shall elect in its discre- tion (including cash collateral for Letter of Credit Accommo- dations in an amount equal to one hundred five (105%) percent of the aggregate undrawn face amount thereof); second, the Supplemental Loan, together with all accrued and unpaid inter- est, fees, charges, costs and expenses payable hereunder and under the Supplemental Loan Letter Agreement, shall be repaid; and third, any Excluded Portion then outstanding and any early 7 termination fee payable in accordance with Section 13.1(c) of the Loan Agreement shall be repaid. (c) Excluded Portion. During the period while any Supplemental Loan Obligations remain outstanding, Agent will not, without the prior written consent of each of the Lenders, make any Loan, Letter of Credit Accommodation or other financial accommodation which would constitute an Excluded Portion. As used this Section 2A.3, the following capitalized terms shall have the following meanings: "Excluded Portion" shall mean at any time (i) the portion of the Aggregate Revolving Debt Exposure in excess of the Maximum Revolving Availability (such excess, the "Excluded Principal"); provided, that, the amount set forth in this clause (i) shall not include that portion of the Aggregate Revolving Debt Exposure that exceeds the Maximum Revolving Availability solely as a result of (A) a decline in the value of any Collateral, (B) any act or omission of the Borrower in violation of any Financing Agreement, (C) any other similar circumstance not caused by Agent or any Lender, (D) the imposition of any Availability Reserve by Agent, and (E) the charging to any loan account of Borrower maintained pursuant to this Agreement of regularly scheduled interest, fees, costs, expenses and other charges (provided that if any of the events described in clauses (A) through (E) above result in negative Net Availability, any additional Loans or Letter of Credit Accommodations provided by Agent and/or Lenders during such period while Agent has actual knowledge of negative Net Availability shall not be deemed excluded from the calculation of Excluded Principal); and (ii) any interest, charges, fees, costs, indemnities and expenses with respect to the Excluded Principal described in clause (i) of this definition. "Aggregate Revolving Debt Exposure" means, with respect to the Obligations owing to the Agent and Lenders (other than the Supplemental Loan Obligations), the sum of the aggregate principal amount of Revolving Loans outstanding under the Financing Agreements, all Letter of Credit Accommodations (including the face amount of all undrawn letters of credit plus all unpaid reimbursement obligations) under the Financing Agreements and all other financial accommodations under the Financing Agreements (other than in respect of the Supplemental Loan). "Maximum Revolving Availability" means the lesser of (a) the difference of (i) the Maximum Credit minus (ii) the outstanding principal balance of the Supplemental Loan and (b) an amount equal the Revolving Loans and Letter of Credit Accommodations which would be available to the Borrower based 8 on the lending formulas (subject to the deduction from availability of any Availability Reserves then in effect as determined by Agent) set forth in Section 2.1 of the Loan Agreement as amended by Amendment No. 1. 2A.4 Mandatory Prepayments; Availability Short- falls; Excluded Portion. (a) Mandatory Prepayments. In addition to, and not in limitation of, anything to the contrary contained herein, subject to the provisions of Section 2.3 below, Borrower shall make a mandatory prepayment in respect of the Supplemental Loan on June 15, 2001 in the amount of the June 15th Mandatory Prepayment, on June 29, 2001 in the amount of the June 29th Mandatory Prepayment, and on July 13, 2001 in the amount of July 13th Mandatory Prepayment (each such payment a "Mandatory Prepayment" and all such payments, collectively, the "Mandatory Prepayments"). (b) Availability Shortfalls. Notwithstanding anything to the contrary contained in Section 2A.4(a) above but without limiting any of the rights of Supplemental Lender under the Supplemental Loan Letter Agreement to charge default rate interest arising as a result of any failure to timely fund any Supplemental Loan Obligation, if as of the date any Mandatory Prepayment or other Supplemental Loan Obligation is due and owing, Borrower will not have Net Availability of at least $1.00 after giving effect to such payments (an "Availability Shortfall"), Borrower shall pay such Mandatory Prepayment as follows: Borrower shall be required to fund that portion of the Mandatory Prepayment or other Supplemental Loan Obligation in an amount equal to the lesser of (i) the Mandatory Prepayment or other Supplemental Loan Obligation required to be paid and (ii) the amount of Net Availability determined as of the date that the applicable Mandatory Prepayment or other Supplemental Loan Obligation is due less $1.00 (such amount being referred to as a "Partial Required Payment"). With respect to the difference between the applicable Mandatory Prepayment or other Supplemental Loan Obligation and the Partial Required Payment (such amount being referred to as the "Unpaid Required Payment"), Borrower shall repay the Unpaid Required Payment at any time that the Borrower has Net Availability of greater than $1.00 until such Unpaid Required Payment has been paid in full. Failure to pay any Unpaid Required Payment in full within seven (7) days from the initial due date shall constitute an immediate Supplemental Loan Event of Default. 2A.5 Supplemental Loan Availability Reserves. In addition to, and not in limitation of, Agent's right to establish Availability Reserves under Section 2.3) of the Loan 9 Agreement, Agent shall have the right to establish an Availability Reserve in respect of the Supplemental Loan (the "Supplemental Loan Reserve") in an amount determined by Agent and, to adjust such Supplemental Loan Reserve from time to time, in Agent's discretion exercised on a basis consistent with the imposition and adjustment of any other Availability Reserves. Agent agrees to provide Borrower with one (1) Business Day's notice prior to the establishment of any Supplemental Loan Reserve. Once so established, the Supplemental Loan Reserve shall constitute an additional Availability Reserve for all purposes under this Agreement. 2A.6 Supplemental Loan Event of Default. In addition to, and not in limitation of, the Events of Default as set forth in Section 10.1 of this Agreement, Borrower acknowledges and agrees that the occurrence of any "Supplemental Loan Event of Default" under the Supplemental Loan Letter Agreement shall constitute an Event of Default under this Agreement for all purposes (each such event, a "Supplemental Loan Event of Default"). 1.5 Section 9 of the Loan Agreements is hereby amended by adding at the end thereof, the following new Section 9.20: 9.20 Fixed Charge Coverage Ratio. So long as the Supplemental Loan remains outstanding, Borrower shall not permit the ratio of (i) the sum of (a) EBITDA, less (b) capital expenditures, less (c) cash taxes, to (ii) the sum of payments made or required to be made by Borrower during such period for (a) interest, fees and scheduled principal payments/availability reductions due under the Loan Agreement, (b) fees due and payable under the Supplemental Loan Letter Agreement, (c) interest, fees and scheduled principal payments due on any and all other indebtedness of the Borrower (including, without limitation, the Fortress Credit Agreement and CIBC Credit Agreement and related agreements), and (d) regularly scheduled payments under any lease agreement which is or should be capitalized in accordance with GAAP, to be less than the ratios set forth on the attached Schedule 3.1 on a fiscal monthly basis for the fiscal monthly period then ended. 1.6 Section 10.1(m) of the Loan Agreement is hereby amended and restated in its entirety to read as follows: "(m) any Supplemental Loan Event of Default shall have occurred or there shall have occurred any event of default under any of the other Financing Agreements." 10 1.7 The Loan Agreement is hereby amended by adding Schedule 3.1 hereto as a new Schedule 3.1 thereto. 1.8 The Loan Agreement is hereby amended by inserting Schedule 8.8 hereto in place of the existing Schedule 8.8 to the Loan Agreement. 1.9 Exhibit A {Information Certificate} to Loan Agreement is hereby amend- ed by deleting Schedule 9 {Locations of Collateral} thereto and adding in place thereof Schedule 9 {Locations of Collateral} attached hereto. SECTION 2. REPRESENTATIONS, WARRANTIES AND COVENANTS Borrower hereby represents, warrants and covenants with and to Agent and Lenders as follows: 2.1 Representations in Financing Agreements. Each of the representations and warranties made by or on behalf of Borrower to Agent and Lenders in any of the Financing Agreements was true and correct when made and in all material respects is true and correct on and as of the date of this Amendment No. 1 with the same full force and effect as if each of such representations and warranties had been made by Borrower on the date hereof and in this Amendment No. 1. 2.2 No Event of Default. No Default or Event of Default exists on the date of this Amendment No. 1 (after giving effect to the amendments to the Financing Agreements made by this Amendment No. 1) 2.3 Binding Effect of Documents. This Amendment No. 1 and the other Financ- ing Agreements have been duly executed and delivered to Agent and Lenders by Borrower, and are in full force and effect, as modified hereby and the agree- ments and obligations of the Borrower contained herein constitutes the legal, valid and binding obligations of Borrower enforceable against Borrower in accor- dance with their terms. 2.4 No Conflict, Etc.The execution, delivery and performance of this Amend- ment No.1, the Supplemental Loan Letter Agreement and the other Financing Agree- ments contemplated by this Amendment No. 1 by Borrower will not violate any requirement of law or contractual obligation of Borrower, and will not result in, or require, the creation or imposition of any lien or encumbrance on any of Borrower's properties or revenues, except in favor of Agent and Lenders. SECTION 3. CONDITIONS TO EFFECTIVENESS OF CERTAIN PROVISIONS OF THIS AMENDMENT NO. 1 3.1 The effectiveness of Section 1 of this Amendment No. 1 shall be subject to the satisfaction of the following conditions and/or receipt by Agent of eac of the following, in form and substance satisfactory to Agent (the date tha Agent receives each of the foregoing being referred to herein as the "Supple- mental Loan Effective Date"): 11 (a) an original of this Amendment No. 1, duly authorized, executed and de- livered by Borrower and Agent on behalf of itself and the Required Lenders; (b) an original Participation Agreement duly executed and delivered by Hil- co Capital LP in favor of the Supplemental Loan Lender and Agent; (c) an original Supplemental Loan Letter Agreement duly executed and deliv- ered by Borrower, Agent, Supplemental Loan Lender and Hilco Capital LP; (d) an opinion letter, in form and substance satisfactory to Agent, from Blackwell Sanders Peper Martin with respect to this Amendment No. 1 and the transactions contemplated hereunder which shall expressly permit Hilco Capital LP to rely on such opinion and the opinion issued by such counsel at the time of the closing of the Loan Agreement; (e) a Secretary's Certificate of Borrower certifyin and/or attaching (a) articles of incorporation, (b) bylaws, (c) resolutions and (d) incumbency of of- ficers; (f) no Overadvance (as defined in the Supplemental Loan Letter Agreement) shall be outstanding on the date prior to the Supplemental Loan Effective Date; (g) the Agent, Supplemental Loan Lender and Hilco Capital LP shall have re- ceived and found acceptable, in their sole discretion, the results of a final field examination of the Collateral; and (h) any and all such further instruments and documents as Agent may require to obtain the full benefits of this Amendment No. 1 and to protect, preserve an maintain Agent's and Lenders' rights in the Collateral. SECTION 4. PROVISIONS OF GENERAL APPLICATION 4.1 Effect of this Amendment No. 1. Except as modified pursuant hereto, no other changes or modifications to the Financing Agreements are intended or im- plied and in all other respects the Financing Agreements are hereby specifically ratified, restated and confirmed by all parties hereto as of the effective date hereof. To the extent of conflict between the terms of this Amendment No. 1 and the other Financing Agreements, the terms of this Amendment No. 1 shall control. The Loan Agreement and this Amendment No. 1 shall be read and construed as one agreement. 4.2 Further Assurances. The parties hereto shall execute and deliver such additional documents and take such additional action as may be necessary or de- sirable to effectuate the provisions and purposes of this Amendment No. 1. 4.3 Binding Effect. This Amendment No. 1 shall be binding upon and inure to the benefit of each of the parties hereto and their respective successors and assigns. 12 4.4 Survival of Representations and Warranties. All representations and warranties made in this Amendment No. 1 or any other document furnished in con- nection with this Amendment No. 1 shall survive the execution and delivery of this Amendment No. 1 and the other documents, and no investigation by Agent or any Lender or any closing shall affect the representations and warranties or the right of Agent or Lenders to rely upon them. 4.5 Expenses. Borrower agrees to pay on demand all out of pocket costs and expenses of Agent and Lenders in connection with the preparation, execution and delivery of this Amendment No. 1 and all other agreements, documents and instruments executed and/or delivered in connection therewith or related thereto, including, without limitation, the fees and out-of-pocket expenses of counsel for Agent and Lenders with respect thereto. 4.6 Severability. Any provision of this Amendment No. 1 held by a court of competent jurisdiction to be invalid or unenforceable shall not impair or inval- idate the remainder of this Amendment No. 1 and the effect thereof shall be con- fined to the provision so held to be invalid or unenforceable. 4.7 Governing Law. This Amendment No. 1 shall be governed by, construed and enforced in accordance with the laws of the State of New York, without regard to conflicts of laws principles thereof. 4.8 Counterparts. This Amendment No. 1 may be executed in any number of counterparts, but all of such counterparts shall together constitute but one and the same agreement. In making proof of this Amendment No. 1, it shall not be necessary to produce or account for more than one. [REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK] 13 [Signature Page to Amendment No. 1] IN WITNESS WHEREOF, this Amendment No. 1 is executed and de- livered as of the day and year first above written. PAYLESS CASHWAYS, INC. By: Title: CONGRESS FINANCIAL CORPORATION (CENTRAL), as Agent on behalf of the Required Lenders and as Supplemental Loan Lender By: Title: 14 [Guarantor's Acknowledgement and Consent to Amendment No. 1] Acknowledgment and Consent The undersigned hereby acknowledges receipt of the attached Amendment No. 1 and consents to the execution and performance thereof by Payless Cashways, Inc. The undersigned hereby also reaffirms that the guarantee of such undersigned in favor of Agent remains in full force and effect and acknowledges and agrees that there is no defense, setoff or counterclaim of any kind, nature or description to obligations arising under such guarantee. LUMBERJACK STORES, INC. By: Name: Title: 15 SCHEDULE 3.1 FIXED CHARGE COVERAGE RATIO
Fiscal Monthly Period Ended 1 Ratio February 24, 2001..................... 0.05 to 1.0 March 31, 2001........................ 1.0 to 1.0 April 28, 2001........................ 1.0 to 1.0 May 26, 2001.......................... 0.7 to 1.0
[FN] 1 The dates set forth on this Schedule 3.1 correspond to the last day of each fiscal monthly accounting period maintained by Borrower. EX-10.1(B) 3 0003.txt Exhibit 10.1(b) AMENDMENT TO THE AMENDED AND RESTATED PAYLESS CASHWAYS, INC. 1998 OMNIBUS INCENTIVE PLAN The Amended and Restated Payless Cashways, Inc. 1998 Omnibus Incen- tive Plan is hereby amended by deleting Section 4 (a) in its entirety and adding a new Section 4(a) to read as follows: (a) Subject to adjustment as provided in Section 4(c) hereof, a total of Three Million (3,000,000) Shares shall be available for the grant of Awards under the Plan; provided, however, that not more than Four Hundred Eighty Thousand (480,000) of such Shares shall be issued as Restricted Stock and that no more than Two Hundred Thousand (200,000) shares of Restricted Stock shall be issued in any one fiscal year. Any Shares issued hereunder may consist of authorized and unissued shares or treasury shares. If any Shares subject to any Award granted hereunder, or to which such an Award relates, are forfeited or such Award otherwise terminates without the issuance of such Shares or of other consideration in lieu of such Shares, the Shares subject to such Award, or to which such Award relates, to the extent of any such forfeiture or termination, shall again be available for grant under the Plan. In addition, to the extent permitted by Code Section 422, any Shares issued by, and any Awards granted by or that become obligations of, the Company through or as the result of the assumption of outstanding grants or the substitution of Shares under outstanding grants of an acquired company shall not reduce the Shares available for grants under the Plan. This Amendment is effective October 18, 2000. PAYLESS CASHWAYS, INC. By: EX-10.2(A) 4 0004.txt 1 EXHIBIT 10.2(a) FORM OF EMPLOYMENT AGREEMENT (Form A) 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. 800 NW Chipman Road, P.0. Box 648001 Lee's Summit, MO 64064-8001 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 10.1(a) 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 $650,000 75% Richard B. Witaszak Senior Vice President - Finance $245,000 50% Frank Chambers Executive Vice President - Professional $260,000 50% Business Development David J. Krumbholz Senior Vice President - Store Operations $245,000 50% Edward L. Zimmerlin Senior Vice President - Merchandising $245,000 50% and Marketing Kelly R. Abney Vice President - Logistics and Facilities $217,000 50% James L. Deats Vice President - Information Systems $190,000 50% Louise R. Iennaccaro Vice President - Human Resources $154,000 40% James P. Fitzpatrick Vice President - Merchandise Planning $175,000 40%
EX-10.2(B) 5 0005.txt EXHIBIT 10.2(b) FORM OF EMPLOYMENT AGREEMENT (Form B) 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 (1) 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 (1) 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 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 management and executive incentive compensation program or plan for officers of the Company as from time to time may be in effect, if any (the "Incentive Compensation"). The 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 ____, the Executive's "Annual Incentive Target Percentage of Base Compensation," as used in the CMIP, shall be __________ percent (____%) of Base Salary. 2 (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 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 3 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 Para- graph 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 Executive's position, with or without reasonable accommodation by the Company, 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 under this Agreement. The 4 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 dis- honesty, deceit or breach of fiduciary duty in the performance of the Executive's duties as an employee of the Company; or (ii) has neglected or failed to perform substan- tially the duties of the Executive's employment under this Agreement, including but not limited to an act of insubordination; or (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 officer of the Company; or (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 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); or (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) 5 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; or (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; or (v) the Company otherwise fails to perform its material obligations under this Agreement. Any notification of the Executive's intent to terminate the Agreement and the Executive's employment for Good Reason under this Paragraph must be given, pursuant to Paragraph 6(e), no later than thirty (30) days after the Executive learns, or reasonably should become aware, of the occurrence of the event giving rise to the right to terminate for Good Reason. 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 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 6 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, at the discretion of the Chief Executive Officer, the Executive may receive Incentive Compensation prorated for the time during which services were rendered in the year of termination, at the rate determined 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) 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. (h) 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 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. 8 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. No additions or modifications to this Agreement will be effective unless made in writing and signed by the Executive and the Company. 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 here- under shall be sent registered or certified mail, addressed to the respective parties at their addresses set forth below: To the Executive: ______________________________ To the Company: Payless Cashways, Inc. P. O. Box 648001 Lee's Summit, MO 64064-8001 Attn: Vice President - Human Resources or 800 Northwest Chipman Road, Suite 5900 Lee's Summit, MO 64063 Attn: Vice President - Human Resources Blackwell Sanders Peper Martin LLP Two Pershing Square 2300 Main, Suite 1000 Kansas City, MO 64108 Attn: Gary D. 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. 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 term or provision, (b) estop that party from enforcing that term or provision, or (c) preclude that party 9 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 provi- sion 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. [EXECUTIVE NAME] PAYLESS CASHWAYS, INC. By:_________________________ _____________________________________ Name:_______________________ Title:______________________ 10 Schedule for Exhibit 10.1(b) 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 - -------------------- ---------------------------------------- -------- -------------------- Renae G. Gonner Vice President - Marketing and $154,000 40% Advertising Kenneth D. Kuehn Vice President - Professional Sales $185,000 40% Steven J. Schultz Regional Vice President $140,000 40% Dennis R. Knowles Regional Vice President $150,000 40%
EX-23.1 6 0006.txt Exhibit 23.1 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 12, 2001, except as to Note I, which is as of January 31, 2001, relating to the balance sheets of Payless Cashways, Inc. as of November 25, 2000 and November 27, 1999, the related statements of operations, stockholders' equity, and cash flows for each of the years in the three-year period ended November 25, 2000, and all related schedules, which report appears in the November 25, 2000 annual report on Form 10-K of Payless Cashways, Inc. /S/ KPMG LLP February 16, 2001 -----END PRIVACY-ENHANCED MESSAGE-----