-----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, BcCkaWbaZBGNCX7iPx7SJr+KqAbOMFaMwTkeaUqmlZOwyMJ4Iak7Lgv5qCTRb6oL b+cHKEtq18ldeqoz8I7QCw== 0000076744-97-000013.txt : 19970228 0000076744-97-000013.hdr.sgml : 19970228 ACCESSION NUMBER: 0000076744-97-000013 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 19961130 FILED AS OF DATE: 19970227 SROS: NYSE 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: IA FISCAL YEAR END: 1130 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-08210 FILM NUMBER: 97545832 BUSINESS ADDRESS: STREET 1: TWO PERSHING SQ 2300 MAIN ST CITY: KANSAS CITY STATE: MO ZIP: 64108 BUSINESS PHONE: 8162346000 10-K 1 FORM 10-K NOVEMBER 30,1996 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) / X / Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 [No fee required] For the fiscal year ended November 30, 1996 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 1-8210 PAYLESS CASHWAYS, INC. (Exact Name of Registrant as Specified in Its Charter) Iowa 42-0945849 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) Two Pershing Square 2300 Main, P.O. Box 419466 Kansas City, Missouri 64141-0466 (Address of Principal Executive Offices) (Zip Code) (816) 234-6000 (Registrant's Telephone Number, Including Area Code) Securities registered pursuant to Section 12 (b)of the Act: Name of Each Exchange on Title of Each Class Which Registered ------------------- ------------------------ Common Stock, $.01 par value New York Stock Exchange 9-1/8% Senior Subordinated Notes due April 15, 2003 New York Stock Exchange Securities registered pursuant to Section 12 (g) of the Act: None Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES / X / NO / / Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. / X / The aggregate market value of the Common Stock, par value $.01 per share, of the registrant held by nonaffiliates of the registrant as of February 7, 1997, was $84,401,479. Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date. Common Stock, $.01 par value, outstanding as of February 7, 1997: Voting -- 37,709,028 shares Class A Non-Voting -- 2,250,000 shares DOCUMENTS INCORPORATED BY REFERENCE Portions of the Annual Report to Shareholders for the year ended November 30, 1996, are incorporated by reference into Part II. Portions of the Annual Proxy Statement for the Annual Meeting of Shareholders to be held April 17, 1997, are incorporated by reference into 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 192 building materials stores in 22 states located in the Midwest, Southwest, Pacific Coast, Rocky Mountain and New England areas under the names of Payless Cashways Building Materials, Furrow Building Materials, Lumberjack Building Materials, Hugh M. Woods Building Materials, Knox Lumber, Somerville Lumber and Contractor Supply. Each store is designed as a one-stop source that provides customers with a complete selection of quality products and services needed to build, improve, and maintain their home, business, farm or ranch properties. The Company's merchandise assortment in each store currently averages approximately 31,000 items in the following categories: lumber and building materials, millwork, tools, hardware, electrical and plumbing products, paint, lighting, home decor, kitchens, decorative plumbing, heating, ventilating and cooling (HVAC), and seasonal items. The Company believes that the combination of a full-line lumberyard, a broad product mix, 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 competitive prices distinguishes Payless from many competitors. The Company's primary customers include professionals and project-oriented do-it-yourselfers. Professionals ("Pros") include remodelers, residential and commercial contractors, and specialty tradespeople as well as enterprises which purchase large quantities of building materials for facility maintenance, such as property management firms, commercial and industrial accounts, and government institutions. Project-oriented do-it-yourselfers ("DIY-ers") are those who engage in more frequent and complex repair or home improvement projects and typically spend in excess of $1,000 annually on home improvement products. Due to its product mix (especially the advantage provided by its full-line lumberyard) and customer service approach, the Company believes that it is well positioned to increase business to the professional customer and serve and defend the do-it-yourself customer. Payless also serves the needs of the moderate and light DIY-er. The Company has adopted a new strategy known as the Dual Path which is discussed at "Strategic Initiatives". As the name suggests, the objective of this strategy is to gain market share with both the Pro and DIY customers in metropolitan markets. This strategy concentrates service to the large-volume professional in a limited number of locations in each market, called Contractor Supply, and includes value-added manufacturing specific to the market. The other stores in each Dual Path market are targeted to the consumer and the neighborhood professional and carry substantially increased merchandise assortments. INDUSTRY OVERVIEW Building materials and home improvement products are sold through two distribution channels -- wholesale supply outlets and retail units. The Company estimates the wholesale supply channel for products sold by the Company represented approximately $142.4 billion in 1996, based on the most recently available unpublished data from the U.S. Department of Commerce for 1996. In the latest study prepared by DRI/McGraw-Hill in November 1996, the retail channel of the industry was estimated to be $135.4 billion in 1996 and is forecast to be $167.6 billion by 2001. 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. Warehouse, home center and building materials chains have grown while the number of local independent merchants has declined. The top 10 chains accounted for approximately 29% of industry sales in 1995. In general terms, customers can be characterized as either wholesale-oriented (professional) or retail-oriented (consumer). Purchases by professionals tend to be larger in volume and require specialized merchandise assortments, competitive market 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. 3 BUSINESS STRATEGY OBJECTIVES The Company's principal objectives are to increase its market share in the Pro and project-oriented DIY segments primarily through its existing stores, to maintain its leadership role in the industry and to continue to improve its balance sheet by reducing its debt. Payless Cashways intends to remain an industry leader by targeting the Pro business as the primary source of growth and by positioning the Company as the preferred alternative to the home improvement warehouse shopping experience. About half of the Company's 1996 revenues were from sales to the Pro customer and the remainder were from sales to the DIY customer. As a national chain, the Company believes it enjoys economies of scale, buying power and professional management that the traditional outlets supplying the professional commonly do not have. These advantages, along with the broad product assortment and full service package, make the Company well-suited to supply the Pro's needs. The Company believes that demographic and lifestyle factors (such as the aging baby boomers, the increase in home-centered activities and the aging housing stock) will result in a growing demand for its products. Based on the Company's consumer research, there is a segment of DIY-ers, which includes the project-oriented DIY-er, which has a stronger preference for shopping at a Payless-oriented outlet than at a home improvement warehouse store. The Company estimates that this segment represents about a third of the DIY population. To this segment, it is very important for their preferred outlet to have knowledgeable employees, high quality products with name brands, consistent in-stock position, and all the products needed to complete a project. The Company believes it is well positioned to meet the needs of this DIY segment and is rated equal to or better than the competition on most of these attributes, according to the Company's consumer research. STRATEGIC INITIATIVES The Company undertook an extensive strategic review in 1995. It was comprehensive and included not only extensive consumer research, but also competitive benchmarking and industry analysis. The review affirmed the Company's business strategy, but highlighted areas of opportunity. Key findings from the review showed that, although many consumers prefer the warehouse format, a significant number prefer the distinctly different type of shopping experience offered by Payless Cashways (smaller scale than the warehouse format; finished, well-lighted showrooms; full-line, drive-in lumberyards). The Company's market research regarding the Pro indicates that, while the Company has established significant business with this group, substantial growth opportunity remains. As a result of the review, the Company intends to better serve DIY customers by increasing convenience, service, and product assortment with particular emphasis on basic repair and maintenance products. The priority in adding products is to add those items most likely to produce repeat visits. In addition, focus is placed on categories with higher margin rates in order to invest the incremental gross margin in even more competitive pricing. While the Company expects to grow slightly from DIY customer sales, the Company also expects the professional and commercial customer to continue to be the primary source of growth. In order to increase market share with those customers, the Company plans to attract and retain more large-volume accounts whose business is not store-based. Some existing and some new facilities will be dedicated primarily to these high-volume professional and commercial accounts. The Company intends to improve the product assortment, key service capabilities, and cost effectiveness at facilities dedicated to Pro customers. This approach is called the "Dual Path" strategy and was implemented in Phoenix in 1996. Of the five facilities the Company operates in the Phoenix market, four were remerchandised to better serve DIY customers with the product offering increased from about 26,000 items to approximately 37,000 items. These stores continue to serve the walk-in, neighborhood professional as well. The fifth facility in Phoenix -- renamed Contractor Supply -- has been dedicated to serve the large-volume professional and commercial customers throughout the Phoenix market. Most of the Phoenix contractor and commercial sales representatives work from this unit which has a business-to-business selling focus. A significant aspect of the Dual Path strategy involves adding manufacturing capabilities to better serve the needs of high-volume professional customers. In January 1996 the Company purchased a door and trim company in Phoenix, which specializes in manufacturing a wide range of custom doors, molding and trim products used by carpenters, homebuilders and remodelers. Also, the Company's existing door plant in Dallas has been expanded to serve the builder, remodeler and carpenter needs that the acquired door company serves in Phoenix. The Company believes that these capabilities help position it to be the supplier of choice for the large-volume professional. 4 The second market to be converted is Cincinnati. All seven of the Company's stores in that market were remodeled to accommodate an additional 8,000 items. The Contractor Supply component of the Dual Path, including appropriate value-added manufacturing, is anticipated to be operational by mid-1997, completing the Cincinnati Dual Path conversion. Three more markets are slated to be converted in 1997: Louisville, KY; Dallas-Ft. Worth, TX; and Minneapolis-St. Paul, MN. Six markets are planned for conversion in 1998. In total, the Company plans to convert 21 markets to the Dual Path strategy. Some components of the Dual Path strategy have been implemented in the Company's retail facilities in other markets. During 1996, approximately 69 stores had significant DIY assortment additions to product offerings. Four stores -- generally not in metropolitan markets -- have been reoriented to the new Contractor Supply format and market position. Given their location, facility size and current customer base, the Company believes that their optimal and most profitable use is as a dedicated professional and commercial supplier. The Company intends to open one new store in 1997 with a format which refines the Company's new store design and represents the Company's continuing efforts to optimize the consumer's shopping experience. PROFESSIONAL STRATEGY The Company believes it is particularly well-suited to serve the needs of professional customers and offers services not provided by most others in the industry. A sales and service staff of approximately 1,600 are dedicated to serving the professional customer. Professional sales representatives have assigned customers for whom they provide service tailored to the customers' business needs. Sales representatives call on professional customers at their places of business and job sites. The sales representatives have detailed information regarding account purchases and the profitability of their accounts. The Company believes that this level of customer service and type of sales management system is effective in increasing purchases and improving profitability from current professional customers as well as building customer loyalty. Each store has a separate commercial sales area for the professional customer to use. These offices allow private discussions between customers and their sales representatives, speed the purchase process for the Pro and offer small amenities to these customers such as coffee, ice, and phone access. The Company has 91 drive-through lumberyards which significantly reduce the time required to complete a purchase and meet the Pros' requirement for fast and efficient service. The Company's merchandise assortment is particularly appealing to the Pro. Preferred brands, commercial grade items, contractor packs and extensive special order capabilities ensure that the Company meets the broad product requirements of this customer segment. The Company has negotiated purchase arrangements with key lumber suppliers which ensure a consistent source of high quality lumber. The Company offers a number of special services which 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 30-day revolving account (Pro Project Card) and a full-service commercial credit program which 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 which 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 data base. The Company has a national accounts program which targets businesses with new construction commercial job sites, often geographically dispersed, and major facilities or multiple locations which utilize large amounts of building materials and improvement products for facility maintenance. The Company continues to develop these accounts which represent multiple individual properties for which it provides repair and maintenance as well as new construction products. Property management firms are an important component of the Company's Pro portfolio. They provide non-seasonal repair and maintenance business which balances business from builders, remodelers and commercial accounts. The Company's Dual Path strategy includes an emphasis on growing the professional business by concentrating the large-volume professional business in one or two facilities in a market. Contractor Supply facilities are expected to have rail access, large lumberyards, a focus on delivery capacity, and a merchandise assortment that is tailored to the professional customer. These facilities will also serve as the base of operations for most of the contractor and commercial sales representatives in the market. The 5 Company currently operates one Contractor Supply facility, in Phoenix, as part of the Dual Path strategy. Market-specific value-added manufacturing (such as custom doors and trim, window mulling, trusses, panelized walls) is an important component of the Dual Path strategy and is in place in Phoenix and under development in Cincinnati. Four other stores in small markets were converted to the Contractor Supply format, without the manufacturing component, in early 1996. DIY STRATEGY The Company's strategy to serve and defend market share with the DIY customer focuses primarily on the segment of DIY-ers with a strong preference for Payless-oriented outlets. Knowledgeable employees, high quality products with brand names, consistent in-stock position, all the products needed to complete a project and competitive pricing are important to the project-oriented DIY customer and have been the foundation upon which the Company has built its business with these customers. 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. Several additional components support the DIY strategy to serve and defend market share in this customer group. These include the following: o ASSORTMENT ADDITIONS. The Company undertook major assortment additions in 1996. In the Dual Path markets, 8,000-12,000 items were added in each of the eleven consumer-oriented stores converted to date. As the remaining Dual Path markets are converted, a similar number of items are expected to be added to the consumer-oriented stores in these markets. In 69 of the Company's other stores with showrooms over 30,000 square feet, 5,000-7,000 items were added and, in smaller stores, an average of 3,000 items were added. The Company continues to upgrade its assortment and displays in product categories which represent a significant portion of the purchases by project-oriented DIY-ers. These upgraded categories include paint, hardware, tools, plumbing, electrical, millwork, and home decor. o ADVERTISING/MARKETING SUPPORT. In the second half of 1996, the Company reinforced its advertising and marketing efforts to the DIY-er in selected underperforming markets. This included additional tabloid newspaper inserts, newspaper runs-of-press (ROPs), and targeted mailings, by zip code, offering discounts and other incentives. The Company significantly enhanced the media mix by adding broadcast, both radio and television, in some markets. o DELIVERY ENHANCEMENTS. An initiative undertaken in 1996 was the improvement of the Company's delivery capacity. This is an element of the service bundle that is key for both project-oriented DIY-ers and professionals. Delivery tracking systems and tow-behind forklifts contributed to the enhancement of this service offering. o RECOGNITION OF CUSTOMER SERVICE. The Company has an employee recognition and reward program and incentive compensation plans for all store employees to promote outstanding customer service. Improved customer service is intended to increase the average sales ticket size and the number of repeat purchasers. MERCHANDISING AND MARKETING During 1996, Payless' full-line stores sold a broad range of building material products currently averaging approximately 31,000 items, many of which are nationally advertised brand-name items. Payless categorizes its product offerings into the classes described below: LUMBERYARD - Dimensional lumber, plywood, sidings, roofing materials, fencing materials, windows, doors and moldings, insulation materials and drywall. HARDWARE - Electrical wire and wiring materials, plumbing materials, power and hand tools, paint and painting supplies, lawn and garden products, door locks, fasteners, and heating and cooling products. SHOWROOM - Interior and exterior lighting, bathroom fixtures and vanities, kitchen cabinets, flooring, panelling, wallcoverings and ceiling tiles. 6 During the last three fiscal years, the three product classifications accounted for the following percentages of Payless' sales: 1996 1995 1994 ---- ---- ---- Lumberyard 50 % 49 % 49 % Hardware 35 35 34 Showroom 15 16 17 ---- ---- ---- 100 % 100 % 100 % As part of the Dual Path strategy, the Contractor Supply centers carry large volumes of lumber, building materials products, related pro-oriented products and market-based value-added manufacturing such as trusses, doors, trim and windows. In Dual Path markets, the majority of stores are remerchandised to increase the product offering to approximately 34,000 to 38,000 items focusing on tools, hardware, paint, electrical and plumbing products. Payless addresses its primary target customers through a mix of newspaper, targeted mailings, and broadcast media advertising methods. The primary media vehicle is newspaper advertisements, both freestanding inserts and run-of-press ads. Additionally, the Company participates in or hosts a variety of customer hospitality events, contractor product shows and national trade association shows and conferences. During fiscal 1996, the Company's expenditures (net of vendor allowances) on all forms of advertising totaled approximately $26 million or 1.0% of sales. The Company utilizes data base marketing techniques to increase the effectiveness of its Pro marketing programs. The data base allows the Company to track and analyze purchases of Pro customers. This purchase history data is used in targeted marketing campaigns and to develop distinct customer profiles for various product categories. In addition, the Company conducts its own market research, including customer intercepts, phone surveys and customer focus groups. STORE LOCATIONS The Company's 192 building materials stores are located in the following states: Number of Stores ---------------- Arizona................... 8 Minnesota................. 8 Arkansas.................. 1 Missouri.................. 11 California................ 16 Montana................... 1 Colorado.................. 18 Nebraska.................. 5 Illinois.................. 3 Nevada.................... 5 Indiana................... 16 New Mexico................ 3 Iowa...................... 10 Ohio...................... 12 Kansas.................... 11 Oklahoma.................. 8 Kentucky.................. 5 Oregon.................... 2 Louisiana................. 1 Tennessee................. 3 Massachusetts............. 5 Texas..................... 40 Payless owns 164 of its store facilities and 153 of the 192 sites on which such stores are located. The remaining 28 stores and 39 sites are leased. Mortgages or deeds of trust on 167 store parcels secure existing indebtedness. Payless has generally located retail stores adjacent to residential areas of major metropolitan cities or adjacent to major arteries in smaller communities which are convenient to the DIY and Pro customer. Operation of multiple stores in a trade area permits more effective supervision of stores and provides certain economies in distribution expenses and advertising costs. Each of Payless' 192 existing stores has an average total selling space of approximately 186,000 square feet consisting of 32,000 square feet of indoor display space and 154,000 square feet of lumberyard. In addition, each store has an average of 51,000 square feet of warehouse space. The average Payless store occupies approximately eight acres of land. The stores built since 1993 average approximately 237,000 square feet of total retail selling space consisting of 57,000 square feet of indoor display space and a 180,000 square foot lumberyard with an attached 17,000 square foot warehouse on ten acres of land. As the Company continues its implementation of the Dual Path strategy, some locations will be converted to the Contractor Supply format, as in Phoenix. In other markets, a different site or facility may be acquired for this purpose, as in Cincinnati. 7 Because these facilities will focus on the large-volume professional customer, the locations are expected to be on rail spurs with several acres available for a large-scale lumberyard. An average Payless store currently carries approximately $1.9 million of inventory, and during fiscal 1996 sales at Payless stores averaged approximately $13.1 million per store. During fiscal 1996, 14 stores were closed. During fiscal 1995, six stores were opened and two stores were sold. During fiscal 1994, seven stores were opened and one store was closed. STORE MANAGEMENT AND PERSONNEL Payless coordinates the operation of its 192 building materials stores through 95 Group Store Directors and Store Managers, each of whom reports directly or through a Group Store Director to one of six Regional Vice Presidents. Supervision and control over the individual stores are facilitated by means of detailed operating reports. All of Payless' Group Store Directors, Store Managers, and Regional Vice Presidents have been promoted from within Payless or from within the stores Payless has acquired. To obtain candidates for store supervisory and management positions, Payless recruits both recent college graduates and persons with business experience. These employees are placed in a formal training program administered by Payless. In addition, Payless maintains an ongoing training program for existing store personnel. Group Store Directors and Store Managers typically have more than ten years of experience with the Company. The stores utilize a departmental management structure designed to provide a superior level of service to customers. Sales personnel are trained in product knowledge, selling skills and systems and procedures. Formal classroom training sessions are supplemented with product clinics and special assignments. Department sales managers typically have more than five years of experience with the Company. Incentive compensation systems reward employees for store performance above goal. In addition to management personnel, all sales and support personnel in the retail stores participate in incentive compensation programs. In fiscal 1996, the Company paid $2.9 million in incentive compensation to its nonmanagement store personnel. Group Store Directors and Store Managers can earn in excess of 35% of base salary in incentive compensation. The Company paid approximately $11.4 million in incentive compensation to its store management personnel for fiscal 1996. The Company believes that its incentive compensation systems are key to employee performance and motivation. INFORMATION SYSTEMS The Company has invested substantial time, effort and dollars ensuring that technology and information are used to the maximum benefit throughout its entire enterprise. In-store-processors based upon current technology standards are integral to management of the stores and support customer services with programs designed to enhance the shopping experience. A satellite-based wide-area-network (WAN) linking each of the various Company facilities provides for daily transmission of 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 sophisticated merchandising, inventory management, distribution and promotional systems which are utilized at the corporate office to manage the purchasing, movement and marketing of product lines. DISTRIBUTION AND SUPPLIERS The Company operates a total of seven distribution centers and three manufacturing locations. The distribution centers maintain inventories and ship product to stores on a weekly basis. The Sedalia, Missouri distribution center handles small-sized, conveyable, high value items such as hardware, plumbing and electrical supplies, and hand tools. The other six distribution centers handle commodity products and bulky manufactured products such as tubs, paneling and ceiling tile. The manufacturing locations assemble pre-hung doors and customized windows. Value-added manufacturing capacity will either be acquired or developed as a part of the Dual Path strategy. 8 In fiscal 1996, 47% of merchandise was channeled through the distribution centers for redistribution to individual stores. This benefits the Company in the areas of product costs, in-stock positions and inventory turnover. The Sedalia distribution center now serves 161 stores. The 592,000 square foot facility utilizes computerized receiving, storage and selection technology. Excluding the Sedalia operation, the Company's regional distribution centers average 18 acres with 154,000 square feet of warehouse space, operating with manual storage and selection systems. In addition, the Company uses third-party operations for specialized needs. Payless purchases substantially all of its merchandise from approximately 4,000 suppliers, no one of which accounted for more than 5% of the Company's purchases during fiscal 1996. 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 28.0% in fiscal 1996, 27.5% in fiscal 1995, and 26.2% in fiscal 1994. Purchases under the Company's commercial credit program as a percentage of sales represented 29.9% in fiscal 1996, 26.5% in fiscal 1995, and 25.1% in fiscal 1994. The Company's private-label credit card program and commercial credit program are administered by a large finance and asset management company. Accounts written off (net of recoveries) under the commercial credit program in fiscal 1996 were approximately $4.9 million or 0.6% of net commercial credit sales. The cost of the private label credit card program represents a fixed percentage fee of charge sales. The fees on the commercial credit program consist of administrative fees which are primarily tied to commercial credit sales and fees for accounts written off, which are substantially all absorbed by the Company. COMPETITION The business of Payless is highly competitive. Payless encounters competition from national and regional chains, including those with a warehouse format, and from local independent wholesalers, supply houses and distributors. In recent years, the building materials retailing industry has experienced increased levels of competition as several national chains have expanded their operations. Certain of these competitors are larger in terms of capital and sales volume and have been operating longer than Payless in particular areas. Although Payless' competition varies by geographical area, Payless continues to differentiate itself from the large warehouse competitors by targeting the DIY customers who have a preference for shopping the Payless-format stores and by targeting the professional customer as the primary source of growth. Payless offers a full-line lumberyard, a broad mix of high quality products, high levels of customer service by knowledgeable employees, consistent in-stock position and competitive pricing. As a result of its focus on the professional customer, the Company competes with local independent lumberyards, independent wholesalers, supply houses and distributors who market primarily to commercial and professional users. EMPLOYEES At November 30, 1996, Payless employed approximately 16,700 persons, approximately 32% of whom were part-time, although the number of employees may fluctuate seasonally. Payless believes its employee relations are satisfactory. Payless' employees are primarily nonunion with less than 2% being represented by a union. A substantial portion of the administrative, purchasing, advertising and accounting functions are centralized at Payless' headquarters in Kansas City, Missouri. ===================== Forward-looking statements in the "Business" section of this Form 10-K are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. There are certain important factors that could cause results to differ materially from those anticipated by some of the statements made above. Investors are cautioned that all forward-looking statements involve risks and uncertainty. In addition to the factors discussed above, among the other factors that could cause actual results to differ materially are the following: 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; growth of certain market segments; competitive pressure on sales and pricing; and an excess of retail space devoted to the sale of building materials. Additional information concerning those and other factors is contained in the Company's Annual Report, copies of which are available from the Company without charge. 9 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. There is no family relationship among Payless' current directors and executive officers.
Principal Occupation and Name Age Five-Year Employment History - ---- --- ---------------------------- David Stanley.............61 Chairman of the Board and Chief Executive Officer of Payless since August 1986; First elected a director: and currently a director of Piper Jaffray Companies, Inc., Digi International, Inc. and 1969 Best Buy Co., Inc. Mr. Stanley is a member of the Corporate Governance and Nominating Committee and Finance Committee of Payless' Board of Directors. Mr. Stanley joined Payless in April 1980. Susan M. Stanton..........48 President and Chief Operating Officer of Payless since November 1993; Senior First elected a director: Vice President - Merchandising of Payless from October 1989 to November 1993; 1993 and currently a director of Western Resources, Inc. Ms. Stanton is a member of the Corporate Governance and Nominating Committee of Payless' Board of Directors. Ms. Stanton joined Payless in March 1983. Gerald M. Buchen..........41 Senior Vice President - Store Operations of Payless since November 1993; and Vice President - Merchandising/Lumberyard of Payless from August 1988 to November 1993. Mr. Buchen joined Payless in August 1974. E. J. Holland, Jr.........53 Senior Vice President - Human Resources/Secretary of Payless since November 1996; Senior Vice President - Human Resources of Payless from June 1992 to November 1996; and Partner of the law firm Spencer Fane Britt & Browne from January 1974 to June 1992. Robert S. Islinger........41 Senior Vice President - Marketing of Payless since August 1996; Vice President - Marketing of Payless from August 1994 to August 1996; and Operating Vice President - Marketing of Service Merchandise Co., Inc. from December 1986 to August 1994. Stephen A. Lightstone.....51 Senior Vice President - Finance/Treasurer and Chief Financial Officer of Payless since February 1988. Mr. Lightstone joined Payless in November 1983. Richard E. Nawrot.........49 Senior Vice President - Information Systems of Payless since September 1991. William H. Parker.........49 Senior Vice President-Merchandising of Payless since August 1996; Corporate Vice President and General Merchandise Manager - Home Decor of Kmart Corporation from January 1994 to February 1996; Vice President - Housewares, Pets and Books of Kmart Corporation from April 1993 to December 1993; and President of Reader's Market - Books and Magazines, a division of Kmart Corporation, from July 1991 to March 1993. Richard G. Luse...........49 Vice President - Controller of Payless since February 1988.
Item 2. PROPERTIES. - ------- ----------- Payless owns 164 of its store facilities and 153 of the 192 sites on which such stores are located. The remaining 28 facilities and 39 sites are leased. The leases provide for various terms. Mortgages or deeds of trust on 167 store parcels secure existing indebtedness. Five of the Company's seven distribution centers are owned and, of the remaining two, one is leased for land only and the facility and land are leased for the other. Mortgages or deeds of trust on five distribution center parcels secure existing indebtedness. One of the Company's manufacturing locations is 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 one manufacturing parcel secure existing indebtedness. Payless leases its corporate office in Kansas City, Missouri, under a lease expiring on November 30, 2002. The administrative offices occupy several floors (approximately 204,000 square feet) of a multi-story building. 10 See also "Strategic Initiatives," "Store Locations" and "Distribution and Suppliers" in Item 1, above. Item 3. LEGAL PROCEEDINGS. - ------- ------------------ On January 6, 1995, a group of terminated employees and others ("Former Employees") filed a lawsuit against the Company and other named defendants (the "Company"), entitled The Payless Cashways, Inc. Partners [et al.] v. Payless Cashways, Inc. [et al], in the United States District Court for the Southern District of Iowa. The Former Employees include management employees who were terminated effective January 10, 1994, in connection with a reduction in force pursuant to a restructuring, in which the Company eliminated certain management in the field organization. The complaint asserted a variety of claims including federal and state securities fraud claims, alleged violations of the Racketeer Influenced and Corrupt Organizations Act ("RICO"), federal and state claims of age discrimination, alleged violations of the Employment Retirement Income Security Act of 1974, and various state law claims including, but not limited to, fraudulent misrepresentation allegations. The complaint also asserted the Former Employees' claims as class representatives and sought to expand the group of party plaintiffs as to the federal age discrimination claims. Various forms of relief, including unspecified monetary damages and an injunctive order, were requested. The Company, in response, filed a motion to dismiss as to the majority of the pending claims except the federal and state age discrimination claims, the state law fraudulent misrepresentation claim and several other state law equitable claims. The Former Employees responded, in part, by filing a second amended complaint and providing, in large part, additional supportive factual detail. The Company filed a reply brief in support of the motion to dismiss. A ruling has been entered on the Company's motion to dismiss the majority of pending claims, substantially narrowing the Former Employee's legal claims by dismissing some age discrimination counts, all federal securities counts and RICO counts except one each, and all state law counts related to an alleged partnership. No ruling has been entered on the Former Employee's motion for class certification. Each of the parties has conducted written discovery pursuant to the court's scheduling order and discovery plan. The Company denies any and all claimed liability and is vigorously defending this litigation, but, given the early state of this litigation, is unable to estimate a potential range of monetary exposure, if any, to the Company or to predict the likely outcome of this matter. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. - ------- ---------------------------------------------------- None. 11 PART II ------- Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER - ------- ----------------------------------------------------------------- MATTERS. -------- Market and dividend information, included on page 36 of the Annual Report to Shareholders for the fiscal year ended November 30, 1996, are incorporated herein by reference. Item 6. SELECTED FINANCIAL DATA. - ------- ------------------------ The Five-Year Financial Summary, included on pages 30 and 31 of the Annual Report to Shareholders for the fiscal year ended November 30, 1996, is incorporated herein by reference. Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS - ------- ----------------------------------------------------------------------- OF OPERATIONS. -------------- Management's Discussion and Analysis of the Financial Condition and Results of Operations, included on pages 6 through 10 of the Annual Report to Shareholders for the fiscal year ended November 30, 1996, is incorporated herein by reference. Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. - ------- -------------------------------------------- The financial statements and independent auditors' report, included on pages 11 through 29 of the Annual Report to Shareholders for the fiscal year ended November 30, 1996, are incorporated herein by reference. The Quarterly Consolidated Statements of Operations, included on pages 4 and 5 of the Annual Report to Shareholders for the fiscal year ended November 30, 1996, are incorporated herein by reference. Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND - ------- --------------------------------------------------------------- FINANCIAL DISCLOSURE. --------------------- None. PART III -------- Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. - -------- --------------------------------------------------- The information required by this item with respect to directors and compliance with Section 16(a) of the Securities Exchange Act of 1934 is incorporated herein by reference to the Registrant's Proxy Statement for the 1997 Annual Meeting of Shareholders, dated February 28, 1997, 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 1997 Annual Meeting of Shareholders, dated February 28, 1997, 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 1997 Annual Meeting of Shareholders, dated February 28, 1997, 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 1997 Annual Meeting of Shareholders, dated February 28, 1997, to be filed pursuant to Regulation 14A. 12 PART IV ------- Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. - -------- ----------------------------------------------------------------- (a) Document list. 1. and 2. The response to this portion of Item 14 is submitted as a separate section of this report. 3. List of exhibits. 3.1 Restated Articles of Incorporation of the Company (incorporated by reference to Exhibit 3.1 filed as part of Amendment No. 1 to Registration Statement No. 33-58008 on Form S-2 on March 8, 1993). 3.2 By-laws of the Company (incorporated by reference to Exhibit 3.1 filed as part of Payless' Quarterly Report on Form 10-Q for the quarter ended August 27, 1994). 4.0 Long-term debt instruments of the Registrant in amounts not exceeding ten percent (10%) of the total assets of the Registrant will be furnished to the Commission upon request. 4.1(a) Amended and Restated Credit Agreement dated October 3, 1996, among Payless, the Banks listed on the signature pages thereof and Canadian Imperial Bank of Commerce, New York Agency, as Administrative Agent 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 24, 1996). 4.1(b) Amended and Restated Borrower Security Agreement, dated October 3, 1996, made by Payless for the benefit of Canadian Imperial Bank of Commerce, New York Agency, as Administrative Agent and Collateral Agent, and the banks and other financial institutions party to the Amended and Restated Credit Agreement (incorporated by reference to Exhibit 4.2 filed as part of Payless' Quarterly Report on Form 10-Q for the quarter ended August 24, 1996). 4.1(c) Form of Deed of Trust, dated October 3, 1996, given to Canadian Imperial Bank of Commerce, New York Agency, as Administrative Agent and Collateral Agent, and the banks and other financial institutions party to the Amended and Restated Credit Agreement (incorporated by reference to Exhibit 4.3 filed as part of Payless' Quarterly Report on Form 10-Q for the quarter ended August 24, 1996). 4.1(d) Form of Mortgage, dated October 3, 1996, given to Canadian Imperial Bank of Commerce, New York Agency, as Administrative Agent and Collateral Agent, and the banks and other financial institutions party to the Amended and Restated Credit Agreement (incorporated by reference to Exhibit 4.4 filed as part of Payless' Quarterly Report on Form 10-Q for the quarter ended August 24, 1996). 4.1(e) Inter-Facility Agreement, dated November 18, 1994, among Canadian Imperial Bank of Commerce, New York Agency, The Bank of Nova Scotia, Nationsbank of Texas, N.A., Bank of America National Trust and Savings Association, Commerce Bank, N.A., Payless and Somerville (incorporated by reference to Exhibit 4.9 filed as part of Payless' Annual Report on Form 10-K for the fiscal year ended November 26, 1994). 4.2 Indenture dated as of April 20, 1993, by and between Payless and United States Trust Company of New York, pursuant to which the 9 1/8% Senior Subordinated Notes of Payless due April 15, 2003, were issued (incorporated by reference to Exhibit 4.2 filed as part of Payless' Quarterly Report on Form 10-Q for the quarter ended May 29, 1993). 4.3(a) Loan Agreement dated June 20, 1989, by and among Payless Cashways, Inc., Knox Home Centers, Inc. ("Knox"), Somerville Lumber and Supply Co., Inc. ("Somerville"), and The Prudential Insurance Company of America (incorporated by reference to Exhibit 4.2 filed as part of Payless' Quarterly Report on Form 10-Q for the quarter ended May 27, 1989). 4.3(b) Promissory Note dated June 20, 1989, from Payless to The Prudential Insurance Company of America, Tranche B (MN) (incorporated by reference to Exhibit 4.12 filed as part of Payless' Quarterly Report on Form 10-Q for the quarter ended May 27, 1989). 4.3(c) Promissory Note dated June 20, 1989, from Payless to The Prudential Insurance Company of America, Tranche B (MT) (incorporated by reference to Exhibit 4.13 filed as part of Payless' Quarterly Report on Form 10-Q for the quarter ended May 27, 1989). 13 4.3(d) Promissory Note dated June 20, 1989, from Payless to the Prudential Insurance Company of America, Tranche B (ND) (incorporated by reference to Exhibit 4.14 filed as part of Payless' Quarterly Report on Form 10-Q for the quarter ended May 27, 1989). 4.3(e) Promissory Note dated June 20, 1989, from Payless to The Prudential Insurance Company of America, Tranche B (NV) (incorporated by reference to Exhibit 4.15 filed a part of Payless' Quarterly Report on Form 10-Q for the quarter ended May 27, 1989). 4.3(f) Promissory Note dated June 20, 1989, from Payless to The Prudential Insurance Company of America, Tranche B (AZ, CA) (incorporated by reference to Exhibit 4.16 filed as part of Payless' Quarterly Report on Form 10-Q for the quarter ended May 27, 1989). 4.3(g) Promissory Note dated June 20, 1989, from Payless to The Prudential Insurance Company of America, Tranche C (IN, KY, NM, OH, TN)(incorporated by reference to Exhibit 4.17 filed as part of Payless' Quarterly Report on Form 10-Q for the quarter ended May 27, 1989). 4.3(h) Promissory Note dated June 20, 1989, from Payless to The Prudential Insurance Company of America, Tranche D (CO, IA, IL, KS, NE, MO, TX, OR, OK) (incorporated by reference to Exhibit 4.18 filed as part of Payless' Quarterly Report on Form 10-Q for the quarter ended May 27, 1989). 4.3(i) Form of Deed of Trust, Mortgage and Security Agreement effective June 20, 1989, given to The Prudential Insurance Company of America (incorporated by reference to Exhibit 4.19 filed as part of Payless' Quarterly Report on Form 10-Q for the quarter ended May 27, 1989). 4.3(j) Form of Deed of Trust, Security Agreement and Assignment of Leases dated June 20, 1989, given to Morgan Bank (Delaware), as Collateral Agent (incorporated by reference to Exhibit 4.20 filed as part of Payless' Quarterly Report on Form 10-Q for the quarter ended May 27, 1989). 4.3(k) First Modification Agreement dated as of October 18, 1991, by and among Payless, Knox, Somerville and The Prudential Insurance Company of America (incorporated by reference to Exhibit 4.9(r) filed as part of Payless' Annual Report on Form 10-K for fiscal year ended November 30, 1991). 4.3(l) Second Modification Agreement dated as of December 17, 1991, by and among Payless, Knox, Somerville and The Prudential Insurance Company of America (incorporated by reference to Exhibit 4.9(s) filed as part of Payless' Annual Report on Form 10-K for fiscal year ended November 30, 1991). 4.3(m) Third Modification Agreement dated as of December 31, 1991, by and among Payless, Knox, Somerville and the Prudential Insurance Company of America (incorporated by reference to Exhibit 4.9(t) filed as part of Payless' Annual Report on Form 10-K for fiscal year ended November 30, 1991). 4.3(n) Fourth Modification Agreement dated as of March 8, 1993, by and among Payless, Somerville and The Prudential Insurance Company of America (incorporated by reference to exhibit 4.6(v) filed as part of Amendment No. 1 to Registration Statement No. 33-58008 on Form S-2 on March 8, 1993). 4.3(o) Letter dated March 12, 1993 modifying Fourth Modification Agreement dated as of March 8, 1993, by and among Payless, Somerville and The Prudential Insurance Company of America (incorporated by reference to Exhibit 4.5(w) filed as part of Registration Statement No. 33-59854 on Form S-2 on March 19, 1993). 4.3(p) Fifth Modification Agreement, dated as of May 25, 1995, by and among Payless, Somerville and The Prudential Insurance Company of America (incorporated by reference to Exhibit 4.1 filed as part of Payless' Quarterly Report on Form 10-Q for the quarter ended August 27, 1995). 4.3(q) Sixth Modification Agreement dated as of November 21, 1995, by and among Payless and The Prudential Insurance Company of America (incorporated by reference to Exhibit 4.4(q) filed as part of Payless' Annual Report on Form 10-K for the year ended November 25, 1995). 10.1 Indemnification Agreement (incorporated by reference to Exhibit 10.2 filed as part of Amendment No. 2 to Registration Statement No. 33-49772 filed August 26, 1992). 14 10.2(a)* Payless Cashways, Inc. Corporate Management Incentive Compensation Program, dated as of December 1991 (incorporated by reference to Exhibit 10.2 filed as part of Payless' Quarterly Report on Form 10-Q for the quarter ended May 30, 1992). 10.2(b)* First Amendment to Payless Cashways, Inc. Corporate Management Incentive Compensation Program, dated as of February 2, 1995 (incorporated by reference to Exhibit 10.3(b) filed as part of Payless' Annual Report on Form 10-K for the fiscal year ended November 26, 1994). 10.3* Employment Agreement dated as of June 16, 1995, between Payless and David Stanley (incorporated by reference to Exhibit 10.1 filed as part of Payless' Quarterly Report on Form 10-Q for the quarter ended May 27, 1995). 10.4(a)* Employment Agreement dated as of February 8, 1993, between Payless and Susan M. Stanton (incorporated by reference to Exhibit 10.26 filed as part of Registration Statement No. 33-58008 on Form S-2 on February 8, 1993). 10.4(b)* Amendment No. 1 to Employment Agreement dated as of October 17, 1996, between Payless and Susan M. Stanton. 10.5(a)* Employment Agreement dated as of February 8, 1993, between Payless and Stephen A. Lightstone (incorporated by reference to Exhibit 10.25 filed as part of Registration Statement No. 33-58008 on Form S-2 on February 8, 1993). 10.5(b)* Amendment No. 1 to Employment Agreement dated as of October 17, 1996, between Payless and Stephen A. Lightstone. 10.6* Employment Agreement dated as of October 17, 1996, between Payless and G. Michael Buchen. 10.7* Employment Agreement dated as of August 2, 1996, between Payless and William H. Parker (incorporated by reference to Exhibit 10.1 filed as part of Payless' Quarterly Report on Form 10-Q for the quarter ended August 24, 1996). 10.8* Retirement Agreement dated as of November 14, 1993, between Payless and Harold Cohen (incorporated by reference to Exhibit 10.6(c) filed as part of Payless' Annual Report on Form 10-K for the fiscal year ended November 27, 1993). 10.9(a)* Payless Cashways, Inc. Wealth-Op Deferred Compensation Plan (incorporated by reference to Exhibit 10.8 filed as part of Post-Effective Amendment No. 7 to Registration Statement No. 33-23893 on Form S-2 filed May 26, 1992). 10.9(b)* Amendment to Payless' Wealth-Op Deferred Compensation Plan (incorporated by reference to Exhibit 10.10(b) filed as part of Payless' Annual Report on Form 10-K for the fiscal year ended November 27, 1993). 10.10(a)* Payless Cashways, Inc. 1988 Deferred Compensation Plan (incorporated by reference to Exhibit 10.11(a) filed as part of Payless' Annual Report on Form 10-K for the fiscal year ended November 27, 1993). 10.10(b)* Amendment to Payless' 1988 Deferred Compensation Plan (incorporated by reference to Exhibit 10.11(b) filed as part of Payless' Annual Report on Form 10-K for the fiscal year ended November 27, 1993). 10.11(a)* Payless Cashways, Inc. Supplemental Death Benefit Plan (incorporated by reference to Exhibit 10.12 filed as part of Payless' Annual Report on Form 10-K for the fiscal year ended November 27, 1993). 10.11(b)* First Amendment to the Payless Cashways, Inc. Supplemental Death Benefit Plan, dated June 16, 1994 (incorporated by reference to Exhibit 10.1 filed as part of Payless' Quarterly Report on Form 10-Q for the quarter ended May 28, 1994). 10.12* Payless Cashways, Inc. Supplemental Disability Plan (incorporated by reference to Exhibit 10.13 filed as part of Payless' Annual Report on Form 10-K for the fiscal year ended November 27, 1993). 10.13(a)* Payless Cashways, Inc. Supplemental Retirement Plan dated as of January 1, 1988 (incorporated by reference to Exhibit 10.14(a) filed as part of Payless' Annual Report on Form 10-K for the fiscal year ended November 27, 1993). 10.13(b)* First Amendment, effective June 22, 1989, to the Payless Cashways, Inc. Supplemental Retirement Plan dated as of January 1, 1988 (incorporated by reference to Exhibit 10.14(b) filed as part of Payless' Annual Report on Form 10-K for the fiscal year ended November 27, 1993). 10.13(c)* Second Amendment dated as of September 7, 1993, to the Payless Cashways, Inc. Supplemental Retirement Plan dated as of January 1, 1988 (incorporated by reference to Exhibit 10.14(c) filed as part of Payless' Annual Report on Form 10-K for the fiscal year ended November 26, 1994). 15 10.13(d)* Third Amendment dated as of August 31, 1994, to the Payless Cashways, Inc. Supplemental Retirement Plan dated as of January 1, 1988 (incorporated by reference to Exhibit 10.1(a) filed as part of Payless' Quarterly Report on Form 10-Q for the quarter ended August 27, 1994). 10.13(e)* Agreement for Supplemental Retirement Benefits between Payless and David Stanley as of August 31, 1994 (incorporated by reference to Exhibit 10.1(b) filed as part of Payless' Quarterly Report on Form 10-Q for the quarter ended August 27, 1994). 10.13(f)* Fourth Amendment, effective June 16, 1995, to the Payless Cashways, Inc. Supplemental Retirement Plan dated as of January 1, 1988 (incorporated by reference to Exhibit 10.2 filed as part of the Payless' Quarterly Report on Form 10-Q for the quarter ended August 27, 1995). 10.14(a) Registration Rights Agreement dated as of August 4, 1988, among PCI Acquisition Corp. and certain of its shareholders (incorporated by reference to Exhibit 10.15(a) filed as part of Payless' Annual Report on Form 10-K for the fiscal year ended November 27, 1993). 10.14(b) Agreement and Amendment dated as of November 11, 1988, to Registration Rights Agreement dated as of August 4, 1988, among Payless and certain of its shareholders (incorporated by reference to Exhibit 10.15(b) filed as part of Payless' Annual Report on Form 10-K for the fiscal year ended November 27, 1993). 10.14(c) Addendum to Shareholders' Agreement and Registration Rights Agreement dated February 22, 1989, by and among Payless and certain of its shareholders (incorporated by reference to Exhibit 10.15(c) filed as part of Payless' Annual Report on Form 10-K for the fiscal year ended November 27, 1993). 10.15(a)* 1988 Payless Cashways, Inc. Employee Stock Plan (incorporated by reference to Annex 1 filed as part of Registration Statement No. 33-24368 on Form S-8 filed September 9, 1988). 10.15(b)* First Amendment to the 1988 Payless Cashways, Inc. Employee Stock Plan, dated November 11, 1988 (incorporated by reference to Exhibit 10.1(b) filed as part of Payless' Quarterly Report on Form 10-Q for the quarter ended February 25, 1989). 10.15(c)* Second Amendment to the 1988 Payless Cashways, Inc. Employee Stock Plan, dated February 22, 1989 (incorporated by reference to Exhibit 10.1(c) filed as part of Payless' Quarterly Report on Form 10-Q for the quarter ended February 25, 1989). 10.15(d)* Third Amendment to the 1988 Payless Cashways, Inc. Employee Stock Plan, dated March 6, 1990 (incorporated by reference to Exhibit 10.2 of Payless' Quarterly Report on Form 10-Q for the quarter ended February 24, 1990). 10.15(e)* Form of Performance Stock Option Agreement pursuant to the 1988 Payless Cashways, Inc. Employee Stock Option Plan amended on June 20, 1991 (incorporated by reference to Exhibit 10.21(e) filed as part of Payless' Annual Report on Form 10-K for fiscal year ended November 30, 1991). 10.15(f)* Amendment to the 1988 Payless Cashways, Inc. Employee Stock Plan, dated as of May 1, 1992 (incorporated by reference to Exhibit 10.26 filed as part of Post-Effective Amendment No. 7 to Form S-2 Registration Statement No. 33-23893 filed May 26, 1992). 10.16(a)* Payless Cashways 1992 Incentive Stock Program (incorporated by reference to Exhibit 10.24 filed as part of Amendment No. 2 to Registration Statement No. 33-49772 on Form S-2 filed August 26, 1992). 10.16(b)* Amendment No. 1 to the Payless Cashways 1992 Incentive Stock Program, dated as of December 12, 1996. 10.17(a)* Payless Cashways Director Option Plan (incorporated by reference to Exhibit 10.23 filed as part of Registration Statement No. 33-59854 on Form S-2 on March 19, 1993). 10.17(b)* Amendment No. 1 to the Payless Cashways Director Option Plan, dated as of December 12, 1996. 10.18(a)* Payless Cashways, Inc. Deferred Compensation Plan for Directors, dated as of October 20, 1995 (incorporated by reference to Exhibit 10.17 filed as part of Payless' Annual Report on Form 10-K for the year ended November 25, 1995). 10.18(b)* Amendment No. 1 to the Payless Cashways, Inc. Deferred Compensation Plan for Directors, dated as of December 12, 1996. 16 11.1 Computation of per share earnings. 13.1 Annual Report to Shareholders. 23.1 Consent of KPMG Peat Marwick LLP. 27.1 Financial data schedule. * Represents a management contract or a compensatory plan or arrangement. Copies of any or all Exhibits will be furnished upon written request and payment of Payless' reasonable expenses in furnishing the Exhibits. (b) Reports on Form 8-K. No reports on Form 8-K have been filed by the Registrant during the quarter ended November 30, 1996. (c) Exhibits. The response to this portion of Item 14 is submitted as a separate section of this report. (d) Financial Statement Schedules. The response to this portion of Item 14 is submitted as a separate section of this report. 17 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Payless has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. PAYLESS CASHWAYS, INC. (Registrant) By s/David Stanley ------------------------------------------ David Stanley, Principal Executive Officer Dated: February 20, 1997 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/David Stanley ------------------------------ David Stanley Chief Executive Officer and February 20, 1997 Chairman of the Board (Principal Executive Officer) s/Susan M. Stanton ------------------------------ Susan M. Stanton President and Chief Operating February 20, 1997 Officer and Direct s/Ralph Strangis ------------------------------ Ralph Strangis Lead Director February 20, 1997 s/Harold Cohen ------------------------------ Harold Cohen Director February 20, 1997 s/Scott G. Fossel ------------------------------ Scott G. Fossel Director February 20, 1997 s/William A. Hall ------------------------------ William A. Hall Director February 20, 1997 s/George Latimer ------------------------------ George Latimer Director February 20, 1997 s/Wayne B. Lyon ------------------------------ Wayne B. Lyon Director February 20, 1997 s/Gary D. Rose ------------------------------ Gary D. Rose Director February 20, 1997 s/Louis W. Smith ------------------------------ Louis W. Smith Director February 20, 1997 s/John H. Weitnauer, Jr. ------------------------------ John H. Weitnauer, Jr. Director February 20, 1997 s/Stephen A. Lightstone ------------------------------ Stephen A. Lightstone Senior Vice President-Finance/ February 20, 1997 Treasurer and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer
18 ANNUAL REPORT ON FORM 10-K ITEM 14(a) (1) and (2), (c) and (d) LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES FINANCIAL STATEMENT SCHEDULES EXHIBITS YEAR ENDED NOVEMBER 30, 1996 PAYLESS CASHWAYS, INC. KANSAS CITY, MISSOURI 19 PAYLESS CASHWAYS, INC. FORM 10-K--ITEM 14(a) (1) and (2) LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES The following financial statements of Payless Cashways, Inc. included in Payless' Annual Report to the Shareholders for the year ended November 30, 1996, are incorporated by reference in Item 8: Statements of Operations--fiscal years ended November 30, 1996, November 25, 1995, and November 26, 1994. Balance Sheets--November 30, 1996, and November 25, 1995. Statements of Cash Flows--fiscal years ended November 30, 1996, November 25, 1995, and November 26, 1994. Statements of Shareholders' Equity--fiscal years ended November 30, 1996, November 25, 1995, and November 26, 1994. Notes to Financial Statements. The following financial statement schedule of Payless Cashways, Inc. is included in Item 14(d): VIII - Valuation and Qualifying Accounts All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted. 20 [KPMG Peat Marwick LLP Letterhead] INDEPENDENT AUDITORS' REPORT ---------------------------- The Board of Directors Payless Cashways, Inc.: Under date of January 13, 1997, we reported on the balance sheets of Payless Cashways, Inc. as of November 30, 1996 and November 25, 1995, and the related statements of operations, shareholders' equity and cash flows for each of the fiscal years in the three-year period ended November 30, 1996, as contained in the 1996 annual report to shareholders. These financial statements and our report thereon are incorporated by reference in the annual report on Form 10-K for the fiscal year 1996. In connection with our audits of the aforementioned financial statements, we also audited the related financial statement schedule as listed in the accompanying index. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement schedule based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. As discussed in Note H to the financial statements, the Company adopted Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," in fiscal 1996. s/KPMG Peat Marwick LLP Kansas City, Missouri January 13, 1997 21 SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS PAYLESS CASHWAYS, INC. (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 30, 1996: Reserve for Inventory Shrink and Obsolescence................. $ 20,354 $ 31,840 $ 38,590 $ 13,604 YEAR ENDED NOVEMBER 25, 1995: Reserve for Inventory Shrink and Obsolescence................. $ 16,661 $ 33,108 $ 29,415 $ 20,354 YEAR ENDED NOVEMBER 26, 1994: Reserve for Inventory Shrink and Obsolescence................. $ 18,252 $ 21,920 $ 23,511 $ 16,661
EX-10 2 AMENDED EMPLOYMENT AGREEMENT STANTON 1 Exhibit 10.4(b) AMENDMENT NO. 1 TO EMPLOYMENT AGREEMENT THIS AGREEMENT, made and entered into as of the 17th day of October, 1996, between Payless Cashways, Inc., an Iowa corporation (the "Company"), and Susan M. Stanton (the "Executive"). WHEREAS, the Company and the Executive have entered into an employment agreement dated February 8, 1993 (the "Employment Agreement"); WHEREAS, since the execution of the Employment Agreement, the Executive has been elected President and Chief Operating Officer of the Company; and WHEREAS, the parties mutually desire to amend the Employment Agreement; NOW, THEREFORE, in consideration of these premises and other good and valuable consideration, the parties agree as follows: 1. Employment and Duties. In the first sentence of Paragraph 1 of the Employment Agreement, the phrase "a senior vice president" is hereby deleted and the phrase "President and Chief Operating Officer" is substituted in lieu thereof. 2. Term of Employment. Paragraph 2 of the Employment Agreement is hereby deleted in its entirety and the following is substituted in lieu thereof: "Term of Employment. Unless sooner terminated as hereinafter provided, the term of this Agreement shall commence on the date hereof and shall continue (a) through March 1, 1998 in the event no Change of Control (as defined in Paragraph 6(e) below) occurs, or (b) through the stated term hereof or one year and sixty (60) days after the date of a Change of Control, whichever is longer." 3. Compensation. In the third sentence of subparagraph (d), Paragraph 3, of the Employment Agreement, the word "or" is hereby inserted immediately preceding the character "(ii)", and the phrase "or (iii) the Company gives written notice of non-renewal of the term of the Executive's employment pursuant to Paragraph 2 above," is hereby deleted. 2 4. Covenant Not to Compete. In subsection (b) of the first sentence of Paragraph 5 of the Employment Agreement, the word "or" is hereby inserted immediately preceding the character "(ii)", and the phrase "or (iii) the election of the Executive not to renew the terms of the Executive's employment under this Agreement as provided in Paragraph 2 above," is hereby deleted. In subsection (c) of the first sentence of Paragraph 5 of the Employment Agreement, the phrase "(including the one year renewal term)" is hereby deleted and the year "1998" is substituted in lieu of the year "1997." 5. Termination Severance Benefits. (a) In subsection (i) of Paragraph 6 (c) of the Employment Agreement, the phrase "a senior vice president" is hereby deleted and the phrase "President and Chief Operating Officer" is substituted in lieu thereof. (b) In Paragraph 6 (g) of the Employment Agreement, subparagraph (i) is hereby deleted in its entirely and the following is substituted in lieu thereof: "(i) Base Salary. The Company shall continue to pay to the Executive the Executive's Base Salary, when and as such Base Salary would have been paid, during the Severance Period (as defined in Paragraph 6(j) below)." (c) In the second sentence of Paragraph 6 (g), subparagraph (ii) of the Employment Agreement, the phrase "remaining in the term of this Agreement (excluding the one year renewal term if termination occurs on or prior to December 1, 1995 and including the one year renewal term if termination occurs after December 1, 1995)" is hereby deleted and the phrase "in the Severance Period" is substituted in lieu thereof. (d) In Paragraph 6(g), subparagraph (v) of the Employment Agreement, the phrase "the term specified in Paragraph 2 above (excluding the one year renewal term if termination of the Executive's employment occurs on or prior to December 1, 1995 and including the one year renewal term if termination occurs after December 1, 1995)" is hereby deleted and the phrase "the Severance Period" is substituted in lieu thereof. 6. Termination Special Severance Benefits. Paragraph 6(h) is hereby deleted in its entirety. 7. Severance Period Definition. A new Paragraph 6(j) is hereby inserted in the Employment Agreement, as follows: 3 "Definition of Severance Period. The term "Severance Period" shall mean: (x) except as provided in subsection (y) herein, the period from the date of the termination of the Executive's employment continuing for the longer of one year after the date of such termination or until March 1, 1998; or (y) in the event of a termination by the Company pursuant to Paragraph 6(d) after a Change of Control or a termination by the Executive pursuant to Paragraph 6(e), the period from the date of the termination of the Executive's employment continuing for two years after the date of such termination; provided, however, that in the case of either (x) or (y), the Severance Period shall continue regardless of the death or disability of the Executive subsequent to the date of termination of employment. In witness whereof, the parties have executed this Amendment No. 1 as of the day and year written above. PAYLESS CASHWAYS, INC. EXECUTIVE By: /s/ David Stanley /s/ Susan Stanton ------------------------------------ --------------------------------- Chairman and Chief Executive Officer Susan M. Stanton Approval by the Compensation Committee of the Board of Directors of the Company is hereby confirmed. /s/ Gary D. Rose - -------------------------- Gary D. Rose, Chair EX-10 3 AMENDED EMPLOYMENT AGREEMENT LIGHTSTONE 1 Exhibit 10.5(b) AMENDMENT NO. 1 TO EMPLOYMENT AGREEMENT THIS AGREEMENT, made and entered into as of the 17th day of October, 1996, between Payless Cashways, Inc., an Iowa corporation (the "Company"), and Stephen A. Lightstone (the "Executive"). WHEREAS, the Company and the Executive have entered into an employment agreement dated February 8, 1993 (the "Employment Agreement"); and WHEREAS, the parties mutually desire to amend the Employment Agreement; NOW, THEREFORE, in consideration of these premises and other good and valuable consideration, the parties agree as follows: 1. Term of Employment. Paragraph 2 of the Employment Agreement is hereby deleted in its entirety and the following is substituted in lieu thereof: "Term of Employment. Unless sooner terminated as hereinafter provided, the term of this Agreement shall commence on the date hereof and shall continue (a) through March 1, 1998 in the event no Change of Control (as defined in Paragraph 6(e) below) occurs, or (b) through the stated term hereof or one year and sixty (60) days after the date of a Change of Control, whichever is longer." 2. Compensation. In the third sentence of subparagraph (d), Paragraph 3, of the Employment Agreement, the word "or" is hereby inserted immediately preceding the character "(ii)", and the phrase "or (iii) the Company gives written notice of non-renewal of the term of the Executive's employment pursuant to Paragraph 2 above," is hereby deleted. 3. Covenant Not to Compete. In subsection (b) of the first sentence of Paragraph 5 of the Employment Agreement, the word "or" is hereby inserted immediately preceding the character "(ii)", and the phrase "or (iii) the election of the Executive not to renew the terms of the Executive's employment under this Agreement as provided in Paragraph 2 above," is hereby deleted. In subsection (c) of the first sentence of Paragraph 5 of the Employment Agreement, the phrase "(including the one year renewal term)" is hereby deleted and the year "1998" is substituted in lieu of the year "1997." 2 4. Termination Severance Benefits. (a) Paragraph 6 (g), subparagraph (i) of the Employment Agreement is hereby deleted in its entirely and the following is substituted in lieu thereof: "Base Salary. The Company shall continue to pay to the Executive the Executive's Base Salary, when and as such Base Salary would have been paid, during the Severance Period (as defined in Paragraph 6(j) below)." (b) In the second sentence of Paragraph 6 (g), subparagraph (ii) of the Employment Agreement, the phrase "remaining in the term of this Agreement (excluding the one year renewal term if termination occurs on or prior to December 1, 1995 and including the one year renewal term if termination occurs after December 1, 1995)" is hereby deleted and the phrase "in the Severance Period" is substituted in lieu thereof. (c) In Paragraph 6(g), subparagraph (v) of the Employment Agreement, the phrase "the term specified in Paragraph 2 above (excluding the one year renewal term if termination of the Executive's employment occurs on or prior to December 1, 1995 and including the one year renewal term if termination occurs after December 1, 1995)" is hereby deleted and the phrase "the Severance Period" is substituted in lieu thereof. 5. Termination Special Severance Benefits. Paragraph 6(h) is hereby deleted in its entirety. 6. Severance Period Definition. A new Paragraph 6(j) is hereby inserted in the Employment Agreement, as follows: "Definition of Severance Period. The term "Severance Period" shall mean: (x) except as provided in subsection (y) herein, the period from the date of the termination of the Executive's employment continuing for the longer of one year after the date of such termination or until March 1, 1998; or (y) in the event of a termination by the Company pursuant to Paragraph 6(d) after a Change of Control or a termination by the Executive pursuant to Paragraph 6(e), the period from the date of the termination of the Executive's employment continuing for two years after the date of such termination; provided, however, that in the case of either (x) or (y), the Severance Period shall continue regardless of the death or disability of the Executive subsequent to the date of termination of employment. 3 In witness whereof, the parties have executed this Amendment No. 1 to Employment Agreement as of the day and year written above. PAYLESS CASHWAYS, INC. EXECUTIVE By:/s/ David Stanley /s/ Stephen A. Lightstone ------------------------------------ ------------------------------- Chairman and Chief Executive Officer Stephen A. Lightstone Approval by the Compensation Committee of the Board of Directors of the Company is hereby confirmed. /s/ Gary D. Rose - ---------------------- Gary D. Rose, Chair EX-10 4 EMPLOYMENT AGREEMENT BUCHEN 1 Exhibit 10.6 EMPLOYMENT AGREEMENT -------------------- THIS AGREEMENT, made and entered into as of the 17th day of October, 1996 between PAYLESS CASHWAYS, INC., an Iowa corporation (the "Company"), and G. MICHAEL BUCHEN (the "Executive"). WHEREAS, the Company desires to employ the Executive and the Executive desires to be employed by the Company 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. Employment and Duties. The Company hereby agrees to employ the Executive, and the Executive hereby accepts employment, to perform such duties and responsibilities of a senior vice president as are, from time to time, assigned to the Executive by the Board of Directors, the Company's Chief Executive Officer or the Company's President/Chief Operating Officer. 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 the President/Chief Operating Officer of the Company or such other person as designated by the Company's Board of Directors. Such duties shall be performed from the Company's principal executive offices in Kansas City, Missouri. 2. Term of Employment. Unless sooner terminated as hereinafter provided, the term of this Agreement shall commence on the date hereof and shall continue (a) through March 1, 1998 in the event no Change of Control (as defined in Paragraph 6 (e) below) occurs, or (b) through the stated term hereof or one year and sixty (60) days after the date of a Change of Control, whichever is longer. 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 $275,000 payable in equal bi-weekly installments, which salary shall be reviewed 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 management and executive incentive compensation program or such 2 other program or plan for executive officers of the Company as from time to time in effect and as determined by the Compensation Committee of the Board of Directors (the "Incentive Compensation"). (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 senior officers, including the Company's Supplemental Retirement Plan dated January 1, 1988, as amended (the "Supplemental Retirement Plan") and other benefits for senior officers set forth in Exhibit A hereto. 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 and Solicitation Provisions. (a) Confidentiality of Proprietary Information. The Executive agrees that, at all times, both during the Executive's employment with the Company and after the termination thereof, the Executive shall not divulge to any other person, firm or corporation, 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 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 3 disclosed to others or used by the Executive directly or indirectly except in the course of the Company's business. (b) Solicitation Prohibition. During the Executive's employment with the Company and for a period of one (1) year after the termination 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 with any other person, firm, corporation, partnership, joint venture or entity whatsoever, solicit or endeavor to entice away from the Company any employee who is or was employed by the Company during the period that the Executive is employed by the Company. Additionally, the Executive shall not, during the Executive's employment with the Company or for a period of one (1) year after the termination of the Executive's employment with the Company for any reason directly or indirectly, through any other individual or entity solicit, entice, persuade or induce any individual or entity to terminate, reduce or refrain from renewing or extending its contractual or prospective relationship or other relationship with the Company. (c) Definition of "Company". For the purposes of Paragraph 4, the term "Company" shall mean the Company and any of its direct or indirect subsidiaries. 5. Covenant Not to Compete. During (a) the Executive's employment with the Company, (b) the one year after termination of the Executive's employment with the Company if such termination is as a result of a voluntary termination by the Executive under Paragraph 6(d) or a termination by the Company for Cause under Paragraph 6(b), and (c) the one year following expiration of the term of Executive's employment hereunder on March 1, 1998, if there has been no termination of the Executive's employment prior thereto, the Executive agrees not to engage in or act as an officer or director, or on an individual basis as an 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 if the annual sales of such business (including any related or commonly owned entity on a combined basis) from the sale of building materials and all related products and services for the most recently completed fiscal year exceeds $500,000,000. 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 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, including damages, as may be proper. 4 6. Termination. (a) Death or Disability. In the event of the Executive's death or disability as defined in the Company's disability plan then in effect, the Company's obligation to make further Base Salary payments hereunder shall thereupon terminate. Execute shall be entitled to receive any Incentive Compensation which the Executive has earned, prorated to the date of the termination of the Executive's employment by reason of death or disability, and the Executive's rights to other compensation and benefits shall be determined under the Company's benefit plans and policies applicable to Company executives then in effect. (b) Termination for Cause by the Company. By following the procedure set forth in Paragraph 6(f), the Company shall have the right to terminate 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) grossly neglected or willfully failed in any way to perform substantially the duties of the Executive's employment hereunder, including but not limited to an act of insubordination; (iii) 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 or plea of nolo contendere to (A) any felony (other than any felony arising out of negligence) or any misdemeanor involving moral turpitude, or (B) any crime or offense involving dishonesty with respect to the Company; or (iv) has knowingly and for the Executive's own benefit 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 terminate. The Executive's rights to other compensation and benefits shall be determined under the Company's benefit plans and policies applicable to Company executives then in effect. (c) Termination for Good Reason by the Executive. By following the procedure set forth in Paragraph 6(f), the Executive shall have the right to terminate the Executive's employment with the Company for "Good Reason" in the event (i) the Executive is not at all times a duly elected senior vice president 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 which disables the Executive from performing the Executive's duties, the Company may reassign 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 reduction in the percentage of Base Salary which is the Incentive Compensation opportunity of the Executive under 5 Paragraph 3(b), an amendment to the Supplemental Retirement Plan which is materially adverse to the Executive or a material reduction in the other benefits to which the Executive is entitled under Paragraph 3(c) above; (iv) the Company requires the Executive's principal place of employment to be anywhere other than the Company's principal executive offices, or there is a relocation of the Company's principal executive offices outside of Kansas City, Missouri; or (v) the Company otherwise fails to perform its 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(g) below. (d) Termination Without Cause or Without Good Reason. The Company may terminate 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(g) below. The Executive may voluntarily terminate the Executive's employment without Good Reason at any time, and in such event the Executive's rights to further Base Salary payments and Incentive Compensation (except Incentive Compensation prorated to the date of termination) shall terminate on the effective date of such resignation and the Executive's rights to other compensation and benefits shall be determined under the Company's benefit plans and policies applicable to Company executives then in effect. (e) Termination Upon Change in Control. In the event of a Change of Control (as defined below), the Executive may terminate the Executive's employment hereunder upon thirty (30) days' prior written notice to the Company; provided that (i) such notice of termination under this Paragraph 6(e) must be given, if at all, during the sixty (60) day period, immediately following the first anniversary of the date of the Change of Control, and (ii) until the termination of the Executive's employment pursuant to this Paragraph 6(e) (subject to the continued right of the Executive to terminate employment for Good Reason pursuant to Paragraph 6(c) above) the Executive shall continue to perform the Executive's duties and responsibilities under this Agreement. In the event the Executive terminates the Executive's employment hereunder pursuant to this Paragraph 6(e), the Executive shall be entitled to the severance benefits set forth in Paragraph 6(g) below; provided, however, in the event that any payment or benefit received or to be received by the Executive in connection with a termination of the Executive's employment pursuant to this Paragraph 6(e) (collectively, the "Termination Payments") would (i) constitute a "parachute payment" within the meaning of Section 280G of the Internal Revenue Code of 1986, as amended (the "Code"), or any similar or successor provision to Section 280G (the "Termination Parachute Payments") and (ii) but for this proviso, be subject to the excise tax imposed by Section 4999 of the Code or any similar or successor provisions to Section 4999 (the "Excise Tax"), then such Termination Payments shall be reduced to the largest amount which the Company, in the 6 Company's reasonable discretion, determines would result in no portion of the Termination Parachute Payments being subject to the Excise Tax. The term "Change in Control" shall occur when and if: (i) any person, as defined in Sections 3(a)(9) and 13(d) of the Securities Exchange Act of 1934 (the "Exchange Act"), becomes the "beneficial owner" (as defined in Rule 13d-3 promulgated pursuant to the Exchange Act), directly or indirectly, of securities of the Company having 25% or more of the voting power in the election of directors of the Company, excluding, however, any person or an "affiliate" (as defined in the Exchange Act) of such person who is the beneficial owner of any shares of any class (preferred or common) of the Company's capital stock on the date hereof; or (ii) the occurrence within any twelve-month period while this Agreement is in effect 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 twelve-month period, provided that any person becoming a director during such twelve-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 twelve-month period. (f) Notice and Right to Cure. The party proposing to terminate 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 is such that it is not curable, the party giving such notice may, within thirty (30) days after the expiration of the time so fixed within which to correct such situation, give written notice to the other party that the employment is terminated effective forthwith. 7 (g) Severance Benefits. If the Executive's employment with the Company is terminated by the Company without Cause, by the Executive for Good Reason or by the Executive after a Change of Control in accordance with Paragraph 6(e), then the Executive shall be entitled to the following benefits: (i) Base Salary. The Company shall continue to pay to the Executive the Executive's Base Salary, when and as such Base Salary would have been paid, during the Severance Period (as defined in Paragraph 6(i) below). (ii) Incentive Compensation. If the effective date of such termination occurs before Incentive Compensation for any preceding fiscal year has been paid, the Company shall pay to the Executive the amount of the Executive's Incentive Compensation for the preceding fiscal year when and as it would have been paid if the Executive remained employed by the Company. (iii) Insurance Coverage. During the Severance Period, the Company shall provide the Executive with health, life and disability insurance substantially similar to the coverage of the benefits which the Executive was receiving or entitled to receive under Paragraph 3(c) immediately prior to the date of termination, the cost of which was paid by the Company. Such insurance coverage shall be provided to the Executive for the longer of (x) the Severance Period, or (y) the period during which such benefits would have been provided, at the Company's expense, to the Executive under the applicable health, life and disability insurance plans of the Company in effect immediately prior to the date of termination. (iv) Stock Incentives. All of the Executive's stock options and restricted stock grants shall continue to vest or be earned and be exercisable in accordance with their respective terms as if the Executive continued to be employed by the Company during the Severance Period (regardless of the death or disability of the Executive subsequent to the date of termination of employment). (v) Retirement Benefits. To the extent that benefits under each of the Company's pension plans and the Company's Supplemental Retirement Plan are computed on the basis of either the salary and benefits paid while in the Company's employ or the term of the Executive's employment with the Company, the benefits payable and the Executive's eligibility therefor shall be determined as though the Executive were 8 employed by the Company under this Agreement for and had attained the age that he would have attained at the end of the Severance Period. (vi) Outplacement Benefits. The Company, at its expense, will provide to the Executive such outplacement benefits as would be appropriate for a senior officer of a company substantially equivalent in size to the Company in terms of sales, profits, number of employees, geographic location and organizational structure, as determined by a national outplacement service provider selected by Company. (h) Survival of Certain Provisions. Notwithstanding any termination of the Executive's employment with the Company under this Agreement, the provisions of Paragraphs 3 and 4 shall, to the extent provided therein, survive any such termination shall be binding upon the Executive in accordance with the provisions thereof. (I) Definition of Severance Period. The term "Severance Period" shall mean: (x) except as provided in subsection (y) herein, the period from the date of the termination of the Executive's employment continuing for the longer of one year after the date of such termination or until March 1, 1998; or (y) in the event of a termination by the Company pursuant to Paragraph 6(d) after a Change of Control or a termination by the Executive pursuant to Paragraph 6(e), the period from the date of the termination of the Executive's employment continuing for two years after the date of such termination; provided, however, that in the case of either (x) or (y), the Severance Period shall continue regardless of the death or disability of the Executive subsequent to the date of termination. 6. Arbitration. The parties hereby agree that any dispute arising hereunder or any claim for breach or violation of any item hereof shall be submitted to arbitration pursuant to the rules of the American Arbitration Association ("AAA") to a panel of three arbitrators selected by mutual agreement of the parties or, if the parties do not mutually agree on the arbitration, in accordance with the rules of the AAA. The award determination of the arbitrators shall be final and binding upon the parties without right of appeal. Either party shall have the right to bring an action in any court of competent jurisdiction to enforce this Paragraph and to enforce any arbitrators' award rendered pursuant to this Paragraph. The venue for all proceedings in arbitration hereunder and for any judicial proceedings related thereof shall be in Kansas City, Missouri. 7. Business Expenses. The Company shall reimburse the Executive for entertainment and travel expenses related to the Company's business in 9 accordance with the practices of the Company in effect on the date hereof with respect to the Executive, subject to the right of the Company to modify its general policies relating to expense reimbursement for employees to the extent such modifications do not materially reduce the extent of reimbursement for the Executive as in effect on the date hereof. 8. Severability. If any one or more of the provisions of this Agreement shall be held invalid or unenforceable, the validity and enforceability of all other provisions of this agreement shall not be affected thereby. 9. Binding Effect. This Agreement shall be binding upon and inure to the benefit of the personal representatives, heirs and assigns of Executive and any successors in interest and assigns of the Company. 10. 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: G. Michael Buchen 400 Nashua Rd. Liberty, MO 64068 To the Company: Payless Cashways, Inc. Two Pershing Square 2300 Main, P. O. Box 419466 Kansas City, MO 64141-0466 Attn: Senior Vice President, General Counsel and Secretary or such other address as a party hereto may notify the other in writing. 12. Applicable Law. This Agreement, or any portion thereof, shall be interpreted in accordance with the laws of the State of Missouri. IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the day and year first written above. G. MICHAEL BUCHEN PAYLESS CASHWAYS, INC. /s/ G. Michael Buchen By /s/ David Stanley - -------------------------- ----------------------------- David Stanley, Chairman and Chief Executive Officer 10 Approval of the foregoing Agreement by the Compensation Committee of the Board of Directors of the Company is hereby confirmed. /s/ Gary D. Rose ------------------------------ Gary D. Rose, Chairman EX-10 5 AMENDMENT 1 1992 INCENTIVE STOCK PROGRAM 1 Exhibit 10.16(b) AMENDMENT NO. 1 TO THE PAYLESS CASHWAYS 1992 INCENTIVE STOCK PROGRAM The Payless Cashways 1992 Incentive Stock Program (the "1992 Stock Program"), effective July 15, 1992, is hereby amended as follows: 1. Section 2. Administration: Section 2 of the 1992 Stock Program is hereby amended by deleting the phrase "disinterested persons" in the first sentence and substituting the phrase "non-employee directors". 2. Section 6. Incentive Stock Option Plan: Section 6 of the 1992 Stock Program is hereby amended by deleting in its entirety the last sentence of said section. 3. Section 7. Non-qualified Stock Option Plan: Section 7 of the 1992 Stock Program is hereby amended by deleting in its entirety the last sentence of said section. 4. Section 8. Stock Appreciation Rights Plan: Section 8 of the 1992 Stock Program is hereby amended by deleting in its entirety subsection (c) and renumbering subsections (d) and (e) to subsections (c) and (d). 5. Section 9. Restricted Stock Awards Plan: Section 9 of the 1992 Stock Program is hereby amended by deleting in its entirety the last sentence of said section. 6. Section 11. Nontransferability: Section 11 of the 1992 Stock Program is hereby amended by inserting the phase "Incentive Stock Option and, unless otherwise determined by the Committee, each Non-Qualified" after the word "Each" in the first sentence of said section. 7. Section 12. Other Provisions: Section 12 of the 1992 Stock Program is hereby amended by deleting in its entirety the phase "have been owned for at least six months and" in the first sentence of said section. 8. Section 17. Adjustment Provisions: Section 17 of the 1992 Stock Program is hereby amended by deleting the phrase "Subject to the six-month holding requirement of paragraphs 6, 7, 8(c) and 9 but" at the beginning of the first sentence of the third paragraph of said section and capitalizing the word "notwithstanding". 2 9. Section 18. Amendment and Termination of Program: Section 18 of the 1992 Stock Program is hereby amended by deleting in its entirety the last sentence of said section. 10. Section 19. Shareholder Approval: Section 18 of the 1992 Stock Program is hereby amended by inserting the phrase "and approved by the shareholders of the Company on July 15, 1992." at the end of the first sentence of said section and deleting in its entirety the last sentence of said sentence. THIS AMENDMENT is made as of and effective December 12, 1996. PAYLESS CASHWAYS, INC. BY: /s/ David Stanley ------------------ ATTEST: /s/ E. J. Holland, Jr. - ---------------------- EX-10 6 AMENDMENT 1 DIRECTOR OPTION PLAN 1 Exhbit 10.17(b) AMENDMENT NO. 1 TO THE PAYLESS CASHWAYS DIRECTOR OPTION PLAN The Payless Cashways Director Option Plan (the "Director Option Plan"), effective March 15, 1993, is hereby amended as follows: 1. Section 5. Non-Qualified Stock Option Awards: Section 5 of the Director Option Plan is amended by deleting the phase "at the time the Plan is effective" in the first sentence and substituting the following phase "on July 15, 1992. 2. Section 6. Terms of the Options: Section 6 of the Director Option Plan is amended by deleting the phase "six months and one day after" in the second sentence and substituting the word "on". 3. Section 7. Nontransferability: Section 7 of the Director Option Plan is amended by deleting the paragraph in its entirety and substituting the following paragraph: "7. Nontransferability ------------------ Each Option awarded under this Plan, unless otherwise determined by the Committee, shall not be transferable other than by will or the laws of descent and distribution, and shall be exercisable, during the participant's lifetime, only by the participant or the participant's guardian or legal representative." 4. Section 11. Amendment and Termination of Plan: Section 11 of the Director Option Plan is amended by deleting the last sentence of said section. 5. Section 12. Shareholder Approval: Section 12 of the Director Option Plan is amended by deleting the paragraph in its entirety and substituting the following paragraph: "12. Shareholder Approval -------------------- This Plan was adopted by the Board of Directors of the Company on February 8, 1993, and was approved by the shareholders of the Company on July 15, 1992." THIS AMENDMENT is made as of and effective December 12, 1996. PAYLESS CASHWAYS, INC. BY: /s/ David Stanley ------------------ ATTEST: /s/ E. J. Holland, Jr. - ---------------------- EX-10 7 AMENDMENT 1 DEFERRED COMPENSATION FOR DIRECTORS 1 Exhibit 10.18(b) AMENDMENT NO. 1 TO THE PAYLESS CASHWAYS, INC. DEFERRED COMPENSATION PLAN FOR DIRECTORS The Payless Cashways, Inc. Deferred Compensation Plan for Directors (the "Deferred Compensation Plan for Directors"), effective October 20, 1995, is hereby amended as follows: 1. Section 1.3 Effective Date: Section 1.3 of the Deferred Compensation Plan for Directors is hereby amended by deleting in its entirety the last sentence of said section. 2. Section 3 Plan Administration: Section 3 of the Deferred Compensation Plan for Directors is hereby amended by deleting in its entirety the last sentence of said section. 3. Section 5.2 Time for Electing Deferral and Change in Election: Section 5.2 of the Deferred Compensation Plan for Directors is hereby amended by deleting in its entirety the last sentence of said section and substituting the following sentence at the end thereof: "An election to defer, once made, shall continue to be effective for succeeding calendar years until revoked or modified by the Director by written request to the Administrative Committee prior to the beginning of a calendar year for which fees would otherwise be deferred, provided that any election to receive distribution in lump sum or installments may not be changed within the twelve-month period prior to termination of services as a Director." 4. Section 5.3 Deferred Accounts: Section 5.3 of the Deferred Compensation Plan for Directors is amended by deleting the paragraph in its entirety and substituting the following paragraph: "5.3 Deferred Accounts. A Deferred Account shall be established for each Director. Fees deferred by a Director shall be credited to such Account as of the date such amounts would have otherwise been paid in cash to the Director, and shall be converted into Common Stock Equivalents based on Fair Market Value as of the date such amounts would have otherwise been paid in cash to the Director. A Director's Deferred Account shall also be credited with dividends and other distributions pursuant to Section 5.4." 2 THIS AMENDMENT is made as of and effective December 12, 1996. PAYLESS CASHWAYS, INC. BY: /s/ Stephen A. Lightstone ---------------------------- ATTEST: /s/ E. J. Holland, Jr. - ---------------------- EX-11 8 EARNINGS PER SHARE 1 Exhibit 11.1 PAYLESS CASHWAYS, INC. COMPUTATION OF PER SHARE EARNINGS (LOSS) - --------------------------------------- (In thousands, except per share amounts)
Fiscal Year End -------------------------------------------------- November 30, November 25, November 26, 1996 1995 1994 ------------ ------------ ------------ PRIMARY - ------- Income (loss) before extraordinary item $ (19,078) $(128,549) $ 52,132 Less: Preferred stock dividends (5,983) (5,527) (5,106) ---------- ---------- ---------- Income (loss) before extraordinary item attributable to Common Stock (25,061) (134,076) 47,026 Extraordinary item -- -- (7,243) ---------- ---------- ---------- Net income (loss) attributable to Common Stock $ (25,061) $(134,076) $ 39,783 Weighted average common and dilutive common equivalent shares outstanding 39,946 (1) 39,904 (1) 40,257 ---------- ---------- ---------- Weighted average common shares outstanding (2) 39,946 39,904 39,791 ---------- ---------- ---------- Income (loss) per common share before extraordinary item $ (.63) $ (3.36) $ 1.17 Extraordinary item per common share -- -- (.18) ---------- ---------- ---------- Net income (loss) per common share $ (.63) $ (3.36) $ .99 ========== ========== ========== FULLY DILUTED - ------------- Net income (loss) attributable to Common Stock $ (25,061) $(134,076) $ 39,783 ---------- ---------- ---------- Weighted average common and dilutive common equivalent shares outstanding 39,946 (1) 39,904 (1) 40,257 ---------- ---------- ---------- Weighted average common shares outstanding (2) 39,946 39,904 39,791 ---------- ---------- ---------- Income (loss) per common share before extraordinary item $ (.63) $ (3.36) $ 1.17 Extraordinary item per common share -- -- (.18) ---------- ---------- ---------- Net income (loss) per common share $ (.63) $ (3.36) $ .99 ========== ========== ==========
2 PAYLESS CASHWAYS, INC. COMPUTATION OF PER SHARE EARNINGS (LOSS) - --------------------------------------- (In thousands, except per share amounts)
Quarter Ended -------------------------------------------------------------------- February 24, May 25, August 24, November 30, 1996 1996 1996 1996 ------------ ------------ ------------ ------------ PRIMARY - ------- Net income (loss) $ (7,623) $ 5,866 $ (22,878) $ 5,557 Less: Preferred stock dividends (1,452) (1,481) (1,510) (1,540) ---------- ---------- ---------- ---------- Net income (loss) attributable to Common Stock $ (9,075) $ 4,385 $ (24,388) $ 4,017 Weighted average common and dilutive common equivalent shares outstanding 39,916 (1) 40,063 39,952 (1) 40,015 ---------- ---------- ---------- ---------- Net income (loss) per common share $ (.23) $ .11 $ (.61) $ .10 ========== ========== ========== ========== FULLY DILUTED - ------------- Net income (loss) attributable to Common Stock $ (9,075) $ 4,385 $ (24,388) $ 4,017 Weighted average common and dilutive common equivalent shares outstanding 39,916 (1) 40,079 39,952 (1) 40,015 ---------- ---------- ---------- ---------- Net income (loss) per common share $ (.23) $ .11 $ (.61) $ .10 ========== ========== ========== ==========
3 PAYLESS CASHWAYS, INC. COMPUTATION OF PER SHARE EARNINGS (LOSS) - --------------------------------------- (In thousands, except per share amounts)
Quarter Ended -------------------------------------------------------------------- February 25, May 27, August 26, November 25, 1995 1995 1995 1995 ------------ ------------ ------------ ------------ PRIMARY - ------- Net income (loss) $ (3,864) $ 4,613 $ 8,146 $(137,444) Less: Preferred stock dividends (1,341) (1,368) (1,395) (1,423) ---------- ---------- ---------- ---------- Net income (loss) attributable to Common Stock $ (5,205) $ 3,245 $ 6,751 $(138,867) Weighted average common and dilutive common equivalent shares outstanding 39,878 (1) 40,092 40,116 39,914 (1) ---------- ---------- ---------- ---------- Net income (loss) per common share $ (.13) $ .08 $ .17 $ (3.48) ========== ========== ========== ========== FULLY DILUTED - ------------- Net income (loss) attributable to Common Stock $ (5,205) $ 3,245 $ 6,751 $(138,867) Weighted average common and dilutive common equivalent shares outstanding 39,878 (1) 40,092 40,116 39,914 (1) ---------- ---------- ---------- ---------- Net income (loss) per common share $ (.13) $ .08 $ .17 $ (3.48) ========== ========== ========== ========== (1) Due to a loss being incurred for the period, dilutive common equivalent shares have not been computed as the resulting loss per share would be antidilutive. (2) Excludes dilutive common equivalent shares for computation of loss per common share.
EX-13 9 ANNUAL REPORT FISCAL 1996 4 Exhibit 13.1 Payless Cashways, Inc. QUARTERLY STATEMENTS OF OPERATIONS (unaudited) In thousands, except per share amounts
First Second Third Fourth Fiscal Year Ended November 30, 1996 Quarter Quarter Quarter Quarter - ------------------------------------------------------------------------------------------------------------------------------- Income Net sales $ 526,767 $ 682,252 $ 723,793 $ 710,017 Other income 1,597 1,521 1,481 3,477 --------------------------------------------------------------- 528,364 683,773 725,274 713,494 Costs and expenses Cost of merchandise sold 372,916 491,500 535,956 506,362 Selling, general and administrative 141,405 152,929 157,403 163,729 Special charges -- -- 8,184 -- Asset impairment charges -- -- 59,697 -- Provision for depreciation and amortization 13,184 13,586 14,007 14,239 Interest expense 15,352 14,606 14,438 16,092 Interest income -- -- (4,900) -- --------------------------------------------------------------- 542,857 672,621 784,785 700,422 --------------------------------------------------------------- INCOME (LOSS) BEFORE INCOME TAXES (14,493) 11,152 (59,511) 13,072 Federal and state income taxes (6,870) 5,286 (36,633) 7,515 --------------------------------------------------------------- NET INCOME (LOSS) $ (7,623) $ 5,866 $ (22,878) $ 5,557 =============================================================== Net income (loss) per common share $ (.23) $ .11 $ (.61) $ .10 =============================================================== Weighted average common and dilutive common equivalent shares outstanding 39,916 40,063 39,952 40,015 =============================================================== Special charges ($5.0 million after tax, or $.12 per share) reflected in the third quarter consist of costs associated with the closing of nine stores, eight of which had been closed at November 30, 1996. Third quarter cost of merchandise sold reflects an inventory write-down ($3.5 million after tax or $.09 per share) in connection with these store closings. The Company recorded an asset impairment charge ($44.6 million after tax, or $1.12 per share) in the third quarter as well as a federal income tax benefit ($23.7 million or $.59 per share) and related interest income ($2.9 million after tax, or $.07 per share) pursuant to legislation and a settlement with the Internal Revenue Service. A liquidation of LIFO inventories and a lower-than-anticipated rate of inflation decreased the LIFO inventory provision, after tax, by $4.0 million, or $.10 per share, in the fourth quarter.
5 Payless Cashways, Inc. QUARTERLY STATEMENTS OF OPERATIONS (unaudited) (cont'd.) In thousands, except per share amounts
First Second Third Fourth Fiscal Year Ended November 25, 1995 Quarter Quarter Quarter Quarter - --------------------------------------------------------------------------------------------------------------------------------- Income Net sales $ 556,218 $ 711,679 $ 737,237 $ 675,052 Other income 1,344 1,517 1,357 1,266 ---------------------------------------------------------------- 557,562 713,196 738,594 676,318 Costs and expenses Cost of merchandise sold 389,065 513,418 530,402 479,735 Selling, general and administrative 142,669 158,984 159,272 158,664 Special charges -- -- -- 153,667 Provision for depreciation and amortization 14,689 15,083 15,567 15,017 Interest expense 15,273 15,573 15,247 14,974 ---------------------------------------------------------------- 561,696 703,058 720,488 822,057 ---------------------------------------------------------------- INCOME (LOSS) BEFORE INCOME TAXES (4,134) 10,138 18,106 (145,739) Federal and state income taxes (1,770) 4,550 8,985 (16,676) ---------------------------------------------------------------- Income (loss) before equity in loss of joint venture (2,364) 5,588 9,121 (129,063) Equity in loss of joint venture (1,500) (975) (975) (8,381) ---------------------------------------------------------------- NET INCOME (LOSS) $ (3,864) $ 4,613 $ 8,146 $ (137,444) ================================================================ Net income (loss) per common share $ (.13) $ .08 $ .17 $ (3.48) ================================================================ Weighted average common and dilutive common equivalent shares outstanding 39,878 40,092 40,116 39,914 ================================================================ A lower-than-anticipated rate of inflation decreased the LIFO inventory provision, after tax, by $.9 million, or $.02 per share, in the fourth quarter. Special charges reflected in the fourth quarter consist of costs associated with the closing of six stores, the sale of a distribution center and the reorientation of several stores to concentrate on the professional customer. Fourth quarter equity in loss of joint venture includes the $8.0 million, or $.20 per common share, loss on the sale of the Company's Mexican joint venture investment.
6 Payless Cashways, Inc. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations The following discussion of the Company's financial condition and results of operations should be read in conjunction with the Financial Statements and notes thereto included elsewhere in this Annual Report to Shareholders.
Operating Data Fiscal Year Ended ---------------------------------------------- percent of net sales Nov. 30, Nov. 25, Nov. 26, 1996 1995 1994 ---------------------------------------------- Net sales....................................................... 100.0 % 100.0 % 100.0 % Other income.................................................... .3 .2 .4 Cost of merchandise sold........................................ 72.1 71.4 70.5 Selling, general and administrative............................. 23.3 23.1 21.8 Special charges................................................. .3 5.7 -- Asset impairment charges........................................ 2.3 -- -- Provision for depreciation and amortization..................... 2.1 2.3 2.2 Interest expense................................................ 2.3 2.3 2.4 Interest income................................................. (.2) -- -- ---------------------------------------------- Income (loss) before income taxes............................... (1.9) (4.6) 3.5 Federal and state income taxes.................................. (1.2) (.2) 1.5 Equity in loss of joint venture................................. -- (.4) (.1) ---------------------------------------------- Income (loss) before extraordinary item......................... (.7) (4.8) 1.9 Extraordinary item.............................................. -- -- (.3) ---------------------------------------------- Net income (loss)............................................... (.7)% (4.8)% 1.6 % ==============================================
SALES Net sales for fiscal 1996, a 53-week year, decreased 1.4% from fiscal 1995, a 52-week year, and fiscal 1995 net sales decreased 1.6% from fiscal 1994, also a 52-week year. On a 52-week basis, net sales for fiscal year 1996 decreased 3.0% compared to fiscal 1995. Same-store sales (sales from stores that have been open one full year), on a 52-week basis, decreased by 2.5% for fiscal 1996, and decreased 4.5% for fiscal 1995. Net sales for 1996 reflect increasing competitive pressure on the Company's consumer business, although there was strong growth in the professional business aided by improved external conditions such as housing activity and consumer sentiment. Sales from professional customers increased 7.7%, while sales from the consumer side of the business decreased 8.1% in fiscal 1996. The Company expects that openings by warehouse-format competitors will continue. The Company believes the implementation of its Dual Path strategy positions it to meet new competition and grow the business. The Company, early in 1996, closed six stores and closed another eight stores in the fourth quarter of 1996. Net sales for 1995 were negatively impacted by deflated lumber costs, a slower housing environment, softness in consumer spending, competitive pressures and, in a number of markets, an excess of retail space devoted to the sale of building materials. Sales from professional customers declined 1.9% in fiscal 1995 compared to double-digit gains in the past several years. Six new stores were opened during 1995. Gains of $2.3 million, related to insurance settlement proceeds in excess of net book value for buildings and equipment destroyed in a 1995 fire loss, are included in other income for fiscal 1996. Other income for fiscal year 1994 includes gains of $5.9 million related to settlements of 1993 flood losses. COSTS AND EXPENSES The cost of merchandise sold, as a percent of sales, was 72.1% in fiscal 1996, 71.4% in fiscal 1995, and 70.5% in fiscal 1994. A third quarter inventory write-down of $5.8 million, related to the closing of nine underperforming stores, was 0.2% of sales for fiscal 1996. The decrease in 1996 gross margins was also due, in part, to the growth in sales to the professional customer whose merchandise purchases include a higher percentage of commodity goods at margin rates somewhat lower than the Company average. Cost of merchandise sold in fiscal 1996 benefited from a $3.2 million LIFO credit, related to a liquidation of LIFO inventories and deflation, compared to a $4.2 million and a $3.1 million LIFO charge in fiscal 1995 and 1994, respectively. The remainder of the cost of merchandise sold increase in 1996, as well as the increase in 1995, were primarily due to the Company's pricing initiatives. Selling, general and administrative expenses, as a percent of sales, were 23.3%, 23.1%, and 21.8% for fiscal 1996, 1995 and 1994, respectively. The increase as a percent of sales for fiscal 1996 was due primarily to lower sales; the 1996 decrease in dollars was due primarily to savings from six stores closed in the first quarter of fiscal 1996. 7 Payless Cashways, Inc. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND RESULTS OF OPERATIONS (cont'd.) The primary reasons for the 1995 increase over 1994 selling, general and administrative expenses were costs associated with new stores and investment in approximately 200 outside sales people. Lower sales in 1995 also contributed to the increase in selling, general and administrative expenses as a percent of sales. Interest expense decreased to $60.5 million in fiscal 1996 due primarily to retirement of long-term debt, some of which was replaced with lower interest-bearing debt. Interest expense decreased to $61.1 million in fiscal 1995 from $65.6 million in fiscal 1994, due to retirement of long-term debt and lower interest rates. The Company also recorded interest income of $4.9 million ($2.9 million after tax) in the third quarter of 1996, related to a pending tax refund arising out of recent legislation and a settlement with the Internal Revenue Service ("IRS"). A special charge of $8.2 million ($5.0 million after tax), primarily a cash charge, was recorded in the third quarter of fiscal 1996 to reflect future store rentals and real estate disposal costs related to the closing of nine underperforming stores. In addition, the Company adopted Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" ("SFAS 121"). SFAS 121 requires the Company to record impairments of long-lived assets and associated goodwill when there is evidence that events or changes in circumstances have made recovery of an asset's carrying value unlikely. As a result of the increasingly competitive environment for building materials retailing and in connection with the evaluation of certain underperforming stores, the Company recorded an asset impairment charge of $59.7 million ($44.6 million after tax) in the third quarter of 1996. This charge included the carrying value write-down of $25.7 million for certain real estate which is considered impaired, the write-off of $22.4 million of goodwill which is attributable to those assets and which was established in 1988 as part of the Company's leveraged buyout, and $11.6 million of future store lease obligations. Additional details on the special charge and the asset impairment charge are set forth in Notes H and I, respectively, to the Financial Statements. The Company will continue to review assets for impairment, particularly given the ongoing competitive environment for building materials retailing. On December 15, 1995, the Company announced a restructuring plan which included the closing of six underperforming stores on December 30, 1995, the sale of an underutilized distribution center on December 22, 1995, and, during the first quarter of fiscal 1996, the reorientation of several stores to concentrate on the professional customer. The plan was completed during fiscal 1996, except for the completion of all real estate sales. A pretax special charge of $153.7 million was recorded in the fourth quarter of fiscal 1995 to reflect costs associated with the restructuring. Proceeds from future real estate sales will be used to reduce debt and to fund capital expenditures. Among other effects, the 1995 special charge reduced amortization of goodwill in 1996 by approximately $3.2 million. Additional details on the restructuring costs are set forth in Note I to the Financial Statements. On August 20, 1996, the Small Business Job Protection Act of 1996 was signed into law. Certain provisions of this Act clarify the Tax Reform Act of 1986 and make retroactively tax deductible certain costs and expenses previously recorded by the Company without any related tax benefit. In addition, during 1996, the Company settled with the IRS regarding several tax issues. As a result, the Company recorded a tax benefit of $23.7 million and related interest income, discussed earlier. This tax benefit includes recoverable income taxes of $10.0 million and non-cash tax benefits of $13.7 million. The effective tax rate for fiscal 1996 was different from the 35% statutory rate primarily due to the effect of goodwill amortization and the write-off of goodwill as part of the asset impairment charge, both of which are non-deductible for income tax purposes, and the tax benefit related to recent legislation and the IRS settlement. The effective tax rate for fiscal years 1995 and 1994 were also different from the 35% statutory rate primarily due to the effect of goodwill amortization and the 1995 write-off of a portion of goodwill. NET INCOME (LOSS) The Company had a loss before extraordinary item of $19.1 million in 1996 compared to a loss before extraordinary item of $128.5 million in 1995 and income before extraordinary item of $52.1 million in fiscal 1994. The 1996 8 Payless Cashways, Inc. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND RESULTS OF OPERATIONS (cont'd.) loss before extraordinary item reflects store closing charges, an asset impairment charge, a federal income tax benefit and related interest income, all discussed above. The 1995 loss before extraordinary item reflects the pretax special charge of $153.7 million ($133.1 million net of tax) in connection with the restructuring discussed above. Both the 1995 and the 1994 results reflect the Company's share in its Mexican joint venture's operating loss prior to the sale of this investment in October 1995. The 1995 equity in the loss of joint venture also includes an $8.0 million, pretax, loss on the sale of this investment. Excluding the non-routine items recorded during fiscal 1996 and 1995, income before extraordinary item for 1996 would have decreased to $7.4 million compared to income before extraordinary item for 1995 of $12.5 million, due primarily to lower sales in 1996. The 1995 decrease from 1994 income before extraordinary item of $52.1 million was due to lower sales and higher expense levels in 1995.
Comparative Operating Data Fiscal Year Ended November 30, 1996 Fiscal Year Ended November 25, 1995 ------------------------------------------ --------------------------------------- In thousands, except per share amounts Pro Forma Historical Pro Forma Historical (Excluding (Including (Excluding (Including Non-Routine Items) Non-Routine Items) Non-Routine Items) Non-Routine Items) ------------------------------------------ --------------------------------------- Net sales and other income $ 2,650,905 $ 2,650,905 $ 2,685,670 $ 2,685,670 Income from operations before depreciation and amortization $ 134,552 $ 60,824 $ 153,461 $ (206) Net income (loss) $ 7,428 $ (19,078) $ 12,499 $ (128,549) Net income (loss) per common share $ .04 $ (.63) $ 0.17 $ (3.36) Average common shares outstanding 39,946 39,946 39,904 39,904
In October 1995, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), which is effective for fiscal years beginning after December 15, 1995. As permitted by SFAS 123, the Company plans to continue to account for its stock-based plans under APB No. 25, "Accounting for Stock Issued to Employees" and to provide pro forma disclosures of the compensation expense determined under the fair value provisions of SFAS 123, if material. In June 1996, the FASB issued Statement of Financial Accounting Standards No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" ("SFAS 125"), which is effective for transactions after December 31, 1996. The Company believes that, based upon available information, its ongoing sales of commercial credit receivables will qualify for sale treatment in compliance with SFAS 125. Effects of Inflation - -------------------- The Company experienced slight deflation in its non-lumber inventories during 1996. Inflation rates, included in the Company's cost of merchandise sold, were comparable for fiscal 1995 and 1994. Approximately 82% 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. During 1995, the Company experienced price deflation in its lumber inventory which is valued using the FIFO inventory accounting method. The Company estimates that this price deflation had a negative 1.6% impact on same-store sales. Financing Activities - -------------------- On October 3, 1996, the Company amended its $408 million credit agreement to include two tranches of term loans in the aggregate amount of $273 million, a revolving credit facility of $135 million and a $60 million working capital facility (the "Swingline Facility") that can only be drawn upon if the revolving credit facility is fully utilized (the "Amended Credit Agreement"). The Swingline Facility must be repaid in full prior to repaying any other part of the Amended Credit Agreement. All facilities mature in November 2000. As part of the amendment, permitted levels of capital expenditures were increased (to $72 million in 1997, $81 million in 1998, $100 million in 1999 and $59 million in 2000), additional collateral (including substantially all merchandise inventory) was added, various covenants were modified or 9 Payless Cashways, Inc. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND RESULTS OF OPERATIONS (cont'd.) eliminated and interest rates were increased. The Amended Credit Agreement is designed to give the Company additional flexibility and liquidity in order to continue the implementation of its strategic plan and provide the banks with additional security. On December 22, 1995, the Company made a $16.5 million mortgage loan prepayment in connection with the sale of a distribution center described below and in Note I to the Financial Statements. In November 1995, the Company amended and restated its five-year credit agreement to include a $40.0 million term loan and to reduce the revolving credit facility to $380.0 million. As part of the amendment, various covenants were modified and interest rates were increased. In addition, in 1995, the Company entered into an interest rate cap limiting the interest rates on $100 million of its floating rate debt to 8% LIBOR through January 20, 1998. Also, during 1995, the Company entered into an interest rate swap agreement under which it agreed to pay quarterly a 6-9/16% fixed rate of interest effective December 1, 1995, through December 1, 1999, in exchange for quarterly receipt of LIBOR on $36.0 million. In November 1994, the Company entered into a $420 million credit agreement to replace its existing bank credit agreement and a multi-draw credit agreement. Also during 1994, the Company repurchased and retired $26.3 million aggregate principal amount of Senior Subordinated Notes with $25 million borrowed under the multi-draw credit agreement. At November 30, 1996, Payless had approximately $637.0 million of indebtedness. Payless expects from time to time to incur additional seasonal indebtedness. Liquidity and Capital Resources - ------------------------------- The Company's principal source of cash is from operations. Cash provided by operating activities was $32.4 million for fiscal 1996, compared to $108.4 million for fiscal 1995 and $117.3 million for fiscal 1994. The 1996 decrease in cash provided by operating activities was primarily due to a decrease in accounts payable and an increase in merchandise inventories, as well as decreased operating income. The 1996 decrease in accounts payable levels compared to year-ago levels is primarily due to slower inventory turns and a shift in the mix of purchases between commodity products (shorter payment terms) and non-commodity products (longer payment terms). The primary reason for the 1995 decrease in cash provided by operating activities was decreased operating income. Borrowings are available under the Amended Credit Agreement to supplement cash generated by operations. At November 30, 1996, $100.0 million was available for borrowing. Working capital was $131.0 million and $98.4 million at the end of fiscal 1996 and fiscal 1995, respectively. The current ratio was 1.41 to 1 and 1.29 to 1 at the end of fiscal 1996 and fiscal 1995, respectively. The primary reasons for the increase in working capital and the current ratio were increased levels of inventory, a decrease in the current portion of long-term debt and a decrease in accounts payable. The Company's inventory levels are at the lowest levels during the seasonally low sales months of December through February and are at the highest levels during the peak selling months of May through September. During the peak period, inventory is financed by cash from operations and trade accounts payable. During the winter months, inventory is financed by cash from operations, trade accounts payable and borrowings under the Amended Credit Agreement, as needed. The Company believes that cash generated from operations and borrowings under the Amended Credit Agreement will adequately meet its working capital needs, debt service and other obligations which will become due in fiscal 1997. During 1996, the Company's primary investing activities were capital expenditures primarily for strategic initiatives, renovation of existing stores and additional equipment. The Amended Credit Agreement governs the amount of capital expenditures which can be made and increases the permitted levels of capital expenditures compared to the previous bank credit agreement (to $72 million in 1997, $81 million in 1998, $100 million in 1999 and $59 million in 2000). The Company spent approximately $41.7 million, $67.3 million and $81.9 million in fiscal 1996, 1995 and 1994, respectively, for strategic initiatives, including 10 Payless Cashways, Inc. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND RESULTS OF OPERATIONS (cont'd.) the acquisition of a door and trim manufacturer in Phoenix, AZ, during January 1996, renovation of existing stores, additional equipment and, in fiscal 1995 and 1994, new stores. For fiscal 1996, the Company shifted its emphasis from new store openings to initiatives that further address the needs of the professional and do-it-yourself customers. Several stores were reoriented to concentrate on the professional customer and merchandise assortment was added to many stores to address do-it-yourself customer demand for more choices of price, quality and style. During fiscal 1996, in support of the professional customer, the Company completed the acquisition of the manufacturer mentioned above and expanded the manufacturing capability of one of its existing door plants. During the first quarter of 1996, the Company sold a distribution center in connection with the 1995 restructuring plan, providing approximately $11.9 million of cash proceeds. The Company leased one new store in 1996, which it plans to open in 1997. During 1995, six new stores were opened and two stores were sold. The Company intends to finance fiscal 1997 budgeted capital expenditures of approximately $72 million, consisting primarily of strategic initiatives, renovation of existing stores, and additional equipment, with funds generated from operations and borrowings under the Amended Credit Agreement. During fiscal 1995, the Company also invested $9.3 million in its joint venture, Total Home de Mexico, S.A. de C.V., prior to the sale of this investment in October 1995. Significant changes in the Mexican economy caused the Company to reassess its position and sell its Mexican investment to an affiliate of its former joint venture partner. The Company's most significant financing activity is and will continue to be the retirement of indebtedness. In connection with the sale of the distribution center, discussed above, and in anticipation of selling real estate related to stores closed in 1996, the Company repaid approximately $16.5 million of related indebtedness during the first quarter of 1996. Although the Company's consolidated indebtedness is and will continue to be substantial, management believes that, based upon its analysis of the Company's financial condition, the cash flow generated from operations during the past 12 months and the expected results of operations in the future, cash flow from operations and borrowing availability under the Amended Credit Agreement should provide sufficient liquidity to meet all cash requirements for the next 12 months without additional financing. The Amended Credit Agreement contains a number of financial covenants with which the Company must comply. Several of these require that the Company's operating performance improves over the remaining term of the Amended Credit Agreement. Certain of these covenants are detailed in Note B to the Financial Statements. First quarter 1997 results are likely to be below results for the same quarter of the prior year. Management currently expects that it will achieve compliance with these covenants throughout fiscal 1997. Forward-looking statements in the Letter to Shareholders, the subsection entitled "Costs and Expenses" and in this subsection of this Annual Report 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 some of the statements made above. Investors are cautioned that all forward-looking statements involve risks and uncertainty. In addition to the factors discussed above, among the other factors that could cause actual results to differ materially are the following: 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; growth of certain market segments; competitive pressure on sales and pricing; and an excess of retail space devoted to the sale of building materials. Additional information concerning those and other factors is contained in the Company's Securities and Exchange Commission filings, including but not limited to the Form 10-K, copies of which are available from the Company without charge or on the Company's web site, payless.cashways.com. 11 Payless Cashways, Inc. STATEMENTS OF OPERATIONS
Fiscal Year Ended -------------------------------------------------------- November 30, November 25, November 26, In thousands, except per share amounts 1996 1995 1994 - -------------------------------------------------------------------------------------------------------------------------------- Income Net sales $ 2,642,829 $ 2,680,186 $ 2,722,539 Other income--Note A 8,076 5,484 10,643 -------------------------------------------------------- 2,650,905 2,685,670 2,733,182 Costs and expenses Cost of merchandise sold 1,906,734 1,912,620 1,918,674 Selling, general and administrative--Notes E, F and G 615,466 619,589 594,024 Special charges--Note I 8,184 153,667 -- Asset impairment charges--Note H 59,697 -- -- Provision for depreciation and amortization 55,016 60,356 58,692 Interest expense--Note B 60,488 61,067 65,571 Interest income--Note D (4,900) -- -- -------------------------------------------------------- 2,700,685 2,807,299 2,636,961 -------------------------------------------------------- INCOME (LOSS) BEFORE INCOME TAXES (49,780) (121,629) 96,221 Federal and state income taxes--Note D (30,702) (4,911) 41,808 -------------------------------------------------------- Income (loss) before equity in loss of joint venture and extraordinary item (19,078) (116,718) 54,413 Equity in loss of joint venture--Note A -- (11,831) (2,281) -------------------------------------------------------- Income (loss) before extraordinary item (19,078) (128,549) 52,132 Extraordinary item: early extinguishment of debt--Notes B and D -- -- (7,243) -------------------------------------------------------- NET INCOME (LOSS) $ (19,078) $ (128,549) $ 44,889 ======================================================== Net income (loss) attributable to Common Stock $ (25,061) $ (134,076) $ 39,783 ======================================================== Income (loss) per common share before extraordinary item $ (.63) $ (3.36) $ 1.17 Extraordinary item: early extinguishment of debt -- -- (.18) -------------------------------------------------------- Net income (loss) per common share--Note A $ (.63) $ (3.36) $ .99 ======================================================== Weighted average common and dilutive common equivalent shares outstanding--Notes A and C 39,946 39,904 40,257 ======================================================== See notes to financial statements
12 Payless Cashways, Inc. BALANCE SHEETS
November 30, November 25, In thousands 1996 1995 - ------------------------------------------------------------------------------------------------------------------------- ASSETS CURRENT ASSETS Cash and cash equivalents $ 425 $ 960 Merchandise inventories--Notes A and B 399,010 392,604 Prepaid expenses and other current assets 22,281 29,375 Income taxes receivable--Note D 15,200 -- Deferred income taxes--Note D 13,681 19,740 ----------------------------------- TOTAL CURRENT ASSETS 450,597 442,679 OTHER ASSETS Real estate held for sale--Note H 18,529 6,082 Cost in excess of net assets acquired, less accumulated amortization of $105,198 and $95,372, respectively--Notes A, H and I 292,946 323,819 Deferred financing costs--Notes A and B 12,837 11,421 Other 12,917 14,925 LAND, BUILDINGS AND EQUIPMENT--Notes A and B Land and land improvements 179,633 190,951 Buildings 476,144 507,339 Equipment 98,304 93,830 Automobiles and trucks 24,264 26,468 Construction in progress 4,590 7,867 Allowance for depreciation and amortization (277,643) (280,945) ----------------------------------- TOTAL LAND, BUILDINGS AND EQUIPMENT 505,292 545,510 ----------------------------------- $ 1,293,118 $ 1,344,436 =================================== See notes to financial statements
13 Payless Cashways, Inc. BALANCE SHEETS (cont'd.)
November 30, November 25, In thousands 1996 1995 - ------------------------------------------------------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Current portion of long-term debt--Note B $ 18,340 $ 31,472 Trade accounts payable 121,891 159,844 Salaries, wages and bonuses 31,052 24,106 Accrued interest 3,193 4,894 Insurance reserves 25,713 20,553 Future store lease payments--Note H 17,460 -- Other accrued expense--Notes E, H and I 71,182 75,611 Taxes, other than income taxes 24,318 21,114 Income taxes payable--Note D 6,444 6,685 ----------------------------------- TOTAL CURRENT LIABILITIES 319,593 344,279 LONG-TERM DEBT, less portion classified as current liability--Note B 618,667 608,627 NON-CURRENT LIABILITIES Deferred income taxes--Note D 41,665 59,994 Other--Note F 23,462 23,373 SHAREHOLDERS' EQUITY--Notes A, B and C Preferred Stock, $1.00 par value, 25,000,000 shares authorized; issued: Cumulative Preferred Stock, 406,000 shares, $78,563 and $72,580 aggregate liquidation preference, respectively 40,600 40,600 Common Stock, $.01 par value: Voting, 150,000,000 shares authorized, 37,709,028 and 37,663,922 shares issued, respectively 377 376 Non-Voting Class A, 5,000,000 shares authorized, 2,250,000 shares issued 23 23 Additional paid-in capital 487,728 487,083 Accumulated deficit (238,997) (219,919) ----------------------------------- TOTAL SHAREHOLDERS' EQUITY 289,731 308,163 ----------------------------------- COMMITMENTS AND CONTINGENCIES--Notes E, F, G and J $ 1,293,118 $ 1,344,436 =================================== See notes to financial statements
14 Payless Cashways, Inc. STATEMENTS OF CASH FLOWS
Fiscal Year Ended ------------------------------------------------------- November 30, November 25, November 26, In thousands 1996 1995 1994 - -------------------------------------------------------------------------------------------------------------------------------- Cash Flows from Operating Activities Net income (loss) $ (19,078) $ (128,549) $ 44,889 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 55,016 60,356 58,692 Asset impairment charges--Note H 59,697 -- -- Non-cash interest 2,534 2,351 4,803 Loss on early extinguishment of debt--Note B -- -- 7,243 Equity in loss of joint venture--Note A -- 11,831 2,281 Deferred income taxes (12,270) (22,326) 7,753 Special charges--Note I 8,184 153,667 -- Other 1,337 927 1,674 Changes in assets and liabilities: Decrease in trade receivables -- 5,858 8,770 Decrease (increase) in merchandise inventories (6,406) 4,062 (23,663) Decrease (increase) in prepaid expenses and other current assets (4,763) 9,532 (8,831) Increase in income taxes receivable (15,200) -- -- (Decrease) increase in trade accounts payable (37,953) 8,785 5,794 Increase in other current liabilities 1,349 1,934 7,925 ------------------------------------------------------- NET CASH PROVIDED BY OPERATING ACTIVITIES 32,447 108,428 117,330 Cash Flows from Investing Activities Additions to land, buildings and equipment (40,117) (67,281) (81,906) Proceeds from sale of land, buildings and equipment 14,709 467 2,175 Acquisition of business, excluding working capital: Land, buildings and equipment (193) -- -- Purchase price in excess of net assets acquired (1,360) -- -- Investment in joint venture--Note A -- (9,254) (6,369) Decrease (increase) in other assets 1,435 3,049 (5,788) ------------------------------------------------------- NET CASH USED IN INVESTING ACTIVITIES (25,526) (73,019) (91,888) Cash Flows from Financing Activities Proceeds from long-term debt--Note B 28,000 -- 369,999 Retirements of long-term debt -- Note B (31,092) (34,301) (390,357) Fees and financing costs paid in connection with debt refinancing -- Note B (3,670) (1,267) (3,094) Sale of Common Stock under stock option plan 94 16 2,326 Sale of Common Stock under warrants -- -- 133 Decrease in short-term borrowings -- -- (5,000) Other (788) (1,577) (442) ------------------------------------------------------- NET CASH USED IN FINANCING ACTIVITIES (7,456) (37,129) (26,435) ------------------------------------------------------- Net decrease in cash and cash equivalents (535) (1,720) (993) Cash and cash equivalents, beginning of period 960 2,680 3,673 ------------------------------------------------------- Cash and cash equivalents, end of period $ 425 $ 960 $ 2,680 ======================================================= See notes to financial statements
15 Payless Cashways, Inc. STATEMENTS OF SHAREHOLDERS' EQUITY
Preferred Common Additional Foreign Stock Stock Paid-in Currency Accumulated In thousands $1.00 Par Value $.01 Par Value Capital Translation Deficit Total - ----------------------------------------------------------------------------------------------------------------------------------- Balance at November 27, 1993 $ 40,600 $ 395 $ 482,575 $ -- $ (136,259) $ 387,311 Net income for the year 44,889 44,889 Sale of Voting Common Stock under stock option plan 3 3,337 3,340 Sale of Voting Common Stock under warrants -- 133 133 Tax benefit from stock option exercises--Note D 148 148 Restricted Stock--Note C 1 133 134 Conversion of Non-Voting Class B Common Stock to Voting Common Stock--Note C -- -- Foreign currency translation adjustment (90) (90) ---------------------------------------------------------------------------------- Balance at November 26, 1994 $ 40,600 $399 $ 486,326 $ (90) $ (91,370) $ 435,865 Net loss for the year (128,549) (128,549) Sale of Voting Common Stock under stock option plan -- 77 77 Tax benefit from stock option exercises--Note D 325 325 Restricted Stock--Note C -- 355 355 Foreign currency translation adjustment (2,499) (2,499) Sale of joint venture stock 2,589 2,589 ---------------------------------------------------------------------------------- Balance at November 25, 1995 $ 40,600 $ 399 $ 487,083 $ -- $ (219,919) $ 308,163 Net loss for the year (19,078) (19,078) Sale of Voting Common Stock under stock option plan 1 463 464 Tax benefit from stock option exercises--Note D (24) (24) Restricted Stock --Note C -- 206 206 ---------------------------------------------------------------------------------- Balance at November 30, 1996 $ 40,600 $ 400 $ 487,728 $ -- $ (238,997) $ 289,731 ================================================================================== See notes to financial statements
16 Payless Cashways, Inc. NOTES TO FINANCIAL STATEMENTS NOTE A-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION: During fiscal 1996, Payless Cashways, Inc. (the "Company") merged its wholly owned subsidiary into the Company. The financial statements prior to fiscal 1996 include the accounts of Payless Cashways, Inc. and its wholly owned subsidiary. All significant intercompany transactions and balances have been eliminated in the accompanying financial statements prior to fiscal 1996. The Company was a 49% investor in Total Home de Mexico, S.A. de C.V., a joint venture with a Mexican company, Alfa, S.A. de C.V. ("Alfa"), until October 24, 1995. At that time, the Company sold its ownership interest to an affiliate of Alfa, and an $8.0 million, or $.20 per common share, loss on the sale has been reflected in the accompanying 1995 statements of operations as equity in loss of joint venture. The Company had accounted for this investment on the equity method. DESCRIPTION OF BUSINESS: The Company is engaged in only one line of business--the retail sale of building materials and supplies. At November 30, 1996, the Company operated 192 stores in 22 states located in the Midwest, Southwest, Pacific Coast, Rocky Mountain and New England areas. The Company's primary customers include project-oriented do-it-yourselfers and professionals. In recent years, the building materials retailing industry has experienced increased levels of competition as several national chains have expanded their operations. USE OF ESTIMATES AND OTHER UNCERTAINTIES: In preparing the financial statements in conformity with generally accepted accounting principles, management has made estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The Company's future results could be adversely affected by a number of factors, including: competitive pressure on sales and pricing from well-capitalized warehouse-format home centers; the Company's ability to effectively execute its business strategy; weather conditions; consumer spending and debt levels; interest rates; housing activity, including existing home turnover and new home construction; lumber prices; product mix; sales of real estate held for sale; and growth of certain market segments. MERCHANDISE INVENTORIES: Inventories are stated at the lower of cost (approximately 82% 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 increased approximately $24.3 million and $27.5 million at November 30, 1996, and November 25, 1995, respectively. During fiscal 1996, the liquidation of LIFO inventories decreased cost of merchandise sold and, therefore, decreased the loss before income taxes by $1.2 million. LAND, BUILDINGS AND EQUIPMENT: Land, buildings and equipment are stated on the basis of cost. Provisions for depreciation of land improvements, buildings and equipment are computed primarily by the straight-line method over the estimated useful lives of the assets or the terms of the related leases, which range from three to 39 years. The accompanying 1996 statements of operations reflect $2.3 million as other income related to an insurance reimbursement for lost profits and settlement proceeds in excess of net book value for buildings and equipment destroyed in a fire loss. In July 1993, two of the Company's retail facilities were destroyed by the midwestern floods. The Company carries property, business interruption, and extra-expense insurance coverages. The Company operated temporary locations to service its customers until these facilities were rebuilt or replaced. Settlement proceeds in excess of net book value of $2.8 million related to the flood-damaged 17 Payless Cashways, Inc. NOTES TO FINANCIAL STATEMENTS real estate, fixtures and equipment and the $3.1 million reimbursement of lost profits have been reflected in the accompanying 1994 statements of operations as other income. DEFERRED FINANCING COSTS: Deferred financing costs are being amortized over the respective borrowing terms using the interest method. STOCK-BASED COMPENSATION: In October 1995, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), which is effective for fiscal years beginning after December 15, 1995. As permitted by SFAS 123, the Company plans to continue to account for its stock-based plans under APB No. 25, "Accounting for Stock Issued to Employees" and to provide pro forma disclosures of the compensation expense determined under the fair value provisions of SFAS 123, if material. FOREIGN CURRENCY TRANSLATION: Prior to the sale of the investment on October 24, 1995, adjustments resulting from the currency translation of the Mexican joint venture financial statements into U.S. dollars as of the balance sheet date were reflected as a separate component of shareholders' equity. COST IN EXCESS OF NET ASSETS ACQUIRED: The cost in excess of the fair value of net assets acquired (goodwill) is being amortized using the straight-line method over 40 years. When facts and circumstances indicate potential impairment, the Company evaluates the recoverability of asset carrying values, including associated goodwill, using estimates of undiscounted future cash flows over remaining asset lives. When impairment is indicated, any impairment loss is measured by the excess of carrying values over fair values. The Company adopted Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," in the third quarter of fiscal 1996. See Note H. NET INCOME (LOSS) PER COMMON SHARE: Net income (loss) per common share has been computed based on the weighted average number of common shares outstanding during the period plus common stock equivalents, when dilutive, consisting of certain stock options and shares issuable under the Director Deferred Compensation Plan, when applicable. For purposes of this computation, net income (loss) was adjusted for dividend requirements on preferred stock. INCOME TAXES: The Company accounts for income taxes based on Statement of Financial Accounting Standards No. 109 ("SFAS 109"), "Accounting for Income Taxes." Under the asset and liability method of SFAS 109, 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. Under SFAS 109, 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 1996, federal and state income tax refunds, net of payments, were $8.8 million and during fiscal 1995 and 1994, federal and state income taxes paid, net of refunds, were $21.0 million and $32.2 million, respectively. Cash paid for interest, net of interest capitalized, was $62.2 million, $60.0 million, and $67.0 million during fiscal 1996, 1995, and 1994, respectively. SALE OF RECEIVABLES: The Company sells its commercial credit accounts to a third-party administrator pursuant to an 18 Payless Cashways, Inc. NOTES TO FINANCIAL STATEMENTS (cont'd.) agreement. A substantial portion of the Company's commercial credit sales are to remodelers and contractors. Under the agreement, the Company pays a servicing fee and assumes the credit risk. At November 30, 1996, and November 25, 1995, the outstanding balance of commercial credit accounts sold to the third-party administrator was approximately $104.7 million and $93.0 million, respectively. The Company has provided a reserve of $5.7 million at November 30, 1996, and $5.5 million at November 25, 1995, which is believed to adequately cover its credit risk related to these accounts. Under a third-party administrative servicing agreement for the Company's private-label charge card program, charge card accounts are sold to the administrator and the Company assumes no credit risk. In June 1996, the FASB issued Statement of Financial Accounting Standards No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" ("SFAS 125"), which is effective for transactions after December 31, 1996. The Company believes that, based upon available information, its ongoing sales of commercial credit receivables will qualify for sale treatment in compliance with SFAS 125. 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. 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 $564 million and $617 million at November 30, 1996 and November 25, 1995, respectively. The Company believes the carrying amounts of cash and cash equivalents, trade receivables, trade accounts payable and accrued expenses are a reasonable estimate of their fair value. DERIVATIVE FINANCIAL INSTRUMENTS: Premiums paid for purchased interest rate cap agreements are amortized to interest expense over the term of the agreement. Unamortized premiums are included in deferred financing costs in the balance sheets. Amounts received under the cap agreement are reflected as a reduction of interest expense. Amounts received or paid under the interest rate swap agreement discussed in Note G are reflected as a reduction or increase of rent expense. At November 30, 1996, the aggregate carrying value of such instruments was approximately $0.6 million. The estimated amount the Company would have had to pay at November 30, 1996, to cancel or transfer the agreements to other parties, was approximately $0.9 million. ACCOUNTING PERIOD: The Company's fiscal year ends on the last Saturday in November. Fiscal year 1996 consisted of 53 weeks and fiscal years 1995 and 1994 consisted of 52 weeks each. NOTE B--LONG-TERM DEBT Long-term debt consisted of the following:
In thousands 1996 1995 ------------------------------- Amended Credit Agreement, secured by inventory, certain real estate, and equipment, variable interest rate, payable in varying amounts through 2000 $ 354,000 $ 326,000 Mortgage loan payable to insurance company, secured by certain real estate, 11.04% to 11.21%, payable in varying amounts through 2003 108,000 138,987 Senior subordinated notes, 9-1/8%, due 2003 173,655 173,655 Other senior debt, 10% to 12%, payable in varying amounts through 2004 1,352 1,457 ------------------------------- 637,007 640,099 Less portion classified as current liability (18,340) (31,472) ------------------------------- $ 618,667 $ 608,627 ===============================
On October 3, 1996, the Company restructured and amended its $408 million credit agreement to include two tranches of term loans in the aggregate amount of $273 million, a revolving credit facility 19 Payless Cashways, Inc. NOTES TO FINANCIAL STATEMENTS (cont'd.) of $135 million and a $60 million working capital facility (the "Swingline Facility") that can only be drawn upon if the revolving credit facility is fully utilized (the "Amended Credit Agreement"). The Swingline Facility must be repaid in full prior to repaying any other part of the Amended Credit Agreement. The term loans require annual principal payments of $3 million beginning on September 15, 1997, with final maturity on November 20, 2000. At November 30, 1996, there were combined borrowings under the agreement of $354.0 million as well as outstanding standby letters of credit of $14.0 million. The Company had $100.0 million available for borrowing under this agreement at the end of fiscal 1996. The Amended Credit Agreement is secured by substantially all merchandise inventory, certain real estate, and substantially all of the equipment of the Company. All loans under the Amended Credit Agreement, except the $100 million Tranche B loans, bear interest at fluctuating rates of either the alternate base rate (8-1/4% at November 30, 1996) plus 1.5% per annum or LIBOR (5-19/32% at November 30, 1996) plus 2.5% per annum. The Tranche B loans bear interest at fluctuating rates of either the alternate base rate plus 2.0% or LIBOR plus 3.0%. In addition to scheduled repayments, the Company will also be required to repay borrowings under the Amended Credit Agreement with proceeds of certain asset sales and certain other transactions and with excess cash flow, as defined. The effect of these provisions is generally to require that substantially all cash flows not applied to the repayment of other indebtedness or permitted capital expenditures are to be applied to the repayment of borrowings under the Amended Credit Agreement. The Amended Credit Agreement contains a number of covenants, including, but not limited to, minimum cash flow (defined as earnings before interest, taxes, depreciation, amortization, and rent, "EBITDAR"), a maximum debt to EBITDAR ratio, and limitations on capital expenditures and capitalized leases. The Company is also prohibited from paying dividends on its Common and Preferred Stock. Compliance with the minimum cash flow and the maximum debt to EBITDAR covenants is determined on a rolling-four-quarter basis. The measurements for those covenants, over the term of the Amended Credit Agreement, are as follows: Minimum Cash Flow Maximum Debt to Fiscal Quarter Ending (EBITDAR) EBITDAR ---------------------- ----------------- --------------- November 1996 150,000,000 4.61 to 1.00 February 1997 148,000,000 4.65 to 1.00 May 1997 138,300,000 4.95 to 1.00 August 1997 133,000,000 5.11 to 1.00 November 1997 135,500,000 4.97 to 1.00 February 1998 137,650,000 4.85 to 1.00 May 1998 142,350,000 4.64 to 1.00 August 1998 147,500,000 4.44 to 1.00 November 1998 152,500,000 4.23 to 1.00 February 1999 154,650,000 4.15 to 1.00 May 1999 159,350,000 4.00 to 1.00 August 1999 164,500,000 3.86 to 1.00 November 1999 169,500,000 3.70 to 1.00 February 2000 171,950,000 3.63 to 1.00 May 2000 177,500,000 3.49 to 1.00 August 2000 183,600,000 3.36 to 1.00 For the fiscal year ended November 30, 1996, actual EBITDAR was $165.2 million and the ratio of debt to EBITDAR was 3.86 to 1. On November 18, 1994, the Company entered into a five-year revolving credit facility providing borrowings initially of up to $420 million. The previous credit agreement was repaid on this date, resulting in an extraordinary charge of approximately $7.7 million, net of tax, in the accompanying 1994 statement of operations. To reduce the impact of changes in interest rates with regard to the credit agreement described above, during 1995, the Company entered into an interest rate cap with an affiliate of an investment banking firm, limiting to 8% LIBOR the interest rates on $100 million of its floating rate debt through January 20, 1998. Under the agreement, semiannual payments, if any, would be received, although no amounts were received by the Company during fiscal years 1995 or 1996. On April 20, 1993, the Company issued senior subordinated notes. The senior subordinated notes are unsecured obligations, subordinated to substantially all indebtedness of the Company, and mature on April 15, 2003. Interest is payable on April 15 and October 15 of each year at 9-1/8% per 20 Payless Cashways, Inc. NOTES TO FINANCIAL STATEMENTS (cont'd.) annum. The senior subordinated notes are callable after April 15, 1998, at 104.5625% face value declining ratably to par on and after April 15, 2000. The senior subordinated notes contain certain covenants that, among other things, limit the ability of the Company and its subsidiaries to incur certain indebtedness, pay dividends, issue preferred stock of subsidiaries, issue guarantees and pledges of subsidiaries, engage in transactions with stockholders and affiliates, create payment restrictions affecting subsidiaries and engage in mergers and consolidations. During 1994, the Company had borrowed $25 million under a multi-draw credit agreement to repurchase and retire $26.3 million aggregate principal amount of the 9-1/8% senior subordinated notes resulting in an extraordinary gain of approximately $.5 million, net of tax, in the accompanying 1994 statement of operations. The multi-draw credit agreement was prepaid on November 16, 1994. The Company has a mortgage loan with an insurance company secured by land, land improvements and buildings, having a net book value of approximately $300.2 million at November 30, 1996. On December 22, 1995, the Company made a $16.5 million mortgage loan prepayment in connection with the sale of a distribution center described at Note I. The Company defeased certain industrial revenue bonds during fiscal 1988 by placing government securities in an irrevocable trust. Such industrial revenue bond debt is considered to be extinguished and does not appear as a liability in the accompanying balance sheets. Bonds in the amount of $6.0 million are outstanding as of November 30, 1996. Scheduled maturities of long-term debt, including sinking fund requirements, are: In thousands 1997 $ 18,340 1998 27,937 1999 16,970 2000 360,613 2001 17,448 Thereafter 195,699 ------------ $ 637,007 ============ NOTE C--SHAREHOLDERS' EQUITY The total number of shares of all classes of Common Stock, $.01 par value, which the Company has the authority to issue, is 160,000,000, consisting of 150,000,000 shares of Voting Common Stock, 5,000,000 shares of Non-Voting Class A Common Stock and 5,000,000 shares of Non-Voting Class B Common Stock. All classes of Common Stock are substantially identical except for voting rights. Shares of Non-Voting Class A Common Stock are convertible at the option of the holder, subject to certain restrictions, into a like number of shares of Voting Common Stock. During 1994, 1,125,000 outstanding shares of Non-Voting Class B Common Stock were converted into a like number of shares of Voting Common Stock under a similar right of conversion. In the event of liquidation, all distributions on the Common Stock of the Company are payable to all classes of Common Stock in a like manner. Masco Capital, an affiliate of one of the Company's suppliers, owns 100% of the Company's Cumulative Preferred Stock ("Preferred Stock"). The terms of the Preferred Stock provide for dividends at an annual rate of 8% until 2008 (at which time the rate increases) on a cumulative basis, whether or not declared. At November 30, 1996, cumulative undeclared dividends on the Preferred Stock were $38.0 million ($93.50 per share). The Preferred Stock is not convertible into Common Stock. Each share of Preferred Stock is generally entitled to 5.9994 votes on all matters on which holders of Common Stock are entitled to vote. Unless full cumulative dividends plus the then current quarterly dividends on Preferred Stock have been paid or declared and all necessary funds set apart for payment, 1) no cash dividends may be paid on Common Stock, 2) no Common Stock may be purchased, redeemed or otherwise acquired by the Company, and 3) no moneys may be paid into a sinking fund for Common Stock. 21 Payless Cashways, Inc. NOTES TO FINANCIAL STATEMENTS (cont'd.) The Company has adopted a deferred compensation plan for non-employee directors (the "Director Deferred Comp Plan"). Under the Director Deferred Comp Plan, each non-employee director may elect to defer receipt of all or part of his cash compensation on a pretax basis and invest those deferrals in the Company's Common Stock. The shares of Common Stock issuable under the Director Deferred Comp Plan will be either authorized and unissued shares or previously issued and outstanding shares reacquired by the Company. Shares will be issued when a distribution is made following a director's termination of services. Under an option plan adopted for non-employee directors (the "Director Option Plan"), each non-employee director is granted an option of $100,000 worth of the Company's Common Stock, valued on the date on which the director is first elected, for an aggregate exercise price of $100,000. In addition, each non-employee director will receive an option to purchase 1,000 shares of Common Stock on the date immediately following the Company's Annual Meeting so long as such non-employee director continues to serve on the Company's Board of Directors. The exercise price for the annual options will be the fair market value of the Company's Common Stock on such anniversary date. Options granted under the Director Option Plan may be exercised after the grant date and expire on the earlier of (a) ten years after the date of grant, or (b) one year after the date on which the director ceases to be a member of the Company's Board of Directors. An aggregate of 350,000 shares of Common Stock are reserved for issuance under the Director Option Plan. The Payless Cashways 1992 Incentive Stock Program (the "Program") has been established to attract and retain outstanding individuals in certain key positions. The Program provides for the grant of incentive stock options, non-qualified stock options, stock appreciation rights, restricted stock awards and performance units. All grants made after July 15, 1992, were under the Program. The aggregate number of shares of Common Stock reserved for issuance under the Program is equal to the sum of (1) the greater of (a) 3,500,000 shares of Common Stock or (b) 5% of the sum of (i) the Common Stock outstanding at the end of any fiscal year during the term of the Program and (ii) the Common Stock reserved for issuance upon exercise or conversion of any options, warrants or Preferred Stock outstanding at the end of any fiscal year during the term of the Program; plus (2) any shares which remain available under the Plan (defined below) or which are subject to options or awards outstanding on July 15, 1992, and which expire, terminate or are cancelled after such date. The exercise price for any incentive stock options will be at least 100% of the fair market value of the Common Stock at the date of grant. The exercise price for any non-qualified stock options will be at least 85% of the fair market value of the Common Stock at the date of grant. There were 69,700 shares of Restricted Stock, granted under the Program, outstanding as of November 30, 1996. The shares of Restricted Stock are subject to certain transfer restrictions and 25,700 shares, 32,000 shares, and 12,000 shares vest in February 1997, February 1998, and August 1999, respectively. The 1988 Payless Cashways, Inc. Employee Stock Plan (the "Plan") provided for the conversion of options to purchase shares of the predecessor company Common Stock into options to purchase shares of the successor company Common Stock, and for the granting of options for the purchase of up to 1,643,781 shares of Common Stock and awards of up to approximately 183,000 shares of Restricted Stock. One-third of the options were performance-based and two-thirds vested without regard to performance tests. All unvested options under the Plan vested as of March 15, 1993. The exercise price for options was the fair market value of the Company's Common Stock on the date of grant. After adoption of the Program (defined above), no further grants were made pursuant to the Plan. 22 Payless Cashways, Inc. NOTES TO FINANCIAL STATEMENTS (cont'd.) The following sets forth details of shares under options for all three plans.
1992 Incentive 1988 Employee Stock Program Stock Plan Director Option Plan ----------------------------------------------------------------------------------------------- Number Average Number Average Number Average Of Shares Price Of Shares Price Of Shares Price ----------------------------------------------------------------------------------------------- Fiscal Year 1994: Options granted 963,758 $ 14.60 -- $ -- 8,000 $ 15.88 Options exercised (8,356) 11.98 (283,495) 7.85 -- -- Options terminated or cancelled (283,626) 12.67 (8,784) 11.34 -- -- ----------------------------------------------------------------------------------------------- Options outstanding at November 26, 1994 2,073,825 $ 13.26 1,961,042 $ 9.79 56,692 $ 14.59 =============================================================================================== Options exercisable at November 26, 1994 346,159 $ 12.18 1,961,042 $ 9.79 56,692 $ 14.59 =============================================================================================== Fiscal Year 1995: Options granted 1,549,325 $ 6.62 -- $ -- 20,903 $ 7.75 Options exercised -- -- (7,000) 2.22 -- -- Options terminated or cancelled (286,727) 11.48 (70,748) 11.31 -- -- ----------------------------------------------------------------------------------------------- Options outstanding at November 25, 1995 3,336,423 $ 10.33 1,883,294 $ 9.76 77,595 $ 12.75 =============================================================================================== Options exercisable at November 25, 1995 768,892 $ 12.86 1,883,294 $ 9.76 77,595 $ 12.75 =============================================================================================== Fiscal Year 1996: Options granted 209,100 $ 3.64 -- $ -- 9,000 $ 4.63 Options exercised -- -- (41,706) 2.22 -- -- Options terminated or cancelled (576,691) 10.17 (265,002) 11.82 -- -- ----------------------------------------------------------------------------------------------- Options outstanding at November 30, 1996 2,968,832 $ 9.89 1,576,586 $ 9.61 86,595 $ 11.90 =============================================================================================== Options exercisable at November 30, 1996 1,336,082 $ 11.49 1,576,586 $ 9.61 86,595 $ 11.90 ===============================================================================================
23 Payless Cashways, Inc. NOTES TO FINANCIAL STATEMENTS (cont'd.) NOTE D-INCOME TAXES For the year ended November 30, 1996, an income tax benefit of $30.7 million was recorded. On August 20, 1996, the Small Business Job Protection Act of 1996 was signed into law. Certain provisions of this Act clarify the Tax Reform Act of 1986 and make retroactively tax deductible certain costs and expenses previously recorded by the Company without any related tax benefit. In addition, the Company settled with the Internal Revenue Service regarding several tax issues. As a result, the Company has recorded a tax benefit of $23.7 million and related interest income of $4.9 million ($2.9 million after tax) in the third quarter of 1996. This tax benefit includes recoverable income taxes of $10.0 million and non-cash tax benefits of $13.7 million. A debit of $24,000 to additional paid-in capital reflected the tax effect of excess expense recognized for financial reporting purposes over the tax deduction for employee stock options. At November 30, 1996, the Company has tax credit carryforwards for federal income tax purposes totaling $1.1 million which are available over an indefinite period. For the year ended November 25, 1995, an income tax benefit of $4.9 million was allocated to the loss before equity in loss of joint venture. No income tax benefit was recorded for the equity in loss of the joint venture. A credit of $325,000 to additional paid-in capital reflected the tax effect of the excess tax deduction for employee stock options over the expense recognized for financial reporting purposes. Income taxes for the year ended November 26, 1994, were allocated to income before equity in loss of joint venture and extraordinary item, and to the extraordinary item for early extinguishment of debt; see Note B. For the year ended November 26, 1994, the income tax benefit allocated to the extraordinary item was $4.8 million; the income tax expense allocated to income before equity in loss of joint venture and extraordinary item was $41.8 million. A credit of $148,000 to additional paid-in capital reflected the tax effect of the excess tax deduction for employee stock options over the expense recognized for financial reporting purposes. Income tax expense (benefit) attributable to the income (loss) before equity in loss of joint venture and extraordinary item consisted of the following:
In thousands 1996 1995 1994 ------------------------------------------------------ Currently payable (receivable) Federal $ (18,901) $ 14,915 $ 29,636 State 469 2,500 4,419 ------------------------------------------------------ (18,432) 17,415 34,055 Deferred Federal $ (11,534) $ (20,986) $ 7,288 State (736) (1,340) 465 ------------------------------------------------------ (12,270) (22,326) 7,753 ------------------------------------------------------ $ (30,702) $ (4,911) $ 41,808 ======================================================
24 Payless Cashways, Inc. NOTES TO FINANCIAL STATEMENTS (cont'd.) The differences between actual income tax expense and the amount computed by applying the statutory federal income tax rate to the income (loss) before income taxes, equity in loss of joint venture and extraordinary item were as follows:
1996 1995 1994 ----------------------------------------------------------- Federal statutory rate (35.0) % (35.0) % 35.0 % State income taxes, net of federal tax benefit (1.5) 1.5) 4.0 Benefit from new law and tax settlement (47.6) -- -- Amortization and write-off of goodwill 22.7 32.9 4.7 Permanent tax differences .4 (.1) (.1) Tax credits (.7) (.3) (.2) ----------------------------------------------------------- (61.7) % (4.0) % 43.4 % ===========================================================
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 1996 1995 ------------------------------------- Deferred tax assets: Insurance reserves $ 13,026 $ 11,770 Lease liability 7,159 -- Retirement, deferred compensation, restricted stock and stock option plans 6,101 7,061 Post-retirement benefits 5,706 5,330 Vacation reserves 4,981 4,926 Reserves for bad debts 3,056 2,790 Other 7,709 5,932 ------------------------------------- Total deferred tax assets 47,738 37,809 Less valuation allowance -- -- ------------------------------------- Net deferred tax assets 47,738 37,809 ------------------------------------- Deferred tax liabilities: Land, buildings and equipment (54,763) (60,955) Inventory basis difference (11,221) (7,754) Acquisition fees -- (4,949) Other (9,738) (4,405) ------------------------------------- Total deferred tax liabilities (75,722) (78,063) ------------------------------------- Net deferred tax liability $ (27,984) $ (40,254) =====================================
NOTE E--PENSION 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. Prior to January 1995, the Company had two defined benefit pension plans that were merged into a single plan on January 1, 1995. The Company's funding policy is to contribute annually the amount actuarially determined to provide the plan with sufficient assets to meet future benefit payment requirements. Assets of the pension plan are maintained in trust funds. The Company also has a supplemental pension plan covering certain of its officers. The plan is an unfunded, non-contributory defined benefit pension plan. Benefits under the plan are based on years of service, age and the employee's average compensation. 25 Payless Cashways, Inc. NOTES TO FINANCIAL STATEMENTS (cont'd.)
Net pension cost included the following components: In thousands 1996 1995 1994 ------------------------------------------------- Service cost - benefits earned during the period $ 5,025 $ 4,714 $ 4,623 Interest cost on projected benefit obligation 4,647 3,987 3,684 Actual return on plan assets (8,167) (6,741) (166) Net amortization and deferral 5,185 4,426 (2,295) ------------------------------------------------- Net periodic pension cost $ 6,690 $ 6,386 $ 5,846 =================================================
Significant assumptions used in accounting for defined benefit plans were as follows:
1996 1995 1994 ------------------------------------------------- Weighted average discount rate 7.5% 7.5% 7.5% Rate of increase in future compensation levels 5.0% 5.0% 5.0% Expected long-term rate of return on plan assets 8.5% 8.5% 8.5%
The following table sets forth the plans' funded status and amounts recognized in the balance sheets:
In thousands 1996 1995 --------------------------------------------------------------- Supplemental Supplemental Pension Pension Pension Pension Plan Plan Plan Plan --------------------------------------------------------------- Actuarial present value of benefit obligations: Accumulated benefit obligation Vested $ 41,707 $ 6,262 $ 36,840 $ 5,931 Non-vested 4,403 1,505 4,535 1,215 --------------------------------------------------------------- Total 46,110 7,767 41,375 7,146 Increase in benefits due to estimated future compensation increases 10,988 1,989 9,655 1,451 --------------------------------------------------------------- Projected benefit obligation for service rendered to date 57,098 9,756 51,030 8,597 Plan assets at fair value, primarily publicly traded stocks and U.S. Government obligations 48,993 -- 38,038 -- --------------------------------------------------------------- Plan assets less than projected benefit obligation (8,105) (9,756) (12,992) (8,597) Unrecognized net loss from past experience different from that assumed 1,118 1,591 3,519 1,139 Unrecognized prior service cost 1,237 785 1,378 849 --------------------------------------------------------------- Accrued pension cost included in other accrued expenses $ (5,750) $ (7,380) $ (8,095) $ (6,609) ===============================================================
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. In fiscal year 1994, the employees of Somerville Lumber and Supply Co., Inc. were covered by a profit sharing plan for which contributions were made at the discretion of the Somerville Board of Directors and approval of the Company's Compensation Committee. On October 23, 1995, the profit sharing plan was merged into the Payless Cashways, Inc. Employee Savings Plan. The aggregate contributions to all defined contribution plans were $3.1 million, $2.9 million, and $2.7 million in 1996, 1995, and 1994, respectively. 26 Payless Cashways, Inc. NOTES TO FINANCIAL STATEMENTS (cont'd.) NOTE F--POST-RETIREMENT BENEFIT PLANS 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. In fiscal years 1996, 1995, and 1994, 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 30, 1996, accumulated post-retirement benefit obligation by $623,000 and the aggregate of the service and interest cost components of net periodic post-retirement benefit cost for the fiscal year ended November 30, 1996, by $71,000. Net post-retirement benefit cost included the following components:
In thousands 1996 1995 1994 ------------------------------------------------ Service cost - benefits earned during the period $ 642 $ 1,098 $ 923 Interest cost on accumulated post-retirement benefit obligation 1,084 1,309 1,092 Amortization of prior service cost 47 47 -- Amortization of unrecognized loss -- 93 48 ------------------------------------------------ Net periodic post-retirement benefit cost $ 1,773 $ 2,547 $ 2,063 ================================================
The following table sets forth the plans' funded status and amounts recognized in the balance sheets:
In thousands 1996 1995 1994 ----------------------------------------------- Accumulated post-retirement benefit obligation: Retirees and beneficiaries $ 8,111 $ 12,144 $ 9,830 Fully eligible active plan participants 1,965 781 375 Other active plan participants 3,893 3,939 8,113 ------------------------------------------------ Total 13,969 16,864 18,318 Plan assets at fair value -- -- -- ------------------------------------------------ Accumulated post-retirement benefit obligation in excess of plan assets 13,969 16,864 18,318 Unrecognized net gain (loss) from past experience different from that assumed 3,197 (749) (3,684) Unrecognized prior service cost (838) (885) (932) ------------------------------------------------ Accrued post-retirement benefit cost included in other non-current liabilities $ 16,328 $ 15,230 $ 13,702 ================================================
Significant assumptions used in accounting for post-retirement benefit plans were as follows:
1996 1995 1994 ------------------------------------------------ Weighted average discount rate 7.5% 7.5% 7.5% Rate of increase in future compensation levels 5.0% 5.0% 5.0% Health-care cost trend rate 7.6% 8.1% 8.5%
27 Payless Cashways, Inc. NOTES TO FINANCIAL STATEMENTS (cont'd.) NOTE G--LEASES The Company leases certain stores and other facilities under non-cancellable operating leases. Aggregate minimum future rentals under non-cancellable operating leases for the next five years are: 1997 -- $23,653,000; 1998 -- $23,010,000; 1999 -- $21,879,000; 2000 -- $17,698,000; 2001 -- $15,896,000; thereafter -- $41,360,000. Rental expense under operating leases was $30,614,000 for 1996, $27,212,000 for 1995, and $23,912,000 for 1994. During 1995, the Company entered into an agreement providing for the operating lease of five stores, including a new store which will open in 1997. The Company will have the option to purchase the stores at the end of the lease terms in late 1999. In the event the Company chooses not to exercise this option, it is obligated to arrange the sale of the stores to an unrelated party and is required to pay the lessor any difference between the net sales proceeds and the lessor's net investment in stores (at November 30, 1996, $38.2 million for the five stores), subject to certain limitations. Rental payments under the leases vary with the level of interest rates. To reduce the impact of changes in interest rates related to this lease, the Company during 1995 entered into an interest rate swap agreement under which it pays a 6-9/16% fixed rate of interest quarterly through December 1, 1999, in exchange for quarterly receipt of LIBOR on $36 million. The agreement contains a number of covenants including a provision requiring that the Company maintain minimum levels of net worth, as defined. At November 30, 1996, the Company's net worth, as defined, exceeded the minimum required level by approximately $38.3 million. The minimum level of net worth is increased each fiscal quarter by 75% of net income (not decreased by any net loss) and by 100% of cash proceeds from any issuance of equity. For the purpose of computing consolidated net worth for this covenant, extraordinary gains and losses are excluded. NOTE H -- ASSET IMPAIRMENT CHARGES The Company adopted Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," ("SFAS 121") in the third quarter of 1996. As a result of the increasingly competitive environment for building materials retailing and in connection with the evaluation of certain underperforming stores, the Company conducted its review and determined certain assets were impaired. These assets included certain real estate, including future store lease obligations, and associated goodwill which is attributable to those assets and which was established in 1988 as part of the Company's leveraged buyout. An asset impairment charge of $59.7 million ($44.6 million after tax) was recorded after considering current and expected future operating cash flows for certain stores together with the proceeds the Company could expect to receive upon the sale of these assets. As a result of the impairment charge, goodwill was reduced $22.4 million, certain real estate carrying values were reduced $25.7 million and an $11.6 million liability for future store lease payments, net of $6.0 million in amounts the Company estimates to be recoverable, was recorded. The Company will continue to review assets for impairment, particularly given the ongoing competitive environment for building materials retailing. 28 Payless Cashways, Inc. NOTES TO FINANCIAL STATEMENTS (cont'd.) NOTE I--SPECIAL CHARGES A special charge of $8.2 million ($5.0 million after tax), primarily a cash charge, was recorded in the third quarter of fiscal 1996 in connection with the closing of nine underperforming stores. Eight of the nine stores were closed at November 30, 1996, and the remaining store will close in fiscal 1997. The Company also recorded an inventory write-down of $5.8 million ($3.5 million after tax), included in cost of merchandise sold, in connection with the store closings. The fiscal 1996 special charge includes:
Amount Amount Charged Utilized Through Reserve at In millions 1996 Nov. 30, 1996 Nov. 30, 1996 ------------------------------------------------------------------ Future store rentals $ 3.7 $ -- $ 3.7 Real estate disposal costs 4.5 1.0 3.5 ------------------------------------------------------------------ $ 8.2 $ 1.0 $ 7.2 ==================================================================
Historical financial data for the closing of the nine stores is as follows for the fiscal years presented:
In thousands 1996 1995 1994 --------------------------------------------------------------- Net sales $ 63,088 $ 70,284 $ 52,710 Net operating income (loss) $ (7,636) $ (1,720) $ 1,209
Costs of $153.7 million associated with a restructuring plan which included the closing of six stores on December 30, 1995, the sale of a distribution center on December 22, 1995, and the reorientation of several stores to concentrate on the professional customer during the first two quarters of fiscal 1996, are contained in the accompanying statement of operations for fiscal 1995 as special charges. Historical financial data for the six closed stores is as follows for the fiscal years presented:
In thousands 1995 1994 ------------------------------- Net sales $61,969 $75,722 Net operating loss $(4,023) $(3,891)
The fiscal 1995 special charge includes:
Amount Amount Charged Utilized Through Changes In Reserve at In millions 1995 Nov. 30, 1996 Estimate Nov. 30, 1996 ---------------------------------------------------------- Write-off of allocable cost in excess of assets acquired (goodwill) $ 101.5 $ 101.5 $ -- $ -- Real estate write-down and disposal costs 31.2 30.7 1.9 2.4 Inventory liquidation and store closing costs 15.3 13.7 (1.6) -- Severance and other employment costs 3.9 3.6 (.3) -- Other 1.8 .9 -- .9 ----------------------------------------------------------- $ 153.7 $ 150.4 $ -- $ 3.3 ===========================================================
29 NOTE J--LITIGATION The Company is a defendant in a lawsuit brought in connection with a reduction in force pursuant to a January 1994 restructuring. The suit asserted a variety of claims including federal and state securities fraud claims, alleged violations of the Racketeer Influenced and Corrupt Organizations Act ("RICO"), federal and state claims of age discrimination, alleged violations of the Employment Retirement Income Security Act of 1974, and various state law claims including, but not limited to, fraudulent misrepresentation allegations. A ruling has been entered on the Company's motion to dismiss the majority of pending claims, substantially narrowing plaintiff's legal claims by dismissing some age discrimination counts, all federal securities counts and RICO counts except one each, and all state law counts related to an alleged partnership. No ruling has been entered on the plaintiff's motion for class certification. The Company denies any and all claimed liability and is vigorously defending this litigation, but, given the early state of this litigation, is unable to estimate a potential range of monetary exposure, if any, to the Company or to predict the likely outcome of this matter. - -------------------------------------------------------------------------------- INDEPENDENT AUDITORS' REPORT The Board of Directors Payless Cashways, Inc.: We have audited the accompanying balance sheets of Payless Cashways, Inc. as of November 30, 1996, and November 25, 1995, and the related statements of operations, shareholders' equity and cash flows for each of the fiscal years in the three-year period ended November 30, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures 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 30, 1996 and November 25, 1995, and the results of its operations and its cash flows for each of the fiscal years in the three-year period ended November 30, 1996 in conformity with generally accepted accounting principles. As discussed in Note H to the financial statements, the Company adopted Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," in fiscal 1996. s/KPMG Peat Marwick LLP Kansas City, Missouri January 13, 1997 30 Payless Cashways, Inc. FIVE-YEAR FINANCIAL SUMMARY
In thousands, except per share amounts, percentages and ratios 1996 1995 1994 1993 1992 - --------------------------------------------------------------------------------------------------------------------------------- Net sales and other income (a) $2,650,905 $2,685,670 $2,733,182 $2,605,978 $2,500,364 Cost of merchandise sold 1,906,734 1,912,620 1,918,674 1,824,663 1,739,396 Selling, general and administrative 615,466 619,589 594,024 570,016 551,479 Special charges (b) 8,184 153,667 -- 4,000 6,500 Asset impairment charges (c) 59,697 -- -- -- -- Depreciation and amortization 55,016 60,356 58,692 56,213 55,429 Interest expense 60,488 61,067 65,571 125,247 153,780 Interest income (d) 4,900 -- -- -- -- --------------------------------------------------------------------------------- Income (loss) before income taxes (49,780) (121,629) 96,221 25,839 (6,220) Federal and state income taxes (d) (30,702) (4,911) 41,808 16,170 2,780 --------------------------------------------------------------------------------- Income (loss) before equity in loss of joint venture, extraordinary item and cumulative effect of change in accounting principle (19,078) (116,718) 54,413 9,669 (9,000) Equity in loss of joint venture (e) -- (11,831) (2,281) -- -- Extraordinary item (f) -- -- (7,243) (45,828) -- Cumulative effect on prior years of change in accounting principle (g) -- -- -- -- (6,902) --------------------------------------------------------------------------------- Net income (loss) $ (19,078) $ (128,549) $ 44,889 $ (36,159) $ (15,902) ================================================================================= Income (loss) per common share before extraordinary item and cumulative effect of change in accounting principle $ (.63) $ (3.36) $ 1.17 $ .16 $ (2.10) Weighted average common and dilutive common equivalent shares outstanding 39,946 39,904 40,257 30,514 6,571 Current ratio 1.41 1.29 1.45 1.25 1.21 Working capital $ 131,004 $ 98,400 $ 139,128 $ 85,142 $ 74,911 Total assets $1,293,118 $1,344,436 $1,495,882 $1,458,481 $1,466,068 Long-term debt $ 618,667 $ 608,627 $ 654,131 $ 640,127 $ 986,155 Common Stock subject to puts and calls $ -- $ -- $ -- $ -- $ 6,283 Shareholders' equity $ 289,731 $ 308,163 $ 435,865 $ 387,311 $ 10,674 Capital expenditures $ 41,670 $ 67,281 $ 81,906 $ 49,982 $ 36,612 Income from operations before depreciation and amortization (h) $ 134,552 $ 153,461 $ 220,484 $ 211,299 $ 209,489
31 (a) Net sales and other income include gains of $2.3 million in 1996 related to settlements of 1995 fire losses and gains of $5.9 million in 1994 related to settlements of 1993 flood losses. (b) Special charges for 1996 consisted of costs associated with the closing of nine stores. Special charges for 1995 consisted of restructure costs associated with the closing of six stores, the sale of a distribution center and the reorientation of several stores to concentrate on the professional customer. Special charges for 1993 consisted of costs associated with the elimination of a layer from the Company's field management organization. Special charges for 1992 consisted of fees and expenses incurred in connection with the Company's withdrawn recapitalization plan. (c) Asset impairment charges consist of a reduction of goodwill and certain real estate carrying values and the recording of a liability for future store lease payments, net of amounts estimated to be recoverable, in connection with the adoption of SFAS 121. (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 1995, the Company recorded an $8.0 million loss on the sale of its Mexican joint venture investment. (f) Represents losses on early extinguishment of debt. (g) Effective December 1, 1991, the Company changed its method of accounting for post-retirement benefits other than pensions. (h) Income from operations before 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. A 1996 inventory write-down of $5.8 million, related to the closing of nine underperforming stores, is also excluded. 32 Payless Cashways, Inc. FIVE-YEAR OPERATIONAL SUMMARY
Average sales per facility, number of customers, gross square feet and retail square feet are in thousands 1996 (a) 1995 (b) 1994 1993 1992 - -------------------------------------------------------------------------------------------------------------------------------- Number of retail facilities 192 206 202 196 195 Average same-store sales per facility $ 13,107 $ 13,114 $ 13,716 $ 13,284 $ 12,800 Number of customers 56,736 59,685 60,812 60,678 62,641 Average sales per customer $ 45.81 $ 44.91 $ 44.77 $ 42.87 $ 39.84 Number of employees 16,664 18,122 18,406 18,093 17,784 Average sales per employee $ 152,228 $ 147,894 $ 147,778 $ 143,757 $ 140,346 Gross square feet (total) 17,578 19,453 18,730 18,095 18,013 Retail square feet (inside) 6,209 6,740 6,468 6,200 6,029 Sales per retail square foot $ 408.56 $ 397.65 $ 420.53 $ 419.52 $ 413.98 Percent increase (decrease) in same- store sales (2.5)% (4.5)% 3.3% 4.1% 6.4% (a) Fiscal year 1996 was a 53-week year. All 1996 data has b een computed on a 52-week basis. (b) Includes six retail stores closed in December 1995.
- ------------------------------------------------------------------------------- Payless Cashways, Inc. RESPONSIBILITY FOR FINANCIAL STATEMENTS The financial statements of Payless Cashways, Inc. have been prepared by management in accordance with generally accepted accounting principles and necessarily include amounts based on management's judgment and best estimates. The presentation, integrity and consistency of the financial statements are the responsibility of management. The financial statements have been audited by KPMG Peat Marwick LLP, independent auditors. Their responsibility is to audit the Company's financial statements in accordance with generally accepted auditing standards and to express their opinion on these statements with respect to fairness of presentation of the Company's financial position, results of operations and cash flows. To fulfill its responsibilities, management has developed a system of internal controls designed to provide reasonable assurance that assets are safeguarded, transactions are executed in accordance with management's authorizations and financial records provide a reliable basis for preparing financial statements and other data. Management believes the controls in place are sufficient to provide this reasonable assurance. The controls include careful selection and training of qualified personnel, appropriate division of responsibilities, communication of written policies and procedures throughout the Company and a program of internal audits. The Board of Directors, through its Audit Committee composed of Directors who are neither officers nor employees of the Company, is responsible for the maintenance of a strong control environment and quality financial reporting. The Board, on the recommendation of the Audit Committee, selects and engages the independent auditors. The Audit Committee meets periodically with management, the independent auditors and internal auditors to discuss the results of both independent and internal audits, the adequacy of internal controls and financial reporting matters. The independent auditors and the internal auditors have direct access to the Audit Committee without the presence of management, when deemed appropriate. s/David Stanley s/Stephen A. Lightstone - ----------------------------------- --------------------------------------- David Stanley Stephen A. Lightstone Chairman of the Board Senior Vice President-Finance/Treasurer and Chief Executive Officer and Chief Financial Officer 33 BOARD OF DIRECTORS AND OFFICERS [List not included in EDGARized exhibit.] 34 1996 STORE LOCATIONS [Map not included in EDGARized exhibit.] 35 1996 STORE LOCATIONS (cont'd.) [Map not included in EDGARized exhibit.] 36 SHAREHOLDER INFORMATION Payless Cashways Common Stock is traded on the New York Stock Exchange (ticker symbol PCS). The number of registered holders of the Company's Common Stock at November 30, 1996, was 1,343, one of which was a holder of Non-Voting Class A Common Stock. No cash dividends have been declared on the Common Stock since 1988. The Company's Preferred Stock and certain of its 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 or Cumulative Preferred Stock. 1996 1995 -------------------------------------------------------------------- Price range of Common Stock High Low High Low -------------------------------------------------------------------- First quarter 4-3/4 3-5/8 10 8-1/4 Second quarter 5-1/8 3-3/4 9-3/4 6-1/2 Third quarter 5 1-3/8 7-3/4 5-5/8 Fourth quarter 2-1/4 1-1/2 6-3/4 3-5/8 37 {Inside back cover} Copies of the Payless Cashways, Inc. Form 10-K for fiscal 1996, filed with the Securities and Exchange Commission, are available without charge. To obtain a copy, please write to: Payless Cashways, Inc. Investor Relations P.O. Box 419466 Kansas City, MO 64141-0466 (Web site: payless.cashways.com) Annual Meeting - April 17, 1997, 10:00 a.m. Independent Auditors Two Pershing Square, 2300 Main Street KPMG Peat Marwick LLP Kansas City, MO 64108 Kansas City, MO Registrar and Transfer Agent Telephone Number of UMB Bank, n.a. Payless Cashways, Inc. is Kansas City, MO (816) 234-6000 (816) 860-7786 EX-23 10 AUDITORS' CONSENT 1 Exhibit 23.1 AUDITORS' CONSENT ----------------- The Board of Directors Payless Cashways, Inc.: We consent to incorporation by reference in the registration statements on Form S-8 and Form S-3 of Payless Cashways, Inc. of our audit reports dated January 13, 1997, relating to the balance sheets of Payless Cashways, Inc. as of November 30, 1996 and November 25, 1995 and the related statements of operations, shareholders' equity and cash flows for each of the fiscal years in the three-year period ended November 30, 1996, and the related schedule, which reports appear in the November 30, 1996 annual report on Form 10-K of Payless Cashways, Inc. Kansas City, Missouri February 21, 1997 EX-27 11 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from the November 30, 1996, financial statements and is qualified in its entirety by reference to such financial statements. 1000 12-MOS NOV-30-1996 NOV-30-1996 425 0 0 0 399010 450597 782935 277643 1293118 319593 618667 0 40600 400 248731 1293118 2642829 2650905 1906734 1906734 0 0 60488 (49780) (30702) (19078) 0 0 0 (19078) (.63) 0
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