-----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, IH+Ue0sl/TlrEcqQdmGJ2ktz5VWDFhrpVJjw7irI7QJjceQ4wlkKvJNYAzy+AVUt CNAK7OYK0ad/bhfSp37FFA== 0000922907-98-000028.txt : 19980415 0000922907-98-000028.hdr.sgml : 19980415 ACCESSION NUMBER: 0000922907-98-000028 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19980228 FILED AS OF DATE: 19980414 SROS: NONE 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-Q SEC ACT: SEC FILE NUMBER: 001-08210 FILM NUMBER: 98593367 BUSINESS ADDRESS: STREET 1: TWO PERSHING SQ 2300 MAIN ST STREET 2: P O BOX 419466 CITY: KANSAS CITY STATE: MO ZIP: 64141 BUSINESS PHONE: 8162346000 10-Q 1 FORM 10-Q 2/28/98 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) / X / Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended February 28, 1998 Or / / Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from to Commission file number 0-4437 PAYLESS CASHWAYS, INC. (Exact Name of Registrant as Specified in Its Charter) Delaware 42-0945849 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) Two Pershing Square 2300 Main, P.O. Box 419466 Kansas City, Missouri 64141-0466 (Address of Principal Executive Offices) (Zip Code) (816) 234-6000 (Registrant's Telephone Number, Including Area Code) 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 the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. There were 19,992,397 shares of Common Stock, $.01 par value, outstanding as of March 30, 1998. 2 PAYLESS CASHWAYS, INC. PART I -- FINANCIAL INFORMATION Item 1. Financial Statements STATEMENTS OF OPERATIONS (Unaudited) (1) (In thousands, except per share amounts)
Reorganized | Predecessor Company | Company ----------------- | ---------------- Thirteen | Thirteen Weeks Ended | Weeks Ended February 28, | March 1, 1998 | 1997 --------------------------|------------------------ | | Income | Net sales $ 394,271 | $ 487,550 Other income 789 | 1,205 --------------------------|------------------------ 395,060 | 488,755 | Costs and Expenses | Cost of merchandise sold 291,909 | 348,247 Selling, general and administrative 112,170 | 138,407 Special charges 5,584 | -- Provision for depreciation and amortization 8,312 | 12,804 Interest expense 10,235 | 16,055 --------------------------|------------------------ 428,210 | 515,513 --------------------------|------------------------ | LOSS BEFORE INCOME TAXES (33,150) | (26,758) | Federal and state income taxes (8,188) | (18,623) --------------------------|------------------------ NET LOSS $ (24,962) | $ (8,135) ==========================|======================== | Net loss per common share-basic (2) $ (1.25) | ==========================| | Weighted average common shares outstanding (2) 20,000 | ==========================| See notes to condensed financial statements
3 PAYLESS CASHWAYS, INC. CONDENSED BALANCE SHEETS (Unaudited) (1)
Reorganized | Predecessor Company | Company -----------------------------------------|--------------- February 28, November 29, | March 1, (In thousands) 1998 1997 | 1997 -----------------------------------------|--------------- | ASSETS | | CURRENT ASSETS | Cash and cash equivalents $ 5,604 $ 11,961 | $ 8,509 Merchandise inventories (3) 411,358 414,882 | 386,812 Prepaid expenses and other current assets 12,073 14,705 | 18,889 Income taxes receivable 9,706 32,232 | 34,464 Deferred income taxes 6,171 8,665 | 13,104 -----------------------------------------|-------------- TOTAL CURRENT ASSETS 444,912 482,445 | 461,778 | OTHER ASSETS | Real estate held for sale 24,996 48,562 | 16,639 Cost in excess of net assets acquired, less | accumulated amortization of $107,568 | at March 1, 1997 -- -- | 290,910 Deferred financing costs 2,398 2,600 | 12,867 Other 9,848 14,316 | 13,626 | LAND, BUILDINGS AND EQUIPMENT 367,064 363,418 | 787,318 Allowance for depreciation and amortization (8,301) -- | (285,808) -----------------------------------------|-------------- TOTAL LAND, BUILDINGS AND EQUIPMENT 358,763 363,418 | 501,510 -----------------------------------------|-------------- $ 840,917 $ 911,341 | $ 1,297,330 ======================================================== See notes to condensed financial statements
4 PAYLESS CASHWAYS, INC. CONDENSED BALANCE SHEETS - Continued (Unaudited) (1)
Reorganized | Predecessor Company | Company -------------------------------------- | ------------- February 28, November 29, | March 1, (In thousands) 1998 1997 | 1997 -----------------------------------------|--------------- | | LIABILITIES AND SHAREHOLDERS' EQUITY | | CURRENT LIABILITIES | Current portion of long-term debt (4) $ 3,135 $ 9,354 | $ 18,765 Trade accounts payable 52,308 75,583 | 107,516 Other current liabilities 113,899 136,741 | 152,659 Income taxes payable 2,990 2,362 | 6,249 -----------------------------------------|-------------- TOTAL CURRENT LIABILITIES 172,332 224,040 | 285,189 | LONG-TERM DEBT, less portion | classified as current liability (4) 438,513 424,031 | 664,572 | NON-CURRENT LIABILITIES | Deferred income taxes 50,476 58,788 | 41,729 Other 20,758 20,682 | 24,177 | SHAREHOLDERS' EQUITY (5) | Common Stock, $.01 par value, 50,000,000 shares | authorized, 20,000,000 shares issued at | February 28, 1998, and November 29, 1997 200 200 | -- Preferred Stock, $1.00 par value, 25,000,000 | shares authorized; issued: | Cumulative Preferred Stock, 406,000 shares | issued and $80,134 aggregate | liquidation preference at March 1, 1997 -- -- | 40,600 Common Stock, $.01 par value: | Voting, 150,000,000 shares authorized, | 37,711,528 shares issued at March 1, 1997 -- -- | 377 Non-Voting Class A, 5,000,000 shares authorized | 2,250,000 shares issued at March 1, 1997 -- -- | 23 Additional paid-in capital 183,600 183,600 | 487,795 Accumulated deficit (24,962) -- | (247,132) -----------------------------------------|-------------- TOTAL SHAREHOLDERS' EQUITY 158,838 183,800 | 281,663 -----------------------------------------|-------------- $ 840,917 $ 911,341 | $ 1,297,330 ======================================================== See notes to condensed financial statements
5 PAYLESS CASHWAYS, INC. CONDENSED STATEMENTS OF CASH FLOWS (Unaudited) (1)
Reorganized | Predecessor Company | Company ------------------ | ---------------- Thirteen | Thirteen Weeks Ended | Weeks Ended February 28, | March 1, (In thousands) 1998 | 1997 | ------------------ | ----------------- | Cash Flows from Operating Activities | | Net loss $ (24,962) | $ (8,135) Adjustments to reconcile net loss to net cash | provided by operating activities: | Depreciation and amortization 8,312 | 12,804 Deferred income taxes (5,818) | 641 Non-cash interest 170 | 700 Other 76 | 851 Changes in assets and liabilities (16,807) | (38,376) -----------------------|---------------------- NET CASH USED IN OPERATING ACTIVITIES (39,029) | (31,515) | Cash Flows from Investing Activities | | Additions to land, buildings and equipment (3,788) | (6,875) Proceeds from sale of land, buildings and equipment 23,697 | 1,985 Acquisition of business, excluding working capital: | Purchase price in excess of net assets acquired -- | (334) Decrease (increase) in other assets 4,468 | (708) -----------------------|---------------------- | NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 24,377 | (5,932) | Cash Flows from Financing Activities | | Retirements of long-term debt (54,737) | (3,670) Net proceeds from revolving credit facility 63,000 | 50,000 Other 32 | (799) -----------------------|---------------------- NET CASH PROVIDED BY FINANCING ACTIVITIES 8,295 | 45,531 -----------------------|--------------------- | Net (decrease) increase in cash and cash equivalents (6,357) | 8,084 Cash and cash equivalents, beginning of period 11,961 | 425 -----------------------|--------------------- Cash and cash equivalents, end of period $ 5,604 | $ 8,509 =======================|===================== See notes to condensed financial statements
6 PAYLESS CASHWAYS, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS Thirteen weeks ended February 28, 1998, and March 1, 1997. (1) The accompanying condensed financial statements have been prepared in accordance with the instructions to Form 10-Q. To the extent that information and footnotes required by generally accepted accounting principles for complete financial statements are contained in or consistent with the audited financial statements incorporated by reference in the Company's Form 10-K for the year ended November 29, 1997, such information and footnotes have not been duplicated herein. In the opinion of management, all adjustments, consisting of normal recurring accruals, considered necessary for a fair presentation of financial statements have been reflected herein. The November 29, 1997, condensed balance sheet has been derived from the audited financial statements as of that date. (2) Basic net loss per common share has been computed based on the weighted-average number of common shares outstanding during the period. Dilutive net loss per common share is computed based on the weighted-average number of common shares plus potential common shares outstanding during the period, when dilutive, consisting of certain stock options. However, given the net loss reported in the first quarter of fiscal 1998, the impact of considering such stock option would be antidilutive. Accordingly, diluted loss per common share has not been presented. Net loss per common share has not been presented for the Predecessor Company because Old Preferred Stock and Old Common Stock were canceled on December 2, 1997, under the Plan of Reorganization. Presentation of net loss per common share based on Predecessor Company average shares outstanding would therefore not be meaningful. (3) Approximately 80% of the Company's inventories are valued using the LIFO (last-in, first-out) method. Because inventory determination under the LIFO method is only made at the end of each fiscal year based on the inventory levels and costs at that time, interim LIFO determinations must necessarily be based on management's estimates of expected year-end inventory levels and costs. Since future estimates of inventory levels and costs are subject to change, interim financial results reflect the Company's most recent estimate of the effect of inflation and are subject to final year-end LIFO inventory amounts. If the FIFO (first-in, first-out) method of inventory accounting had been used by the Company, inventories would have been $1.0 million and $25.5 million higher than reported at February 28, 1998, and March 1, 1997, respectively. (4) Long-term debt consisted of the following:
Reorganized | Predecessor Company | Company -------------------------------------- | -------------- February 28, November 29, | March 1, (In thousands) 1998 1997 | 1997 -----------------------------------------|---------------- | Exit Financing Agreement, variable interest rate $ 339,794 $ 317,133 | $ -- Mortgage loan, variable interest rate 100,665 102,010 | -- Note payable, variable interest rate -- 13,000 | -- Amended Credit Agreement, variable interest rate -- -- | 404,000 Mortgage loan, 11.04% to 11.21% -- -- | 104,358 Senior subordinated notes, 9-1/8% -- -- | 173,655 Other senior debt 1,189 1,242 | 1,324 -----------------------------------------|---------------- 441,648 433,385 | 683,337 Less portion classified as current liability (3,135) (9,354) | (18,765) -----------------------------------------|---------------- $ 438,513 $ 424,031 | $ 664,572 ==========================================================
On February 26, 1998, the Company borrowed an additional $13 million under the variable rate mortgage loan and prepaid the note payable. (5) During the first quarter of 1998, the Company granted 1,350,000 stock options under the Payless Cashways, Inc. 1998 Omnibus Incentive Plan. The exercise price for these incentive stock options was the fair market value of the Common Stock on the grant date. The Company has accounted for these stock options according to APB Opinion No. 25, "Accounting for Stock Issued to Employees." 7 PAYLESS CASHWAYS, INC. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. RESULTS OF OPERATIONS Income Net sales for the quarter ended February 28, 1998, decreased 19.1% from the same period of 1997 in total and 7.5% on a same-store sales basis. (Same stores are those open one full year.) The sales decline for the first quarter is primarily due to the lingering impact of the Company's July 1997 Chapter 11 filing and competitive pressure. Same-store sales to professional customers declined 4.5% and same-store sales to do-it-yourself customers declined 10.3%. During the second half of fiscal 1997, the Company closed 30 stores whose sales were $64.5 million in the first quarter of 1997. Costs and Expenses Cost of merchandise sold, as a percent of sales, was 74.0% and 71.4% for the first quarter of 1998 and 1997, respectively. The increase for the first quarter of 1998 was primarily due to more competitive pricing designed to regain customer traffic lost during the Chapter 11 period during fiscal 1997. Selling, general and administrative expenses were 28.4% of sales for both the first quarter of 1998 and 1997. Selling, general and administrative expenses for the first quarter of 1998 decreased approximately $26.2 million compared to the same period of the prior year primarily because of closed stores. A special charge of $5.6 million ($3.4 million after tax), primarily a cash charge, was recorded in the first quarter of 1998 to reflect severance costs related to the elimination of staff at the Company's headquarters and regional administrative centers. The provision for depreciation and amortization decreased from the first quarter of 1997 due primarily to goodwill written off and assets written down in fresh-start reporting related to the Company's emergence from bankruptcy. In addition, assets were removed from service in connection with the store closings mentioned above. Interest expense for the first quarter of 1998 decreased compared to the same period of 1997 primarily due to lower borrowing levels in 1998 somewhat offset by higher interest rates in 1998. Certain debt was discharged in accordance with a Plan of Reorganization effective December 2, 1997. The income tax benefit for the first quarter of 1998 was $8.2 million compared to $18.6 million for the first quarter of 1997. The effective tax rates for 1998 and 1997 were different from the 35% statutory rate primarily due to various expenses that are permanently non-deductible for income tax purposes. The most significant of these expenses was goodwill amortization in fiscal 1997. Such tax benefits reflect management's estimates of the annual effective tax rates at the end of each quarter, and are subject to change throughout the year. Net Loss Net loss for the quarter ended February 28,1998, was $25.0 million compared to $8.1 million for the same period of 1997. The increase in net loss was primarily the result of decreased same-store sales and increased cost of goods sold. Loss per common share was $1.25. Excluding the special charge, net loss for the first quarter of 1998 would have been $20.8 million and loss per common share would have been $1.04. LIQUIDITY AND CAPITAL RESOURCES Cash used in operating activities was $39.0 million for the first quarter of 1998 compared to $31.5 million for the same period of 1997. The increase in cash used in operating activities was primarily caused by the increased net loss in 1998. The Company benefited from income tax refunds of $24.6 million received in the first quarter of 1998. During the first quarters of 1998 and 1997, the Company used cash of approximately $.4 million and $1.8 million, respectively, in operating activities related to the execution of the 1997, 1996 and 1995 restructuring plans and $8.8 million in the first quarter of 1998 for costs related to the Chapter 11 filing. In addition, the Company used $4.6 million in the first quarter of 1998 to 8 PAYLESS CASHWAYS, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS - Continued pay severance costs related to the elimination of staff at the Company's headquarters and regional administrative centers. Due to seasonally lower sales in the winter months, cash flow in the first quarter represents a small amount of annual operating cash flow. Borrowings are available under the Exit Financing Agreement to supplement cash generated by operations. At February 28, 1998, $33.0 million was available for borrowing under the Exit Financing Agreement. At February 28, 1998, working capital was $272.6 million compared to $258.4 million and $176.6 million at November 29, 1997 and March 1, 1997, respectively. The current ratios at February 28,1998, November 29, 1997, and March 1, 1997, were 2.58 to 1, 2.15 to 1, and 1.62 to 1, respectively. The Company's primary investing activities are capital expenditures for the renovation of existing stores and additional equipment. The Exit Financing Agreement governs the amount of capital expenditures that can be made ($59.6 million in 1998, $52.1 million in 1999, $41.2 million in 2000, $51.3 million in 2001 and $52.3 million in 2002). The Company spent approximately $3.8 million and $7.2 million during the first quarter of 1998 and 1997, respectively, for renovation of existing stores and additional equipment. In 1997 the Company's capital expenditures also included expenditures for strategic initiatives. The Company's Board of Directors is currently analyzing the Company's competitive positioning in the market and the related capital expenditures. Until such evaluation is complete, budgeted capital expenditures for 1998 will be limited to normal renovation of existing stores and routine equipment purchases, which will be financed with funds generated from operations and borrowings under the Exit Financing Agreement. During the first quarter of 1998, the Company sold twelve real estate properties related to stores previously closed for approximately $23.6 million of cash proceeds. Additionally, in the first quarter of 1998, the Company received $5.1 million from the surrender of certain life insurance policies related to a terminated benefit plan. The Company's most significant financing activity is and will continue to be the retirement of indebtedness. As a result of the Company's reorganization under Chapter 11, the indebtedness of the Company was reduced significantly in fiscal 1997. 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 Exit Financing Agreement should provide sufficient liquidity to meet all cash requirements for the next 12 months without additional financing. As a result of the Chapter 11 filing, trade creditors have significantly shortened credit terms. The Company believes that progress with regard to lengthening terms and reestablishing trade credit is continuing, but availability of trade credit cannot be assured. The Exit Financing Agreement contains a number of financial covenants with which the Company must comply. Management currently expects that it will achieve compliance with these covenants throughout fiscal 1998; however, factors beyond management's control, including competitive conditions, economic conditions, supplier support, lumber prices, and weather, could cause noncompliance. If compliance with these covenants is not achieved, the Company may be required to renegotiate its existing covenants with lenders or to refinance borrowings. Success in achieving any such renegotiations or refinancing, or the specific terms thereof, including interest rates, capital expenditure limits or borrowing capacity, cannot be assured. If the Company fails to achieve compliance with these covenants or, in the absence of such compliance, if the Company fails to amend such financial covenants on terms favorable to the Company, the Company may be in default under such covenants. If such default occurred, it would permit acceleration of its debt under the Exit Financing Agreement which, in turn, would permit acceleration of substantially all of the Company's other long-term debt. Statements above in the subsections entitled "Costs and Expenses," and in this subsection of this report such as "estimated", "believe", "expect" and similar expressions which are not historical are forward-looking statements that involve risks and uncertainties. Such statements include, without limitation, the Company's expectation as to future performance. Such forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. There are certain important factors that could cause results to differ materially from those anticipated by the forward-looking statements made above. Investors are cautioned that all forward-looking statements involve risks and uncertainty. Among the factors that could cause actual results to differ materially are the following: competitor activities; stability of customer demand; stability of the sales force; supplier support; consumer spending and debt levels; interest rates; housing activity; lumber prices; product mix; growth of certain market segments; an excess of retail space devoted to the sale of building materials; and the success of the Company's strategy. Additional information concerning these and other 9 PAYLESS CASHWAYS, INC. 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. 10 PAYLESS CASHWAYS, INC. REVIEW BY INDEPENDENT AUDITORS The condensed consolidated financial statements of Payless Cashways, Inc. for the thirteen week periods ended February 28, 1998, and March 1, 1997, have been reviewed by KPMG Peat Marwick LLP, independent auditors. Their report is included in this filing. PART II -- OTHER INFORMATION Item 1. Legal Proceedings. A group of terminated employees and others have filed a lawsuit against the Company and other named defendants in the United States District Court for the Southern District of Iowa. (See the full description of the lawsuit in Item 3-Legal Proceedings contained in the Company's Form 10-K for the year ended November 29, 1997.) The lawsuit was brought in connection with a reduction in force pursuant to a January 1994 restructuring. The suit has asserted a variety of claims including federal and state securities fraud claims, alleged violations of the Racketeer Influenced and Corrupt Organizations (RICO) Act, 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 Company filed a motion to dismiss the majority of the claims; and Rulings and an Order have been issued with respect thereto, substantially narrowing plaintiff's legal claims by dismissing some age discrimination counts, all federal securities fraud and RICO counts except one each, and all state law counts related to an alleged partnership. The plaintiff's motion for class certification has been denied on all claims except the age discrimination claims. The court has recently granted the plaintiff's motion for class certification of certain age discrimination claims. As a result of this ruling, approximately 20 additional individuals may choose to participate in the age claims asserted in this suit. Each of the parties has conducted discovery pursuant to the court's scheduling order and discovery plan. The lawsuit was formally stayed pursuant to the automatic stay issued by the Bankruptcy Court following the voluntary Chapter 11 reorganization filing on July 21, 1997. During the Chapter 11 reorganization, plaintiffs timely filed proofs of claim, including a purported claim on behalf of the potential Age Discrimination Employment Act opt-in class, for an aggregate of $37 million, which was reduced by the Bankruptcy Court to a reserve of $22 million. The case has been returned to the United States District Court for the Southern District of Iowa for resolution. Any recovery for the plaintiffs would be treated as a general unsecured claim entitling the plaintiffs to their pro rata share of 8,269,329 shares of New Common Stock reserved for such claims. The Company denies any and all claimed liability and is vigorously defending this litigation, but is unable to estimate a potential range of monetary exposure, if any, to the Company or to predict the likely outcome of this matter. Item 4. Submission of Matters to a Vote of Security Holders. None. Item 5. Other. Unsecured claims against the Company by vendors and suppliers for goods delivered and services rendered prior to July 21, 1997, claims in respect of the 9-1/8% senior subordinated notes, contingent unliquidated claims and claims for damage arising from the rejection by the Company pursuant to Section 365 of the Bankruptcy Code of executory contracts and unexpired leases (collectively, "General Unsecured Claims") will receive their pro rata share of 8,269,329 shares of New Common Stock or approximately 41% of the shares of the newly reorganized Company. Holders of General Unsecured Claims began receiving their first distribution of shares in partial satisfaction and discharge of their allowed claims on or about December 15, 1997. To date 5,866,312 shares of New Common Stock have been issued to holders of General Unsecured Claims whose claims have been allowed by the Bankruptcy Court. The remaining shares of New Common Stock are held for future distributions to holders of General Unsecured Claims, pending the final resolution of disputed claims. 11 PAYLESS CASHWAYS, INC. Item 6. Exhibits and Reports on Form 8-K. a. Exhibits. 4.0 Long-term debt instruments of Payless in amounts not exceeding ten percent (10%) of the total assets of Payless will be furnished to the Commission upon request. 10.1 Payless Cashways, Inc. 1998 Omnibus Incentive Plan effective January 15, 1998. 10.2 Settlement Agreement, Resignation, and Full General Release dated January 5, 1998, by and between Payless and David Stanley. 10.3 Settlement Agreement, Resignation, and Full General Release dated January 6, 1998, by and between Payless and Susan M. Stanton. 10.4 Settlement Agreement, Resignation, and Full General Release dated January 21, 1998, by and between Payless and Stephen A. Lightstone. 10.5 Settlement Agreement, Resignation, and Full General Release dated January 17, 1998, by and between Payless and G. Michael Buchen. 10.6 Settlement Agreement, Resignation, and Full General Release dated January 23, 1998, by and between Payless and E. J. Holland, Jr. 10.7 Form of Indemnification Agreement between Payless and various officers and directors. 15.1 Letter re unaudited financial information - KPMG Peat Marwick LLP. 27.1 Financial data schedule. b. Reports on Form 8-K. The Registrant has filed one report on Form 8-K during the quarter ended February 28, 1998. The report was dated December 2, 1997, and contained Item 5, Other Events, and Item 7, Financial Statements and Exhibits. No financial statements were filed with this report. 12 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PAYLESS CASHWAYS, INC. (Registrant) Date: April 7, 1998 By: s/Richard G. Luse --------------------------------------- Richard G. Luse, Senior Vice President- Finance and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) EX-10 2 OMNIBUS INCENTIVE PLAN 1 PAYLESS CASHWAYS, INC. 1998 OMNIBUS INCENTIVE PLAN Section 1. Purpose. The purposes of the 1998 Omnibus Incentive Plan of Payless Cashways, Inc. (the "Plan") are to give the Company and its Affiliates a competitive advantage in attracting, motivating and retaining Employees and Outside Directors and to more closely align the interests of the Employees with the Company's stockholders and to motivate Employees to enhance the value of the Company for the benefit of all stockholders. Section 2. Definitions. As used in the Plan, the following terms shall have the meanings set forth below: (1) "Affiliate" means (i) any Person that directly, or through one or more intermediaries, controls, or is controlled by, or is under common control with, the Company, (ii) any entity in which the Company has an equity interest of at least 50%, and (iii) any entity in which the Company has any other significant equity interest, as determined by the Committee. (2) "Award" means any Option, Limited Right, Performance Share, Performance Unit, Restricted Stock, Shares, Dividend Equivalent, or any other right, interest, or option relating to Shares granted pursuant to the provisions of the Plan. (3) "Award Agreement" means any written agreement or contract, setting forth the terms and conditions of any Award granted hereunder. (4) "Board" means the Board of Directors of the Company. (5) "Code" means the Internal Revenue Code of 1986, as amended from time to time, and any successor thereto. (6) "Committee" means the Compensation Committee of the Board, or such other committee designated by the Board, authorized to administer the Plan under Section 3 hereof. The Committee shall consist of not less than two directors, each of whom shall be a Non-Employee Person within the meaning of Rule 16b-3 and an outside director within the meaning of Code Section 162(m). (7) "Company" means Payless Cashways, Inc., a Delaware corporation. (8) "Disability" means permanent and total disability as determined under procedures established by the Committee for purposes of the Plan. 2 (9) "Dividend Equivalent" means any right granted pursuant to Section 11 hereof. (10) "Employee" means any employee (including officers) of the Company or any Affiliates regularly employed for more than 20 hours per week. (11) "Exchange Act" means the Securities Exchange Act of 1934, as amended, and any successors thereto, and the rules and regulations promulgated thereunder, all as shall be amended from time to time. (12) "Fair Market Value" means, with respect to any property, the market value of such property as determined by such methods or procedures as shall be established from time to time by the Committee. (13) "Incentive Stock Option" means an Option granted under Section 6 hereof that is intended to meet the requirements of Code Section 422 or any successor provision thereto. (14) "Limited Right" means any right granted to a Participant pursuant to Section 7 hereof. (15) "Non-Qualified Stock Option" means an Option granted under Section 6 hereof that is not intended to be an Incentive Stock Option, and an Option granted to an Outside Director pursuant to Section 10 hereof. (16) "Option" means an Incentive Stock Option or a Non-Qualified Stock Option. (17) "Outside Director" means a member of the Board who is not an Employee of the Company or an Affiliate. (18) "Participant" means an Employee or Outside Director who receives an Award under the Plan. (19) "Performance Award" means any Award of Performance Shares or Performance Units pursuant to Section 8 hereof. (20) "Performance Goals" means preestablished, objectively determinable performance goals, and a level or levels of performance with respect to each of the goals, adopted by the Committee prior to the grant of Restricted Stock or Performance Awards and that are based, in whole or in part, on one or more of the following performance-based criteria: (i) attainment during the Performance Period of a specified price per share of the Company's common stock; (ii) attainment during the Performance Period of a specified rate of growth or increase in the amount of growth in the price per share of the Company's common stock; (iii) attainment during the Performance Period of a specified level of the Company's earnings or earnings per share of the Company's common stock; (iv) attainment during the Performance Period of a specified rate 3 of growth or increase in the amount of growth of the Company's earnings or earnings per share of the Company's common stock; (v) attainment during the Performance Period of a specified level of the Company's cash flow or cash flow per share of the Company's common stock; (vi) attainment during the Performance Period of a specified rate of growth or increase in the amount of growth of the Company's cash flow or cash flow per share of the Company's common stock; (vii) attainment during the Performance Period of a specified level of the Company's return on equity; (viii) attainment during the Performance Period of a specified rate of growth or increase in the amount of growth of the Company's return on equity; (ix) attainment during the Performance Period of a specified level of the Company's return on assets or return on net assets. For purposes hereof, "earnings" may, but need not, be measured by reference to earnings before interest, taxes, depreciation and amortization. (21) "Performance Period" means that period established by the Committee at the time any Performance Award is granted or at any time thereafter during which any performance criteria, including any Performance Goal, if applicable, specified by the Committee with respect to such Award are to be measured. (22) "Performance Share" means any grant pursuant to Section 8 hereof of a unit valued by reference to a designated number of Shares. (23) "Performance Unit" means any grant pursuant to Section 8 hereof of (i) a bonus consisting of cash or other property, the amount or value of which, and/or the entitlement to which, is conditioned upon the attainment of any performance criteria, including any Performance Goals, if applicable, specified by the Committee, or (ii) a unit valued by reference to a designated amount of property other than Shares. (24) "Person" means any individual, corporation, limited liability company, partnership, association, joint-stock company, trust, unincorporated organization, or government or political subdivision thereof. (25) "Restricted Stock" means any Share issued pursuant to Section 9 hereof with the restriction that the holder may not sell, transfer, pledge, or assign such Share and with such other restrictions as the Committee, in its sole discretion, may impose (including, without limitation, any restriction on the right to vote such Share, and the right to receive any cash dividends), which restrictions may lapse separately or in combination upon such conditions and at such time or times, in installments or otherwise, as the Committee may deem appropriate, and which restriction shall provide that the Shares subject to such restriction shall be forfeited if the restriction does not lapse prior to such date or such event as the Committee may deem appropriate. (26) "Restricted Stock Award" means an award of Restricted Stock pursuant to Section 9 hereof. 4 (27) "Rule 16b-3" means Rule l6b-3 promulgated by the Securities and Exchange Commission under the Exchange Act, or any successor rule or regulation thereto. (28) "Shares" means shares of the Common Stock of the Company, par value $.01 per share. (29) "Termination of Employment" means the termination of the Participant's employment with the Company and any Affiliate. A Participant employed by an Affiliate shall also be deemed to incur a Termination of Employment if the Affiliate ceases to be an Affiliate and the Participant does not immediately thereafter become an employee of the Company or another Affiliate. Section 3. Administration. (1) Committee. The Plan shall be administered by the Committee. (2) Committee Authority. Subject to the terms of the Plan and applicable law, the Committee shall have full power and authority to: (i) designate Participants, (ii) determine the type or types of awards to be granted to each Participant hereunder, (iii) determine the number of Shares to be covered by or with respect to which payments, rights, or other matters are to be calculated in connection with each Award, (iv) determine the terms and conditions of any Award, (v) determine whether, to what extent, and under what circumstances Awards may be settled or exercised in cash, Shares, other securities, other Awards, or other property, or canceled, forfeited, or suspended, and the method or methods by which Awards may be settled, exercised, canceled, forfeited, or suspended, (vi) interpret and administer the Plan and any instrument or agreement relating to, or Award made under, the Plan, (vii) establish, amend, suspend or waive such rules and regulations and appoint such agents as it deems appropriate for the proper administration of the Plan, (viii) make any other determination and take any other action that the Committee deems necessary or desirable for administration of the Plan, and (ix) determine to what extent and under what circumstances Shares and other amounts payable with respect to an Award shall be deferred either automatically or at the election of the Participant or the Committee. (3) Replacement Awards. Subject to the terms of the Plan (including without limitation Section 13 hereof), the Committee shall also have the authority to grant Awards in replacement of Awards previously granted under this Plan or any other compensation plan of the Company or an Affiliate. (4) Delegation. The Committee, in its discretion, may delegate its authority and duties under the Plan to an officer of the Company under such conditions and/or limitations as the Committee may establish; provided, however, that only the Committee may select and grant Awards, or otherwise take any action with respect to Awards, to Participants who are (i) officers or directors of the Company for purposes of Section 16 of the Exchange Act, or (ii) Participants who are "covered employees" under Code Section 162(m). 5 (5) Decisions of Committee and Its Delegates. Unless otherwise expressly provided in the Plan, all determinations, designations, interpretations, and other decisions of the Committee, or (unless the Committee has specified an appeal process to the contrary) any other Person(s) to whom the Committee has delegated authority, shall be final, conclusive and binding upon all Persons, including the Company, any Participant, any stockholder, and any Employee. All determinations of the Committee shall be made by a majority of its members. The Committee and each member thereof shall be entitled to rely upon any report or other information furnished by any officer or employee of the Company or any Affiliate, or the Company's independent auditors, and shall be entitled to rely upon the advice of counsel, who may be counsel to the Company. Members of the Committee and any employee of the Company or an Affiliate acting at the direction or on behalf of the Committee shall not be personally liable for any action or determination taken or made in good faith with respect to the Plan upon such report, information or advice. Section 4. Shares Subject to the Plan. (1) Subject to adjustment as provided in Section 4(c) hereof, a total of Two Million Four Hundred Thousand (2,400,000) Shares shall be available for the grant of Awards under the Plan; provided, however, that not more than Four Hundred Eighty Thousand (480,000) of such shares shall be issued as Restricted Stock and that no more than Two Hundred Thousand (200,000) shares of Restricted Stock shall be issued in any one fiscal year. Any Shares issued hereunder may consist of authorized and unissued shares or treasury shares. If any Shares subject to any Award granted hereunder, or to which such an Award relates, are forfeited or such Award otherwise terminates without the issuance of such Shares or of other consideration in lieu of such Shares, the Shares subject to such Award, or to which such Award relates, to the extent of any such forfeiture or termination, shall again be available for grant under the Plan. In addition, to the extent permitted by Code Section 422, any Shares issued by, and any Awards granted by or that become obligations of, the Company through or as the result of the assumption of outstanding grants or the substitution of Shares under outstanding grants of an acquired company shall not reduce the Shares available for grants under the Plan. (2) For purposes of this Section 4, (1) If an Award (other than a Dividend Equivalent) is denominated in Shares, the number of Shares covered by such Award, or to which such Award relates, shall be counted on the date of grant of such Award against the aggregate number of Shares available for granting Awards under the Plan; (2) Dividend Equivalents and Awards not denominated in Shares shall be counted against the aggregate number of Shares available for granting Awards under the Plan in 6 such amount and at such time as the Committee shall determine under procedures adopted by the Committee consistent with the purposes of the Plan; and (3) Awards that operate in tandem with (whether granted simultaneously with or at a different time from), or that are substituted for, other Awards or awards under other Company plans may be counted or not counted under procedures adopted by the Committee in order to avoid double counting. (3) In the event that the Committee shall determine that any dividend or other distribution (whether in the form of cash, Shares, or other securities or property), stock split, reverse stock split, merger, reorganization, consolidation, recapitalization, split-up, spin-off, repurchase, exchange of shares, issuance of warrants or other rights to purchase Shares or other securities of the Company, or other transaction or event affects the Shares such that an adjustment is determined by the Committee to be appropriate in order to prevent dilution or enlargement of the benefits or potential benefits intended to be made available under the Plan, then the Committee may: (i) make adjustments in the aggregate number and class of shares or property which may be delivered under the Plan and may substitute other shares or property for delivery under the Plan, including shares of another entity which is a party to any such merger, reorganization, consolidation or exchange of shares; and (ii) make adjustments in the number, class and option price of shares or property subject to outstanding Awards and Options granted under the Plan, and may substitute other shares or property for delivery under outstanding Awards and Options, including shares of another entity which is a party to any such merger, reorganization, consolidation or exchange of shares, as may be determined to be appropriate by the Committee in its sole discretion, provided that the number of Shares subject to any Award or Option shall always be a whole number. The preceding sentence shall not limit the actions which may be taken by the Committee under Section 12 of the Plan. No adjustment shall be made with respect to Awards of Incentive Stock Options that would cause the Plan to violate Code Section 422. Section 5. Eligibility. Any Employee or Outside Director shall be eligible to be selected as a Participant. Notwithstanding any other provision of the Plan to the contrary, no Participant may be granted an Option, Limited Right, Performance Shares, Shares or Restricted Stock with respect to a number of Shares in any one calendar year which, when added to the Shares subject to any other Option, Limited Right, Performance Shares, Shares or Restricted Stock granted to such Participant in the same fiscal year, shall exceed One Million (1,000,000) Shares. If an Option, Limited Right, or Performance Share is canceled, the canceled Option, Limited Right or Performance Share continues to count against the maximum number of Shares for which an Option, Limited Right or Performance Share may be granted to a Participant in any fiscal year. All Shares specified in this Section 5 shall be adjusted to the extent necessary to reflect adjustments to Shares required by Section 4(c) hereof. No Participant may be granted Performance Units in any one fiscal year which when added to all other Performance Units granted to such Participant in the same fiscal year shall exceed 300% of the Participant's annual base salary as of the first day of 7 such fiscal year (or, if later, as of the date on which the Participant becomes an Employee); provided, however, that no more than $1,200,000 of annual base salary may be taken into account for purposes of determining the maximum amount of Performance Units which may be granted in any fiscal year to any Participant. Section 6. Stock Options. Options may be granted under this Section 6 to Participants, other than Outside Directors, either alone or in addition to other Awards granted under the Plan. Options may be Incentive Stock Options or Non-Qualified Stock Options, or a combination thereof. The Committee may condition the grant of any Incentive Stock Option upon approval of the Plan by the Company's stockholders. Any Option granted to a Participant under this Section 6 shall be evidenced by an Award Agreement in such form as the Committee may from time to time approve. Any such Option shall be subject to the following terms and conditions and to such additional terms and conditions, not inconsistent with the provisions of the Plan, as the Committee shall determine: (1) Option Price. The purchase price per Share purchasable under an Option shall be determined by the Committee but shall not be less than 100% of the Fair Market Value of the Share on the effective date of the grant of the Option (or, if the Committee so determines, in the case of any Option retroactively granted in tandem with or in substitution for another Award or any outstanding Award granted under any other plan of the Company, on the effective date of the grant of such other Award or award under another Company plan). (2) Option Term. The term of each Option shall be determined by the Committee, except as provided below for Incentive Stock Options. (3) Exercisability. Options shall be exercisable at such time or times as determined by the Committee at or subsequent to the granting of such either automatically or at the election of the Participant or the Committee, except as otherwise provided in Section 12(a); provided, however, that the Committee may condition the exercise of any Option upon approval of the Plan by the Company's stockholders. In addition, the Committee may at any time accelerate the time at which Options may be exercised and otherwise modify the time of exercise of the Options. (4) Method of Exercise. Subject to the other provisions of the Plan and any applicable Award Agreement, the Participant may make payment of the option price in such form or forms as the Committee shall determine, including, payment by delivery of cash, Shares, Restricted Stock, or other consideration (including, where permitted by law and the Committee, Awards) having a Fair Market Value on the exercise date equal to the total option price, or by any combination of cash, Shares, Restricted Stock and other consideration as the Committee may specify in the applicable Award Agreement; provided, however, that if Restricted Stock is surrendered to pay the option price, an equal number of Shares issued as a result of the option exercise shall be subject to the same restrictions. The Committee may also specify in the applicable Award Agreement the methods by which the exercise price may be paid or deemed to 8 be paid and the methods by or forms in which Shares will be delivered or deemed to be delivered to Participants. (5) Incentive Stock Options. The terms of any Incentive Stock Option granted hereunder shall comply in all respects with the provisions of Code Section 422, or any successor provision, and any regulations promulgated thereunder. In accordance with rules and procedures established by the Committee, the aggregate Fair Market Value (determined as of the time of grant) of the Shares with respect to which Incentive Stock Options held by any Participant are exercisable for the first time by such Participant during any calendar year under the Plan (and under any other benefit plans of the Company or of any parent or subsidiary corporation of the Company as defined in Code Section 424), shall not exceed One Hundred Thousand Dollars ($100,000) or, if different, the maximum limitation in effect at the time of grant under Code Section 422, or any successor provision. and any regulations promulgated thereunder. The option price per Share purchasable under an Incentive Stock Option shall not be less than 100% of the Fair Market Value of the Share on the date of grant of the Option. Each Incentive Stock Option shall expire not later than 10 years from its date of grant. No Incentive Stock Option shall be granted to any Participant if at the time the Option is granted such Participant owns stock possessing more than 10% of the total combined voting power of all classes of stock of the Company, its parent or its subsidiaries unless (i) the option price per Share is at least 110% of the Fair Market Value of the Share on the date of grant, and (ii) such Option by its terms is not exercisable after the expiration of five years from the date such Option is granted. (6) Form of Settlement. In its sole discretion, the Committee may provide at the time of grant that the Shares to be issued upon an Option's exercise shall be in the form of Shares subject to restrictions as the Committee may determine, or other similar securities, or may reserve the right to so provide after the time of grant. (7) Reload Options. If and to the extent the Committee expressly provides, at the time of grant or later, that the Participant shall have the right to receive Reload Options (as defined below) with respect to Non-Qualified Stock Options, the Participant shall receive Reload Options in accordance with and subject to the following terms and conditions: (1) Grant of the Reload Option; Number of Shares; Price. Subject to paragraph (ii) of this subsection and, except as provided in paragraph (viii) hereof, to the availability of Shares to be optioned to the Participant under the Plan (including the limitations set forth in Section 5 hereof), if a Participant has an Option (the "Original Option") with reload rights and pays for the exercise of the Original Option by surrendering Shares or Restricted Stock (whether by means of delivering Shares or Restricted Stock previously held by the optionee or by delivering Shares or Restricted Stock simultaneously acquired on exercise of the Original Option), the Participant shall receive a new option ("Reload Option") for the number of Shares or Restricted Shares so surrendered at an option price per Share equal to the Fair Market Value of a Share on the date of the exercise of the Original Option. 9 (2) Conditions to Grant of Reload Option. A Reload Option will not be granted if (A) the Fair Market Value of a Share on the date of exercise of the Original Option is less than the exercise price of the Original Option, or (B) the Participant is no longer an Employee of the Company or of an Affiliate. (3) Term of Reload Option. The Reload Option shall expire on the same date as the Original Option, or at such later date as the Committee may provide. (4) Type of Option. The Reload Option shall be a Non-Qualified Stock Option. (5) Additional Reload Options. Except as expressly provided by the Committee (at the time of the grant of the Original Option or later), Reload Options shall not include any right to subsequent Reload Options. (6) Date of Grant; Vesting. The date of grant of the Reload Option shall be the date of the exercise of the Original Option. Reload Options shall be exercisable in full beginning from the date of grant, except as otherwise provided by the Committee. (7) Stock Withholding Grants of Reload Options. If and to the extent expressly permitted by the Committee, if the other requirements of this subsection are satisfied, and if Shares are withheld or Shares surrendered for tax withholding pursuant to Section 16(f) hereof, a Reload Option will be granted for the number of Shares surrendered as payment for the exercise of the Original Option plus the number of Shares surrendered or withheld to satisfy tax withholding. (8) Share Limits. Reload Options granted with respect to Original Options paid for by delivery of Shares or Restricted Stock simultaneously acquired on exercise of the Original Option shall be counted or not counted against or as a reduction from the number of shares available for grant under Section 4 hereof under procedures adopted by the Committee in order to prevent dilution or enlargement of the benefits or potential benefits intended to be made available under the Plan. (9) Other Terms and Conditions. In connection with Reload Options for officers who are subject to Section 16 of the Exchange Act, the Committee may at any time impose any limitations which, in the Committee's sole discretion, are necessary or desirable in order to comply with Section 16(b) of the Exchange Act and the rules and regulations thereunder, or in order to obtain any exemption therefrom. Section 7. Limited Rights. Limited Rights may be granted to Participants only with respect to an Option granted under Section 6 hereof or a stock option granted under another plan of the Company. Any Limited Right shall be subject to the following terms and conditions and to such additional terms 10 and conditions, not inconsistent with the Plan, as the Committee shall determine. Any Limited Right related to a Non-Qualified Stock Option may be granted at the same time such Option is granted or at any time thereafter before exercise or expiration of such Option. Any Limited Right related to an Incentive Stock Option must be granted at the same time such Option is granted. A Limited Right shall terminate and no longer be exercisable upon termination or exercise of the related Option, except that a Limited Right granted with respect to less than the full number of Shares covered by a related Option shall not be reduced until the exercise or termination of the related Option exceeds the number of Shares not covered by the Limited Right. Any Option related to any Limited Right shall no longer be exercisable to the extent the related Limited Right has been exercised. Any Limited Right shall be exercisable to the extent, and only to the extent, the related Option is exercisable and only during the ninety (90) day period immediately following a Change in Control of the Company (as defined in Section 12 hereof). The Committee may impose such other conditions or restrictions on the exercise of any Limited Right as it deems appropriate. Subject to the terms of the Plan and any applicable Award Agreement, a Limited Right granted under the Plan shall confer on the holder thereof a right to receive, upon exercise thereof, an amount equal to the excess of (i) the Fair Market Value of one Share on the date of exercise or if greater and only with respect to any Limited Right related to a Non-Qualified Stock Option, the highest price per Share paid in connection with any Change in Control of the Company, over (ii) the option price of the related Option, multiplied by the number of Shares as to which the holder is exercising the Limited Right. The amount payable to the holder shall be paid by the Company in cash. Section 8. Performance Awards. (1) Administration. Performance Awards may be granted to Participants other than Outside Directors in the form of Performance Shares or Performance Units, either alone or in addition to other Awards granted under the Plan. Performance Shares or Performance Units shall be payable to, or be exercisable by, the Participant holding such Award, in whole or in part, following achievement of one or more performance criteria during such Performance Period as determined by the Committee. Except as provided in Section 12, Performance Awards will be paid only after the end of the relevant Performance Period. Performance Awards may be paid in cash, Shares, Restricted Stock, Options, other property or any combination thereof, in the sole discretion of the Committee at the time of payment. Performance Awards may be paid in a lump sum or in installments following the close of the Performance Period or, in accordance with subsection (c) hereof, on a deferred basis. Notwithstanding the foregoing, an Award Agreement may condition the vesting or exercise of a Performance Award on any combination of the achievement of one or more performance criteria and/or the completion of a specified period of service as the Committee shall determine at the time of grant. If the Committee determines that a Performance Award should qualify as "performance-based compensation" within the meaning of Code Section 162(m), when making such Performance Award, the Committee shall adopt Performance Goals, certify completion of such goals and comply with any other requirements necessary to be in compliance with the performance-based compensation requirements of Code 11 Section 162(m). The Committee may make the payment of any Performance Award granted prior to approval of the Plan by the Company's stockholders contingent upon such approval. (2) Performance Period and Criteria. The length of the Performance Period, the performance criteria levels to be achieved for each Performance Period, and the amount of the Award to be distributed shall be conclusively determined by the Committee. (3) Deferral of Awards. At the discretion of the Committee, payment of a Performance Award or any portion thereof may be deferred by a Participant until such time as the Committee may establish. All such deferrals shall be accomplished by the delivery on a form provided by the Company of a written, irrevocable election by the Participant prior to such time payment would otherwise be made. Further, all deferrals shall be made in accordance with administrative guidelines established by the Committee to ensure that such deferrals comply with all applicable requirements of the Code and its regulations. Deferred payments shall be paid in a lump sum or installments, as determined by the Committee. The Committee may also credit interest, at such rates to be determined by the Committee, on cash payments that are deferred and credit Dividend Equivalents on deferred payments denominated in the form of Shares. Section 9. Restricted Stock. (1) Administration. Restricted Stock Awards may be granted to Participants other than Outside Directors, either alone or in addition to other Awards granted under the Plan. The granting of Restricted Stock shall take place on the date the Committee decides to grant the Restricted Stock, or if the Restricted Stock Award provides that the grant of Restricted Stock is conditioned upon the achievement of performance criteria specified in the Restricted Stock Award, on a date established by the Committee following the achievement of such measures of performance. A Restricted Stock Award may condition the grant of Restricted Stock and/or the lapse of any restriction or restrictions on Restricted Stock on any combination of the achievement of one or more performance criteria and/or the completion of a specified period of service as the Committee shall determine at the time the Restricted Stock Award is made. If the Committee determines that a Restricted Stock Award should qualify as "performance-based compensation" within the meaning of Code Section 162(m), when making Restricted Stock Awards, the Committee shall adopt Performance Goals, certify completion of such goals and comply with any other requirements necessary to be in compliance with the performance-based compensation requirements of Code Section 162(m). The Committee may make the grant of any Restricted Stock Award granted prior to approval of the Plan by the Company's stockholders contingent upon such approval. (2) Registration. Any Restricted Stock issued hereunder may be evidenced in such manner as the Committee in its sole discretion deems appropriate, including, without limitation, book-entry registration or issuance of a stock certificate or certificates. In the event any stock 12 certificate is issued in respect of shares of Restricted Stock awarded under the Plan, such certificate shall be registered in the name of the Participant, shall be held in escrow by the Company, and shall bear an appropriate legend referring to the terms, conditions and restrictions applicable to such Award, substantially in the following form: "The transferability of this certificate and shares represented hereby are restricted pursuant to the terms and conditions (including forfeiture) of the 1998 Omnibus Incentive Plan of Payless Cashways, Inc. and a Restricted Stock Agreement. Copies of such Plan and Agreement are on file at the corporate headquarters of Payless Cashways, Inc." (3) Transfer Restrictions. Subject to the provisions of the Plan and the Award Agreement, during the period, if any, set by the Committee, commencing with the date of such Award for which such Participant's continued service is required (the "Restriction Period"), and until the later of (i) the expiration of the Restriction Period or (ii) the date the performance criteria (if any) including Performance Goals if applicable are satisfied, the Participant shall not be permitted to sell, assign, transfer, pledge or otherwise encumber shares of Restricted Stock. Within these limits, the Committee may provide for the lapse of restrictions based upon period of service in installments or otherwise and may accelerate or waive, in whole or in part, restrictions based upon period of service or upon performance; provided, however, that any applicable performance criteria, including any Performance Goals if applicable, have been satisfied. (4) Rights of Restricted Stockholder. Except as otherwise provided in this Section 9 and the Award Agreement, the Participant shall have, with respect to the shares of Restricted Stock, all of the rights of a stockholder of the Company holding Shares, including the right to vote the shares and the right to receive any dividends or other distributions. If so determined by the Committee in the applicable Award Agreement, (i) cash dividends on shares of Restricted Stock shall be automatically deferred and reinvested in additional Restricted Stock, held subject to the vesting of the underlying Restricted Stock, or held subject to meeting performance criteria, including Performance Goals if applicable, and (ii) dividends payable in Shares shall be paid in the form of Restricted Stock, held subject to the vesting of the underlying Restricted Stock, or held subject to meeting performance criteria, including Performance Goals if applicable. (5) Lapse of Restrictions. As soon as practicable following the lapse of the restrictions on Restricted Stock, unrestricted Shares, evidenced in such manner as the Committee deems appropriate, shall be issued to the grantee. (6) Forfeiture. Except as otherwise determined by the Committee at the time of grant, upon Termination of Employment for any reason before the restriction lapses, all shares of Restricted Stock still subject to restriction shall be forfeited by the Participant (who shall sign any document and take any other action required to assign such shares back to the Company) and reacquired without further consideration by the Company. 13 Section 10. Outside Directors' Options. (1) Grant of Options. The Committee may grant Options under this Section 10 to Outside Directors, including members of the Committee. All such Options shall be Non-Qualified Stock Options. Any Option granted to an Outside Director shall be evidenced by an Award Agreement in such form as the Committee may from time to time approve. The price at which each Share covered by such Options may be purchased shall be 100% of the Fair Market Value of a Share on the date the Option is granted. (2) Exercise of Options. Except as set forth in this Section 10, Options shall be exercisable at such time or times as determined by the Committee at or subsequent to the granting of such either automatically or at the election of the Outside Director or the Committee. In addition, the Committee may at any time accelerate the times at which Options may be exercised and otherwise modify the time of exercise of the Options. However, no Option shall be exercisable more than 10 years after the date of grant. Options may be exercised by an Outside Director: (i) during the period that the Outside Director remains a member of the Board; (ii) for a period of one year after ceasing to be a member of the Board by reason of death or retirement (as defined below) from the Board; or (v) for a period of 90 days after ceasing to be a member of the Board for reasons other than retirement, death or disability, however, only those Options exercisable at the date the Outside Director ceases to be a member of the Board shall remain exercisable. For purposes of this Section 10, "retire" or "retirement" shall mean discontinuance of service as a director after the director has reached age 60 and has at least five years or more of service on the Board. All Options shall immediately become exercisable in the event of a Change in Control, as hereinafter defined, except that Options shall not be exercisable earlier than six months from the date of grant to the extent required for exemption under Section 16 of the Exchange Act. In the event of the death of an Outside Director or former Outside Director, his Options shall be exercisable only to the extent that they were exercisable at his date of death and only by the executor or administrator of the Outside Director's estate, by the person or persons to whom the Outside Director's rights under the Option shall pass under the Outside Director's will or the laws of descent and distribution, or by a beneficiary designated in writing in accordance with Section 16(a) hereof. (3) Payment. An Option granted to an Outside Director shall be exercisable only upon payment to the Company of the full purchase price of the Shares with respect to which the Option is being exercised. Payment for the Shares shall be in United States dollars, payable in cash or by check or by delivery of Shares having a Fair Market Value on the exercise date equal to the total option price, or by any combination of cash and Shares. (4) Adjustment of Options. In the event there shall be a merger, reorganization, consolidation, recapitalization, stock dividend or other change in corporate structure such that the 14 Shares of the Company are changed into or become exchangeable for a larger or smaller number of Shares, thereafter the number of Shares subject to outstanding Options and the number of Shares subject to Options to be granted to Outside Directors pursuant to the provisions of this Section 10 shall be increased or decreased, as the case may be, in direct proportion to the increase or decrease in the number of Shares of the Company by reason of such change in corporate structure; provided, that the number of Shares shall always be a whole number, and the purchase price per share of any outstanding Options shall, in the case of an increase in the number of Shares, be proportionately reduced, and in the case of a decrease in the number of Shares, shall be proportionately increased. Section 11. Dividend Equivalents. Subject to the provisions of this Plan and any Award Agreement, the recipient of an Award (including, without limitations any deferred Award), may, if so determined by the Committee, be entitled to receive, currently or on a deferred basis, interest or dividends, or interest or dividend equivalents, with respect to the number of Shares covered by the Award, as determined by the Committee, in its sole discretion, and the Committee may provide that such amounts (if any) shall be deemed to have been reinvested in additional Shares or otherwise reinvested. Section 12. Change in Control. (1) In the event of any Change in Control of the Company, as hereinafter defined, the Committee, as constituted before such Change in Control, may, in its sole discretion, as to any Award either at the time an Award is made hereunder or any time thereafter, take any one or more of the following actions: (i) provide for the purchase by the Company of any such Award, upon the Participant's request, for an amount of cash equal to the amount that could have been attained upon the exercise of such Award or realization of the Participant's rights had such Award been currently exercisable or payable; (ii) make such adjustment to any such Award then outstanding as the Committee deems appropriate to reflect such Change in Control; or (iii) cause any such Award then outstanding to be assumed, or new rights substituted therefor, by the acquiring or surviving corporation after such Change in Control. In the event of a Change of Control, there shall be an automatic acceleration of any time periods relating to the exercise or realization of any such Award and all performance award standards shall be deemed satisfactorily completed without any action required by the Committee so that such Award may be exercised or realized in full on or before a date fixed by the Committee, except no Award shall be exercisable earlier than six months after the date of grant to the extent required for exemption under Section 16 of the Exchange Act. The Committee may, in its discretion, include such further provisions and limitations in any agreement documenting such Awards as it may deem equitable and in the best interests of the Company. For purposes of this Plan, a "Change in Control" shall be deemed to have occurred if: 15 (i) any person (as defined in Sections 13(d) and 14(d)(2) of the Exchange Act) becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), without the prior approval of the Incumbent Members (as defined below), 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; (ii) the occurrence within any twelve-month period of a change in the Board of Directors of the Company with the result that the Incumbent Members (as defined below) do not constitute a majority of the Company's Board of Directors. The term "Incumbent Members" shall mean the members of the Board on the date immediately preceding the commencement of such 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 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; or (iii) the stockholders of the Company shall have approved a merger, consolidation or dissolution of the Company or a sale, lease, exchange or disposition of all or substantially all of the Company's assets, unless such merger, consolidation, dissolution, sale, lease, exchange or disposition shall have been approved by a majority of the Incumbent Members. Section 13. Amendments. (1) The Plan. The Board may amend, suspend or terminate the Plan, but no amendment, suspension or termination shall, without the consent of the Participant, alter or impair the rights of the Participant under any award theretofore granted. In addition, no amendment shall be effective without the approval of stockholders if required by Section 16 of the Exchange Act or Code Section 162(m) or Section 422 as the case may be. (2) Awards. The Committee may amend the terms of any Award theretofore granted, prospectively or retroactively, and may also substitute new Awards for Awards previously granted under this Plan or for awards granted under any other compensation plan of the Company or an Affiliate to Participants, including without limitation previously granted Options having higher option prices, but no such amendment or substitution shall impair the rights of any Participant without his or her consent. Except as may provided in an Award Agreement, the Committee may, in its sole discretion, in whole or in part, waive any restrictions or conditions applicable to, or accelerate the vesting of, any Award. (3) Performance Award Criteria. The Committee shall be authorized, without the Participant's consent, to make adjustments in Performance Award criteria or in the terms and 16 conditions of other Awards in recognition of events that it deems in its sole discretion to be unusual or nonrecurring that affect the Company or any Affiliate or the financial statements of the Company or any Affiliate, or in recognition of changes in applicable laws, regulations or accounting principles, whenever the Committee determines that such adjustments are appropriate in order to prevent the dilution or enlargement of benefits or potential benefits under the Plan. (4) Curative Amendments. The Committee may correct any defect, supply any omission or reconcile any inconsistency in the Plan or any Award in the manner and to the extent it deems desirable to carry it into effect. In the event the Company shall assume outstanding employee benefit awards or the right or obligation to make future such awards in connection with the acquisition of another corporation or business entity, the Committee may, in its discretion, make such adjustments in the terms of awards under the Plan as it deems appropriate. Section 14. Termination of Employment and Non-Competition. The Committee shall have full power and authority to determine whether, to what extent and under what circumstances any Award shall be canceled or suspended and shall promulgate rules and regulations to determine (a) what events constitute disability, retirement, termination for an approved reason and termination for cause for purposes of the Plan and (b) the treatment of a Participant under the Plan in the event of his death, disability, retirement, or termination for an approved reason. In addition, but without limitation, all outstanding Awards to any Participant shall be canceled or forfeited if the Participant, without the consent of the Committee, while employed by the Company or after termination of such employment, becomes associated with, employed by, renders services to, or owns any interest in (other than any non-substantial interest, as determined by the Committee), any business that is in competition with the Company or any Affiliate, or with any business in which the Company or any Affiliate has a substantial interest as determined by the Committee or such officers or committee of senior officers to whom the authority to make such determination is delegated by the Committee. Section 15. Termination of Awards under Certain Circumstances. Unless the Participant's Award Agreement provides otherwise, all unexercised, unearned, and/or unpaid Awards, including, but not by way of limitation, Awards earned, but not yet paid, all unpaid dividends and Dividend Equivalents, and all interest accrued on the foregoing shall be canceled or forfeited, as the case may be, if (a) the Participant's employment with the Company or an Affiliate is terminated for cause, (b) the Participant is not in compliance with all applicable provisions of this Plan or with any Award Agreement, or (c) the Participant, whether or not employed or serving as a director, acts or otherwise conducts himself in a manner inimical or contrary to the best interest of the Company or any Affiliate. 17 Section 16. General Provisions. (1) Non-Assignability. No Award may be pledged or otherwise encumbered or subject to any lien, obligation or liability of a Participant (other than to the Company or an Affiliate), or, except for Non-Qualified Stock Options as provided below, assigned or transferred by such Participant other than by will or the laws or descent and distribution and shall be exercisable during the lifetime of the Participant, only by the Participant or, if permissible under applicable law, by the guardian or legal representative of the Participant, provided, however, that the Participant may, pursuant to a written designation of beneficiary filed with and approved by the Committee prior to his death, designate a beneficiary to exercise the rights of the Participant with respect to any Award upon the death of the Participant. Any Award of Non-Qualified Stock Options may be transferred during the lifetime of the Participant, and may be exercised by the transferee in accordance with the terms of the Award, but only if and to the extent such transfers are permitted by the Committee pursuant to the express terms of an Award Agreement and subject to any terms and conditions which the Committee may impose on such transfers. (2) Terms. The term of each Award shall be for such period of months or years from the date of its grant as may be determined by the Committee; provided, however, that in no event shall the term of any Incentive Stock Option or Limited Right related to any Incentive Stock Option exceed a period of 10 years from the date of its grant. (3) Rights to Awards. No Employee, Participant, or other Person shall have any claim to be granted any Award, and there is no obligation for uniformity of treatment of Employees, Participants, or holders or beneficiaries of Awards. (4) No Cash Consideration for Awards. Awards shall be granted for no cash consideration or for such minimal cash consideration as may be required by applicable law. (5) Restrictions. All certificates for Shares delivered under the Plan pursuant to any Award shall be subject to such stock-transfer orders and other restrictions as the Committee may deem advisable under the rules, regulations, and other requirements of the Securities and Exchange Commission, any stock exchange or stock quotation system upon which the Shares are then listed, and any applicable Federal or state securities law, and the Committee may cause a legend or legends to be placed on any such certificates to make appropriate reference to such restrictions. 18 (6) Withholding. The Company shall be authorized to withhold from any Award granted, payment due or Shares or other property transferred under the Plan or from any compensation or other amount owing to a Participant the amount of any applicable withholding and other taxes due and payable in respect of an Award, payment or shares or other property transferred hereunder and to take such other action as may be necessary in the opinion of the Company to satisfy all obligations for the payment of such taxes. The Company may require the Participant to pay to it such tax prior to and as a condition of the making of such payment or transfer of Shares or property under the Plan. The Committee may allow a Participant to pay the amount of taxes due or payable in respect of an Award by withholding from any payment of Shares due as a result of such Award, or by permitting the Participant to deliver to the Company, Shares having a fair market value, as determined by the Committee, equal to the amount of such taxes. (7) No Limit on Other Compensation Arrangements. Nothing contained in this Plan shall prevent the Company or any Affiliate from adopting other or additional compensation arrangements. (8) Governing Law. The validity, construction, and effect of the Plan and any rules and regulations relating to the Plan shall be determined in accordance with the laws of the State of Delaware and applicable Federal law. (9) Severability. If any provision of this Plan or any Award is or becomes or is deemed to be invalid, illegal or unenforceable in any jurisdiction, as to any Person or Award, or would disqualify the Plan or any Award under any law deemed applicable by the Committee, such provision shall be construed or deemed amended to conform to applicable laws, or if it cannot be construed or deemed amended without, in the determination of the Committee, materially altering the intent of the Plan or the Award, such provision shall be stricken and the remainder of the Plan and any such Award shall remain in full force and effect. (10) No Right to Employment. The grant of an Award shall not be construed as giving a Participant the right to be retained in the employ of the Company or any Affiliate. Further, the Company or an Affiliate may at any time terminate the employment of a Participant, free from any liability, or any claim under the Plan, unless otherwise expressly provided in the Plan or in any Award Agreement. (11) Unfunded Status of Awards; Creation of Trusts. The Plan is intended to constitute an "unfunded" plan for incentive and deferred compensation. To the extent than any person acquires a right to receive payments from the Company or any Affiliate pursuant to an Award, such right shall be no greater than the right of any unsecured general creditor of the Company or any Affiliate; provided, however, that the Committee may authorize the creation of trusts and deposit therein cash, Shares or other property, or make other arrangements to meet the Company's obligations under the Plan, and provided that such trusts or other arrangements are consistent with the "unfunded" status of the Plan. 19 (12) No Fractional Shares. No fractional Shares shall be issued or delivered pursuant to the Plan or any Award, and the Committee shall determine whether cash, other securities, or other property shall be paid or transferred in lieu of any fractional Shares, or whether such fractional Shares or any rights thereto shall be canceled, terminated, or otherwise eliminated. (13) Headings. Headings are given to the Sections and subsections of the Plan solely as a convenience to facilitate reference. Such headings shall not be deemed in any way material or relevant to the construction or interpretation of the Plan or any provision thereof. (14) Rule 16b-3 Compliance. With respect to persons subject to Section 16 of the Exchange Act, transactions under this Plan are intended to comply with all applicable conditions of Rule 16b-3. To the extent any provision of this Plan or action by the Committee was not to so comply, the Committee may deem, for such persons, such provision or action null and void to the extent permitted by law. Section 17. Effective Date of Plan. The Plan shall be effective as of January 15, 1998. Section 18. Term of Plan. No Award shall be granted pursuant to the Plan after January 15, 2008 but any Award theretofore granted may extend beyond that date. EX-10 3 STANLEY AGREEMENT 1 SETTLEMENT AGREEMENT, RESIGNATION, AND FULL GENERAL RELEASE This Settlement Agreement, Resignation, and Release ("Agreement") is made and entered into on January 5, 1998 by and between PAYLESS CASHWAYS, INC. ("PAYLESS") and DAVID STANLEY ("STANLEY"). WHEREAS, STANLEY was employed by PAYLESS on April 10, 1980, and is entitled to the benefits of an Employment Agreement dated as of June 16, 1995, as amended on August 20, 1997 (the "Employment Agreement"), and WHEREAS, PAYLESS and STANLEY mutually wish to terminate the employment status of STANLEY, and STANLEY'S employment with PAYLESS shall end on January 13, 1998; and WHEREAS, PAYLESS AND STANLEY have agreed that STANLEY shall retire as Chief Executive Officer and resign as a Director, but that for purposes of his severance benefits STANLEY'S termination shall be regarded as a termination of his employment without cause by PAYLESS; NOW THEREFORE, in consideration of the mutual promises, agreements and releases contained in this Agreement, the parties agree as follows: 1. PAYLESS' AGREEMENTS 1. EFFECTIVE DATE. PAYLESS acknowledges that the effective date of this Agreement shall be January 13, 1998 (the "Effective Date") and that STANLEY will not be required to perform services for PAYLESS after the Effective Date. 2. SEVERANCE BENEFITS PAYLESS agrees to provide STANLEY the severance benefits set forth below. 1. Lump Sum Payment. (1) PAYLESS agrees to pay STANLEY on the Effective Date a lump sum payment (less applicable payroll deductions) in the amount set forth on Schedule I hereto. As set forth in Schedule I, such lump sum payment consists of (A) the amount that STANLEY would have received as base salary from the Effective Date through March 1, 1999 (the "Severance Period") (based on his base salary in effect on January 5, 1998), (B) the remaining 2 amount due STANLEY under the PAYLESS Reorganization Retention Plan, and (C) an amount for unused earned vacation days through the Effective Date. In addition, PAYLESS shall pay STANLEY on the Effective Date or as promptly thereafter as is practicable an amount equal to any previously unreimbursed business expenses. (2) PAYLESS also agrees to pay, in lieu of contributions to the Payless Cashways, Inc. Employee Savings Plan which would otherwise have been made on STANLEY's behalf during the Severance Period, and in partial consideration for the Release of Liability contained herein in Paragraph B.2, an additional lump sum payment (less applicable payroll deductions) of $20,000 (Twenty Thousand Dollars). 2. Continuation of Benefits. PAYLESS agrees that during the Severance Period it will provide STANLEY with health, life and dental benefits and other benefits substantially equivalent to those that STANLEY was receiving or entitled to receive under the Employment Agreement on January 5, 1998. Such benefits are described in Schedule II and shall be provided during the Severance Period (or, if longer, the period during which such benefits would have been provided at PAYLESS' expense under applicable plans of PAYLESS in effect on January 5, 1998). Except as may be indicated in Schedule II, such benefits shall be provided at the same coverage levels that were in effect on January 5, 1998, and such benefits shall be provided at PAYLESS' expense, subject to the same cost sharing provisions, if any, as existed on such date. After the Severance Period, STANLEY shall be eligible for COBRA continuation coverage of health, life, dental and disability benefits for a period of 18 months or such period as may then be provided by law. Notwithstanding the foregoing, STANLEY shall not be entitled to receive such benefits to the extent that STANLEY obtains other employment that provides comparable benefits during the twelve months following termination of employment, provided, however, that STANLEY is under no obligation to seek other employment during such period. 3. Retirement Benefits. PAYLESS agrees that for purposes of determining the benefits payable to STANLEY under the Payless Cashways, Inc. Amended Retirement Plan (the "Pension Plan") and STANLEY's eligibility therefor, STANLEY's date of separation from PAYLESS shall be deemed to be March 1, 1999, his age shall be deemed to be his age on such date and the amount allocable to base pay included in the lump sum payment in paragraph A.2.a(i) shall be included in determining career average pay. If the terms of the Pension Plan do not permit the forgoing, then on the Effective Date PAYLESS shall pay STANLEY an amount equal to the present value of the additional retirement benefits that would have accrued had he continued to perform services for PAYLESS through the Severance Period at the same rate of compensation as was in effect on January 5, 1998. The present value payable hereunder shall be calculated using the GATT rate currently in effect under the Pension Plan. 4. Car Allowance. PAYLESS also agrees to a lump sum payment (less applicable payroll deductions) of $8,400 in lieu of car allowance to be paid on the Effective Date. 3. DEATH OF STANLEY 3 The death of STANLEY prior to the expiration of this Agreement will not void this Agreement, but the terms thereof will survive his death. In the event that STANLEY dies prior to receipt of all sums set forth in section A.2. above, then any and all such remaining sums not yet received by STANLEY otherwise due under this Agreement shall become due and payable to the beneficiaries hereinafter listed: Principal Beneficiary: Trust under agreement dated March 6, 1995, between David Stanley, as Donor, and David Stanley and Jean B. Keffeler, as Trustees.. 4. STOCK INCENTIVE The parties acknowledge that STANLEY has no vested stock incentives. 5. TELEPHONE, E-MAIL AND COMPUTER ACCESS For a period of three months after the Effective Date STANLEY will be provided telephone answering and e-mail services and remote access to the Company's Microsoft Outlook and Quicken programs. 6. INDEMNIFICATION Set forth as Schedules III through V hereto are provisions of PAYLESS Certificate of Incorporation and Bylaws relating to Indemnification of directors and officers and an Indemnification Agreement dated November 26, 1997, between PAYLESS and STANLEY(collectively "Indemnification Provisions"). Such Indemnification Provisions are incorporated by this reference and made a part of this Agreement in their entirety. PAYLESS acknowledges and agrees that STANLEY and his estate are entitled to the benefit of such Indemnification Provisions notwithstanding his termination of service and that such provisions apply to his service as a director and officer of PAYLESS and any of its predecessors. PAYLESS further acknowledges that the Indemnification Provisions obligate PAYLESS, among other matters, to indemnify STANLEY against any and all expenses (including costs and attorneys' fees) which be might incur as a witness or party with respect to that certain matter pending in the United States District Court for the Southern District of Iowa captioned PAYLESS Cashways, Inc. Partners [et. al.] v. PAYLESS Cashways, Inc. [et. al.]. PAYLESS agrees to honor such obligations with respect to such proceeding or any other proceeding to which STANLEY may become a party or witness by reason of the fact that he served as a director or officer of PAYLESS, except as may be provided in the Indemnification Provisions. PAYLESS further agrees that as to STANLEY, any amendments or changes to the Indemnification Provisions or the insurance coverages described in paragraph A.7 below will not adversely affect STANLEY without STANLEY's written consent, and that breach by STANLEY of any provision of this AGREEMENT will not constitute grounds by PAYLESS to change such coverages or to terminate its obligations under this Agreement or otherwise with respect to the Indemnification Provisions. PAYLESS and STANLEY agree that said Indemnification Agreement is hereby amended to delete section 9.6 thereof in its entirety. 7. LIABILITY INSURANCE 4 PAYLESS currently maintains $30 million in directors' and officers' liability insurance that provides coverage for STANLEY and other directors and officers of PAYLESS. The coverage period, including the run-off provisions provided for thereunder, continue through December 2, 2003. PAYLESS agrees to maintain such directors' and officers' liability insurance coverage or to provide similar coverage to STANLEY so that STANLEY will remain insured under similar coverage at current levels until December 2, 2003 with respect to the period of time that STANLEY served as a director or officer of PAYLESS. PAYLESS has given STANLEY a copy of such policy and will give him a copy of any amendment or rider promptly after it becomes effective. 8. NON-COMPETE PROVISIONS PAYLESS agrees that the provisions of Section 5 of the Employment Agreement do not apply after the Effective Date. 9. RELEASE OF LIABILITY PAYLESS releases STANLEY of all claims and demands of any kind, known or unknown, which it may have against STANLEY as of the Effective Date or which it may have had at any time before the Effective Date for any acts which STANLEY committed or omitted during his employment with PAYLESS. PAYLESS understands that it is releasing STANLEY, to the maximum extent permissible by law, from any liability which STANLEY may have had to it, known or unknown, at any time up to and including the Effective Date. 2. STANLEY'S AGREEMENTS 1. VOLUNTARY RESIGNATION STANLEY and PAYLESS acknowledge that STANLEY does and he does hereby retire from PAYLESS and voluntarily resign his employment as Chief Executive Officer and resign as a Director, effective as of the Effective Date. STANLEY and PAYLESS acknowledge that the resignation which is the subject of this Agreement has been effected by the mutual and amicable agreement of both parties. Notwithstanding the foregoing STANLEY will, at PAYLESS' request, provide transitional advisory services to PAYLESS' acting Chief Executive Officer for a period ending April 30, 1998 and may continue to occupy his current office during the month of January, 1998. Such service will be performed without compensation other than reimbursement of business expenses. The hours (if any) during which STANLEY performs such transitional advisory services on any given day shall be determined by him, although he will use reasonable efforts to respond timely to accommodate the reasonable requests of PAYLESS' acting Chief Executive Officer for his services. 2. RELEASE OF LIABILITY 5 STANLEY releases PAYLESS from the terms of the Employment Agreement and acknowledges that further obligations of STANLEY and PAYLESS in that Employment Agreement are extinguished upon execution of this Agreement, except as specifically noted herein. STANLEY understands that he is releasing PAYLESS to the maximum extent permissible by law, from any liability which STANLEY believes PAYLESS may have had to him, at any time up to and including the date he signs this Agreement. STANLEY waives any legal right or claims STANLEY may have or may have had, including claims of race, color, national origin, sex or gender, age or disability discrimination, arising under the Title VII of the Civil Rights Acts of 1964, the Rehabilitation Act of 1973, the Civil Rights Act of 1866 (Section 1981), the Americans with Disabilities Act of 1990, the Employee Retirement Income Security Act of 1974, the Age Discrimination in Employment Act, the Family and Medical Leave Act of 1993, the Missouri Human Rights Act, the Missouri Workers Compensation Act and the Missouri Service Letter Act and under any other federal, state, or local statute, regulation, or common law of any state, including any and all claims in tort or contract; provided, however, that nothing contained in this Release of Liability shall modify or in any way detract from the indemnification provisions of Paragraph A.5 herein. 3. COOPERATION AGREEMENT STANLEY also agrees to cooperate and assist PAYLESS in the investigation and handling of any actual or threatened court action, arbitration or administrative proceeding or dispute involving any matter that arose during STANLEY's employment (including, but not limited to, testifying in deposition and/or court and providing information to PAYLESS). PAYLESS acknowledges and agrees that it is responsible for any and all expenses (including costs and attorneys' fees) that STANLEY may incur in connection with any such proceeding. 4. ADEQUACY OF CONSIDERATION STANLEY acknowledges that the sum paid by PAYLESS under this Agreement is adequate consideration for STANLEY'S execution of this Agreement, and further acknowledges that the sum is in excess of the amounts to which he would be entitled under the existing Employment Agreement, policies or practices of PAYLESS. 5. CONFIDENTIALITY AND NON-SOLICITATION STANLEY agrees that notwithstanding the provisions of this Agreement, the provisions of Section 4 of his Employment Agreement will continue to apply in accordance with their terms after the Effective Date. 3. OTHER AGREEMENTS 1. NON-DISPARAGEMENT 6 STANLEY and PAYLESS acknowledge and agree that disparaging or critical statements made by STANLEY about PAYLESS or its board members, officers and employees of PAYLESS or disparaging statements made by board members or senior officers of PAYLESS about STANLEY would be uniquely detrimental to the interests of both parties. Therefore, STANLEY agrees to refrain from making such disparaging or critical statements about PAYLESS, or its board members, officers, and employees of PAYLESS, and PAYLESS agrees that PAYLESS' board members and senior officers (i.e. the Chairman, acting Chief Executive Officer, President and the senior vice presidents) will refrain from making such disparaging or critical statements about STANLEY. All other provisions of this Agreement notwithstanding, PAYLESS agrees that any statements made by STANLEY during any testimony given by him as part of any deposition, court hearing, trial, arbitration hearing or similar proceeding, shall not be considered a disparaging or critical statement, and STANLEY agrees that any statements made by PAYLESS or its board members, officers, and employees of PAYLESS during any testimony given by any of them as part of any deposition, court hearing, trial, arbitration hearing, or similar proceeding, shall not be considered a disparaging or critical statement. 2. NO ADMISSION OF LIABILITY STANLEY acknowledges that this Agreement shall not in any way be construed as an admission by PAYLESS of any liability on the part of PAYLESS, and that all such liability is expressly denied by PAYLESS. Likewise, PAYLESS acknowledges that this Agreement shall not in any way be construed as an admission by STANLEY of any liability on the part of STANLEY and that all such liability is expressly denied by STANLEY. 3. VOLUNTARY NATURE OF AGREEMENT AND ADVICE OF COUNSEL STANLEY acknowledges that he has read this Agreement and any attached exhibits, understands their terms, and signs the Agreement voluntarily of his own free will, without coercion or duress, and with full understanding of the significance and binding effect of the Agreement. STANLEY has consulted with his attorney before signing this Agreement. STANLEY further acknowledges that he has been represented by counsel with respect to his pending and potential claims and has thoroughly discussed all aspects of this Agreement with his attorney. 4. CONSIDERATION PERIOD AND REVOCATION STANLEY received this Agreement on January 5, 1998. STANLEY acknowledges that he has had a reasonable lime. and has had adequate opportunity to consider the terms of the Agreement and whether or not to enter into the Agreement. STANLEY has twenty-one (21) calendar days, after the date STANLEY received the Agreement, within which to consider the Agreement, although he may return it sooner if he desires. STANLEY may revoke the Agreement by delivering a written notice of revocation to E. J. Holland, Jr ., Sr. Vice-President - Administration/Secretary, within seven (7) calendar days after STANLEY signs the Agreement. The provisions of this Agreement will become effective and enforceable on the Effective Date, 7 which is the eighth (8th) calendar day following the date STANLEY signs the Agreement. 5. BINDING EFFECT This Agreement will be binding upon STANLEY and his heirs, administrators, representatives, executors, successors and assigns, and will inure to the benefit of PAYLESS and its successors and assigns. Similarly, this agreement will be binding on PAYLESS, its officers, agents and successors in interest and assigns and will inure to the benefit of STANLEY and his heirs, administrators, representatives, executors, successors and assigns. 6. NEWS RELEASES PAYLESS agrees that before it makes any public announcements concerning the resignation of STANLEY in any newspaper, trade publication, radio, television, or other form of public communication, it will submit such a prepared announcement to STANLEY for his review and approval. No such announcement will be made without the prior approval of STANLEY. STANLEY agrees that his approval shall not be unreasonably refused. 7. GOVERNING LAW This Agreement will be interpreted and enforced in accordance with the laws of the State of Missouri. 8. SEVERABILITY Should any provision of this Agreement be declared or determined by a court of competent jurisdiction to be invalid or otherwise unenforceable, the remaining parts, terms and provisions shall continue to be valid, legal and enforceable, and will be performed and enforced to the fullest extent permitted by law. 9. COMPLETE AGREEMENT Except for the Indemnification Provisions and rights and obligations under directors' and officers' liability insurance policy referred to in paragraphs A.6 and A.7, which this Agreement merely supplements but which otherwise remain in full force and effect, and except for the confidentiality and non-solicitation provision referred to in Paragraph B.5, this Agreement contains the entire agreement between STANLEY and PAYLESS with respect to the subject matter hereof and, except as otherwise noted herein, supersedes all prior agreements or understandings between them. No change or waiver of any part of this Agreement will be valid unless in writing and signed by both STANLEY and PAYLESS. 10. ARBITRATION The parties hereby agree that any dispute arising hereunder or any claim for breach or 8 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 arbitrators, 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 thereto shall be in Kansas City, Missouri. IN WITNESS WHEREOF, the parties have executed this Agreement on the day and year set forth first above written. PAYLESS CASHWAYS, INC. DAVID STANLEY By: /s/ Peter G. Danis, Jr. /s/ David Stanley ----------------------- ---------------------- Name: Peter G.Danis, Jr. Date: January 5, 1998 Title: Chairman Date: January 5, 1998 9 Schedule I to David Stanley Settlement Agreement (Lump sum payment computation) Severance Period Base Salary - $ 750,000.00 Unpaid Retention Bonus 97,500.00 Unused Vacation Through Effective Date 62,500.00 ------------- Total $ 910,000.00 10 Schedule II to David Stanley Settlement Agreement (Benefit Continuation) Group Medical/Vision Group Dental Group Life and Supplemental Death Benefits during the Severance Period, and a $650,000 life insurance policy thereafter Annual Physical in early 1998 1997 Tax Preparation ($1,000 limit) 11 Schedule III to David Stanley Settlement Agreement CERTIFICATE OF INCORPORATION INDEMNIFICATION PROVISION ARTICLE VIII INDEMNIFICATION; INSURANCE The directors and officers of the corporation shall be indemnified to the maximum extent permitted by law. Without limiting the foregoing, each person who was or is made a party or is threatened to be made a party to any action, suit or proceeding, whether civil, criminal, administrative or investigative (hereinafter a "proceeding"), by reason of the fact that he or she, or a person of whom he or she is the legal representative, is or was a director or officer of the corporation, or is or was serving, at the request of the corporation, as a director, officer, employee, fiduciary or agent of another corporation or of a partnership, joint venture, trust or other enterprise, shall be indemnified and held harmless by the corporation, to the fullest extent which it is empowered to do so by the Delaware General Corporation Law, as the same exists or may hereafter be amended (but, in the case of any such amendment, only to the extent that such amendment permits the corporation to provide broader indemnification rights than said law permitted the corporation to provide prior to such amendment), against all expenses, judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with such proceeding, including attorneys' fees, and such indemnification shall inure to the benefit of his or her heirs, executors and administrators; provided, however, that, except as provided in the bylaws of the corporation, the corporation shall indemnify any such person seeking indemnification in connection with a proceeding initiated by such person only if such proceeding was authorized by the board of directors of the corporation. Expenses incurred by a director or officer of the corporation in defending a civil or criminal action, suit or proceeding shall be paid by the corporation in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of the director or officer to repay such amount if it is ultimately determined that the director or officer is not entitled to be indemnified by the corporation as authorized by the Delaware General Corporation Law. The foregoing right of indemnification and advancement of expenses shall be a contract right and shall in no way be exclusive of any other rights of indemnification and advancement of expenses to which any such director or officer may be entitled by law, agreement, vote of stockholders or of disinterested directors or otherwise. All rights of indemnification and advancement of expenses hereunder shall survive any repeal or modification of this Article VIII as to any set of facts or proceeding then existing, shall continue as to a person who has ceased to be an officer or director and shall inure to the benefit of the heirs, executors and administrators of such a director or officer. The procedures with respect to indemnification shall be set forth in the bylaws of the corporation. 12 The corporation may maintain insurance, at its expense, to protect itself and any person who is or was a director, officer, employee or agent of the corporation or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any such expense, liability or loss, whether or not the corporation would have the power to indemnify such person against such expense, liability or loss under the Delaware General Corporation Law. 13 Schedule IV to David Stanley Settlement Agreement BYLAWS INDEMNIFICATION PROVISIONS ARTICLE V INDEMNIFICATION OF OFFICERS, DIRECTORS AND OTHERS Section 1. Procedure for Indemnification of Directors and Officers. Any indemnification of a director or officer of the corporation or advance of expenses under Article VIII of the certificate of incorporation shall be made promptly, and in any event within thirty days, upon the written request of the director or officer. If a determination by the corporation that the director or officer is entitled to indemnification pursuant to this Article V is required, and the corporation fails to respond within sixty days to a written request for indemnity, the corporation shall be deemed to have approved the request. If the corporation denies a written request for indemnification or advancing of expenses, in whole or in part, or if payment in full pursuant to such request is not made within thirty days, the right to indemnification or advances as granted by this Article V shall be enforceable by the director or officer in any court of competent jurisdiction. Such person's costs and expenses incurred in connection with successfully establishing his or her right to indemnification, in whole or in part, in any such action shall also be indemnified by the corporation. It shall be a defense to any such action (other than an action brought to enforce a claim for expenses incurred in defending any proceeding in advance of its final disposition where the required undertaking, if any, has been tendered to the corporation) that the claimant has not met the standards of conduct which make it permissible under the Delaware General Corporation Law for the corporation to indemnify the claimant for the amount claimed, but the burden of such defense shall be on the corporation. Neither the failure of the corporation (including its board of directors, independent legal counsel or its stockholders) to have made a determination prior to the commencement of such action that indemnification of the claimant is proper in the circumstances because he or she has met the applicable standard of conduct set forth in the Delaware General Corporation Law, nor an actual determination by the corporation (including its board of directors, independent legal counsel or its stockholders) that the claimant has not met such applicable standard of conduct, shall be a defense to the action or create a presumption that the claimant has not met the applicable standard of conduct. Section 2. Article Not Exclusive. The rights to indemnification and the payment of expenses incurred in defending a proceeding in advance of its final disposition conferred in this Article V shall not be exclusive of any other right which any person may have or hereafter acquire under any statute, provision or the certificate of incorporation, bylaw, agreement, vote of stockholders or disinterested directors or otherwise. 14 Section 3. Employees and Agents. Persons who are not covered by the foregoing provisions of this Article V and who are or were employees or agents of the corporation, or who are or were serving at the request of the corporation as employees or agents of another corporation, partnership, joint venture, trust or other enterprise, may be indemnified to the extent authorized at any time or from time to time by the board of directors. Expenses (including attorneys' fees) incurred by employees and agents may be paid upon such terms and conditions, if any, as the board of directors deems appropriate; provided, that such expenses may only be paid by the corporation in advance of a proceeding's final disposition upon receipt of an undertaking by or on behalf of such employee or agent to repay such amount if it shall ultimately be determined that he or she is not entitled to be indemnified by the corporation. Section 4. Contract Rights. The provisions of this Article V shall be deemed to be a contract right between the corporation and each director or officer who serves in any such capacity at any time while this Article V and the relevant provisions of the Delaware General Corporation Law or other applicable law are in effect, and any repeal or modification of this Article V or any such law shall not affect any rights or obligations then existing with respect to any state of facts or proceeding then existing. Section 5. Merger or Consolidation. For purposes of this Article V, references to "the corporation" shall include, in addition to the resulting corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors, officers, and employees or agents, so that any person who is a director, officer, employee or agent of such constituent corporation or is or was serving at the request of such constituent corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, shall stand in the same position under this Article V with respect to the resulting or surviving corporation as he or she would have with respect to such constituent corporation if its separate existence had continued. 15 Schedule V to David Stanley Settlement Agreement INDEMNIFICATION AGREEMENT EX-10 4 STANTON AGREEMENT 1 SETTLEMENT AGREEMENT, RESIGNATION, AND FULL GENERAL RELEASE This Settlement Agreement, Resignation, and Release ("Agreement") is made and entered into on January 6, 1998 by and between PAYLESS CASHWAYS, INC. ("PAYLESS") and SUSAN M. STANTON (" STANTON"). WHEREAS, STANTON was employed by PAYLESS on March 7, 1983 and is entitled to the benefits of an Employment Agreement dated as of February 8, 1993, as amended as of October 17, 1996, June 30, 1997 and August 20, 1997, (the "Employment Agreement") ; and WHEREAS, PAYLESS and STANTON mutually wish to terminate the employment status of STANTON, and STANTON'S employment with PAYLESS shall end on January 13, 1998; and WHEREAS, PAYLESS AND STANTON have agreed that STANTON shall resign as President and Chief Operating Officer and as a Director, but that for purposes of her severance benefits STANTON'S termination shall be regarded as a termination of her employment without cause by PAYLESS; NOW THEREFORE, in consideration of the mutual promises, agreements and releases contained in this Agreement, the parties agree as follows: 1. A. PAYLESS' AGREEMENTS 1. EFFECTIVE DATE. PAYLESS acknowledges that the effective date of this Agreement shall be January 13, 1998 (the "Effective Date") and that STANTON will not be required to perform services for PAYLESS after the Effective Date. 2. SEVERANCE BENEFITS PAYLESS agrees to provide STANTON the severance benefits set forth below. 1. Lump Sum Payment. (1) PAYLESS agrees to pay STANTON on the Effective Date a lump sum payment (less applicable payroll deductions) in the amount set forth on Schedule I hereto. As set forth in Schedule 1, such lump sum payment consists of (A) the amount that STANTON would have received as base salary from the Effective Date through March 1, 1999 (the "Severance Period") (based on her base salary in effect on January 5, 1998), (B) the remaining amount due STANTON under the PAYLESS Reorganization Retention Plan, and (C) an amount 2 for unused earned vacation days through the Effective Date. In addition, PAYLESS shall pay STANTON on the Effective Date or as promptly thereafter as is practicable an amount equal to any previously unreimbursed business expenses. (2) PAYLESS also agrees to pay, in lieu of matching contributions to the Payless Cashways, Inc. Employee Savings Plan which would otherwise have been made on STANTON's behalf during the Severance Period, and in partial consideration for the Release of Liability contained herein in Paragraph B.2, an additional lump sum payment (less applicable payroll deductions) of $20,000 (Twenty Thousand Dollars). 2. Continuation of Benefits. PAYLESS agrees that during the Severance Period it will provide STANTON with health, life (including supplemental death benefits), dental and disability (including supplemental disability) benefits and other benefits substantially equivalent to those that STANTON was receiving or entitled to receive under the Employment Agreement on January 5, 1998. Such benefits are described in Schedule II and shall be provided during the Severance Period (or, if longer, the period during which such benefits would have been provided at PAYLESS' expense under applicable plans of PAYLESS in effect on January 5, 1998). Except as may be indicated in Schedule II, such benefits shall be provided at the same coverage levels that were in effect on January 5, 1998, and such benefits shall be provided at PAYLESS' expense, subject to the same cost sharing provisions, if any, as existed on such date. After the Severance Period, STANTON shall be eligible for COBRA continuation coverage of health, life (including supplemental death benefits), dental and disability (including supplemental disability) benefits for a period of 18 months or such period as may then be provided by law. STANTON shall not be entitled to receive such benefits to the extent that she obtains other employment prior to the end of the Severance Period that provides comparable benefits, provided, however, that STANTON is under no obligation to seek other employment during such period. 3. Retirement Benefits. PAYLESS agrees that for purposes of determining the benefits payable to STANTON under the Payless Cashways, Inc. Amended Retirement Plan (the "Pension Plan") and STANTON's eligibility therefor, STANTON's date of separation from PAYLESS shall be deemed to be March 1, 1999, her age shall be deemed to be her age on such date and the amount allocable to base pay included in the lump sum payment in Paragraph A.2.a (i) shall be included in determining career average pay. If the terms of the Pension Plan do not permit the forgoing, then on the Effective Date PAYLESS shall pay STANTON an amount equal to the present value of the additional retirement benefits that would have accrued had she continued to perform services for PAYLESS through the Severance Period at the same rate of compensation as was in effect on January 5, 1998. The present value payable hereunder shall be calculated using GATT rate currently in effect under the Pension Plan. 4. Automobile. PAYLESS also agrees to a lump sum payment (less applicable payroll deductions) of $11,668.66 in lieu of car allowance to be paid on the Effective Date. STANTON and PAYLESS agree that the lease of her company car will be terminated. 3 3. DEATH OF STANTON The death of STANTON prior to the expiration of this Agreement will not void this Agreement, but the terms thereof will survive her death. In the event that STANTON dies prior to receipt of all sums set forth in section A.2. above, then any and all such remaining sums not yet received by STANTON otherwise due under this Agreement shall become due and payable to the beneficiaries hereinafter listed: Principal Beneficiary: Susan M. Stanton Living Trust dated August, 1989. 4. STOCK INCENTIVE The parties acknowledge that STANTON has no vested stock incentives. 5. OUT PLACEMENT PAYLESS will provide STANTON at PAYLESS' expense with telephone answering and e-mail services at Payless for a period of 60 days and executive-level out placement services at an out placement service of PAYLESS' choice in the Kansas City area, including an office and telephone transfer services, until she obtains other employment, for a maximum of 18 months. 6. INDEMNIFICATION Set forth as Schedules III through V hereto are provisions of PAYLESS Certificate of Incorporation and Bylaws relating to indemnification of directors and officers and an Indemnification Agreement dated November 26, 1997, between PAYLESS and STANTON (collectively "Indemnification Provisions"). Such Indemnification Provisions are incorporated by this reference and made a part of this Agreement in their entirety. PAYLESS acknowledges and agrees that STANTON and her estate are entitled to the benefit of such Indemnification Provisions notwithstanding her termination of service and that such provisions apply to her service as a director and officer of PAYLESS and any of its predecessors. PAYLESS further acknowledges that the Indemnification Provisions obligate PAYLESS, among other matters, to indemnify STANTON against any and all expenses(including costs and attorneys' fees) which she might incur as a witness or party with respect to that certain matter pending in the United States District Court for the Southern District of Iowa captioned PAYLESS Cashways, Inc. Partners [et. al.] v. PAYLESS Cashways, Inc. [et. al.]. PAYLESS agrees to honor such obligations with respect to such proceeding or any other proceeding to which STANTON may become a party or witness by reason of the fact that she served as a director or officer of PAYLESS, except as may be provided in the Indemnification Provisions. PAYLESS further agrees that as to STANTON, any amendments or changes to the Indemnification Provisions or the insurance coverages described in paragraph A.7 below will not adversely affect STANTON without STANTON's written consent, and that breach by STANTON of any provision of this AGREEMENT will not constitute grounds by PAYLESS to change such coverages or to terminate its obligations under this 4 Agreement or otherwise with respect to the Indemnification Provisions. PAYLESS and STANTON agree that said Indemnification Agreement is hereby amended to delete section 9.6 thereof in its entirety. 7. LIABILITY INSURANCE PAYLESS currently maintains $30 million in directors' and officers' liability insurance that provides coverage for STANTON and other directors and officers of PAYLESS. The coverage period, including the run-off provisions provided for thereunder, continue through December 2, 2003. PAYLESS agrees to maintain such directors' and officers' liability insurance coverage or to provide similar coverage to STANTON so that STANTON will remain insured under similar coverage at current levels until December 2, 2003 with respect to the period of time that STANTON served as a director or officer of PAYLESS. PAYLESS has given STANTON a copy of such policy and will give her a copy of any amendment or rider promptly after it becomes effective. 8. NON-COMPETE PROVISIONS PAYLESS agrees that the provisions of Section 5 of the Employment Agreement do not apply after the Effective Date. 9. RELEASE OF LIABILITY PAYLESS releases STANTON of all claims and demands of any kind, known or unknown, which it may have against STANTON as of the Effective Date or which it may have had at any time before the Effective Date for any acts which STANTON committed or omitted during her employment with PAYLESS. PAYLESS understands that it is releasing STANTON, to the maximum extent permissible by law, from any liability which STANTON may have had to it, known or unknown, at any time up to and including the Effective Date. 2. STANTON'S AGREEMENTS 1. VOLUNTARY RESIGNATION STANTON and PAYLESS acknowledge that STANTON does and she hereby does voluntarily resign her employment as President and Chief Operating Officer and as a Director, effective as of the Effective Date. STANTON and PAYLESS acknowledge that the resignation which is the subject of this Agreement has been effected by the mutual and amicable agreement of both parties. Notwithstanding the foregoing STANTON will, at PAYLESS' request, provide transitional advisory services to PAYLESS' acting Chief Executive Officer for a period ending April 30, 1998 and may continue to occupy her current office during the month of January, 1998. Such service will be performed without compensation other than reimbursement of business expenses. The hours (if any) during which STANTON performs such transitional advisory 5 services on any given day shall be determined by her, although she will use reasonable efforts to respond timely to accommodate the reasonable requests of PAYLESS' acting Chief Executive Officer for her services. 2. RELEASE OF LIABILITY. STANTON releases PAYLESS from the terms of the Employment Agreement and acknowledges that further obligations of STANTON and PAYLESS in that Employment Agreement are extinguished upon execution of this Agreement, except as specifically noted herein. STANTON understands that she is releasing PAYLESS to the maximum extent permissible by law, from any liability which STANTON believes PAYLESS may have had to her, at any time up to and including the date she signs this Agreement. STANTON waives any legal right or claims STANTON may have or may have had, including claims of race, color, national origin, sex or gender, age or disability discrimination, arising under the Title VII of the Civil Rights Acts of 1964, the Rehabilitation Act of 1973, the Civil Rights Act of 1866 (Section 1981), the Americans with Disabilities Act of 1990, the Employee Retirement Income Security Act of 1974, the Age Discrimination in Employment Act, the Family and Medical Leave Act of 1993, the Missouri Human Rights Act, the Missouri Workers Compensation Act and the Missouri Service Letter Act and under any other federal, state, or local statute, regulation, or common law of any state, including any and all claims in tort or contract; provided, however, that nothing contained in this Release of Liability shall modify or in any way detract from the Indemnification provisions of Paragraph A.5 herein. 3. COOPERATION AGREEMENT STANTON also agrees to cooperate and assist PAYLESS in the investigation and handling of any actual or threatened court action, arbitration or administrative proceeding or dispute involving any matter that arose during STANTON'S employment (including, but not limited to, testifying in deposition and/or court and providing information to PAYLESS). PAYLESS acknowledges and agrees that it is responsible for any and all expenses (including costs and attorneys' fees) that STANTON may incur in connection with any such proceeding. 4. ADEQUACY OF CONSIDERATION STANTON acknowledges that the sum paid by PAYLESS under this Agreement is adequate consideration for STANTON'S execution of this Agreement, and further acknowledges that the sum is in excess of the amounts to which she would be entitled under the existing Employment Agreement, policies or practices of PAYLESS. 5. CONFIDENTIALITY AND NON-SOLICITATION STANTON agrees that notwithstanding the provisions of this Agreement, the provisions of Section 4 of her Employment Agreement will continue to apply in accordance with their terms 6 after the Effective Date. 3. OTHER AGREEMENTS 1. NON-DISPARAGEMENT STANTON and PAYLESS acknowledge and agree that disparaging or critical statements made by STANTON about PAYLESS or its board members, officers and employees of PAYLESS or disparaging statements made by board members or senior officers of PAYLESS about STANTON would be uniquely detrimental to the interests of both parties. Therefore, STANTON agrees to refrain from making such disparaging or critical statements about PAYLESS, or its board members, officers, and employees of PAYLESS, and PAYLESS agrees that PAYLESS' board members and senior officers (i.e. the Chairman, acting Chief Executive Officer, President, and the senior vice presidents) will refrain from making such disparaging or critical statements about STANTON. All other provisions of this Agreement notwithstanding, PAYLESS agrees that any statements made by STANTON during any testimony given by her as part of any deposition, court hearing, trial, arbitration hearing or similar proceeding, shall not be considered a disparaging or critical statement and STANTON agrees that any statements made by PAYLESS or its board members, officers, and employees of PAYLESS during any testimony given by any of them as part of any deposition, court hearing, trial, arbitration hearing, or similar proceeding, shall not be considered a disparaging or critical statement. 2. NO ADMISSION OF LIABILITY STANTON acknowledges that this Agreement shall not in any way be construed as an admission by PAYLESS of any liability on the part of PAYLESS, and that all such liability is expressly denied by PAYLESS. Likewise, PAYLESS acknowledges that this Agreement shall not in any way be construed as an admission by STANTON of any liability on the part of STANTON and that all such liability is expressly denied by STANTON. 3. VOLUNTARY NATURE OF AGREEMENT AND ADVICE OF COUNSEL STANTON acknowledges that she has read this Agreement and any attached exhibits, understands their terms, and signs the Agreement voluntarily of her own free will, without coercion or duress, and with full understanding of the significance and binding effect of the Agreement. STANTON has consulted with her attorney before signing this Agreement. STANTON further acknowledges that she has been represented by counsel with respect to her pending and potential claims and has thoroughly discussed all aspects of this Agreement with her attorney. 7 4. CONSIDERATION PERIOD AND REVOCATION STANTON received this Agreement on January 6, 1998. STANTON acknowledges that she has had a reasonable time, and has had adequate opportunity to consider the terms of the Agreement and whether or not to enter into the Agreement. STANTON has twenty-one (21) calendar days, after the date STANTON received the Agreement, within which to consider the Agreement, although she may return it sooner if she desires. STANTON may revoke the Agreement by delivering a written notice of revocation to E. J. Holland, Jr ., Sr. Vice-President - Administration/Secretary, within seven (7) calendar days after STANTON signs the Agreement. The provisions of this Agreement will become effective and enforceable on the Effective Date, which is the eighth (8th) calendar day following the date STANTON signs the Agreement. 5. BINDING EFFECT This Agreement will be binding upon STANTON and her heirs, administrators, representatives, executors, successors and assigns, and will inure to the benefit of PAYLESS and its successors and assigns. Similarly, this Agreement will be binding on PAYLESS, its officers, agents and successors in interest and assigns and will inure to the benefit of STANTON and her heirs, administrators, representatives, executors, successors and assigns. 6. NEWS RELEASES PAYLESS agrees that before it makes any public announcements concerning the resignation of STANTON in any newspaper, trade publication, radio, television, or other form of public communication, it will submit such a prepared announcement to STANTON for her review and approval. No such announcement will be made without the prior approval of STANTON. STANTON agrees that her approval shall not be unreasonably refused. 7. GOVERNING LAW This Agreement will be interpreted and enforced in accordance with the laws of the State of Missouri. 8. SEVERABILITY Should any provision of this Agreement be declared or determined by a court of competent jurisdiction to be invalid or otherwise unenforceable, the remaining parts, terms and provisions shall continue to be valid, legal and enforceable, and will be performed and enforced to the fullest extent permitted by law. 8 9. COMPLETE AGREEMENT Except for the Indemnification Provisions and rights and obligations under directors' and officers' liability insurance policy referred to in paragraphs A.6 and A.7, which this Agreement merely supplements but which otherwise remain in full force and effect, and except for the confidentiality and non-solicitation provision referred to in Paragraph B.5, this Agreement contains the entire agreement between STANTON and PAYLESS with respect to the subject matter hereof and, except as otherwise noted herein supersedes all prior agreements or understandings between them. No change or waiver of any part of this Agreement will be valid unless in writing and signed by both STANTON and PAYLESS. 10. 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 arbitrators, 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 thereto shall be in Kansas City, Missouri. IN WITNESS WHEREOF, the parties have executed this Agreement on the day and year set forth first above written. PAYLESS CASHWAYS, INC. SUSAN M. STANTON By: /s/ Donald E. Roller /s/ Susan M. Stanton ---------------------- ---------------------- Name: Donald E. Roller Date: January 6, 1998 Title: Acting Chief Executive Officer Date: January 6, 1998 9 Schedule I to Susan Stanton Settlement Agreement Lump sum payment computation Severance Period Base Salary - $ 519,231.00 Unpaid Retention Bonus 67,500.00 Unused Vacation Days Through Effective Date 34,616.00 ----------- Total $ 621,347.00 10 Schedule II to Susan Stanton Settlement Agreement Benefit Continuation Group Medical/Vision Group Dental Group Long/Term Disability and Supplemental Disability Group Life Insurance and Supplemental Death Benefits during the Severance Period, and a $450,000 life insurance policy thereafter Annual Physical in early 1998 1997 Tax Preparation ($1,000 limit) 11 Schedule III to Susan Stanton Settlement Agreement CERTIFICATE OF INCORPORATION INDEMNIFICATION PROVISION ARTICLE VIII INDEMNIFICATION; INSURANCE The directors and officers of the corporation shall be indemnified to the maximum extent permitted by law. Without limiting the foregoing, each person who was or is made a party or is threatened to be made a party to any action, suit or proceeding, whether civil, criminal, administrative or investigative (hereinafter a "proceeding"), by reason of the fact that he or she, or a person of whom he or she is the legal representative, is or was a director or officer of the corporation, or is or was serving, at the request of the corporation, as a director, officer, employee, fiduciary or agent of another corporation or of a partnership, joint venture, trust or other enterprise, shall be indemnified and held harmless by the corporation, to the fullest extent which it is empowered to do so by the Delaware General Corporation Law, as the same exists or may hereafter be amended (but, in the case of any such amendment, only to the extent that such amendment permits the corporation to provide broader indemnification rights than said law permitted the corporation to provide prior to such amendment), against all expenses, judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with such proceeding, including attorneys' fees, and such indemnification shall inure to the benefit of his or her heirs, executors and administrators; provided, however, that, except as provided in the bylaws of the corporation, the corporation shall indemnify any such person seeking indemnification in connection with a proceeding initiated by such person only if such proceeding was authorized by the board of directors of the corporation. Expenses incurred by a director or officer of the corporation in defending a civil or criminal action, suit or proceeding shall be paid by the corporation in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of the director or officer to repay such amount if it is ultimately determined that the director or officer is not entitled to be indemnified by the corporation as authorized by the Delaware General Corporation Law. The foregoing right of indemnification and advancement of expenses shall be a contract right and shall in no way be exclusive of any other rights of indemnification and advancement of expenses to which any such director or officer may be entitled by law, agreement, vote of stockholders or of disinterested directors or otherwise. All rights of indemnification and advancement of expenses hereunder shall survive any repeal or modification of this Article VIII as to any set of facts or proceeding then existing, shall continue as to a person who has ceased to be an officer or director and shall inure to the benefit of the heirs, executors and administrators of such a director or officer. The procedures with respect to indemnification shall be set forth in the bylaws of the corporation. 12 The corporation may maintain insurance, at its expense, to protect itself and any person who is or was a director, officer, employee or agent of the corporation or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any such expense, liability or loss, whether or not the corporation would have the power to indemnify such person against such expense, liability or loss under the Delaware General Corporation Law. 13 Schedule IV to Susan Stanton Settlement Agreement BYLAWS INDEMNIFICATION PROVISIONS ARTICLE V INDEMNIFICATION OF OFFICERS, DIRECTORS AND OTHERS Section 1. Procedure for Indemnification of Directors and Officers. Any indemnification of a director or officer of the corporation or advance of expenses under Article VIII of the certificate of incorporation shall be made promptly, and in any event within thirty days, upon the written request of the director or officer. If a determination by the corporation that the director or officer is entitled to indemnification pursuant to this Article V is required, and the corporation fails to respond within sixty days to a written request for indemnity, the corporation shall be deemed to have approved the request. If the corporation denies a written request for indemnification or advancing of expenses, in whole or in part, or if payment in full pursuant to such request is not made within thirty days, the right to indemnification or advances as granted by this Article V shall be enforceable by the director or officer in any court of competent jurisdiction. Such person's costs and expenses incurred in connection with successfully establishing his or her right to indemnification, in whole or in part, in any such action shall also be indemnified by the corporation. It shall be a defense to any such action (other than an action brought to enforce a claim for expenses incurred in defending any proceeding in advance of its final disposition where the required undertaking, if any, has been tendered to the corporation) that the claimant has not met the standards of conduct which make it permissible under the Delaware General Corporation Law for the corporation to indemnify the claimant for the amount claimed, but the burden of such defense shall be on the corporation. Neither the failure of the corporation (including its board of directors, independent legal counsel or its stockholders) to have made a determination prior to the commencement of such action that indemnification of the claimant is proper in the circumstances because he or she has met the applicable standard of conduct set forth in the Delaware General Corporation Law, nor an actual determination by the corporation (including its board of directors, independent legal counsel or its stockholders) that the claimant has not met such applicable standard of conduct, shall be a defense to the action or create a presumption that the claimant has not met the applicable standard of conduct. Section 2. Article Not Exclusive. The rights to indemnification and the payment of expenses incurred in defending a proceeding in advance of its final disposition conferred in this Article V shall not be exclusive of any other right which any person may have or hereafter acquire under any statute, provision or the certificate of incorporation, bylaw, agreement, vote of stockholders or disinterested directors or otherwise. 14 Section 3. Employees and Agents. Persons who are not covered by the foregoing provisions of this Article V and who are or were employees or agents of the corporation, or who are or were serving at the request of the corporation as employees or agents of another corporation, partnership, joint venture, trust or other enterprise, may be indemnified to the extent authorized at any time or from time to time by the board of directors. Expenses (including attorneys' fees) incurred by employees and agents may be paid upon such terms and conditions, if any, as the board of directors deems appropriate; provided, that such expenses may only be paid by the corporation in advance of a proceeding's final disposition upon receipt of an undertaking by or on behalf of such employee or agent to repay such amount if it shall ultimately be determined that he or she is not entitled to be indemnified by the corporation. Section 4. Contract Rights. The provisions of this Article V shall be deemed to be a contract right between the corporation and each director or officer who serves in any such capacity at any time while this Article V and the relevant provisions of the Delaware General Corporation Law or other applicable law are in effect, and any repeal or modification of this Article V or any such law shall not affect any rights or obligations then existing with respect to any state of facts or proceeding then existing. Section 5. Merger or Consolidation. For purposes of this Article V, references to "the corporation" shall include, in addition to the resulting corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors, officers, and employees or agents, so that any person who is a director, officer, employee or agent of such constituent corporation or is or was serving at the request of such constituent corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, shall stand in the same position under this Article V with respect to the resulting or surviving corporation as he or she would have with respect to such constituent corporation if its separate existence had continued. 15 Schedule V to Susan Stanton Settlement Agreement INDEMNIFICATION AGREEMENT EX-10 5 LIGHTSTONE AGREEMENT 1 SEVERANCE AGREEMENT, RESIGNATION, AND FULL GENERAL RELEASE This Settlement Agreement, Resignation, and Release ("Agreement") is made and entered into on January 21, 1998 by and between PAYLESS CASHWAYS, INC. ("PAYLESS") and Stephen A. Lightstone ("LIGHTSTONE"). WHEREAS, LIGHTSTONE was employed by PAYLESS on November 1, 1983 and is entitled to the benefits of an Employment Agreement dated as of February 8, 1993, as amended as of October 17, 1996, June 30, 1997 and August 20, 1997, (the "Employment Agreement"); and WHEREAS, PAYLESS and LIGHTSTONE mutually wish to terminate the employment status of LIGHTSTONE, and LIGHTSTONE's employment with PAYLESS shall end on January 30, 1998; and WHEREAS, PAYLESS AND LIGHTSTONE have agreed that LIGHTSTONE shall resign as Senior Vice President Finance, Chief Financial Officer, and Treasurer, but that for purposes of his severance benefits LIGHTSTONE's termination shall be regarded as a termination of his employment without cause by PAYLESS; NOW THEREFORE, in consideration of the mutual promises, agreements and releases contained in this Agreement, the parties agree as follows: 1. A. PAYLESS' AGREEMENTS 1. EFFECTIVE DATE PAYLESS acknowledges that this Agreement will become effective on the 8th day after LIGHTSTONE signs (the "Effective Date"), and that LIGHTSTONE will not be required to perform services for PAYLESS after January 30, 1998. 2. SEVERANCE BENEFITS PAYLESS agrees to provide LIGHTSTONE the severance benefits set forth below. 1. Lump Sum Payment (1) PAYLESS agrees to pay LIGHTSTONE on the Effective Date a lump sum payment (less applicable payroll deductions) in the amount set forth on Schedule I hereto. As set forth in Schedule 1, such lump sum payment consists of (A) the amount that LIGHTSTONE would have received as base salary from the Effective Date through March 1, 1999 (the "Severance Period") (based on his base salary in effect on January 20, 1998), (B) the 2 remaining amount due LIGHTSTONE under the PAYLESS Reorganization Retention Plan, and (C) an amount for unused earned vacation days through the Effective Date. In addition, PAYLESS shall pay LIGHTSTONE on the Effective Date or as promptly thereafter as is practicable an amount equal to any previously unreimbursed business expenses. (2) PAYLESS also agrees to pay, in lieu of matching contributions to the Payless Cashways, Inc. Employee Savings Plan which would otherwise have been made on LIGHTSTONE's behalf during the Severance Period, and in consideration for the Release of Liability contained herein in Paragraph B.2, an additional lump sum payment (less applicable payroll deductions) of $10,000.00. 2. Continuation of Benefits PAYLESS agrees that during the Severance Period it will provide LIGHTSTONE with health, life (including supplemental death benefits), and dental benefits substantially equivalent to those received by eligible active employees of PAYLESS. Such benefits are described in Schedule II and shall be provided during the Severance Period (or, if longer, the period during which such benefits would have been provided at PAYLESS' expense under applicable plans of PAYLESS). Except as may be indicated in Schedule II, such health, life and dental benefits shall be provided at the same coverage levels provided to eligible active employees of PAYLESS, and such benefits shall be provided at PAYLESS' expense, subject to the same cost sharing provisions, if any. In addition, PAYLESS agrees that during the Severance Period it will provide LIGHTSTONE with disability benefits similar to those that LIGHTSTONE was receiving or was entitled to receive under the Employment Agreement, except that during the Severance Period, such benefits will provide a maximum monthly benefit of $5,000.00. Such benefits are also listed in Schedule II. After the Severance Period, LIGHTSTONE shall be eligible for COBRA continuation coverage of health and dental benefits for a period of 18 months or such period as may then be provided by law. LIGHTSTONE shall not be entitled to receive such benefits to the extent that he obtains other employment prior to the end of the Severance Period that provides comparable benefits, provided, however, that LIGHTSTONE is under no obligation to seek other employment during such period. 3. Retirement Benefits PAYLESS agrees that for purposes of determining the benefits payable to LIGHTSTONE under the Payless Cashways, Inc. Amended Retirement Plan (the "Pension Plan") and LIGHTSTONE's eligibility therefor, LIGHTSTONE's date of separation from PAYLESS shall be deemed to be March 1, 1999, his age shall be deemed to be his age on such date and the amount allocable to base pay included in the lump sum payment in Paragraph A.2.a (i) shall be included in determining career average pay. If the terms of the Pension Plan do not permit the foregoing, then on the Effective Date PAYLESS shall pay LIGHTSTONE an amount equal to the present value of the additional retirement benefits that would have accrued had he continued to perform services for PAYLESS through the Severance Period at the same rate of compensation as was in effect on January 21, 1998. The present value payable hereunder shall be calculated using GATT rate currently in effect under the Pension Plan. 4. Automobile PAYLESS also agrees to a lump sum payment (less 3 applicable payroll deductions) of $9,233.25 in lieu of LIGHTSTONE's car allowance, to be paid on the Effective Date. LIGHTSTONE and PAYLESS agree that the lease, and use, of his company car will be terminated. 3. DEATH OF LIGHTSTONE The death of LIGHTSTONE prior to the expiration of this Agreement will not void this Agreement, but the terms thereof will survive his death. In the event that LIGHTSTONE dies prior to receipt of all sums set forth in section A.2. above, then any and all such remaining sums not yet received by LIGHTSTONE otherwise due under this Agreement shall become due and payable to the beneficiaries hereinafter listed: Principal Beneficiary: Executor of the Estate of Stephen A. Lightstone. . 4. STOCK INCENTIVE The parties acknowledge that LIGHTSTONE has no vested stock incentives. 5. OUTPLACEMENT PAYLESS will provide LIGHTSTONE at PAYLESS' expense with telephone answering and e-mail services at Payless for a period of 60 days and executive-level outplacement services at an outplacement service of PAYLESS' choice in the Kansas City area, including an office and telephone transfer services, until he obtains other employment, for a maximum of 18 months. 6. INDEMNIFICATION Set forth as Schedules III through V hereto are provisions of PAYLESS Certificate of Incorporation and Bylaws relating to indemnification of directors and officers and an Indemnification Agreement dated December 2, 1997, between PAYLESS and LIGHTSTONE (collectively "Indemnification Provisions"). Such Indemnification Provisions are incorporated by this reference and made a part of this Agreement in their entirety. PAYLESS acknowledges and agrees that LIGHTSTONE and his estate are entitled to the benefit of such Indemnification Provisions notwithstanding his termination of service and that such provisions apply to his service as an officer of PAYLESS and any of its predecessors. PAYLESS further acknowledges that the Indemnification Provisions obligate PAYLESS, among other matters, to indemnify LIGHTSTONE against any and all expenses(including costs and attorneys' fees) which he might incur as a witness or party with respect to that certain matter pending in the United States District Court for the Southern District of Iowa captioned PAYLESS Cashways, Inc. Partners [et. al.] v. PAYLESS Cashways, Inc. [et. al.]. PAYLESS agrees to honor such obligations with respect to such proceeding or any other proceeding to which LIGHTSTONE may become a party or witness by reason of the fact that he served as an officer of PAYLESS, except as may be provided in the Indemnification Provisions. PAYLESS further agrees that as to LIGHTSTONE, any amendments or changes to the Indemnification Provisions or the insurance coverages described in paragraph A.7 below will not adversely affect LIGHTSTONE without LIGHTSTONE's written consent, and 4 that breach by LIGHTSTONE of any provision of this AGREEMENT will not constitute grounds by PAYLESS to change such coverages or to terminate its obligations under this Agreement or otherwise with respect to the Indemnification Provisions. PAYLESS and LIGHTSTONE agree that said Indemnification Agreement is hereby amended to delete section 9.6 thereof in its entirety. 7. LIABILITY INSURANCE PAYLESS currently maintains $30 million in directors' and officers' liability insurance that provides coverage for LIGHTSTONE and other directors and officers of PAYLESS. The coverage period, including the run-off provisions provided for thereunder, continue through December 2, 2003. PAYLESS agrees to maintain such directors' and officers' liability insurance coverage or to provide similar coverage to LIGHTSTONE so that LIGHTSTONE will remain insured under similar coverage at current levels until December 2, 2003 with respect to the period of time that LIGHTSTONE served as an officer of PAYLESS. PAYLESS has given LIGHTSTONE a copy of such policy and will give him a copy of any amendment or rider promptly after it becomes effective. 8. NON-COMPETE PROVISIONS PAYLESS agrees that the provisions of Section 5 of the Employment Agreement do not apply after the Effective Date. 9. RELEASE OF LIABILITY PAYLESS releases LIGHTSTONE of all claims and demands of any kind, known or unknown, which it may have against LIGHTSTONE as of the Effective Date or which it may have had at any time before the Effective Date for any acts which LIGHTSTONE committed or omitted during his employment with PAYLESS. PAYLESS understands that it is releasing LIGHTSTONE, to the maximum extent permissible by law, from any liability which LIGHTSTONE may have had to it, known or unknown, at any time up to and including the Effective Date. 2. LIGHTSTONE'S AGREEMENTS 1. VOLUNTARY RESIGNATION LIGHTSTONE and PAYLESS acknowledge that LIGHTSTONE does and he hereby does voluntarily resign his employment as Senior Vice President, Finance and Chief Financial Officer, effective as of the Effective Date. LIGHTSTONE and PAYLESS acknowledge that the resignation which is the subject of this Agreement has been effected by the mutual and amicable agreement of both parties. Notwithstanding the foregoing LIGHTSTONE will, at PAYLESS' request, provide transitional advisory services to PAYLESS' acting Chief Executive Officer for a period ending April 30, 1998. Such service will be performed without compensation other than 5 reimbursement of business expenses. The hours (if any) during which LIGHTSTONE performs such transitional advisory services on any given day shall be determined by him, although he will use reasonable efforts to respond timely to accommodate the reasonable requests of PAYLESS' acting Chief Executive Officer for his services. 2. RELEASE OF LIABILITY LIGHTSTONE releases PAYLESS from the terms of the Employment Agreement and acknowledges that further obligations of LIGHTSTONE and PAYLESS in that Employment Agreement are extinguished upon execution of this Agreement, except as specifically noted herein. LIGHTSTONE understands that he is releasing PAYLESS to the maximum extent permissible by law, from any liability which LIGHTSTONE believes PAYLESS may have had to him, at any time up to and including the date he signs this Agreement. LIGHTSTONE waives any legal right or claims LIGHTSTONE may have or may have had, including claims of race, color, national origin, sex or gender, age or disability discrimination, arising under the Title VII of the Civil Rights Acts of 1964, the Rehabilitation Act of 1973, the Civil Rights Act of 1866 (Section 1981), the Americans with Disabilities Act of 1990, the Employee Retirement Income Security Act of 1974, the Age Discrimination in Employment Act, the Family and Medical Leave Act of 1993, the Missouri Human Rights Act, the Missouri Workers Compensation Act and the Missouri Service Letter Act and under any other federal, state, or local statute, regulation, or common law of any state, including any and all claims in tort or contract; provided, however, that nothing contained in this Release of Liability shall modify or in any way detract from the Indemnification provisions of Paragraph A.6 herein. 3. COOPERATION AGREEMENT LIGHTSTONE also agrees to cooperate and assist PAYLESS in the investigation and handling of any actual or threatened court action, arbitration or administrative proceeding or dispute involving any matter that arose during LIGHTSTONE's employment (including, but not limited to, testifying in deposition and/or court and providing information to PAYLESS). PAYLESS acknowledges and agrees that it is responsible for any and all expenses (including costs and attorneys' fees) that LIGHTSTONE may incur in connection with any such proceeding. ADEQUACY OF CONSIDERATION LIGHTSTONE acknowledges that the sum paid by PAYLESS under this Agreement is adequate consideration for LIGHTSTONE's execution of this Agreement, and further acknowledges that the sum is in excess of the amounts to which he would be entitled under the existing Employment Agreement, as amended, and any policies or practices of PAYLESS. 6 4. CONFIDENTIALITY AND NON-SOLICITATION LIGHTSTONE agrees that notwithstanding the provisions of this Agreement, the provisions of Section 4 of his Employment Agreement will continue to apply in accordance with their terms after the Effective Date. 3. OTHER AGREEMENTS 1. NON-DISPARAGEMENT LIGHTSTONE and PAYLESS acknowledge and agree that disparaging or critical statements made by LIGHTSTONE about PAYLESS or its board members, officers and employees of PAYLESS or disparaging statements made by board members or senior officers of PAYLESS about LIGHTSTONE would be uniquely detrimental to the interests of both parties. Therefore, LIGHTSTONE agrees to refrain from making such disparaging or critical statements about PAYLESS, or its board members, officers, and employees of PAYLESS, and PAYLESS agrees that PAYLESS' board members and senior officers (i.e. the Chairman, acting Chief Executive Officer, President, and the senior vice presidents) will refrain from making such disparaging or critical statements about LIGHTSTONE. All other provisions of this Agreement notwithstanding, PAYLESS agrees that any statements made by LIGHTSTONE during any testimony given by him as part of any deposition, court hearing, trial, arbitration hearing or similar proceeding, shall not be considered a disparaging or critical statement and LIGHTSTONE agrees that any statements made by PAYLESS or its board members, officers, and employees of PAYLESS during any testimony given by any of them as part of any deposition, court hearing, trial, arbitration hearing, or similar proceeding, shall not be considered a disparaging or critical statement. 2. NO ADMISSION OF LIABILITY LIGHTSTONE acknowledges that this Agreement shall not in any way be construed as an admission by PAYLESS of any liability on the part of PAYLESS, and that all such liability is expressly denied by PAYLESS. Likewise, PAYLESS acknowledges that this Agreement shall not in any way be construed as an admission by LIGHTSTONE of any liability on the part of LIGHTSTONE and that all such liability is expressly denied by LIGHTSTONE. 3. VOLUNTARY NATURE OF AGREEMENT AND ADVICE OF COUNSEL LIGHTSTONE acknowledges that he has read this Agreement and any attached exhibits, understands their terms, and signs the Agreement voluntarily of his own free will, without coercion or duress, and with full understanding of the significance and binding effect of the Agreement. LIGHTSTONE has consulted with his attorney before signing this Agreement. LIGHTSTONE further acknowledges that he has been represented by counsel with respect to his pending and potential claims and has thoroughly discussed all aspects of this Agreement with his 7 attorney. 4. CONSIDERATION PERIOD AND REVOCATION LIGHTSTONE received this Agreement on January 21, 1998. LIGHTSTONE acknowledges that he has had a reasonable time, and has had adequate opportunity to consider the terms of the Agreement and whether or not to enter into the Agreement. LIGHTSTONE has twenty-one (21) calendar days, after the date LIGHTSTONE received the Agreement, within which to consider the Agreement, although he may sign and deliver sooner if he desires. LIGHTSTONE may revoke the Agreement by delivering a written notice of revocation to Louise Iennacaro, Vice President of Human Resources, within seven (7) calendar days after LIGHTSTONE signs the Agreement. The provisions of this Agreement will become effective and enforceable on the eighth (8th) calendar day following the date LIGHTSTONE signs the Agreement. 5. BINDING EFFECT This Agreement will be binding upon LIGHTSTONE and his heirs, administrators, representatives, executors, successors and assigns, and will inure to the benefit of PAYLESS and its successors and assigns. Similarly, this Agreement will be binding on PAYLESS, its officers, agents and successors in interest and assigns and will inure to the benefit of LIGHTSTONE and his heirs, administrators, representatives, executors, successors and assigns. 6. NEWS RELEASES PAYLESS agrees that before it makes any public announcements concerning the resignation of LIGHTSTONE in any newspaper, trade publication, radio, television, or other form of public communication, it will submit such a prepared announcement to LIGHTSTONE for his review and approval. No such announcement will be made without the prior approval of LIGHTSTONE. LIGHTSTONE agrees that his approval shall not be unreasonably refused. 7. GOVERNING LAW This Agreement will be interpreted and enforced in accordance with the laws of the State of Missouri. 8. SEVERABILITY Should any provision of this Agreement be declared or determined by a court of competent jurisdiction to be invalid or otherwise unenforceable, the remaining parts, terms and provisions shall continue to be valid, legal and enforceable, and will be performed and enforced to the fullest extent permitted by law. 8 9. COMPLETE AGREEMENT Except for the Indemnification Provisions and rights and obligations under directors' and officers' liability insurance policy referred to in paragraphs A.6 and A.7, which this Agreement merely supplements but which otherwise remain in full force and effect, and except for the confidentiality and non-solicitation provision referred to in Paragraph B.5, this Agreement contains the entire agreement between LIGHTSTONE and PAYLESS with respect to the subject matter hereof and, except as otherwise noted herein supersedes all prior agreements or understandings between them. No change or waiver of any part of this Agreement will be valid unless in writing and signed by both LIGHTSTONE and PAYLESS. 10. 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 arbitrators, 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 thereto shall be in Kansas City, Missouri. IN WITNESS WHEREOF, the parties have executed this Agreement on the day and year set forth first above written. PAYLESS CASHWAYS, INC. STEPHEN A. LIGHTSTONE By: /s/ Donald E. Roller /s/ Stephen A. Lightstone ---------------------- --------------------------- Name: Donald E. Roller Date: January 21, 1998 Title: Acting Chief Executive Officer Date: January 22, 1998 9 Schedule I to Lightstone Settlement Agreement Lump sum payment computation Severance Period Base Salary - $ 319,583.32 Through March 1, 1999 Unpaid Retention Bonus 44,250.00 (50% of 30% of $295,000) Unused Vacation Days (4 weeks) Through Effective Date 22,692.31 ----------- Total $ 386,525.63 10 Schedule II to Lightstone Settlement Agreement Benefit Continuation Group Medical/Vision Group Dental Long/Term Disability and Supplemental Disability (up to a maximum monthly benefit of $5,000.00) GroupLife Insurance and Supplemental Death Benefits during the Severance Period, and a $295,000.00 life insurance policy thereafter Annual Physical in early 1998 1997 Tax Preparation ($1,000 limit) 11 Schedule III to Lightstone Settlement Agreement CERTIFICATE OF INCORPORATION INDEMNIFICATION PROVISION ARTICLE VIII INDEMNIFICATION; INSURANCE The directors and officers of the corporation shall be indemnified to the maximum extent permitted by law. Without limiting the foregoing, each person who was or is made a party or is threatened to be made a party to any action, suit or proceeding, whether civil, criminal, administrative or investigative (hereinafter a "proceeding"), by reason of the fact that he or she, or a person of whom he or she is the legal representative, is or was a director or officer of the corporation, or is or was serving, at the request of the corporation, as a director, officer, employee, fiduciary or agent of another corporation or of a partnership, joint venture, trust or other enterprise, shall be indemnified and held harmless by the corporation, to the fullest extent which it is empowered to do so by the Delaware General Corporation Law, as the same exists or may hereafter be amended (but, in the case of any such amendment, only to the extent that such amendment permits the corporation to provide broader indemnification rights than said law permitted the corporation to provide prior to such amendment), against all expenses, judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with such proceeding, including attorneys' fees, and such indemnification shall inure to the benefit of his or her heirs, executors and administrators; provided, however, that, except as provided in the bylaws of the corporation, the corporation shall indemnify any such person seeking indemnification in connection with a proceeding initiated by such person only if such proceeding was authorized by the board of directors of the corporation. Expenses incurred by a director or officer of the corporation in defending a civil or criminal action, suit or proceeding shall be paid by the corporation in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of the director or officer to repay such amount if it is ultimately determined that the director or officer is not entitled to be indemnified by the corporation as authorized by the Delaware General Corporation Law. The foregoing right of indemnification and advancement of expenses shall be a contract right and shall in no way be exclusive of any other rights of indemnification and advancement of expenses to which any such director or officer may be entitled by law, agreement, vote of stockholders or of disinterested directors or otherwise. All rights of indemnification and advancement of expenses hereunder shall survive any repeal or modification of this Article VIII as to any set of facts or proceeding then existing, shall continue as to a person who has ceased to be an officer or director and shall inure to the benefit of the heirs, executors and administrators of such a director or officer. The procedures with respect to indemnification shall be set forth in the bylaws of the corporation. 12 The corporation may maintain insurance, at its expense, to protect itself and any person who is or was a director, officer, employee or agent of the corporation or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any such expense, liability or loss, whether or not the corporation would have the power to indemnify such person against such expense, liability or loss under the Delaware General Corporation Law. 13 Schedule IV to Lightstone Settlement Agreement BYLAWS INDEMNIFICATION PROVISIONS ARTICLE V INDEMNIFICATION OF OFFICERS, DIRECTORS AND OTHERS Section 1. Procedure for Indemnification of Directors and Officers. Any indemnification of a director or officer of the corporation or advance of expenses under Article VIII of the certificate of incorporation shall be made promptly, and in any event within thirty days, upon the written request of the director or officer. If a determination by the corporation that the director or officer is entitled to indemnification pursuant to this Article V is required, and the corporation fails to respond within sixty days to a written request for indemnity, the corporation shall be deemed to have approved the request. If the corporation denies a written request for indemnification or advancing of expenses, in whole or in part, or if payment in full pursuant to such request is not made within thirty days, the right to indemnification or advances as granted by this Article V shall be enforceable by the director or officer in any court of competent jurisdiction. Such person's costs and expenses incurred in connection with successfully establishing his or her right to indemnification, in whole or in part, in any such action shall also be indemnified by the corporation. It shall be a defense to any such action (other than an action brought to enforce a claim for expenses incurred in defending any proceeding in advance of its final disposition where the required undertaking, if any, has been tendered to the corporation) that the claimant has not met the standards of conduct which make it permissible under the Delaware General Corporation Law for the corporation to indemnify the claimant for the amount claimed, but the burden of such defense shall be on the corporation. Neither the failure of the corporation (including its board of directors, independent legal counsel or its stockholders) to have made a determination prior to the commencement of such action that indemnification of the claimant is proper in the circumstances because he or she has met the applicable standard of conduct set forth in the Delaware General Corporation Law, nor an actual determination by the corporation (including its board of directors, independent legal counsel or its stockholders) that the claimant has not met such applicable standard of conduct, shall be a defense to the action or create a presumption that the claimant has not met the applicable standard of conduct. Section 2. Article Not Exclusive. The rights to indemnification and the payment of expenses incurred in defending a proceeding in advance of its final disposition conferred in this Article V shall not be exclusive of any other right which any person may have or hereafter acquire under any statute, provision or the certificate of incorporation, bylaw, agreement, vote of stockholders or disinterested directors or otherwise. 14 Section 3. Employees and Agents. Persons who are not covered by the foregoing provisions of this Article V and who are or were employees or agents of the corporation, or who are or were serving at the request of the corporation as employees or agents of another corporation, partnership, joint venture, trust or other enterprise, may be indemnified to the extent authorized at any time or from time to time by the board of directors. Expenses (including attorneys' fees) incurred by employees and agents may be paid upon such terms and conditions, if any, as the board of directors deems appropriate; provided, that such expenses may only be paid by the corporation in advance of a proceeding's final disposition upon receipt of an undertaking by or on behalf of such employee or agent to repay such amount if it shall ultimately be determined that he or she is not entitled to be indemnified by the corporation. Section 4. Contract Rights. The provisions of this Article V shall be deemed to be a contract right between the corporation and each director or officer who serves in any such capacity at any time while this Article V and the relevant provisions of the Delaware General Corporation Law or other applicable law are in effect, and any repeal or modification of this Article V or any such law shall not affect any rights or obligations then existing with respect to any state of facts or proceeding then existing. Section 5. Merger or Consolidation. For purposes of this Article V, references to "the corporation" shall include, in addition to the resulting corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors, officers, and employees or agents, so that any person who is a director, officer, employee or agent of such constituent corporation or is or was serving at the request of such constituent corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, shall stand in the same position under this Article V with respect to the resulting or surviving corporation as he or she would have with respect to such constituent corporation if its separate existence had continued. 15 Schedule V to Lightstone Settlement Agreement INDEMNIFICATION AGREEMENT EX-10 6 BUCHEN AGREEMENT 1 SETTLEMENT AGREEMENT, RESIGNATION, AND FULL GENERAL RELEASE This Settlement Agreement, Resignation, and Release ("Agreement") is made and entered into on January 17, 1998 by and between PAYLESS CASHWAYS, INC. ("PAYLESS") and G. MICHAEL BUCHEN ("BUCHEN"). WHEREAS, BUCHEN was employed by PAYLESS on August 5, 1974 and is entitled to the benefits of an Employment Agreement dated as of October 17, 1996, as amended as of June 30, 1997 and August 20, 1997, (the "Employment Agreement") ; and WHEREAS, PAYLESS and BUCHEN mutually wish to terminate the employment status of BUCHEN, and BUCHEN'S employment with PAYLESS shall end on January 30, 1998; and WHEREAS, PAYLESS AND BUCHEN have agreed that BUCHEN shall resign as Senior Vice President-Merchandising, but that for purposes of his severance benefits BUCHEN'S termination shall be regarded as a termination of his employment without cause by PAYLESS; NOW THEREFORE, in consideration of the mutual promises, agreements and releases contained in this Agreement, the parties agree as follows: 1. A PAYLESS' AGREEMENTS 1. EFFECTIVE DATE. PAYLESS acknowledges that the effective date of this Agreement shall be January 30, 1998 (the "Effective Date") and that BUCHEN will not be required to perform services for PAYLESS after the Effective Date. 2. SEVERANCE BENEFITS PAYLESS agrees to provide BUCHEN the severance benefits set forth below. 1. Lump Sum Payment. (1) PAYLESS agrees to pay BUCHEN on the Effective Date a lump sum payment (less applicable payroll deductions) in the amount set forth on Schedule I hereto. As set forth in Schedule I, such lump sum payment consists of (A) the amount that BUCHEN would have received as base salary from the Effective Date through March 1, 1999 (the "Severance Period") (based on his base salary in effect on July 21, 1997), (B) the remaining amount due BUCHEN under the PAYLESS Reorganization Retention Plan, and (C) an amount for unused earned vacation days through the Effective Date. In addition, PAYLESS shall pay BUCHEN on the Effective Date or as promptly thereafter as is practicable an amount equal to any 2 previously unreimbursed business expenses. (2) PAYLESS also agrees to pay, in lieu of matching contributions to the Payless Cashways, Inc. Employee Savings Plan which would otherwise have been made on BUCHEN'S behalf during the Severance Period, and in consideration for the Release of Liability contained herein in Paragraph B.2, an additional lump sum payment (less applicable payroll deductions) of $10,000 (Ten Thousand Dollars). 2. Continuation of Benefits. PAYLESS agrees that during the Severance Period it will provide BUCHEN with health, life (including supplemental death benefits), and dental benefits substantially equivalent to those received by eligible active employees of PAYLESS. Such benefits are described in Schedule II and shall be provided during the Severance Period (or, if longer, the period during which such benefits would have been provided at PAYLESS' expense under applicable plans of PAYLESS in effect on January 5, 1998). Except as may be indicated in Schedule II, such health, life and dental benefits shall be provided at the same coverage levels provided to eligible active employees of PAYLESS, and such benefits shall be provided at PAYLESS' expense, subject to the same cost sharing provisions, if any. In addition, PAYLESS agrees that during the Severance Period it will provide BUCHEN with disability benefits similar to those that BUCHEN was receiving or was entitled to receive under the Employment Agreement, except that during the Severance Period, such benefits will provide a maximum monthly benefit of $5,000.00. Such benefits are listed in Schedule II. After the Severance Period, BUCHEN shall be eligible for COBRA continuation coverage of health and dental benefits for a period of 18 months or such period as may then be provided by law. BUCHEN shall not be entitled to receive such benefits to the extent that he obtains other employment prior to the end of the Severance Period that provides comparable benefits, provided, however, that BUCHEN is under no obligation to seek other employment during such period. 3. Retirement Benefits. PAYLESS agrees that for purposes of determining the benefits payable to BUCHEN under the Payless Cashways, Inc. Amended Retirement Plan (the "Pension Plan") and BUCHEN'S eligibility therefor, BUCHEN'S date of separation from PAYLESS shall be deemed to be March 1, 1999, his age shall be deemed to be his age on such date and the amount allocable to base pay included in the lump sum payment in Paragraph A.2.a (i) shall be included in determining career average pay. If the terms of the Pension Plan do not permit the foregoing, then on the Effective Date PAYLESS shall pay BUCHEN an amount equal to the present value of the additional retirement benefits that would have accrued had he continued to perform services for PAYLESS through the Severance Period at the same rate of compensation as was in effect on July 21, 1997. The present value payable hereunder shall be calculated using GATT rate currently in effect under the Pension Plan. 4. Automobile. PAYLESS also agrees to a lump sum payment (less applicable payroll deductions) of $8,161.62 in lieu of car allowance, to be paid on the Effective Date. BUCHEN and PAYLESS agree that the lease, and use, of his company car will be terminated. 3 3. DEATH OF BUCHEN The death of BUCHEN prior to the expiration of this Agreement will not void this Agreement, but the terms thereof will survive his death. In the event that BUCHEN dies prior to receipt of all sums set forth in section A.2. above, then any and all such remaining sums not yet received by BUCHEN otherwise due under this Agreement shall become due and payable to the beneficiaries hereinafter listed: Principal Beneficiary: Carol A. Buchen. 4. STOCK INCENTIVE The parties acknowledge that BUCHEN has no vested stock incentives. 5. OUT PLACEMENT PAYLESS will provide BUCHEN at PAYLESS' expense with executive-level outplacement services at Rights Associates, including an office and telephone transfer services. 6. INDEMNIFICATION Set forth as Schedules III through V hereto are provisions of PAYLESS Certificate of Incorporation and Bylaws relating to indemnification of directors and officers and an Indemnification Agreement dated December 2, 1997, between PAYLESS and BUCHEN (collectively "Indemnification Provisions"). Such Indemnification Provisions are incorporated by this reference and made a part of this Agreement in their entirety. PAYLESS acknowledges and agrees that BUCHEN and his estate are entitled to the benefit of such Indemnification Provisions notwithstanding his termination of service and that such provisions apply to his service as an officer of PAYLESS and any of its predecessors. PAYLESS further acknowledges that the Indemnification Provisions obligate PAYLESS, among other matters, to indemnify BUCHEN against any and all expenses (including costs and attorneys' fees) which he might incur as a witness or party with respect to that certain matter pending in the United States District Court for the Southern District of Iowa captioned PAYLESS Cashways, Inc. Partners [et. al.] v. PAYLESS Cashways, Inc. [et. al.]. PAYLESS agrees to honor such obligations with respect to such proceeding or any other proceeding to which BUCHEN may become a party or witness by reason of the fact that he served as an officer of PAYLESS, except as may be provided in the Indemnification Provisions. PAYLESS further agrees that as to BUCHEN, any amendments or changes to the Indemnification Provisions or the insurance coverages described in paragraph A.7 below will not adversely affect BUCHEN without BUCHEN'S written consent, and that breach by BUCHEN of any provision of this AGREEMENT will not constitute grounds by PAYLESS to change such coverages or to terminate its obligations under this Agreement or otherwise with respect to the Indemnification Provisions. PAYLESS and BUCHEN agree that said Indemnification Agreement is hereby amended to delete section 9.6 thereof in its entirety. 4 7. LIABILITY INSURANCE PAYLESS currently maintains $30 million in directors' and officers' liability insurance that provides coverage for BUCHEN and other officers of PAYLESS. The coverage period, including the run-off provisions provided for thereunder, continue through December 2, 2003. PAYLESS agrees to maintain such directors' and officers' liability insurance coverage or to provide similar coverage to BUCHEN so that BUCHEN will remain insured under similar coverage at current levels until December 2, 2003 with respect to the period of time that BUCHEN served as an officer of PAYLESS. PAYLESS has given BUCHEN a copy of such policy and will give him a copy of any amendment or rider promptly after it becomes effective. 8. NON-COMPETE PROVISIONS PAYLESS agrees that the provisions of Section 5 of the Employment Agreement do not apply after the Effective Date. 9. RELEASE OF LIABILITY PAYLESS releases BUCHEN of all claims and demands of any kind, known or unknown, which it may have against BUCHEN as of the Effective Date or which it may have had at any time before the Effective Date for any acts which BUCHEN committed or omitted during his employment with PAYLESS. PAYLESS understands that it is releasing BUCHEN, to the maximum extent permissible by law, from any liability which BUCHEN may have had to it, known or unknown, at any time up to and including the Effective Date. 2. BUCHEN'S AGREEMENTS 1. VOLUNTARY RESIGNATION BUCHEN and PAYLESS acknowledge that BUCHEN does and he hereby does voluntarily resign his employment as Senior Vice President-Merchandising, effective as of the Effective Date. BUCHEN and PAYLESS acknowledge that the resignation which is the subject of this Agreement has been effected by the mutual and amicable agreement of both parties. Notwithstanding the foregoing BUCHEN will, at PAYLESS' request, provide transitional advisory services to PAYLESS for a period ending April 30, 1998. Such service will be performed without compensation other than reimbursement of business expenses. The hours (if any) during which BUCHEN performs such transitional advisory services on any given day shall be determined by him, although he will use reasonable efforts to respond timely to accommodate the reasonable requests of PAYLESS for his services. 2. RELEASE OF LIABILITY. BUCHEN releases PAYLESS from the terms of the Employment Agreement and 5 acknowledges that further obligations of BUCHEN and PAYLESS in that Employment Agreement are extinguished upon execution of this Agreement, except as specifically noted herein. BUCHEN understands that he is releasing PAYLESS to the maximum extent permissible by law, from any liability which BUCHEN believes PAYLESS may have had to him, at any time up to and including the date he signs this Agreement. BUCHEN waives any legal right or claims BUCHEN may have or may have had, including claims of race, color, national origin, sex or gender, age or disability discrimination, arising under the Title VII of the Civil Rights Acts of 1964, the Rehabilitation Act of 1973, the Civil Rights Act of 1866 (Section 1981), the Americans with Disabilities Act of 1990, the Employee Retirement Income Security Act of 1974, the Age Discrimination in Employment Act, the Family and Medical Leave Act of 1993, the Missouri Human Rights Act, the Missouri Workers Compensation Act and the Missouri Service Letter Act and under any other federal, state, or local statute, regulation, or common law of any state, including any and all claims in tort or contract; provided, however, that nothing contained in this Release of Liability shall modify or in any way detract from the Indemnification provisions of Paragraph A.6 herein. 3. COOPERATION AGREEMENT BUCHEN also agrees to cooperate and assist PAYLESS in the investigation and handling of any actual or threatened court action, arbitration or administrative proceeding or dispute involving any matter that arose during BUCHEN'S employment (including, but not limited to, testifying in deposition and/or court and providing information to PAYLESS). PAYLESS acknowledges and agrees that it is responsible for any and all expenses (including costs and attorneys' fees) that BUCHEN may incur in connection with any such proceeding. 4. ADEQUACY OF CONSIDERATION BUCHEN acknowledges that the sum paid by PAYLESS under this Agreement is adequate consideration for BUCHEN'S execution of this Agreement, and further acknowledges that the sum is in excess of the amounts to which he would be entitled under the existing Employment Agreement, policies or practices of PAYLESS. 5. CONFIDENTIALITY AND NON-SOLICITATION BUCHEN agrees that notwithstanding the provisions of this Agreement, the provisions of Section 4 of his Employment Agreement will continue to apply in accordance with their terms after the Effective Date. 6 3. OTHER AGREEMENTS 1. NON-DISPARAGEMENT BUCHEN and PAYLESS acknowledge and agree that disparaging or critical statements made by BUCHEN about PAYLESS or its board members, officers and employees or disparaging statements made by board members or senior officers of PAYLESS about BUCHEN would be uniquely detrimental to the interests of both parties. Therefore, BUCHEN agrees to refrain from making such disparaging or critical statements about PAYLESS, or its board members, officers, and employees of PAYLESS, and PAYLESS agrees that PAYLESS' board members and senior executive officers will refrain from making such disparaging or critical statements about BUCHEN. All other provisions of this Agreement notwithstanding, PAYLESS agrees that any statements made by BUCHEN during any testimony given by him as part of any deposition, court hearing, trial, arbitration hearing or similar proceeding, shall not be considered a disparaging or critical statement and BUCHEN agrees that any statements made by PAYLESS or its board members, officers, and employees of PAYLESS during any testimony given by any of them as part of any deposition, court hearing, trial, arbitration hearing, or similar proceeding, shall not be considered a disparaging or critical statement. 2. NO ADMISSION OF LIABILITY BUCHEN acknowledges that this Agreement shall not in any way be construed as an admission by PAYLESS of any liability on the part of PAYLESS, and that all such liability is expressly denied by PAYLESS. Likewise, PAYLESS acknowledges that this Agreement shall not in any way be construed as an admission by BUCHEN of any liability on the part of BUCHEN and that all such liability is expressly denied by BUCHEN. 3. VOLUNTARY NATURE OF AGREEMENT AND ADVICE OF COUNSEL BUCHEN acknowledges that he has read this Agreement and any attached schedules, understands their terms, and signs the Agreement voluntarily of his own free will, without coercion or duress, and with full understanding of the significance and binding effect of the Agreement. BUCHEN has consulted with his attorney before signing this Agreement. BUCHEN further acknowledges that he has been represented by counsel with respect to his pending and potential claims and has thoroughly discussed all aspects of this Agreement with his attorney. 7 4. CONSIDERATION PERIOD AND REVOCATION BUCHEN received this Agreement on January 17, 1998. BUCHEN acknowledges that he has had a reasonable time, and has had adequate opportunity to consider the terms of the Agreement and whether or not to enter into the Agreement. BUCHEN has twenty-one (21) calendar days, after the date BUCHEN received the Agreement, within which to consider the Agreement, although he may sign and deliver it to PAYLESS sooner if he desires. BUCHEN may revoke the Agreement by delivering a written notice of revocation to E. J. Holland, Jr ., Sr. Vice-President - Administration/Secretary, within seven (7) calendar days after BUCHEN signs the Agreement. The provisions of this Agreement will become effective and enforceable on the eighth (8th) calendar day following the date BUCHEN signs the Agreement. 5. BINDING EFFECT This Agreement will be binding upon BUCHEN and his heirs, administrators, representatives, executors, successors and assigns, and will inure to the benefit of PAYLESS and its successors and assigns. Similarly, this Agreement will be binding on PAYLESS, its officers, agents and successors in interest and assigns and will inure to the benefit of BUCHEN and his heirs, administrators, representatives, executors, successors and assigns. 6. NEWS RELEASES PAYLESS agrees that before it makes any public announcements concerning the resignation of BUCHEN in any newspaper, trade publication, radio, television, or other form of public communication, it will submit such a prepared announcement to BUCHEN for his review and approval. No such announcement will be made without the prior approval of BUCHEN. BUCHEN agrees that his approval shall not be unreasonably refused. 7. GOVERNING LAW This Agreement will be interpreted and enforced in accordance with the laws of the State of Missouri. 8. SEVERABILITY Should any provision of this Agreement be declared or determined by a court of competent jurisdiction to be invalid or otherwise unenforceable, the remaining parts, terms and provisions shall continue to be valid, legal and enforceable, and will be performed and enforced to the fullest extent permitted by law. 8 9. COMPLETE AGREEMENT Except for the Indemnification Provisions and rights and obligations under directors' and officers' liability insurance policy referred to in paragraphs A.6 and A.7, which this Agreement merely supplements but which otherwise remain in full force and effect, and except for the confidentiality and non-solicitation provision referred to in Paragraph B.5, this Agreement contains the entire agreement between BUCHEN and PAYLESS with respect to the subject matter hereof and, except as otherwise noted herein supersedes all prior agreements or understandings between them. No change or waiver of any part of this Agreement will be valid unless in writing and signed by both BUCHEN and PAYLESS. 10. 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 arbitrators, 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 thereto shall be in Kansas City, Missouri. IN WITNESS WHEREOF, the parties have executed this Agreement on the day and year set forth first above written. PAYLESS CASHWAYS, INC. G. MICHAEL BUCHEN By: /s/ Donald E. Roller /s/ G. Michael Buchen ----------------------- ------------------------ Name: Donald E. Roller Date: January 17, 1998 Title: Acting Chief Executive Officer Date: January 21, 1998 9 Schedule I to G. Michael Buchen Settlement Agreement Lump sum payment computation Severance Period Base Salary $ 296,153.85 (13 months at $275,000 base rate in effect on 1/21/97) Unpaid Retention Bonus 41,250.00 (50% of 30% of $275,000) Unused Vacation Days (6 weeks pay at $275,000 per annum) 31,730.77 Additional Lump Sum Payment, pursuant to 10,000.00 P. A(2)(a)(ii) Automobile Allowance 8,161.62 ---------- Total $ 387,296.24 10 Schedule II to G. Michael Buchen Settlement Agreement Benefit Continuation Group Medical/Vision Group Dental Long Term Disability and Supplemental Disability (limited to a maximum monthly benefit of $5,000.00) GroupLife Insurance and Supplemental Death Benefits during the Severance Period, and a $275,000 life insurance policy thereafter Annual Physical in early 1998 1997 Tax Preparation ($1,000 limit) 11 Schedule III to G. Michael Buchen Settlement Agreement CERTIFICATE OF INCORPORATION INDEMNIFICATION PROVISION ARTICLE VIII INDEMNIFICATION; INSURANCE The directors and officers of the corporation shall be indemnified to the maximum extent permitted by law. Without limiting the foregoing, each person who was or is made a party or is threatened to be made a party to any action, suit or proceeding, whether civil, criminal, administrative or investigative (hereinafter a "proceeding"), by reason of the fact that he or she, or a person of whom he or she is the legal representative, is or was a director or officer of the corporation, or is or was serving, at the request of the corporation, as a director, officer, employee, fiduciary or agent of another corporation or of a partnership, joint venture, trust or other enterprise, shall be indemnified and held harmless by the corporation, to the fullest extent which it is empowered to do so by the Delaware General Corporation Law, as the same exists or may hereafter be amended (but, in the case of any such amendment, only to the extent that such amendment permits the corporation to provide broader indemnification rights than said law permitted the corporation to provide prior to such amendment), against all expenses, judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with such proceeding, including attorneys' fees, and such indemnification shall inure to the benefit of his or her heirs, executors and administrators; provided, however, that, except as provided in the bylaws of the corporation, the corporation shall indemnify any such person seeking indemnification in connection with a proceeding initiated by such person only if such proceeding was authorized by the board of directors of the corporation. Expenses incurred by a director or officer of the corporation in defending a civil or criminal action, suit or proceeding shall be paid by the corporation in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of the director or officer to repay such amount if it is ultimately determined that the director or officer is not entitled to be indemnified by the corporation as authorized by the Delaware General Corporation Law. The foregoing right of indemnification and advancement of expenses shall be a contract right and shall in no way be exclusive of any other rights of indemnification and advancement of expenses to which any such director or officer may be entitled by law, agreement, vote of stockholders or of disinterested directors or otherwise. All rights of indemnification and advancement of expenses hereunder shall survive any repeal or modification of this Article VIII as to any set of facts or proceeding then existing, shall continue as to a person who has ceased to be an officer or director and shall inure to the benefit of the heirs, executors and administrators of such a director or officer. The procedures with respect to indemnification shall be set forth in the bylaws of the corporation. 12 The corporation may maintain insurance, at its expense, to protect itself and any person who is or was a director, officer, employee or agent of the corporation or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any such expense, liability or loss, whether or not the corporation would have the power to indemnify such person against such expense, liability or loss under the Delaware General Corporation Law. 13 Schedule IV to G. Michael Buchen Settlement Agreement BYLAWS INDEMNIFICATION PROVISIONS ARTICLE V INDEMNIFICATION OF OFFICERS, DIRECTORS AND OTHERS Section 1. Procedure for Indemnification of Directors and Officers. Any indemnification of a director or officer of the corporation or advance of expenses under Article VIII of the certificate of incorporation shall be made promptly, and in any event within thirty days, upon the written request of the director or officer. If a determination by the corporation that the director or officer is entitled to indemnification pursuant to this Article V is required, and the corporation fails to respond within sixty days to a written request for indemnity, the corporation shall be deemed to have approved the request. If the corporation denies a written request for indemnification or advancing of expenses, in whole or in part, or if payment in full pursuant to such request is not made within thirty days, the right to indemnification or advances as granted by this Article V shall be enforceable by the director or officer in any court of competent jurisdiction. Such person's costs and expenses incurred in connection with successfully establishing his or her right to indemnification, in whole or in part, in any such action shall also be indemnified by the corporation. It shall be a defense to any such action (other than an action brought to enforce a claim for expenses incurred in defending any proceeding in advance of its final disposition where the required undertaking, if any, has been tendered to the corporation) that the claimant has not met the standards of conduct which make it permissible under the Delaware General Corporation Law for the corporation to indemnify the claimant for the amount claimed, but the burden of such defense shall be on the corporation. Neither the failure of the corporation (including its board of directors, independent legal counsel or its stockholders) to have made a determination prior to the commencement of such action that indemnification of the claimant is proper in the circumstances because he or she has met the applicable standard of conduct set forth in the Delaware General Corporation Law, nor an actual determination by the corporation (including its board of directors, independent legal counsel or its stockholders) that the claimant has not met such applicable standard of conduct, shall be a defense to the action or create a presumption that the claimant has not met the applicable standard of conduct. Section 2. Article Not Exclusive. The rights to indemnification and the payment of expenses incurred in defending a proceeding in advance of its final disposition conferred in this Article V shall not be exclusive of any other right which any person may have or hereafter acquire under any statute, provision or the certificate of incorporation, bylaw, agreement, vote of stockholders or disinterested directors or otherwise. 14 Section 3. Employees and Agents. Persons who are not covered by the foregoing provisions of this Article V and who are or were employees or agents of the corporation, or who are or were serving at the request of the corporation as employees or agents of another corporation, partnership, joint venture, trust or other enterprise, may be indemnified to the extent authorized at any time or from time to time by the board of directors. Expenses (including attorneys' fees) incurred by employees and agents may be paid upon such terms and conditions, if any, as the board of directors deems appropriate; provided, that such expenses may only be paid by the corporation in advance of a proceeding's final disposition upon receipt of an undertaking by or on behalf of such employee or agent to repay such amount if it shall ultimately be determined that he or she is not entitled to be indemnified by the corporation. Section 4. Contract Rights. The provisions of this Article V shall be deemed to be a contract right between the corporation and each director or officer who serves in any such capacity at any time while this Article V and the relevant provisions of the Delaware General Corporation Law or other applicable law are in effect, and any repeal or modification of this Article V or any such law shall not affect any rights or obligations then existing with respect to any state of facts or proceeding then existing. Section 5. Merger or Consolidation. For purposes of this Article V, references to "the corporation" shall include, in addition to the resulting corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors, officers, and employees or agents, so that any person who is a director, officer, employee or agent of such constituent corporation or is or was serving at the request of such constituent corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, shall stand in the same position under this Article V with respect to the resulting or surviving corporation as he or she would have with respect to such constituent corporation if its separate existence had continued. 15 Schedule V to G. Michael Buchen Settlement Agreement INDEMNIFICATION AGREEMENT EX-10 7 HOLLAND AGREEMENT 1 SEVERANCE AGREEMENT, RESIGNATION, AND FULL GENERAL RELEASE This Severance Agreement, Resignation, and Release ("Agreement") is made and entered into on January 23, 1998 by and between PAYLESS CASHWAYS, INC. ("PAYLESS") and E. J. HOLLAND, JR. ("HOLLAND"). WHEREAS, HOLLAND was employed by PAYLESS on June 30, 1992, and is entitled to the benefits of an Executive Change in Control Agreement dated as of June 26, 1997, as amended as of August 20, 1997, (the "Control Agreement"); and WHEREAS, PAYLESS and HOLLAND mutually wish to terminate the employment status of HOLLAND, and HOLLAND's employment with PAYLESS shall end on January 30, 1998, or such later date as HOLLAND and PAYLESS shall agree, and WHEREAS, PAYLESS and HOLLAND have agreed that HOLLAND shall resign as Senior Vice President-Administration/Secretary, but that for purposes of his severance benefits HOLLAND's termination shall be regarded as a termination of his employment without cause by PAYLESS; NOW THEREFORE, in consideration of the mutual promises, agreements and releases contained in this Agreement, the parties agree as follows: 1. A. PAYLESS' AGREEMENTS 1. EFFECTIVE DATE PAYLESS acknowledges that this Agreement will become effective on the 8th day following HOLLAND's execution of this Agreement (the "Effective Date"), and that HOLLAND will not be required to perform services for PAYLESS after January 30, 1998, or such later date as HOLLAND and PAYLESS shall agree. 2. SEVERANCE BENEFITS PAYLESS agrees to provide HOLLAND the severance benefits set forth below. 1. Lump Sum Payment (1) PAYLESS agrees to pay HOLLAND on the Effective Date a lump sum payment (less applicable payroll deductions) in the amount set forth on Schedule I hereto. As set forth in Schedule I, such lump sum payment consists of (A) the amount that HOLLAND would have received as one year's annual Base Salary from the Effective Date through February 1, 1999 (the "Severance Period") (based on his base salary in effect on July 21, 1997), 2 (B) the remaining amount due HOLLAND under the PAYLESS Reorganization Retention Plan, and (C) an amount for unused earned vacation days through the Effective Date. In addition, PAYLESS shall pay HOLLAND on the Effective Date or as promptly thereafter as is practicable an amount equal to any previously unreimbursed business expenses. (2) PAYLESS also agrees to pay, in lieu of matching contributions to the Payless Cashways, Inc. Employee Savings Plan which would otherwise have been made on HOLLAND's behalf during the Severance Period, and in consideration for the Release of Liability contained herein in Paragraph B.2, an additional lump sum payment (less applicable payroll deductions) of $10,000.00. 2. Continuation of Benefits PAYLESS agrees that during the Severance Period it will provide HOLLAND with health, life (including supplemental death benefits), and dental benefits substantially equivalent to those received by HOLLAND as of the date of the termination of his employment. Such benefits are described in Schedule II and shall be provided during the Severance Period (or, if longer, the period during which such benefits would have been provided at PAYLESS' expense under applicable plans of PAYLESS. Except as may be indicated in Schedule II, such health, life and dental benefits shall be provided at the same coverage levels provided to HOLLAND as of the date of the termination of his employment, and such benefits shall be provided at PAYLESS' expense, subject to the same cost sharing provisions, if any, applicable to HOLLAND as of the date of the termination of his employment. In addition, PAYLESS agrees that during the Severance Period it will provide HOLLAND with disability benefits similar to those that HOLLAND was receiving or was entitled to receive during the period of his employment, except that during the Severance Period, such benefits will provide a maximum monthly benefit of $5,000.00. Such benefits are also listed in Schedule II. PAYLESS agrees to use its reasonable best efforts to obtain an additional $5,000.00 of monthly disability benefits on behalf of HOLLAND during the Severance Period. After the Severance Period, HOLLAND shall be eligible for COBRA continuation coverage of health and dental benefits for a period of 18 months or such period as may then be provided by law. HOLLAND shall not be entitled to receive such benefits to the extent that he obtains other employment prior to the end of the Severance Period that provides comparable benefits, provided, however, that HOLLAND is under no obligation to seek other employment during such period. 3. Retirement Benefits PAYLESS agrees that for purposes of determining the benefits payable to HOLLAND under the Payless Cashways, Inc. Amended Retirement Plan (the "Pension Plan") and HOLLAND's eligibility therefor, HOLLAND's date of separation from PAYLESS shall be deemed to be February 1, 1999, his age shall be deemed to be his age on such date and the amount allocable to base pay included in the lump sum payment in Paragraph A.2.a(i) shall be included in determining career average pay. If the terms of the Pension Plan do not permit the foregoing, then on the Effective Date PAYLESS shall pay HOLLAND an amount equal to the present value of the additional retirement benefits that would have accrued had he continued to perform services for PAYLESS through the Severance Period at the same rate of compensation as was in effect on the date of this Agreement. The present value payable hereunder shall be 3 calculated using GATT rate currently in effect under the Pension Plan. 4. Automobile PAYLESS also agrees to a lump sum payment (less applicable payroll deductions) of $8,158.00 in lieu of HOLLAND's car allowance, to be paid on the Effective Date. HOLLAND and PAYLESS agree that the lease, and use, of his company car will be terminated as of the Effective Date. 3. DEATH OF HOLLAND The death of HOLLAND prior to the expiration of this Agreement will not void this Agreement, but the terms thereof will survive his death. In the event that HOLLAND dies prior to receipt of all sums set forth in section A.2. above, then any and all such remaining sums not yet received by HOLLAND otherwise due under this Agreement shall become due and payable to the beneficiaries hereinafter listed: Principal Beneficiary: The Trustee(s) under Trust Agreement created by Edward J. Holland Jr. dated December 15, 1992, as amended, or the successor(s) in trust, Beneficiary, if the trust evidenced by said agreement is in effect at HOLLAND's death. If said trust is not then in effect, the proceeds will be payable in one sum to HOLLAND's estate. 4. STOCK INCENTIVE The parties acknowledge that HOLLAND has no vested stock incentives. 5. OUTPLACEMENT PAYLESS will provide HOLLAND at PAYLESS' expense with telephone answering and e-mail services at Payless for a period of 60 days and executive-level outplacement services at an outplacement service of PAYLESS' choice in the Kansas City area, including an office and telephone transfer services, until he obtains other employment, for a maximum of 18 months. 6. INDEMNIFICATION Set forth as Schedules III through V hereto are provisions of PAYLESS Certificate of Incorporation and Bylaws relating to indemnification of directors and officers and an Indemnification Agreement dated December 2, 1997, between PAYLESS and HOLLAND (collectively "Indemnification Provisions"). Such Indemnification Provisions are incorporated by this reference and made a part of this Agreement in their entirety. PAYLESS acknowledges and agrees that HOLLAND and his estate are entitled to the benefit of such Indemnification Provisions notwithstanding his termination of service and that such provisions apply to his service as an officer of PAYLESS and any of its predecessors. PAYLESS further acknowledges that the Indemnification Provisions obligate PAYLESS, among other matters, to indemnify HOLLAND against any and all expenses (including costs and attorneys' fees) which he might incur as a witness or party with respect to that certain matter pending in the United States District Court for the Southern District of Iowa captioned PAYLESS Cashways, Inc. Partners [et. al.] v. PAYLESS Cashways, Inc. [et. al.]. PAYLESS agrees to honor such obligations with respect to such 4 proceeding or any other proceeding to which HOLLAND may become a party or witness by reason of the fact that he served as an officer of PAYLESS, except as may be provided in the Indemnification Provisions. PAYLESS further agrees that as to HOLLAND, any amendments or changes to the Indemnification Provisions or the insurance coverages described in paragraph A.7 below will not adversely affect HOLLAND without HOLLAND's written consent, and that breach by HOLLAND of any provision of this AGREEMENT will not constitute grounds by PAYLESS to change such coverages or to terminate its obligations under this Agreement or otherwise with respect to the Indemnification Provisions. PAYLESS and HOLLAND agree that said Indemnification Agreement is hereby amended to delete section 9.6 thereof in its entirety. 7. LIABILITY INSURANCE PAYLESS currently maintains $30 million in directors' and officers' liability insurance that provides coverage for HOLLAND and other officers of PAYLESS. The coverage period, including the run-off provisions provided for thereunder, continue through December 2, 2003. PAYLESS agrees to maintain such directors' and officers' liability insurance coverage or to provide similar coverage to HOLLAND so that HOLLAND will remain insured under similar coverage at current levels until December 2, 2003 with respect to the period of time that HOLLAND served as an officer of PAYLESS. PAYLESS has given HOLLAND a copy of such policy and will give him a copy of any amendment or rider promptly after it becomes effective. 8. RELEASE OF LIABILITY PAYLESS releases HOLLAND of all claims and demands of any kind, known or unknown, which it may have against HOLLAND as of the Effective Date or which it may have had at any time before the Effective Date for any acts which HOLLAND committed or omitted during his employment with PAYLESS. PAYLESS understands that it is releasing HOLLAND, to the maximum extent permissible by law, from any liability which HOLLAND may have had to it, known or unknown, at any time up to and including the Effective Date. 2. HOLLAND'S AGREEMENTS 1. VOLUNTARY RESIGNATION HOLLAND and PAYLESS acknowledge that HOLLAND does and he hereby does voluntarily resign his employment as Senior Vice President-Administration/Secretary, effective as of the Effective Date or such later date as HOLLAND and PAYLESS shall agree. HOLLAND and PAYLESS acknowledge that the resignation which is the subject of this Agreement has been effected by the mutual and amicable agreement of both parties. Notwithstanding the foregoing HOLLAND will, at PAYLESS' request, provide transitional advisory services to PAYLESS for a period ending April 30, 1998. Such service will be performed without compensation other than reimbursement of business expenses. The hours (if any) during which HOLLAND 5 performs such transitional advisory services on any given day shall be determined by him, although he will use reasonable efforts to respond timely to accommodate the reasonable requests of PAYLESS for his services. 2. RELEASE OF LIABILITY HOLLAND releases PAYLESS from the terms of the Control Agreement and acknowledges that further obligations of HOLLAND and PAYLESS in that Control Agreement are extinguished upon execution of this Agreement, except as specifically noted herein. HOLLAND understands that he is releasing PAYLESS to the maximum extent permissible by law, from any liability which HOLLAND believes PAYLESS may have had to him, at any time up to and including the date he signs this Agreement. HOLLAND waives any legal right or claims HOLLAND may have or may have had, including claims of race, color, national origin, sex or gender, age or disability discrimination, arising under the Title VII of the Civil Rights Acts of 1964, the Rehabilitation Act of 1973, the Civil Rights Act of 1866 (Section 1981), the Americans with Disabilities Act of 1990, the Employee Retirement Income Security Act of 1974, the Age Discrimination in Employment Act, the Family and Medical Leave Act of 1993, the Missouri Human Rights Act, the Missouri Workers Compensation Act and the Missouri Service Letter Act and under any other federal, state, or local statute, regulation, or common law of any state, including any and all claims in tort or contract; provided, however, that nothing contained in this Release of Liability shall modify or in any way detract from the Indemnification provisions of Paragraph A.6 herein. 3. COOPERATION AGREEMENT HOLLAND also agrees to cooperate and assist PAYLESS in the investigation and handling of any actual or threatened court action, arbitration or administrative proceeding or dispute involving any matter that arose during HOLLAND's employment (including, but not limited to, testifying in deposition and/or court and providing information to PAYLESS). PAYLESS acknowledges and agrees that it is responsible for any and all expenses (including costs and attorneys' fees) that HOLLAND may incur in connection with any such proceeding. 4. ADEQUACY OF CONSIDERATION HOLLAND acknowledges that the sum paid by PAYLESS under this Agreement is adequate consideration for HOLLAND's execution of this Agreement, and further acknowledges that the sum is in excess of the amounts to which he would be entitled under the existing Control Agreement, policies or practices of PAYLESS. 6 3. OTHER AGREEMENTS 1. NON-DISPARAGEMENT HOLLAND and PAYLESS acknowledge and agree that disparaging or critical statements made by HOLLAND about PAYLESS or its board members, officers and employees or disparaging statements made by board members or senior officers of PAYLESS about HOLLAND would be uniquely detrimental to the interests of both parties. Therefore, HOLLAND agrees to refrain from making such disparaging or critical statements about PAYLESS, or its board members, officers, and employees of PAYLESS, and PAYLESS agrees that PAYLESS' board members and senior executive officers will refrain from making such disparaging or critical statements about HOLLAND. All other provisions of this Agreement notwithstanding, PAYLESS agrees that any statements made by HOLLAND during any testimony given by him as part of any deposition, court hearing, trial, arbitration hearing or similar proceeding, shall not be considered a disparaging or critical statement and HOLLAND agrees that any statements made by PAYLESS or its board members, officers, and employees of PAYLESS during any testimony given by any of them as part of any deposition, court hearing, trial, arbitration hearing, or similar proceeding, shall not be considered a disparaging or critical statement. 2. NO ADMISSION OF LIABILITY HOLLAND acknowledges that this Agreement shall not in any way be construed as an admission by PAYLESS of any liability on the part of PAYLESS, and that all such liability is expressly denied by PAYLESS. Likewise, PAYLESS acknowledges that this Agreement shall not in any way be construed as an admission by HOLLAND of any liability on the part of HOLLAND and that all such liability is expressly denied by HOLLAND. 3. VOLUNTARY NATURE OF AGREEMENT AND ADVICE OF COUNSEL HOLLAND acknowledges that he has read this Agreement and any attached schedules, understands their terms, and signs the Agreement voluntarily of his own free will, without coercion or duress, and with full understanding of the significance and binding effect of the Agreement. HOLLAND has consulted with his attorney before signing this Agreement. HOLLAND further acknowledges that he has been represented by counsel with respect to his pending and potential claims and has thoroughly discussed all aspects of this Agreement with his attorney. 4. CONSIDERATION PERIOD AND REVOCATION HOLLAND received this Agreement on January 23, 1998. HOLLAND acknowledges that he has had a reasonable time, and has had adequate opportunity to consider the terms of the Agreement and whether or not to enter into the Agreement. HOLLAND has twenty-one (21) calendar days, after the date HOLLAND received the Agreement, within which to consider the 7 Agreement, although he may sign and deliver it to PAYLESS sooner if he desires. HOLLAND may revoke the Agreement by delivering a written notice of revocation to Louise Iennacaro, Vice President of Human Resources, within seven (7) calendar days after HOLLAND signs the Agreement. The provisions of this Agreement will become effective and enforceable on the eighth (8th) calendar day following the date HOLLAND signs the Agreement. 5. BINDING EFFECT This Agreement will be binding upon HOLLAND and his heirs, administrators, representatives, executors, successors and assigns, and will inure to the benefit of PAYLESS and its successors and assigns. Similarly, this Agreement will be binding on PAYLESS, its officers, agents and successors in interest and assigns and will inure to the benefit of HOLLAND and his heirs, administrators, representatives, executors, successors and assigns. 6. NEWS RELEASES PAYLESS agrees that before it makes any public announcements concerning the resignation of HOLLAND in any newspaper, trade publication, radio, television, or other form of public communication, it will submit such a prepared announcement to HOLLAND for his review and approval. No such announcement will be made without the prior approval of HOLLAND. HOLLAND agrees that his approval shall not be unreasonably refused. 7. GOVERNING LAW This Agreement will be interpreted and enforced in accordance with the laws of the State of Missouri. 8. SEVERABILITY Should any provision of this Agreement be declared or determined by a court of competent jurisdiction to be invalid or otherwise unenforceable, the remaining parts, terms and provisions shall continue to be valid, legal and enforceable, and will be performed and enforced to the fullest extent permitted by law. 9. COMPLETE AGREEMENT Except for the Indemnification Provisions and rights and obligations under directors' and officers' liability insurance policy referred to in paragraphs A.6 and A.7, which this Agreement merely supplements but which otherwise remain in full force and effect, this Agreement contains the entire agreement between HOLLAND and PAYLESS with respect to the subject matter hereof and, except as otherwise noted herein supersedes all prior agreements or understandings between them. No change or waiver of any part of this Agreement will be valid unless in writing and signed by both HOLLAND and PAYLESS. 8 10. 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 arbitrators, 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 thereto shall be in Kansas City, Missouri. IN WITNESS WHEREOF, the parties have executed this Agreement on the day and year set forth first above written. PAYLESS CASHWAYS, INC. E. J. HOLLAND, JR. By: /s/ Donald E. Roller /s/ E. J. Holland, Jr. ------------------------ ------------------------- Name: Donald E. Roller Date: January 23, 1998 Title: Acting Chief Executive Officer Date: January 23, 1998 9 Schedule I to E. J. Holland, Jr. Severance Agreement Lump sum payment computation Severance Period Base Salary $242,000.00 (12 months at rate in effect on 7/21/97) Unpaid Retention Bonus $36,300.00 (50% of 30% of $242,000) Unused Vacation Days (4 weeks pay at $242,000 per annum) $18,615.38 Additional Lump Sum Payment pursuant to P. A(2)(a)(ii) $10,000.00 Additional Retirement Benefit, as [to be determined] described in P. A(2)(c) Automobile Allowance $8,158.00 ---------- Total (exclusive of Additional Retirement Benefit $315,073.38 described in P. A(2)(c) 10 Schedule II to E. J. Holland, Jr. Severance Agreement Benefit Continuation Group Medical/Vision Group Dental Long Term Disability and Supplemental Disability (limited to a maximum monthly benefit of $5,000.00) Combined Group Life Insurance and Supplemental Death Benefits of $810,000 during the Severance Period, and a $270,000 life insurance policy thereafter Annual Physical in early 1998 1997 Tax Preparation ($1,000 limit) 11 Schedule III to E. J. Holland, Jr. Severance Agreement CERTIFICATE OF INCORPORATION INDEMNIFICATION PROVISION ARTICLE VIII INDEMNIFICATION; INSURANCE The directors and officers of the corporation shall be indemnified to the maximum extent permitted by law. Without limiting the foregoing, each person who was or is made a party or is threatened to be made a party to any action, suit or proceeding, whether civil, criminal, administrative or investigative (hereinafter a "proceeding"), by reason of the fact that he or she, or a person of whom he or she is the legal representative, is or was a director or officer of the corporation, or is or was serving, at the request of the corporation, as a director, officer, employee, fiduciary or agent of another corporation or of a partnership, joint venture, trust or other enterprise, shall be indemnified and held harmless by the corporation, to the fullest extent which it is empowered to do so by the Delaware General Corporation Law, as the same exists or may hereafter be amended (but, in the case of any such amendment, only to the extent that such amendment permits the corporation to provide broader indemnification rights than said law permitted the corporation to provide prior to such amendment), against all expenses, judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with such proceeding, including attorneys' fees, and such indemnification shall inure to the benefit of his or her heirs, executors and administrators; provided, however, that, except as provided in the bylaws of the corporation, the corporation shall indemnify any such person seeking indemnification in connection with a proceeding initiated by such person only if such proceeding was authorized by the board of directors of the corporation. Expenses incurred by a director or officer of the corporation in defending a civil or criminal action, suit or proceeding shall be paid by the corporation in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of the director or officer to repay such amount if it is ultimately determined that the director or officer is not entitled to be indemnified by the corporation as authorized by the Delaware General Corporation Law. The foregoing right of indemnification and advancement of expenses shall be a contract right and shall in no way be exclusive of any other rights of indemnification and advancement of expenses to which any such director or officer may be entitled by law, agreement, vote of stockholders or of disinterested directors or otherwise. All rights of indemnification and advancement of expenses hereunder shall survive any repeal or modification of this Article VIII as to any set of facts or proceeding then existing, shall continue as to a person who has ceased to be an officer or director and shall inure to the benefit of the heirs, executors and administrators of such a director or officer. The procedures with respect to indemnification shall be set forth in the bylaws of the corporation. 12 The corporation may maintain insurance, at its expense, to protect itself and any person who is or was a director, officer, employee or agent of the corporation or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any such expense, liability or loss, whether or not the corporation would have the power to indemnify such person against such expense, liability or loss under the Delaware General Corporation Law. 13 Schedule IV to E. J. Holland, Jr. Severance Agreement BYLAWS INDEMNIFICATION PROVISIONS ARTICLE V INDEMNIFICATION OF OFFICERS, DIRECTORS AND OTHERS Section 1. Procedure for Indemnification of Directors and Officers. Any indemnification of a director or officer of the corporation or advance of expenses under Article VIII of the certificate of incorporation shall be made promptly, and in any event within thirty days, upon the written request of the director or officer. If a determination by the corporation that the director or officer is entitled to indemnification pursuant to this Article V is required, and the corporation fails to respond within sixty days to a written request for indemnity, the corporation shall be deemed to have approved the request. If the corporation denies a written request for indemnification or advancing of expenses, in whole or in part, or if payment in full pursuant to such request is not made within thirty days, the right to indemnification or advances as granted by this Article V shall be enforceable by the director or officer in any court of competent jurisdiction. Such person's costs and expenses incurred in connection with successfully establishing his or her right to indemnification, in whole or in part, in any such action shall also be indemnified by the corporation. It shall be a defense to any such action (other than an action brought to enforce a claim for expenses incurred in defending any proceeding in advance of its final disposition where the required undertaking, if any, has been tendered to the corporation) that the claimant has not met the standards of conduct which make it permissible under the Delaware General Corporation Law for the corporation to indemnify the claimant for the amount claimed, but the burden of such defense shall be on the corporation. Neither the failure of the corporation (including its board of directors, independent legal counsel or its stockholders) to have made a determination prior to the commencement of such action that indemnification of the claimant is proper in the circumstances because he or she has met the applicable standard of conduct set forth in the Delaware General Corporation Law, nor an actual determination by the corporation (including its board of directors, independent legal counsel or its stockholders) that the claimant has not met such applicable standard of conduct, shall be a defense to the action or create a presumption that the claimant has not met the applicable standard of conduct. Section 2. Article Not Exclusive. The rights to indemnification and the payment of expenses incurred in defending a proceeding in advance of its final disposition conferred in this Article V shall not be exclusive of any other right which any person may have or hereafter acquire under any statute, provision or the certificate of incorporation, bylaw, agreement, vote of stockholders or disinterested directors or otherwise. 14 Section 3. Employees and Agents. Persons who are not covered by the foregoing provisions of this Article V and who are or were employees or agents of the corporation, or who are or were serving at the request of the corporation as employees or agents of another corporation, partnership, joint venture, trust or other enterprise, may be indemnified to the extent authorized at any time or from time to time by the board of directors. Expenses (including attorneys' fees) incurred by employees and agents may be paid upon such terms and conditions, if any, as the board of directors deems appropriate; provided, that such expenses may only be paid by the corporation in advance of a proceeding's final disposition upon receipt of an undertaking by or on behalf of such employee or agent to repay such amount if it shall ultimately be determined that he or she is not entitled to be indemnified by the corporation. Section 4. Contract Rights. The provisions of this Article V shall be deemed to be a contract right between the corporation and each director or officer who serves in any such capacity at any time while this Article V and the relevant provisions of the Delaware General Corporation Law or other applicable law are in effect, and any repeal or modification of this Article V or any such law shall not affect any rights or obligations then existing with respect to any state of facts or proceeding then existing. Section 5. Merger or Consolidation. For purposes of this Article V, references to "the corporation" shall include, in addition to the resulting corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors, officers, and employees or agents, so that any person who is a director, officer, employee or agent of such constituent corporation or is or was serving at the request of such constituent corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, shall stand in the same position under this Article V with respect to the resulting or surviving corporation as he or she would have with respect to such constituent corporation if its separate existence had continued. 15 Schedule V to E. J. Holland, Jr. Severance Agreement INDEMNIFICATION AGREEMENT EX-10 8 FORM OF INDEMNIFICATION AGREEMENT 1 INDEMNIFICATION AGREEMENT This Agreement, dated as of March , 1998, is made by and between Payless Cashways, Inc., a Delaware corporation (the "Company"), and ________________who is serving as a director and/or officer of the Company ("Indemnitee"). RECITALS WHEREAS, Indemnitee is currently serving in the capacity or capacities described above. WHEREAS, the Company desires to attract and retain the services of highly qualified individuals, such as Indemnitee, to serve as directors, officers, employees and agents of the Company and to indemnify these individuals so as to provide them with the maximum protection permitted by law. WHEREAS, the Company and Indemnitee recognize the substantial increase in corporate litigation in general, subjecting directors, officers, employees, and agents to expensive litigation risk at the same time that the availability and coverage of liability insurance has been severely limited. WHEREAS, Indemnitee is currently entitled to indemnification under Delaware General Corporation Law and the Certificate of Incorporation of the Company. WHEREAS, Indemnitee regards the protection extended by Delaware law and the Certificate of Incorporation as beneficial, but Indemnitee may not be willing to serve or continue to serve as director or officer of the Company without additional inducements, and the Company desires Indemnitee to serve in such capacity and in other capacities. AGREEMENT 1. Definitions. 1.1 "Agent" means any person who is or was a director, officer, employee, agent or fiduciary of the Company or a subsidiary of the Company, or is or was serving at the request of, for the convenience of, or to represent the interests of the Company or a subsidiary of the Company as a director, officer, employee, agent or fiduciary of another corporation, partnership, joint venture, trust or other enterprise or entity, including service with respect to an employee benefit plan. 1.2 "Disinterested Director" means a director of the Company who is not and was not a party to the proceeding for which indemnification is being sought by the claimant. 2 1.3 "Expenses" includes all direct and indirect costs of any type or nature whatsoever (including, without limitation, all attorneys' fees and related disbursements, other out-of-pocket costs and reasonable compensation for time spent by Indemnitee for which he/she is not otherwise compensated by the Company or any third party) actually and reasonably incurred by Indemnitee in connection with either the investigation, defense or appeal of a proceeding or establishing or enforcing a right to indemnification under this Agreement, Section 145 of the General Corporation Law of Delaware or otherwise. 1.4 "Independent Legal Counsel" means a law firm, a member of a law firm, or an independent practitioner,that is experienced in matters of corporation law and shall include any person who, under the applicable standards of professional conduct then prevailing, would not have a conflict of interest in representing either the Company or Indemnitee in an action to determine Indemnitee's rights under this Agreement. 1.5 "Proceeding" means any threatened, pending, or completed action, suit or other proceeding, whether civil, criminal, administrative, investigative or any other type whatsoever. 1.6 "Subsidiary" means any corporation, partnership, joint venture or other enterprise, a majority of whose equity interests are owned by the Company, directly or through one or more other subsidiaries. 2. Agreement to Serve. Indemnitee agrees to serve or to continue to serve as an Agent of the Company in the capacity Indemnitee currently serves as an agent of the Company, so long as he/she is duly appointed or elected and qualified in accordance with the applicable provisions of the Certificate of Incorporation of the Company or any Subsidiary of the Company or until such time he/she tenders his/her resignation in writing. 3. D&O Insurance. 3.1 Maintenance of D&O Insurance. So long as Indemnitee shall continue to serve in any capacity described in Section 2 and thereafter so long as there is any reasonable possibility that Indemnitee shall be subject to any proceeding by reason of the fact that Indemnitee served in any of such capacities, the Company will use reasonable efforts to purchase and maintain in effect for the benefit of Indemnitee one or more valid, binding and enforceable policies of directors' and officers' liability insurance ("D&O Insurance") providing, in all respects, coverage and amounts as reasonably determined by the Board of Directors. 3.2 Unavailability or Impracticality of D&O Insurance. Notwithstanding subsection 3.1, the Company shall not be required to maintain D&O Insurance if (a) such insurance is not reasonably available or (b) in the reasonable business judgment of the Board of Directors of the Company as it may exist from time to time, either (i) the premium cost for such insurance is substantially disproportionate to the amount of insurance or (ii) the coverage is so limited by exclusions that there is insufficient benefit provided by such insurance. 3 4. Limitation of Indemnity. Notwithstanding anything in Section 7 or Section 8 to the contrary, the Company shall not be liable under this Agreement to make any indemnity payment or advancement of expenses in connection with any Proceeding (a) to the extent that payment is actually made to or on behalf of Indemnitee under a valid and collectible insurance policy, except in respect of any amount in excess of the limits of liability of such policy or any applicable deductible under such policy; (b) to the extent that payment has been or will be made to Indemnitee other than pursuant to this Agreement; (c) with respect to acts or omissions listed in Section 102(b)(7) of the Delaware General Corporation Law, as amended from time to time; and (d) if a final decision by a Court having jurisdiction in the matter shall determine that such indemnification is not lawful. 5. Notice and Defense of Claim. 5.1 Notification of Proceeding. Promptly after receipt by Indemnitee of notice of the commencement or the threat of commencement of any Proceeding, Indemnitee shall notify the Company of the commencement or threat of commencement thereof. The failure to notify or promptly notify the Company shall not relieve the Company from any liability that it may have to Indemnitee otherwise than under this Agreement and shall relieve the Company from liability hereunder only to the extent the Company has been prejudiced in its defense of such Proceeding as a result of Indemnitee's failure to notify the Company. 5.2 Notice to Insurer. If, at the time of the receipt of a notice of the commencement of a Proceeding pursuant to subsection 5.1, the Company has D&O Insurance in effect, the Company shall give prompt notice of the commencement of such proceeding to the insurers in accordance with the procedures set forth in the D&O Insurance policy. The Company shall thereafter take all necessary or desirable action to cause such insurers to pay, to or on behalf of Indemnitee, all amounts payable as a result of such proceeding in accordance with the terms of such policy. 5.3 Assumption of Defense. In the event the Company shall be obligated to pay any expenses or costs of any Proceedings against Indemnitee, the Company, if appropriate, shall be entitled to assume the defense of such proceeding, with counsel approved by Indemnitee, upon the delivery to Indemnitee of written notice of its election to assume the defense. After delivery of such notice, the Company will not be liable to Indemnitee under this Agreement for any fees of counsel subsequently incurred by Indemnitee with respect to the same Proceeding, provided, however, that (a) Indemnitee shall have the right to employ separate counsel in any such Proceeding at Indemnitee's expense, or (b) if (i) the employment of counsel by Indemnitee has been previously authorized by the Company, (ii) Indemnitee shall have reasonably concluded that there may be a conflict of interest between the Company and Indemnitee in the conduct of such defense, or (iii) the Company shall not, in fact, have employed counsel to assume the defense of such Proceeding, then the fees and expenses of Indemnitee's counsel shall be at the expense of the Company. The Company shall not be entitled to assume the defense of any Proceeding brought by or in the right of the Company or as to which Indemnitee shall have made the conclusion provided for in (b)(ii) above. 4 5.4 Cooperation and Settlement of Claim. In defense of any claim or threat thereof, Indemnitee shall give the Company such information and cooperation as the Company may reasonably request. The Company shall not be liable to indemnify Indemnitee under this Agreement for any amounts paid in settlement of any action or claim effected without the prior written consent of the Company. The Company shall not settle any action or claim in any manner which will impose any penalty or limitation on Indemnitee without Indemnitee's prior written consent. Both the Company and Indemnitee agree that they will not unreasonably withhold their consent to any proposed settlement. In the event that consent is not given and the parties hereto are unable to agree on a proposed settlement, Independent Legal Counsel shall be retained by the Company, at its expense (with the consent of Indemnitee, which consent shall not be unreasonably withheld), for the purpose of determining whether or not the proposed settlement is reasonable under all the circumstances; and if Independent Legal Counsel determines the proposed settlement is reasonable under all the circumstances, the settlement may be consummated without the consent of the other party. 6. Determination of Right to Indemnification. 6.1 Procedure. The Secretary of the Company shall, promptly upon receipt of a request for indemnification, advise the Board of Directors in writing that Indemnitee has requested indemnification. Indemnitee shall be entitled to indemnification if: (i) Indemnitee is in fact an Agent of the Company or is or was serving at the request of the Company as an Agent of another entity, (ii) Indemnitee acted in good faith and in a manner Indemnitee reasonably believed to be in or not opposed to the best interests of the Company, (iii) with respect to any criminal action or proceeding, Indemnitee had no reason to believe his/her conduct was unlawful, and (iv) the indemnification would not otherwise be prohibited under Delaware law. The determination with respect to Indemnitee's entitlement to indemnification shall be made in the specific case as follows: (a) by a majority vote of Disinterested Directors, even though less than a quorum, (b) by Independent Legal Counsel selected by such Disinterested Directors, or (c) if Disinterested Directors cannot be obtained, by vote of the stockholders of the Company. 6.2 Notice of Determination. Following the determination with respect to Indemnitee's entitlement to indemnification under subsection 6.1, the Secretary or any other officer of the Company shall provide written notice to Indemnitee of such determination. 6.3 Payment of Indemnification. After a determination that Indemnitee is entitled to indemnification, whether under subsection 6.1 or pursuant to an adjudication or arbitration under Section 9, the Company shall pay all costs and expenses reasonably incurred by Indemnitee in investigating, defending, and appealing any Proceeding against Indemnitee. Such payment shall be made within a reasonable time after the Company's receipt of evidence that an indemnifiable expense has been incurred. 6.4 Payment of Independent Legal Counsel. If the determination of entitlement to indemnification is to be made by Independent Legal Counsel under subsection 6.1 5 of this Agreement, the Company shall pay any and all reasonable fees and expenses incurred by such independent counsel in connection with acting pursuant to this Agreement. 6.5 Payment of Expenses Incurred by Indemnitee in Making Determination. All reasonable costs or expenses (including attorneys' fees and disbursements) incurred by Indemnitee in cooperating with the persons responsible for making the determination called for under subsection 6.1 shall be borne by the Company, irrespective of the determination as to Indemnitee's entitlement to indemnification. 6.6 Presumption of Entitlement to Indemnification. In making any determination under subsection 6.1 or subsection 9.1, it shall be presumed that Indemnitee is entitled to indemnification under this Agreement, and the Company shall have the burden of proof to overcome this presumption. As is provided under Section 145 of the General Corporation Law of Delaware, the termination of any Proceeding covered by this Agreement, by judgment, order, settlement or conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption for the purpose of subsection 6.1 or any other provision of this Agreement that Indemnitee did not act in good faith and in a manner that Indemnitee reasonably believed to be in or not opposed to the best interests of the Company and, with respect to any criminal action or proceeding, had reasonable cause to believe that the conduct was unlawful. 7. Mandatory Indemnification. Subject to the limitations set forth in Section 4 and the determination to be made under Section 6, if Indemnitee is a person who was or is a party or is threatened to be made a party to or is involved (including involvement as a witness) in a Proceeding, including any action by or in the right of the Company, by reason of the fact that he/she is or was or has agreed to become an Agent, or by reason of any action alleged to have been taken or omitted by him/her in any capacity, the Company shall indemnify Indemnitee against all expense, liability and loss (including, but not limited to, judgements, fines, ERISA excise taxes or penalties and amounts paid or to be paid in settlement), actually and reasonably incurred by him/her in connection with the investigation, defense, settlement or appeal of such Proceeding; provided, however, that except as provided in subsection 9.1 of this Agreement with respect to remedies of Indemnitee, the Company shall indemnify Indemnitee in connection with a Proceeding (or part thereof) initiated by Indemnitee only if such Proceeding (or any part thereof) was authorized by the Board of Directors of the Company. 8. Mandatory Advancement of Expenses. The Company shall pay in advance of final determination all costs and expenses reasonably incurred by Indemnitee in connection with the investigation, defense, settlement or appeal of any Proceeding to which Indemnitee is a party or is threatened to be made a party or with respect to which Indemnitee is otherwise involved (including involvement as a witness) as an Agent. An advancement of expenses incurred by Indemnitee in his/her capacity as an Agent shall be made only upon receipt by the Company of (a) a written affirmation by Indemnitee of Indemnitee's good faith belief that Indemnitee has met the standard of conduct necessary for indemnification as outlined in Section 6 and Section 7, and (b) an undertaking by or on behalf of Indemnitee to repay all amounts so advanced if it shall ultimately be determined by final judicial decision from which there is no 6 further right to appeal that Indemnitee is not entitled to be indemnified for such expenses under this Agreement or otherwise. The advances to be made hereunder shall be paid within a reasonable time after the Company's receipt of a written request for reimbursement for incurred costs and expenses. 9. Remedies of Indemnitee. 9.1 In the event (a) the Company determines pursuant to subsection 6.1 that Indemnitee is not entitled to indemnification under this Agreement or (b) the Company fails to make the determination called for in subsection 6.1 within 60 days of the Company's receipt of the request for indemnification, Indemnitee may seek an adjudication in an appropriate court of the State of Delaware, or in any other court of competent jurisdiction, for the purpose of enforcing Indemnitee's right to indemnification or the advance payment of expenses pursuant to this Agreement. Alternatively, Indemnitee may, at Indemnitee's option, seek an award in arbitration to be conducted by a single arbitrator pursuant to the rules of the American Arbitration Association. Indemnitee must exercise the rights under this subsection within 180 days of the earlier of (x) the date of notice of a determination that Indemnitee is not entitled to indemnification or (y) the date 60 days after the Company receives the request for indemnification. 9.2 In the event that a determination shall have been made pursuant to Section 6 of this Agreement that Indemnitee is not entitled to indemnification, any judicial proceeding or arbitration commenced pursuant to this Section 9 shall be conducted in all respects as a de novo trial or arbitration, on the merits, and Indemnitee shall not be prejudiced by reason of that adverse determination. 9.3 If a determination shall have been made pursuant to Section 6 of this Agreement that Indemnitee is entitled to indemnification, the Company shall be bound by such determination in any judicial proceeding or arbitration commenced pursuant to this Section 9, absent (a) a misstatement by Indemnitee of a material fact, or an omission of a material fact necessary to make Indemnitee's statement not materially misleading, in connection with the request for indemnification or (b) a prohibition of such indemnification under applicable law. 9.4The Company shall be precluded from asserting in any judicial proceeding or arbitration commenced pursuant to this Section 9 that the procedures and presumptions of this Agreement are not valid, binding and enforceable and shall stipulate in any such court or before any such arbitrator that the Company is bound by all the provisions of this Agreement. 9.5 The obligations of the Company to make the payments required to be made hereunder and to perform and observe the other agreements on its part contained herein, shall not be subject to diminution by set off, counterclaim, abatement or otherwise; provided, however, that Indemnitee shall not be released from any liability or obligation that Indemnitee may owe the Company, whether hereunder or otherwise. 7 9.6 Indemnitee's expenses incurred in successfully establishing his/her right to indemnification or advancement of expenses under this Section 9, in whole or in part, in any such action (or settlement thereof) shall be paid by the Company. 10. Notice. All notices, requests, demands, and other communications relating to this Agreement shall be in writing and shall be deemed to be duly given if (a) delivered by hand and receipted for by the party to whom the notice or communication shall have been directed or (b) mailed by certified or registered mail with postage prepaid, on the third business day after the date on which it is so mailed: if to Indemnitee, to: - ------------------------------------- - ------------------------------------- or to such other address as may have been furnished to the Company by Indemnitee and if to the Company, to: Payless Cashways, Inc. 2300 Main Kansas City, MO 64108 Attention: Secretary/Assistant Secretary with a copy to: Blackwell Sanders Matheny Weary & Lombardi LLP 2300 Main Kansas City, MO 64108 Attention: Gary D. Gilson or to such other address as may have been furnished to Indemnitee by the Company. 11. Severability. If this Agreement, or any portion hereof, shall be held to be invalid or unenforceable for any reason, the Company shall nevertheless indemnify Indemnitee as to all expenses, judgments, fines and penalties with respect to any action, suit or proceeding, whether threatened or commenced, to the full extent permitted by any portion of this Agreement that shall not have been held to be invalid or unenforceable under the General Corporation Law of Delaware and the Certificate of Incorporation of the Company. Such invalidity or unenforceability shall not otherwise affect the validity or enforceability of the other provisions hereof. 8 12. Modification and Waiver. No supplement, modification, or amendment of this Agreement shall be binding unless executed in writing by both parties. No waiver of any of the provisions of this Agreement shall be deemed or shall constitute a waiver of any other provisions (whether or not similar); nor shall such waiver constitute a continuing waiver. 13. Continuation of Indemnity. All agreements and obligations of the Company contained in this Agreement shall continue during the period Indemnitee has consented to be or is a director or officer of the Company or is or was serving at the request of the Company as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise and shall continue thereafter so long as Indemnitee shall be subject to any possible claim or threatened, pending or completed Proceeding by reason of the fact that Indemnitee has consented to be or is or was a director or officer of the Company or is or was serving in any other capacity referred to in this Agreement. 14. Binding Effect. This Agreement shall be binding upon the Company and its successors and assigns and shall inure to the benefit of Indemnitee and his/her heirs, assigns and personal representatives. 15. Non-exclusivity. The indemnification, contribution and advance payment of expenses provided by any provision of this Agreement shall not be deemed exclusive of any other rights to which Indemnitee may be entitled under any provision of law, the Certificate of Incorporation, any Bylaw, other agreement, vote of stockholders or disinterested directors or otherwise, both as to action in Indemnitee's official capacity and as to action in any other capacity after consenting to serve as a director or while occupying any of the positions or having any of the relationships referred to in this Agreement. 16. Subrogation Rights. In the event of any payment under this Agreement, the Company shall be subrogated to the extent of such payment to all of the rights of recovery of Indemnitee against any person or organization and Indemnitee shall execute all papers required and shall do everything that may be reasonablely necessary to secure such rights. 17. Document to Supersede.This Agreement shall supersede any other prior written Indemnification Agreement between the Company and Indemnitee. 18. Governing Law. The parties agree that this Agreement shall be construed and enforced in accordance with and governed by the laws of the State of Delaware applicable to contracts made and to be performed in that state. 19. Counterparts. This Agreement may be executed in any number of counterparts, each of which shall constitute the original. 20. Headings. The headings of the paragraphs of this Agreement are inserted for convenience only and shall not be deemed to constitute part of this Agreement or to affect the construction of it. 9 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. PAYLESS CASHWAYS, INC. - --------------------------------- ---------------------------------------- Name: By: - --------------------------------- ---------------------------------------- Address: Title: - --------------------------------- ---------------------------------------- - --------------------------------- EX-15 9 KPMG PEATMARWICK LETTER 1 [Letterhead of KPMG Peat Marwick LLP] EXHIBIT 15.1 INDEPENDENT AUDITORS' REPORT ---------------------------- The Board of Directors Payless Cashways, Inc.: We have reviewed the accompanying condensed balance sheets of Payless Cashways, Inc. as of February 28, 1998 and March 1, 1997 and the related condensed statements of operations and cash flows for the thirteen-week periods then ended. These condensed financial statements are the responsibility of the Company's management. We conducted our reviews in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our reviews, we are not aware of any material modifications that should be made to the accompanying condensed financial statements for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the balance sheet of Payless Cashways, Inc. as of November 29, 1997 and the related statements of operations, shareholders' equity and cash flows for the fiscal year then ended (not presented herein); and in our report dated January 19, 1998, we expressed an unqualified opinion on those financial statements. In our opinion, the information set forth in the accompanying condensed balance sheet as of November 29, 1997 is fairly presented, in all material respects, in relation to the balance sheet from which it has been derived. Our report states that the November 29, 1997 balance sheet reflects the application of fresh-start reporting as of that date and, therefore, is not comparable in all respects to the balance sheets of the Company prior to November 29, 1997. s/ KPMG Peat Marwick LLP Kansas City, Missouri March 17, 1998 EX-27 10 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from the February 28, 1998, financial statements and is qualified in its entirety by reference to such financial statements. 1000 3-MOS NOV-28-1998 FEB-28-1998 5604 0 0 0 411358 444912 367064 (8301) 840917 172332 438513 0 0 200 158638 840917 394271 395060 291909 291909 0 0 10235 (33150) (8188) (24962) 0 0 0 (24962) (1.25) 0
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