-----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, RfzHY1KMDeqGgAtR8F1vy7WBXQo7QUuAQv+3NHzDkAORyEjhGNgi8XZg7eBExb0t drakHaAYLv44UBjaKDItPA== 0000950123-97-006027.txt : 19970722 0000950123-97-006027.hdr.sgml : 19970722 ACCESSION NUMBER: 0000950123-97-006027 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19970531 FILED AS OF DATE: 19970721 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: PAYLESS CASHWAYS INC CENTRAL INDEX KEY: 0000076744 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-LUMBER & OTHER BUILDING MATERIALS DEALERS [5211] IRS NUMBER: 420945849 STATE OF INCORPORATION: IA FISCAL YEAR END: 1130 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-08210 FILM NUMBER: 97643175 BUSINESS ADDRESS: STREET 1: TWO PERSHING SQ 2300 MAIN ST CITY: KANSAS CITY STATE: MO ZIP: 64108 BUSINESS PHONE: 8162346000 10-Q 1 FORM 10-Q 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 May 31, 1997 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 1-8210 PAYLESS CASHWAYS, INC. (Exact Name of Registrant as Specified in Its Charter) Iowa 42-0945849 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) Two Pershing Square 2300 Main, P.O. Box 419466 Kansas City, Missouri 64141-0466 (Address of Principal Executive Offices) (Zip Code) (816) 234-6000 (Registrant's Telephone Number, Including Area Code) 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. Common Stock, $.01 par value, outstanding as of July 15, 1997: Voting -- 39,964,041 shares 2 PAYLESS CASHWAYS, INC. PART I -- FINANCIAL INFORMATION Item 1. Financial Statements. STATEMENTS OF OPERATIONS (Unaudited) (1) and (2)
(In thousands, except per share amounts) Thirteen Weeks Ended Twenty-Six Weeks Ended --------------------------------------------------------------------- May 31, May 25, May 31, May 25, 1997 1996 1997 1996 --------------------------------------------------------------------- INCOME Net sales $ 661,191 $ 682,252 $ 1,148,741 $ 1,209,019 Other income 1,264 1,521 2,469 3,118 --------------------------------------------------------------------- 662,455 683,773 1,151,210 1,212,137 COSTS AND EXPENSES Cost of merchandise sold 483,093 491,500 831,340 864,416 Selling, general and administrative 151,147 152,929 289,554 294,334 Provision for depreciation and amortization 13,037 13,586 25,841 26,770 Interest expense 16,274 14,606 32,329 29,958 --------------------------------------------------------------------- 663,551 672,621 1,179,064 1,215,478 --------------------------------------------------------------------- INCOME (LOSS) BEFORE INCOME TAXES (1,096) 11,152 (27,854) (3,341) Federal and state income taxes 12,133 5,286 (6,490) (1,584) --------------------------------------------------------------------- NET INCOME (LOSS) $ (13,229) $ 5,866 $ (21,364) $ (1,757) ===================================================================== Net income (loss) attributable to common stock $ (14,832) $ 4,385 $ (24,538) $ (4,689) ===================================================================== Net income (loss) per common share (3) $ (.37) $ .11 $ (.61) $ (.12) ===================================================================== Weighted average common and dilutive common equivalent shares outstanding 39,963 40,063 39,961 39,933 =====================================================================
See notes to condensed financial statements -2- 3 PAYLESS CASHWAYS, INC. CONDENSED BALANCE SHEETS (Unaudited) (1) and (2)
May 31, November 30, May 25, (In thousands) 1997 1996 1996 -------------------------------------------------------- ASSETS CURRENT ASSETS Cash and cash equivalents $ 7,847 $ 425 $ 8,001 Merchandise inventories (4) 419,275 399,010 425,999 Prepaid expenses and other current assets 22,987 22,281 26,659 Income taxes receivable 23,861 15,200 -- Deferred income taxes 12,527 13,681 18,337 -------------------------------------------------------- TOTAL CURRENT ASSETS 486,497 450,597 478,996 OTHER ASSETS Real estate held for sale 13,374 18,529 8,591 Cost in excess of net assets acquired, less accumulated amortization of $109,950 $105,198 and $100,343, respectively 289,210 292,946 320,208 Deferred financing costs 12,026 12,837 10,493 Other 14,254 12,917 15,982 LAND, BUILDINGS AND EQUIPMENT 794,450 782,935 812,483 Allowance for depreciation and amortization (292,336) (277,643) (273,202) -------------------------------------------------------- TOTAL LAND, BUILDINGS AND EQUIPMENT 502,114 505,292 539,281 -------------------------------------------------------- $ 1,317,475 $ 1,293,118 $ 1,373,551 ========================================================
See notes to condensed financial statements -3- 4 PAYLESS CASHWAYS, INC. CONDENSED BALANCE SHEETS - Continued (Unaudited) (1) and (2)
May 31, November 30, May 25, (In thousands) 1997 1996 1996 -------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Current portion of long-term debt $ 19,208 $ 18,340 $ 15,449 Trade accounts payable 150,357 121,891 205,186 Other current liabilities 159,306 172,918 144,378 Income taxes payable 5,632 6,444 9,621 -------------------------------------------------------- TOTAL CURRENT LIABILITIES 334,503 319,593 374,634 LONG-TERM DEBT, less portion classified as current liability (1) and (5) 647,187 618,667 609,060 NON-CURRENT LIABILITIES Deferred income taxes 42,682 41,665 59,385 Other 24,626 23,462 23,521 SHAREHOLDERS' EQUITY Preferred Stock, $1.00 par value, 25,000,000 shares authorized; issued: Cumulative Preferred Stock, 406,000 shares, $81,737, $78,563 and $75,512 aggregate liquidation preference, respectively 40,600 40,600 40,600 Common Stock, $.01 par value: Voting, 150,000,000 shares authorized, 39,520,241, 37,709,028, and 37,699,436 shares issued, respectively 395 377 376 Non-Voting Class A, 5,000,000 shares authorized, 450,000, 2,250,000 and 2,250,000 shares issued, respectively 5 23 23 Additional paid-in capital 487,838 487,728 487,628 Accumulated deficit (260,361) (238,997) (221,676) -------------------------------------------------------- TOTAL SHAREHOLDERS' EQUITY 268,477 289,731 306,951 -------------------------------------------------------- $ 1,317,475 $ 1,293,118 $ 1,373,551 ========================================================
See notes to condensed financial statements -4- 5 PAYLESS CASHWAYS, INC. CONDENSED STATEMENTS OF CASH FLOWS (Unaudited) (1) and (2)
Twenty-Six Weeks Ended ---------------------------------------- May 31, May 25, (In thousands) 1997 1996 ---------------------------------------- Cash Flows from Operating Activities Net loss $(21,364) $ (1,757) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization 25,841 26,770 Deferred income taxes 2,171 794 Non-cash interest 1,600 1,200 Other 2,046 1,001 Changes in assets and liabilities (15,224) 3,966 ------------------------------------- NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES (4,930) 31,974 Cash Flows from Investing Activities Additions to land, buildings and equipment (19,895) (18,118) Proceeds from sale of land, buildings and equipment 6,772 11,968 Acquisition of business, excluding working capital: Land, buildings and equipment -- (193) Purchase price in excess of net assets acquired (1,015) (1,360) Increase in other assets (1,337) (1,057) ------------------------------------- NET CASH USED IN INVESTING ACTIVITIES (15,475) (8,760) Cash Flows from Financing Activities Retirements of long-term debt (7,450) (23,447) Proceeds from long-term debt 36,838 7,857 Sale of Common Stock under stock option plan -- 79 Other (1,561) (662) ------------------------------------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 27,827 (16,173) ------------------------------------- Net increase in cash and cash equivalents 7,422 7,041 Cash and cash equivalents, beginning of period 425 960 ------------------------------------- Cash and cash equivalents, end of period $ 7,847 $ 8,001 =====================================
See notes to condensed financial statements -5- 6 PAYLESS CASHWAYS, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS Twenty-six weeks ended May 31, 1997, and May 25, 1996. (1) On July 21, 1997 (the "Petition Date"), the Company commenced a reorganization case (the "Case") by filing a voluntary petition for relief under Chapter 11, Title 11 of the United States Code ("Chapter 11") in the U.S. Bankruptcy Court for the Western District of Missouri in Kansas City (the "Court"). While the Company had sufficient liquidity to fund its current operations, the operating performance of the Company during the second quarter of fiscal 1997, which was well below the Company's expectations, has led management to conclude that it was unlikely that the Company would be able to comply with the covenants contained in its principal credit agreements at the end of the current fiscal year. In the course of the Company's subsequent negotiations with its senior lenders to restructure its debt and after considering all other alternatives with its financial adviser, Houlihan Lokey Howard & Zukin, including the sale of the Company and liquidation, the Company concluded that a Chapter 11 proceeding provided the best approach for a comprehensive financial restructuring of the Company. On July 21, 1997, the Company filed a Disclosure Statement (the "Disclosure Statement") and a Plan of Reorganization (the "Plan") with the Court. The following summary of the Plan omits certain information set forth in the Plan. Any statements contained herein concerning the Plan are not necessarily complete, and in each such instance reference is made to the Plan, a copy of which is filed as an exhibit to this report. Each such statement is qualified in its entirety by such reference. The Court must determine whether the Disclosure Statement contains adequate information to permit a creditor to make an informed decision about the Plan. Once the Disclosure Statement is approved, the Plan will be presented to the Company's impaired creditors and equity security holders for acceptance or rejection. Under the Plan, the Company proposes to cancel existing shares of common and preferred stock and issue approximately 20,000,000 shares of newly reorganized Payless Cashways, Inc. common stock (the "New Common Stock"), as described below. The Plan generally provides for the following: (I) The secured bank group (the "Existing Lenders") under the existing credit agreement (the "Amended Credit Agreement") will receive (a) payment of accrued interest, fees and expenses, (b) Net Cash Proceeds (as defined in the Plan) from the sale of certain collateral securing the Amended Credit Agreement and the collection of certain promissory notes pledged to the Existing Lenders, (c) their allocable portion of $273 million of new term notes (the "New Term Notes") under a secured term loan facility to take effect upon emergence from Chapter 11 (the "Term Facility") and (d) an estimated 10,800,000 shares of New Common Stock (equivalent to approximately 54% of the shares of the newly reorganized Company expected to be outstanding upon emergence from Chapter 11 (the "Effective Date")), of which 460,000 shares will be distributed to the lenders providing a revolving credit facility to supply working capital financing to take effect upon emergence from Chapter 11 (the "Exit Facility") in consideration for their commitment to provide the Exit Facility. The aggregate principal amount of the New Term Notes and the number of shares of New Common Stock allocated to the Existing Lenders is subject to adjustment as set forth in the Plan. The New Term Notes will be subject to a scheduled amortization of an aggregate of $3 million per year and shall be prepaid in the amount of any dispositions or realizations on certain collateral. In addition, the New Term Notes will be prepaid from an annual cash flow sweep of 65% of excess cash flow (as defined in the Term Facility). The New Term Notes will also contain covenants and other provisions consistent with the Amended Credit Agreement. (II) The holders of notes under the existing loan facility with the Prudential Insurance Company of America (the "Prudential Loan Facility") will receive new Prudential notes (the "New Prudential Notes") pursuant to a new Prudential Loan Facility in the amount of the existing notes. These New Prudential Notes will bear interest at a rate of 9.25% per annum, mature on December 31, 2003, will amortize at a rate of $2.5 million per quarter and will be secured by the same collateral that secures the existing Prudential Loan Facility. (III) Unsecured claims against the Company of vendors and suppliers for goods delivered and services rendered prior to the Petition Date, claims in respect of the Senior Subordinated Notes, unliquidated claims arising out of litigation 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 an aggregate number of shares of New Common Stock equal to (a) 19,000,000 less (b) the number of such shares allocated to the Existing Lenders. It is estimated that holders of General -6- 7 PAYLESS CASHWAYS, INC. Unsecured Claims will receive 8,200,000 shares or approximately 41% of the shares of the newly reorganized Company expected to be outstanding on the Effective Date. (IV) Holders of issued and outstanding shares of existing preferred stock will receive their pro rata share of 600,000 shares of New Common Stock (estimated to be 3% of the shares of the newly reorganized Company expected to be outstanding on the Effective Date). (V) Holders of issued and outstanding shares of existing common stock will receive their pro rata share of 400,000 shares of New Common Stock (estimated to be 2% of the shares of the newly reorganized Company expected to be outstanding on the Effective Date). In addition, any stock options relating to existing preferred stock and common stock will be canceled on the Effective Date. In the event that any impaired class of unsecured creditors or equity security holders rejects the Plan, holders of existing shares of common stock would not receive or retain any property under the Plan. Fractional shares of New Common Stock will not be issued to creditors or shareholders in connection with the Plan. In addition, no distribution of less than $5.00 will be made for fractional share interests. As a result of these provisions, many current equity security holders will receive no distribution of stock or cash under the Plan. Borrowings under the Amended Credit Agreement are no longer available to the Company. A commitment for a revolving credit facility (the "DIP Agreement"), subject to Court approval, has been entered into between the Company and a group of institutional lenders (the "DIP Lenders") led by Canadian Imperial Bank of Commerce ("CIBC"), as agent bank. The aggregate DIP Agreement commitment is $125 million with sublimits of $100 million for revolving credit loans and documentary letters of credit (which may not exceed $15 million in the aggregate outstanding at any one time) and $25 million for standby letters of credit. Of the $100 million revolving credit loan/documentary letter of credit sublimit, $80 million is available immediately with the remaining $20 million to be made available upon the application of the Net Cash Proceeds from realizations upon certain collateral securing the Amended Credit Agreement, to reduce amounts outstanding under the Amended Credit Agreement by at least an aggregate of $20 million. On April 1, 1998, the commitment will be automatically reduced to $100 million with the revolving credit/documentary letter of credit subfacility reducing to $75 million (of which only $55 million would be available unless $20 million in Net Cash Proceeds of the designated collateral described above has been applied to reduce amounts outstanding under the Amended Credit Agreement). Interest is to be charged at an annualized rate of 1.5% in excess of CIBC's Alternate Base Rate or, at the Company's option, LIBOR plus 2.5%. As collateral for borrowings under the DIP Agreement, the Company will grant to the DIP Lenders a first priority priming lien in all the collateral securing the Amended Credit Agreement and all property of the Company unencumbered as of the Petition Date or acquired during the Case and a second priority lien on all the collateral securing the existing Prudential Loan Facility and other collateral pledged to other creditors. The DIP Agreement includes various restrictive covenants prohibiting the Company from, among other things, incurring additional indebtedness, with certain limited exceptions, making investments, except for certain limited exceptions (such as the Company's strategic initiatives) and making dividend, redemption and certain other payments on its capital stock. The DIP Agreement also contains certain customary financial covenants and events of default for financing of this type, including a change of control covenant. The DIP Agreement will terminate on the Effective Date or, if earlier, one year after the Petition Date, subject to certain other termination provisions. On the Effective Date, the Company intends to pay all amounts outstanding under the DIP Agreement. It is currently proposed that such payments will be financed from the proceeds of the Exit Facility. As currently proposed, the Exit Facility will have a commitment of $150 million for revolving loans with a sublimit of $40 million for letters of credit. Revolving credit loans under the Exit Facility will bear interest at the rate of LIBOR plus 2.5% per annum. The Exit Facility will be secured by the same liens on all the collateral securing the DIP Agreement. -7- 8 PAYLESS CASHWAYS, INC. In order for the Company to reorganize and emerge from the Case, a plan of reorganization must be confirmed by the Court. A disclosure statement, approved by the Court will be sent to all classes of impaired creditors and equity security holders for acceptance or rejection. Following acceptance or rejection of any plan by impaired classes of creditors and equity security holders, the Court would consider whether to confirm the Plan. Among other things to confirm a plan, the Court is generally required to find that (a) each impaired class of creditors and equity security holders will, pursuant to the Plan, receive at least as much as the class would have received in liquidation of the Company, (b) each impaired class of creditors and equity security holders has accepted the Plan by the requisite vote and (c) confirmation of the Plan is not likely to be followed by the liquidation or need for further financial restructuring of the Company. If any impaired class of creditors or equity security holders does not accept a plan and assuming that all other requirements of the Bankruptcy Code are met, the plan proponents may invoke the so-called "cram-down" provisions of the Bankruptcy Code, whereby the Court may confirm a plan notwithstanding the non-acceptance of the plan by an impaired class of creditors or security holders if, among other things, the plan is fair and equitable and does not discriminate unfairly with respect to each impaired class of claims or interests that has not accepted the plan. The accompanying condensed financial statements have been prepared on a going concern basis, which assumes continuity of operations, realization of assets and liquidation of liabilities in the ordinary course of business. However, as a result of the Chapter 11 filing and circumstances relating thereto, substantial uncertainty exists with respect to the Company's ability to continue as a going concern. If the Company is unable to obtain confirmation of its plan or reorganization, its creditors or equity security holders may seek a liquidation of the Company by conversion to a Chapter 7 bankruptcy proceeding or otherwise. In that event, it is likely that additional liabilities and claims would be asserted which are not presently reflected in the Company's financial statements. Furthermore, certain assets and liabilities, such as merchandise inventories and liabilities related to defined benefit pension plans, are presented using assumptions appropriate for an ongoing business. In the event of liquidation, other assumptions would be utilized and the amounts reflected in the financial statements would be subject to adverse adjustments in amounts which, while not presently determinable, would be material. Financial accounting during a Chapter 11 proceeding is prescribed in "Statement of Position 90-7 of the American Institute of Certified Public Accountants," titled "Financial Reporting by Entities in Reorganization Under the Bankruptcy Code" which the Company adopted July 21, 1997. Among other things, Statement of Position 90-7 provides that the emergence from the Chapter 11 proceeding would result in the creation of a new reporting entity without any accumulated deficit and with the Company's assets and liabilities restated to their fair values, under so-called "fresh start" reporting. The impacts of fresh start reporting will be dependent on the terms of any plan of reorganization confirmed by the Bankruptcy Court and the fair values of assets and liabilities at such time. However, the Company believes that the present aggregate carrying value of goodwill and land, buildings and equipment exceed the fair value of such assets and, as a result, write-downs in the carrying value of such assets will likely be required as a part of fresh start reporting, although the amounts of such write-downs are not presently determinable. On July 21, 1997, the Company also announced its plan to close 29 stores and to eliminate approximately 15% of the staff at the Company's headquarters and regional administrative centers, subject to Court approval. These actions are expected to result in a pretax charge of $60 to $70 million in the third quarter of fiscal 1997 for store closing costs, including $55 to $65 million in non-cash write-offs of goodwill and write-downs of real estate and inventory. Additionally, it is expected that the third quarter of fiscal 1997 will include a charge of approximately $12 million to write-off the remaining balance of deferred financing costs pursuant to Statement of Position 90-7. (2) 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 30, 1996, 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 30, 1996, condensed balance sheet has been derived from the audited financial statements as of that date. -8- 9 PAYLESS CASHWAYS, INC. (3) Net income (loss) per common share has been computed based on the weighted average number of common shares outstanding during the period plus common stock equivalents, when dilutive, consisting of certain stock options and shares issuable under the Director Deferred Compensation Plan, when applicable. For purposes of this computation, net income (loss) was adjusted for dividend requirements on preferred stock. (4) Approximately 82% 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 $27.0 million, $24.3 million and $30.2 million higher than reported at May 31, 1997, November 30, 1996, and May 25, 1996, respectively. (5) Long-term debt consisted of the following:
May 31, November 30, May 25, (In thousands) 1997 1996 1996 --------------------------------------------------------- Amended Credit Agreement $ 390,837 $ 354,000 $ 333,857 Mortgage loan payable to insurance company 100,608 108,000 115,591 Senior subordinated notes 173,655 173,655 173,655 Other senior debt 1,295 1,352 1,406 --------------------------------------------------------- 666,395 637,007 624,509 Less portion classified as current liability (19,208) (18,340) (15,449) --------------------------------------------------------- $ 647,187 $ 618,667 $ 609,060 =========================================================
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. PETITION FOR RELIEF UNDER CHAPTER 11 On October 3, 1996, the Company amended its $408 million credit agreement (the "Amended Credit Agreement") to include two tranches of term loans in the aggregate amount of $273 million, a revolving credit facility of $135 million and a $60 million working capital facility. All facilities matured in November, 2000. As part of the amendment, permitted levels of capital expenditures were increased, additional collateral (including substantially all merchandise inventory) was added, various covenants were modified or eliminated and interest rates were increased. The Amended Credit Agreement was designed to give the Company additional flexibility and liquidity in order to continue the implementation of its strategic plan and provide the banks with additional security. While the Company had sufficient liquidity to fund its current operations, the operating performance of the Company during the second quarter of fiscal 1997, which was well below the Company's expectations, has led management to conclude that it was unlikely that the Company would be able to comply with the covenants contained in its principal credit agreements at the end of the current fiscal year. In the course of the Company's subsequent negotiations with its senior lenders to restructure its debt and after considering all other alternatives with its financial adviser, Houlihan Lokey Howard & Zukin, including the sale of the Company and liquidation, the Company concluded that a Chapter 11 proceeding provided the best approach for a comprehensive financial restructuring of the Company. This action is intended to improve the Company's competitive position by establishing a more appropriate capital structure to operate the business in this period of unprecedented competitive pressure after a decade of dealing with a highly leveraged balance sheet which has limited capital expenditures. On July 21, 1997, the Company filed a voluntary petition to reorganize under Chapter 11 and filed a plan of reorganization for its emergence from Chapter 11. The Company will operate its business as a debtor-in-possession, subject to the jurisdiction of the Court, while pursuing its reorganization plan to restructure the Company's capitalization. As a -9- 10 PAYLESS CASHWAYS, INC. debtor-in-possession in Chapter 11, the Company may not engage in transactions outside of the ordinary course of business without the approval, after notice and hearing, of the Court. The Chapter 11 filing results in an automatic stay of the commencement or prosecution of claims against the Company that arose before the Petition Date. Until a reorganization plan is confirmed by the Court, payments of prepetition liabilities will be limited to those payments approved by the Court. In addition, a plan of reorganization will materially change the amounts currently recorded in its financial statements. The financial statements do not include any adjustments to reflect the possible future effects of the recoverability and classification of assets, the amounts and classification of liabilities which may be allowed in the reorganization plan, or the ultimate capitalization of the Company. On July 21, 1997, the Company filed a Disclosure Statement (the "Disclosure Statement") and Plan of Reorganization (the "Plan") with the Court. The Court must determine whether the Disclosure Statement contains adequate information to permit a creditor to make an informed decision about the Plan. Once the Disclosure Statement is approved, the Plan will be presented to the Company's impaired creditors and equity security holders. For a summary description of the Plan, See Note 1 to Notes to Condensed Financial Statements. Unless otherwise ordered by the Court, confirmation of the Plan requires approval of all impaired classes of creditors and affirmation by the Bankruptcy Court. There can be no assurance that the Plan will be approved in its present form. If the Company is unable to obtain confirmation of its Plan, its creditors or equity security holders may seek other alternatives for the Company, including bids for the Company or parts thereof through an auction process. In that event, it is possible that certain assets would not be realized and additional liabilities and claims would be asserted which are not presently reflected in the consolidated financial statements and which are not presently determinable. The effect of any such assertion or non-realization could be material. The Company will incur professional fees and other cash demands typically incurred in bankruptcy. The rights of prepetition creditors and shareholders and the ultimate payment of their claims and interests may be substantially altered and, in some cases, eliminated under the Bankruptcy Code. It is not possible at this time to predict the ultimate outcome of the Chapter 11 proceeding or its effects on the Company's business or on the claims or interests of creditors or shareholders. As proposed by the Plan, the claims of prepetition unsecured creditors and the interests of shareholders will be materially adversely affected. RESULTS OF OPERATIONS Income Net sales for the quarter ended May 31, 1997, decreased 3.1% from the same period of 1996 in total and 1.2% on a same-store sales basis. (Same stores are those open one full year.) Net sales for the first half of 1997 decreased 5.0% from the same period of 1996 in total and 2.7% on a same-store sales basis. Management believes that the sales declines for the second quarter and first half are primarily due to the impact of competitive pressure as well as a cool, wet spring. Same-store sales to do-it-yourself customers during the second quarter declined 7.3% and same-store sales to professional customers increased 6.7%. Six stores were closed during the first quarter of 1996 and eight additional stores were closed during the fourth quarter of 1996. Those fourteen stores accounted for $31.2 million of sales in the first half of 1996. Costs and Expenses Cost of merchandise sold as a percent of sales was 73.1% and 72.0% for the second quarter of 1997 and 1996, respectively. For the first half of 1997 and 1996, cost of merchandise sold as a percent of sales was 72.4% and 71.5%, respectively. The increase for the second quarter and first half of 1997 was primarily due to competitive price pressure and the growth in sales to the professional customer whose merchandise purchases include a higher percentage of commodity goods at margin rates somewhat lower than the Company's average. Selling, general and administrative expenses were 22.9% and 22.4% of sales for the second quarter of 1997 and 1996, respectively. For the first half of 1997 and 1996, selling, general and administrative expenses were 25.2% and 24.3% of -10- 11 PAYLESS CASHWAYS, INC. sales, respectively. The increase as a percent of sales for the 1997 periods was due to lower sales. Selling, general and administrative expenses for the second quarter and first half of 1997 decreased approximately $1.8 million and $4.8 million, respectively, compared to the same periods of the prior year. The decrease in dollars for both periods of 1997 was due primarily to savings from eight stores closed in the fourth quarter of 1996. The provision for depreciation and amortization decreased from the second quarter and first half of 1996 due primarily to goodwill written-off, assets written-down and assets removed from service in connection with a third quarter 1996 asset impairment charge and the closing of eight underperforming stores during the fourth quarter of 1996. Interest expense for the second quarter and first half of 1997 increased compared to the same periods of 1996 primarily due to higher borrowing levels in 1997. Higher interest rates in 1997 also contributed to the increase in interest expense for both periods. The income tax benefit for the first half of 1997 was $6.5 million compared to $1.6 million for the first half of 1996. The effective tax rates for both periods were different from the 35% statutory rate primarily due to the effect of goodwill amortization, which is non-deductible for income tax purposes. Such tax benefits reflect management's estimates of the annual effective tax rates at the end of each quarter. At the end of the second quarter of 1997, the Company adjusted its estimated annual effective income tax rate and the resulting year-to-date tax provision based on its estimate of annual pretax earnings. The Company reduced its annual earnings estimate based on the results of the second quarter and expectations for the balance of the year. Accordingly, the Company recorded a $12.1 million provision for income taxes in the second quarter of 1997. The second quarter income tax provision reduced the first quarter income tax benefit of $18.6 million by $12.9 million as a result of adjusting the estimated annual effective income tax rate. Net Loss Net loss for the quarter ended May 31, 1997, was $13.2 million compared to net income of $5.9 million for the same period of 1996. For the first half of 1997, net loss was $21.4 million compared to $1.8 million for the same period of 1996. Net loss for the first half of 1997 was primarily the result of decreased same-store sales. Although the second quarter income tax provision, mentioned above, accounted for most of that period's net loss, the second quarter 1997 net loss was also affected by decreased same-store sales. In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128"), which is effective for reporting periods ending after December 15, 1997. The Company expects adoption of SFAS 128 to have an immaterial effect on its earnings per share. LIQUIDITY AND CAPITAL RESOURCES Cash used in operating activities was $4.9 million for the first half of 1997 compared to cash provided by operating activities of $32.0 million for the same period of 1996. The decrease in cash from operating activities was primarily caused by the increased net loss. Several other factors including a decrease in other current liabilities and an increase in income taxes receivable also contributed to the decrease in cash from operating activities. Other current liabilities decreased primarily due to the timing of payroll, insurance and property tax payments. Income taxes receivable increased due to a $6.5 million income tax benefit for the first half of 1997. During the first half of 1997 and 1996, the Company used cash of approximately $3.3 million and $8.4 million, respectively, in operating activities related to the execution of the 1996 and 1995 restructuring plans. Borrowings have been available under the Amended Credit Agreement to supplement cash generated by operations. At May 31, 1997, $56.1 million was available for borrowing under the Amended Credit Agreement. At May 31, 1997, working capital was $152.0 million compared to $131.0 million and $104.4 million at November 30, 1996 and May 25, 1996, respectively. The current ratios at May 31, 1997, November 30, 1996, and May 25, 1996, were 1.45 to 1, 1.41 to 1, and 1.28 to 1, respectively. Borrowings under the Amended Credit Agreement are no longer available to the Company. A commitment for a revolving credit facility (the "DIP Agreement"), subject to Court approval, has been entered into between the Company and the DIP Lenders. Certain terms of the DIP Agreement and -11- 12 PAYLESS CASHWAYS, INC. the Exit Facility are summarized in Note 1 to Notes to Condensed Financial Statements. The Company believes that its ongoing operating cash flow and the DIP Agreement should enable the Company to meet liquidity requirements during the restructuring process. However, notwithstanding all of the events and circumstances described above, there is substantial uncertainty with respect to the Company's liquidity. The Company's primary investing activities are capital expenditures for the implementation of the Company's Dual Path strategy, renovation of existing stores, and additional equipment. The DIP Agreement, upon Court approval, will limit the amount of capital expenditures which can be made ($69 million in fiscal 1997, $21 million in the first quarter of fiscal 1998 and $17 million in the second quarter of fiscal 1998, subject to certain adjustments). The Company spent approximately $20.9 million and $19.7 million during the first half of 1997 and 1996, respectively, for the implementation of the Company's Dual Path strategy, including the acquisition of a door and trim manufacturer during January 1996 and a truss manufacturer during March 1997, renovation of existing stores, and additional equipment. The Company intends to finance the remaining fiscal 1997 capital expenditures of approximately $48.1 million, consisting primarily of the implementation of the Company's Dual Path strategy, renovation of existing stores and additional equipment, with funds generated from operations and borrowings under the DIP Agreement. During the first quarter of 1996, the Company sold a distribution center in connection with the 1995 restructuring plan, providing approximately $11.9 million of cash proceeds. On July 21, 1997, the Company also announced its plan to close 29 stores and to eliminate approximately 15% of the staff at the Company's headquarters and regional administrative centers, subject to Court approval. These actions are expected to result in a pretax charge of $60 to $70 million in the third quarter of fiscal 1997 for store closing costs, including $55 to $65 million in non-cash write-offs of goodwill and write-downs of real estate and inventory. Additionally, it is expected that the third quarter of fiscal 1997 will include a charge of approximately $12 million to write-off the remaining balance of deferred financing costs pursuant to Statement of Position 90-7. FORWARD-LOOKING STATEMENTS Statements above in the sections entitled "Petition For Relief Under Chapter 11" and "Liquidity and Capital Resources" such as "unlikely," "intend", "estimated", "believe", "expect", "anticipate" and similar expressions which are not historical are forward-looking statements that involve risks and uncertainties. Such statements include, without limitation, the Company's expectation as to future performance. Such forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. There are certain important factors that could cause results to differ materially from those anticipated by some of the statements made above. Investors are cautioned that all forward-looking statements involve risks and uncertainty. In addition to the factors discussed above, among the other factors that could cause actual results to differ materially are the following: consumer spending and debt levels; interest rates; housing activity; lumber prices; product mix; growth of certain market segments; competitor activities; an excess of retail space devoted to the sale of building materials; success of the Dual Path strategy; the need for Bankruptcy Court approvals; the adequacy of and compliance with the DIP Agreement; stability of customer demand and supplier support and the many uncertainties involved in operating a business in a Chapter 11 bankruptcy environment. Additional information concerning certain of these and other factors is contained in the Company's Securities and Exchange Commission filings, including but not limited to the Form 10-K and Form 10-Q, copies of which are available from the Company without charge or on the Company's web site, payless.cashways.com. REVIEW BY INDEPENDENT AUDITORS The condensed consolidated financial statements of Payless Cashways, Inc. for the thirteen week and twenty-six week periods ended May 31, 1997 and May 25, 1996, have been reviewed by KPMG Peat Marwick LLP, independent auditors. Their report is included in this filing. -12- 13 PAYLESS CASHWAYS, INC. PART II -- OTHER INFORMATION Item 1. Legal Proceedings. On July 21, 1997, the Company filed a voluntary petition to reorganize under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Western District of Missouri in Kansas City. During the course of its Chapter 11 case, the Company will continue business operations as a debtor-in-possession. As a debtor-in-possession, the Company may not engage in operations outside the normal course of business without approval of the Court. See Notes to Condensed Financial Statements and Management's Discussion and Analysis of Financial Condition and Results of Operations. 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 30, 1996.) 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 Former Employee's motion for class certification has been denied on all claims except the age discrimination claims. No ruling has been entered on the Former Employee's motion for class certification of certain age discrimination claims. Each of the parties has conducted discovery pursuant to the court's scheduling order and discovery plan. The Company denies any and all claimed liability and is vigorously defending this litigation, but 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. The Annual Meeting of Shareholders was held April 17, 1997. Shareholders voted in favor of each of the four nominees for director: Harold Cohen (32,186,007 for; 3,305,010 withheld), Scott G. Fossel (32,103,217 for; 3,387,800 withheld), George Latimer (32,002,079 for; 3,488,938 withheld) and Susan M. Stanton (31,562,024 for; 3,928,993 withheld). Gary S. Kohler was elected (35,360,779 for; 100 withheld) as a Class II director to fill the vacancy anticipated as a result of the resignation of Gary D. Rose. Directors who were previously elected and whose term of office as a director continued after the meeting were David Stanley, William A. Hall, Wayne B. Lyon, Louis W. Smith, Ralph Strangis, and John H. Weitnauer, Jr. Item 5. Other Information. Subsequent to the Annual Meeting of Shareholders, Gary S. Kohler, Wayne B. Lyon and Harold Cohen have resigned from the Board of Directors for individual and various reasons. -13- 14 PAYLESS CASHWAYS, INC. Item 6. Exhibits and Reports on Form 8-K. a. Exhibits. 2.1 Plan of Reorganization. 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* Employment Agreement dated as of May 8, 1997, between Payless and Stanley K. Boyd. 11.1 Computation of per share loss. 15.1 Letter re unaudited financial information - KPMG Peat Marwick LLP. 27.1 Financial data schedule. 99.1 Press Release of July 21, 1997 announcing Chapter 11 filing. * Represents a management contract or a compensatory plan or arrangement. b. Reports on Form 8-K. No reports on Form 8-K were filed by Payless during the quarter ended May 31, 1997. -14- 15 PAYLESS CASHWAYS, INC. 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: July 21, 1997 By: s/Stephen A. Lightstone --------------------------------------------- Stephen A. Lightstone, Senior Vice President, Finance and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) -15- 16 EXHIBIT INDEX 2.1 Plan of Reorganization. 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* Employment Agreement dated as of May 8, 1997, between Payless and Stanley K. Boyd. 11.1 Computation of per share loss. 15.1 Letter re unaudited financial information - KPMG Peat Marwick LLP. 27.1 Financial data schedule. 99.1 Press Release of July 21, 1997 announcing Chapter 11 filing. * Represents a management contract or a compensatory plan or arrangement. EX-2.1 2 PLAN OF REORGANIZATION 1 EXHIBIT 2.1 In The United States Bankruptcy Court For the Western District of Missouri ) In re ) Chapter 11 ) PAYLESS CASHWAYS, INC., ) Case No. ) Debtor. ) PLAN OF REORGANIZATION The Debtor (as hereafter defined) proposes the following plan of reorganization pursuant to the provisions of 11 U.S.C. Section 1101, et seq. ARTICLE I. DEFINITIONS The terms set forth in this Article I shall have the respective meanings hereinafter set forth. Any capitalized term used but not otherwise defined herein shall have the meaning given to that term in the Code (as hereinafter defined). 1.1. "Administrative Expenses" shall mean, collectively, (a) any cost or expense of administration of the Chapter 11 Cases allowed under Section 503(b) or 507(a)(1) of the Code including, without limitation, any such allowed item constituting (i) an actual and necessary post-Filing Date expense of preserving the Debtor's estate, (ii) an actual and necessary post-Filing Date expense of operating the businesses of the Debtor including, without limitation, post-Filing Date loans or other advances or extensions of credit to the Debtor, including amounts advanced to, or credited to the account of the Debtor, or (iii) the amount of any Allowed Claims for reclamation pursuant to Section 546(c) of the Code, and (b) and fees or charges assessed against the Debtor's estate under title 28, United States Code, section 1930. 1.2. "Adverse Determination" shall mean a ruling by the Bankruptcy Court that including, in the distribution under the Plan to Allowed Class 2A Claims, all or a specified portion of the shares of New Payless Common Stock otherwise distributable to Allowed Class 4A Interests and/or Class 5A Interests to the extent provided in Sections 3.4(a), 3.6 and 3.7 of the Plan would violate applicable provisions of the Code and thereby render the Plan not capable of being confirmed under Section 1129 of the Code. 1.3. "Agent" shall mean, CIBC as coordinating and collateral agent for the DIP Facility. 1.4. "Allowed Amount" shall mean, with respect to a particular Claim, (a) the amount of a Claim that is listed in the Debtor's Schedules, as they may from time to time be amended in 2 accordance with Rule 1009 of the Bankruptcy Rules, as not disputed, contingent or unliquidated, if the holder of such Claim has not filed a proof of claim with the Bankruptcy Court within the applicable period of limitation fixed by the Bankruptcy Court pursuant to Rule 3003(c)(3) of the Bankruptcy Rules, or (b) if a holder of a Claim has filed a proof of claim with the Bankruptcy Court within the applicable period of limitation fixed by the Bankruptcy Court pursuant to Rule 3003(c)(3) of the Bankruptcy Rules: (i) the amount stated in such proof of claim if no objection to such proof of claim has been interposed within the applicable period of limitations fixed by the Code or applicable Bankruptcy Rules or as otherwise fixed by the Bankruptcy Court, or (ii) such amount as shall be fixed by an order of the Bankruptcy Court which has become a Final Order if an objection has been interposed within the applicable period of limitations fixed by the Code, applicable Bankruptcy Rules, or the Bankruptcy Court. "Allowed Amount" shall not include any interest on or fees with respect to a Claim which have accrued after the Filing Date except with respect to Class 2 Claims to the extent (i) permitted by Section 506(b) of the Code or (ii) made as adequate protection payments under Section 363(e) of the Code. "Allowed Amount" shall mean, with respect to a particular Interest, (a) that number of shares represented by such Interest as set forth in the Debtor's stock transfer agent's records, as they may be amended and updated from time to time, if no objection to such Interest has been interposed within the applicable period of limitations fixed by the Bankruptcy Court, or (b) that number of shares represented by such Interest as shall be fixed by an order of the Bankruptcy Court which has become a Final Order, if an objection to such Interest has been interposed within the applicable period of limitations fixed by the Bankruptcy Court. 1.5. "Allowed Claim" or "Allowed Class ___________ Claim" shall mean any such Claim for which an Allowed Amount has been determined. 1.6. "Allowed Interest" or "Allowed Class _________ Interest" shall mean any such Interest for which an allowed Amount has been determined. 1.7. "Bankruptcy Court" shall mean that unit of the United States District Court for the Western District of Missouri consisting of those bankruptcy judges in regular active service in such district, or any other court having competent jurisdiction to enter an order confirming the Plan. 1.8. "Bankruptcy Rules" shall mean the Federal Rules of Bankruptcy Procedure, as amended from time to time, as the same shall be applicable to the Chapter 11 Case. 1.9. "Business Day" shall mean any day except Saturday, Sunday and any other day on which commercial banks in New York City are authorized to close. 1.10. "Cash" shall mean cash, cash equivalents and other readily marketable direct obligations of the United States of America and certificates of deposit issued by banks. 1.11. "Chapter 11 Case" shall mean the case under chapter 11 of the Code commenced by the Debtor on the Filing Date. -2- 3 1.12. "CIBC" shall mean Canadian Imperial Bank of Commerce. 1.13. "Class" shall mean a group of Claims or Interests, consisting of Claims or Interests which are substantially similar to each other, as classified pursuant to the Plan. 1.14. "Class 2A Effective Date Payments" shall mean the payments to be distributed to the holders of Allowed Class 2A Claims on the Effective Date in accordance with the provisions of Sections 3.4(a)(i) and 3.4(a)(ii) of the Plan. 1.15. "Class 3A Entitlement" shall mean a number of shares of New Payless Common Stock equal to (a) 19,000,000, minus (b) the number of shares of New Payless Common Stock to be distributed to the holders of the Allowed Class 2A Claims pursuant to Section 3.4(a) of the Plan (i.e., 10,800,000 shares, subject to adjustment as provided in clauses (1), (2) and (4) of the proviso to Section 3.4(a)(iv)), plus (c) the number of any additional shares of New Payless Common Stock to be distributed to the holders of Class 3A Claims pursuant to Sections 3.4(a), 3.6 and 3.7 of the Plan. 1.16. "Code" shall mean the Bankruptcy Reform Act of 1978 as amended, 11 U.S.C. Sections 101 et seq., as the same shall be applicable to the Chapter 11 Case. 1.17. "Collateral" shall have the meaning set forth in the definition of "New Term Notes." 1.18. "Company" shall mean Payless Cashways, Inc., an Iowa corporation, as reorganized pursuant to the Plan. 1.19. "Confirmation Date" shall mean the date the Confirmation Order is entered. 1.20. "Confirmation Order" shall mean an order entered by the Bankruptcy Court confirming the Plan under Section 1129 of the Code. 1.21. "Debtor" shall mean Payless, as debtor and debtor-in-possession. 1.22. "Designated Collateral" shall mean (i) inventory at the 29 stores to be closed pursuant to the Debtor's June 27, 1997 Restructuring Presentation (the "Business Plan"), (ii) the real estate interests in 9 of such stores to be closed (and the 7 properties currently held for sale) and any related fixtures and equipment which presently secure the Existing Credit Facility (iii) the tax refund projected to be received by the Debtor during the Case and (iv) the proceeds of the promissory notes (in the aggregate principal amount of approximately $1,050,000) presently pledged to the Existing Lenders in connection with prior store dispositions and which mature on December 1, 1997. 1.23. "Designated Consummation Date" shall mean a particular day to be designated on or before the tenth (10th) day following the Confirmation Date by the Debtor, in its judgment -3- 4 reasonably exercised after consultation with the Pre-petition Agent, the Agent, and the Underwriters, which is not more than thirty (30) days after the Confirmation Date. 1.24. "DIP Facility" shall mean that certain debtor-in-possession financing agreement and documents related thereto (each as amended, supplemented, or modified from time to time), entered into between the Company, CIBC, as Agent, and certain other financial institutions, authorized pursuant to an order of the Bankruptcy Court. 1.25. "DIP Lenders" shall mean those financial institutions referenced in the definition of DIP Facility. 1.26. "Disallowed Amount" shall mean, with respect to a particular Disputed Claim, that amount which is equal to the difference, if any, between the Face Amount of such Disputed Claim and the Allowed Amount of the Subsequently Allowed Claim related thereto. 1.27. "Disallowed Interest" shall mean, with respect to a particular Disputed Interest, that number of shares equal to the difference, if any, between the Face Amount of the Disputed Interest and the Allowed Amount of the Subsequently Allowed Interest related thereto. 1.28. "Disclosure Statement" shall mean that certain disclosure statement for the Debtor filed with the Bankruptcy Court on the Filing Date, as the same may be amended from time to time. 1.29. "Disputed Claim" or "Disputed [Class ________] Claim" shall mean any Claim for which an Allowed Amount has not yet been determined, and with respect to which an objection has been interposed on or prior to the Confirmation Date or such other date as may be fixed by the Bankruptcy Court and not subsequently withdrawn or finally resolved. An application, motion, complaint or any other legal pleading to subordinate or dismiss a Claim shall be deemed an objection thereto. 1.30. "Disputed Interest" or "Disputed [Class _________] Interest" shall mean any Interest for which an Allowed Amount has not yet been determined, and with respect to which an objection has been interposed on or prior to the Confirmation Date or such other date as may be fixed by the Bankruptcy Court and not subsequently withdrawn or finally resolved. An application, motion, complaint or any other legal pleading seeking to subordinate an Interest shall be deemed an objection thereto. 1.31. "Distribution Date" shall mean the Effective Date and each subsequent date as may be chosen by the Debtor (but, subject to Section 5.14 of the Plan, not more than six calendar months after the preceding Distribution Date) for the making of distributions under the Plan. 1.32. "Effective Date" shall mean the first Business Day: (a) after the Designated Consummation Date; (b) on which no stay of the Confirmation Order is in effect; and -4- 5 (c) on which all conditions set forth in Section 7.1 of the Plan have occurred or been waived as provided in the Plan. 1.33. "Existing Credit Facility" shall mean (i) the Amended and Restated Credit Agreement, dated as of October 3, 1996 among the Debtor, certain banks and financial institutions party thereto, CIBC, as administrative agent and collateral agent, and The Bank of Nova Scotia, NationsBank of Texas, N.A. and Bank of America National Trust and Savings Association, as co-agents and (ii) documentation with respect to cash management obligations, interest rate swap obligations and foreign exchange obligations owing to Existing Lenders, as each of the same may have been subsequently amended, modified or supplemented. 1.34. "Existing Lenders" shall mean those certain financial institutions party to the Existing Credit Facility. 1.35. "Existing Prudential Facility" shall mean the Loan Agreement dated June 20, 1989 among the Debtor, Knox Home Centers, Inc., Somerville Lumber and Supply Co., Inc. and The Prudential Insurance Company of America, as the same may have been subsequently amended, modified or supplemented. 1.36. "Exit Facility" shall mean a revolving credit facility evidenced by a credit agreement among the Company, CIBC, as coordinating and collateral agent and certain financial institutions party thereto, having the terms described in Section XIV of the Term Sheet attached hereto as Exhibit A. 1.37. "Exit Lenders" shall mean those certain financial institutions party to the Exit Facility. 1.38. "Exit Notes" shall mean the notes issued by the Company pursuant to the Exit Facility. 1.39. "Face Amount" shall mean, with respect to a particular Claim, (a) if the holder of such Claim has not filed a proof of claim with the Bankruptcy Court within the applicable period of limitation fixed by the Bankruptcy Court pursuant to Rule 3003(c)(3) of the Bankruptcy Rules, the amount of such Claim that is listed in the Debtor's Schedules, as not disputed, continent or unliquidated; or (b) if the holder of such Claim has filed a proof of claim with the Bankruptcy Court within the applicable period of limitation fixed by the Bankruptcy Court pursuant to Rule 3003(c)(3) of the Bankruptcy Rules, either (i) the liquidated amount, if any, stated in such proof of claim if the amount of such Claim has not been estimated by the Bankruptcy Court pursuant to a Final Order, or (ii) the estimated amount thereof if the amount of such Claim has been estimated by the Bankruptcy Court pursuant to a Final Order. "Face Amount" shall mean, with respect to a particular Interest, the number of shares represented by such Interest if such Interest were not disputed. 1.40. "Filing Date" shall mean July 21, 1997. 1.41. "Final Order" shall mean an order or judgment of the Bankruptcy Court which is not the subject of a pending appeal, petition for certiorari, or other proceedings for review, rehearing, or reargument, which has not been reversed, stayed, modified or amended, and -5- 6 respecting which the time to appeal from or to petition for certiorari or to seek review, rehearing, or reargument of such order shall have expired, as a result of which such order shall have become final in accordance with Rule 8002 of the Bankruptcy Rules and other applicable law. 1.42. "Interests" shall mean the rights of the holders of the issued and outstanding shares of Old Payless Common Stock determined as of the Effective Date. 1.43. "Market Rate" shall mean such rate of interest as shall be determined by the Bankruptcy Court to result in a value for the distributions to be made pursuant to paragraph 3.2 of the Plan equal to the minimum value set forth in Section 1129(a)(9)(C) of the Code. 1.44. "Net Cash Proceeds" shall mean (a) cash proceeds (including, without limitation, all cash proceeds by way of (i) deferred payment of principal pursuant to a note or installment receivable or otherwise, but only as and when received and (ii) receivables and other assets retained as consideration), minus (b) reasonable and customary brokerage commissions and other reasonable and customary fees and expenses (including reasonable and customary fees and expenses of counsel and investment bankers and reasonable and customary inventory liquidation costs) related to the realization of such cash proceeds, minus (c) payments made to retire indebtedness (other than indebtedness outstanding under the Existing Credit Facility) secured by such assets being sold or otherwise disposed of where payment of such indebtedness is required in connection with such sale or disposition. 1.45. "New Payless Common Stock" shall mean the shares of common stock, par value $0.01 per Share, authorized by the amended and restated certificate of incorporation of the Company, a copy of which is annexed hereto as Exhibit A, which are to be distributed by the Company on or after the Effective Date to holders of Allowed Class 2A Claims, Class 3A Claims, Class 4A Interests and Class 5A Interests as set forth in the Plan. As of the Effective Date, 20,000,000 shares of New Payless Common Stock will be available for distribution under the Plan. 1.46. "New Prudential Facility" shall mean that certain Amended and Restated Loan Agreement among the Company and the Prudential Insurance Company of America, in form and substance satisfactory to the Debtor, the Required Existing Lenders and the Required Exit Lenders, to be entered into as of the Consummation Date or such other agreement as may be approved by the Bankruptcy Court pursuant to Section 1129(b) of the Code after notice and a hearing. 1.47. "New Prudential Notes" shall mean the notes issued under the New Prudential Facility in the aggregate amount of approximately $97,400,000 (less any principal payments made during the Chapter 11 Case as a result of any sale of Prudential Real Estate) having an interest rate of 9 1/4%, a final maturity of December 31, 2003, quarterly amortization, commencing on the last day of the first calendar quarter after the Effective Date, of $2,500,000, or such other terms and conditions as are set forth in the New Prudential Facility. 1.48. "New Term Notes" shall mean the term loan notes to be issued by the Company pursuant to the Post-Consummation Facility in an aggregate amount equal to the sum of (i) -6- 7 $273,000,000 plus (ii) the excess, if any, of (a) $47,800,000 over (b) the Net Cash Proceeds from the sale or other liquidation, after the Filing Date, of collateral (including, without limitation, inventory, income tax refunds, pledged promissory notes and real estate) securing the Allowed Class 2A Claims, which Net Cash Proceeds shall have been paid to any of the holders of Allowed Class 2A Claims on or prior to the Effective Date in reduction of their Allowed Class 2A Claims minus (iii) the lesser of (1) $8,000,000 and (2) the excess, if any, of (a) the amount calculated pursuant to clause (ii)(b) above over (b) $47,800,000. The New Term Notes shall be secured by the same collateral securing the Exit Facility (collectively, the "Collateral"). The New Term Notes shall bear interest at a rate per annum equal to LIBOR plus 2.5%, shall mature on December 31, 2002 and shall also have the other terms and conditions as are set forth in the Post-Consummation Facility. The rights of the holders of the New Term Notes with respect to the Collateral shall be subject and subordinate to all obligations owing with respect to the Exit Facility. 1.49. "Old Payless Common Stock" shall mean all authorized, issued and outstanding shares of common stock, par value $0.01 per share, of the Debtor as of the Filing Date. 1.50. "Old Payless Preferred Stock" shall mean all authorized, issued and outstanding shares of Cumulative Preferred Stock, par value $1.00 per share, of the Debtor as of the Filing Date. 1.51. "Payless " shall mean Payless Cashways, Inc., an Iowa corporation. 1.52. "Plan" shall mean this Plan of Reorganization and all exhibits hereto, which are incorporated herein by reference hereto, and any amendments or modifications hereof. 1.53. "Post-Consummation Facility" shall mean a term loan agreement dated as of the Effective Date to which the Company, CIBC, as coordinating and collateral agent, and the Existing Lenders will be party, pursuant to which the New Term Notes are to be issued, having the terms described in Section II.B of the Term Sheet attached hereto as Exhibit A. 1.54. "Prepetition" shall mean arising or accruing prior to the Filing Date. 1.55. "Prepetition Agent" shall mean, CIBC in its capacity as administrative and collateral agent under the Existing Credit Facility. 1.56. "Priority Status" shall mean the priority in distribution which is afforded to certain unsecured Claims pursuant to Section 507(a) of the Code. 1.57. "Priority Tax Claims" shall mean all Claims that are entitled to priority under Section 507(a)(8) of the Code. 1.58. "Pro Rata" shall mean: -7- 8 (a) with respect to Allowed Claims, the same proportion that the Allowed Amount of a Claim of a creditor in any Class of Claims bears to the sum of: (i) the aggregate Allowed Amounts of all Claims of that particular Class of Claims; plus (ii) the aggregate Face Amounts of all Claims of that particular Class of Claims which are subject to dispute as of the Distribution Date, as reduced from time to time as and to the extent that the Disallowed Amounts of such Claims are determined not to be allowed or to the extent the amounts thereof become Allowed Amounts and are thereafter included in the immediately preceding clause (i); (b) with respect to Disputed Claims, the same proportion that the Face Amount of a Disputed Claim of a creditor in any Class of Claims bears to the aggregate of: (i) the aggregate Allowed Amounts of all Claims of that particular Class of Claims; plus (ii) the aggregate Face Amounts of all Claims of that particular Class of Claims which are subject to dispute as of the Distribution Date, as reduced from time to time as and to the extent that the Disallowed Amounts of such Claims are determined not to be allowed or to the extent the amounts thereof become Allowed Amounts and are thereafter included in the immediately preceding clause (i); (c) with respect to Allowed Interests, the same proportion that the Allowed Interest of an interest holder in any Class of Interests bears to the aggregate of: (i) the aggregate Allowed Amounts of all Interests of that particular Class of Interest; plus (ii) the aggregate Face Amounts of all Interests of that particular Class of Interests which are subject to dispute as of the Distribution Date, as reduced from time to time as and to the extent that the Disallowed Amounts of such Interests are determined not to be allowed or to the extent the amounts thereof become Allowed Amounts and are thereafter included in the immediately preceding clause (i); and (d) with respect to Disputed Interests, the same proportion that the Face Amount of a Disputed Interest of an interest holder in any Class of Interests bears to the aggregate of: (i) the aggregate Allowed Amounts of all Interests of that particular Class of Interest; plus -8- 9 (ii) the aggregate Face Amounts of all Interests of that particular Class of Interests which are subject to dispute as of the Distribution Date, as reduced from time to time as and to the extent that the Disallowed Amounts of such Interests are determined not to be allowed or to the extent the amounts thereof become Allowed Amounts and are thereafter included in the immediately preceding clause (i). 1.59. "Prudential Real Estate" shall mean the real property subject to those certain mortgages granted by the Debtor pursuant to the Existing Prudential Facility. 1.60. "Required Existing Lenders" shall mean financial institutions party to the Existing Credit Facility comprising more than one half in number of all such financial institutions and holding at least two-thirds of the aggregate amount of the Allowed Class 2A Claims. 1.61. "Required Exit Lenders" shall mean Exit Lenders holding at least two-thirds of the aggregate commitments under the Exit Facility. 1.62. "Schedules" shall mean the schedules of assets and liabilities filed by the Debtor with the Bankruptcy Court as they may be amended or supplemented from time to time in accordance with Rule 1009 of the Bankruptcy Rules. 1.63. "Senior Subordinated Notes" shall mean all 9-1/8% Senior Subordinated Notes due April 15, 2003 issued and outstanding pursuant to the Senior Subordinated Note Indenture as of the Filing Date. 1.64. "Senior Subordinated Note Indenture" shall mean that certain Indenture of Trust dated April 20, 1993, between the Debtor and the Trustee as the same may have been subsequently amended, modified or supplemented. 1.65. "Subsequent Allowance Fraction" shall mean, when applied to a distribution of property to be made by the Debtor pursuant to the Plan to a holder of a particular Subsequently Allowed Claim or Subsequently Allowed Interest, that fraction having a numerator equal to the Allowed Amount of such Subsequently Allowed Claim or Subsequently Allowed Interest, as the case may be, and the denominator of which is the Face Amount of such Subsequently Allowed Claim or Subsequently Allowed Interest, as the case may be. 1.66. "Subsequently Allowed Claim" shall mean any Claim for which an Allowed Amount is fixed after the Effective Date. 1.67. "Subsequently Allowed Interest" shall mean any Interest for which an Allowed Amount is fixed after the Effective Date. 1.68. "Treatment Option" shall mean the alternative methods of treating a secured Claim in a plan of reorganization as provided in Section 1124 of the Code and set forth in Section 3.4(c) of the Plan, so that such Claim is not impaired by the terms of such plan of reorganization. -9- 10 1.69. "Trustee" shall mean United States Trust Company of New York, as trustee under the Senior Subordinated Note Indenture. 1.70. "Underwriters" shall mean CIBC Wood Gundy Securities Corp., NationsBank, N.A., Goldman, Sachs Credit Partners, L.P, and Lehman Commercial Paper Inc. 1.71. "Unsecured Creditors' Committee" shall mean the Official Committee of Unsecured Creditors appointed in the Chapter 11 Case by the United States Trustee For The Western District of Missouri, as the membership of such Committee is from time to time constituted and reconstituted. ARTICLE II. CLASSIFICATION OF CLAIMS AND INTERESTS For purposes of the Plan, Claims and Interests are classified as follows: 2.1. "Class 1 Claims" shall consist of all Prepetition Claims against the Debtor which are entitled to Priority Status, other than Administrative Expenses and Priority Tax Claims. 2.2. "Class 2A Claims" shall mean claims under the Existing Credit Facility. 2.3. "Class 2B Claims" shall mean claims under the Existing Prudential Facility. 2.4. "Class 2C Claims" shall consist of all secured, Prepetition Claims against the Debtor, each determined in accordance with Sections 506(a) and 1111 of the Code, that are not Allowed Class 2A Claims or Class 2B Claims. 2.5. "Class 3A Claims" shall consist of all unsecured, Prepetition Claims against the Debtor not entitled to Priority Status, including Claims under the Senior Subordinated Notes. 2.6. "Class 4A Interests" shall consist of all shares of Old Payless Preferred Stock, together with any rights of the holders thereof to any accrued dividends. 2.7. "Class 5A Interests" shall consist of all shares of Old Payless Common Stock. ARTICLE III. TREATMENT OF CLAIMS AND INTERESTS 3.1. Treatment of Administrative Expenses. Each holder of an Administrative Expense shall be paid, in accordance Articles IV and V hereof, the Allowed Amount of such holder's Claim in full, in cash, at the option of the Debtor with the consent of the Required Existing Lenders and the Required Exit Lenders in their respective judgments reasonably exercised, (a) on the Effective Date, or (b) on such other date as the Bankruptcy Court may fix, or (c) in the -10- 11 ordinary course of business as said Claim matures, or (d) upon such other less favorable terms as may be agreed upon by such holder and the Debtor. 3.2. Treatment of Priority Tax Claims. Each holder of a Priority Tax Claim shall be paid, consistent with Section 1129(a)(9)(C) of the Code, at the option of the Debtor with the consent of the Required Existing Lenders and the Required Exit Lenders in their respective judgments reasonably exercised, either (a) the Allowed Amount of its Claim in full, in cash, on the Effective Date, or (b) 10% of its Allowed Priority Tax Claim, together with accrued and unpaid interest on the then outstanding amount of such Allowed Priority Tax Claim at the Market Rate, on each anniversary of the Effective Date which occurs prior to the sixth anniversary of the date of assessment of such Allowed Priority Tax Claim; and the balance of such Allowed Priority Tax Claim, together with accrued and unpaid interest thereon at the Market Rate, on the sixth anniversary of the date of assessment of such Allowed Priority Tax Claim. The Debtor shall have the right to prepay any Allowed Priority Tax Claim, in whole or in part, at any time, without penalty and with interest accrued and unpaid thereon to the time of prepayment at the Market Rate. 3.3. Treatment of Prepetition Priority Claims. Class 1 Claims are not impaired. Each holder thereof shall be paid, in accordance with Articles IV and V hereof, the Allowed Amount of its Claim in full, in cash, at the option of the Debtor with the consent of the Required Existing Lenders and the Required Exit Lenders in their respective judgments reasonably exercised, (a) on the Effective Date, or (b) on such other date as the Bankruptcy Court may fix, or (c) in the ordinary course of business as said Claim matures, or (d) upon such other less favorable terms as may be agreed upon by such holder and the Debtor. 3.4. Allowance and Treatment of Secured Claims (a) Class 2A Claims shall be Allowed Claims, not subject to offset, reduction or credit of any kind whatsoever in an amount equal to the sum of (i) the aggregate principal amount outstanding under the Existing Credit Facility of [$417,952,703.59] plus (ii) accrued and unpaid interest and letter of credit fees and other fees and amounts owing (including, without limitation, cash management fees and overdraft repayments), if any, at the non-default contractual rate set forth in the Existing Credit Facility, plus (iii) any unpaid reasonable out-of-pocket expenses and reasonable fees and disbursements of all attorneys and other advisors to the Prepetition Agent and the Existing Lenders. Allowed Class 2A Claims are impaired. Consistent with Section 1124 of the Code, each holder of Allowed Class 2A Claims shall receive in full satisfaction in respect thereof, on the Effective Date, in accordance with Articles IV and V hereof, such holder's allocable portion of: (i) payment in full in cash in immediately available funds of all interest, fees, expenses and other amounts accrued and owing to the Existing Lenders and the Prepetition Agent through the Effective Date pursuant to or in connection with the Existing Credit Facility or the Plan, including, without limitation, letter of credit fees and other fees and amounts owing (including, without limitation, cash management fees and overdraft repayments) and all reasonable out-of-pocket expenses and counsel and other advisory fees and expenses payable under the Existing Credit Facility; and -11- 12 (ii)payment in full in cash in immediately available funds, of the Net Cash Proceeds of Designated Collateral received by the Debtor during the Chapter 11 Case to the extent such Net Cash Proceeds have not theretofore been applied to reduce the amount of the Allowed Class 2A Claims; and (iii) the New Term Notes; and (iv)10,800,000 shares of New Payless Common Stock; provided, however, that (1) the number of shares otherwise distributable to Allowed Class 2A Claims will be decreased by a number equal to the quotient of (A) the excess, if any, of (I) the Net Cash Proceeds from the sale or other liquidation, after the Filing Date, of collateral (including, without limitation, inventory, income tax refunds, pledged promissory notes and real estate) securing the Allowed Class 2A Claims, which proceeds shall have been paid to any of the holders of Allowed Class 2A Claims on or prior to the Effective Date in reduction of their Allowed Class 2A Claims, over (II) $55,800,000, divided by (B) $_______ [assumed per share stock value, to be specified prior to the hearing on confirmation of the Plan]; (2) the number of shares otherwise distributable to Allowed Class 2A Claims will be decreased by a number equal to the quotient of (A) the excess, if any, of (I) $420,000,000 over (II) the aggregate amount of the Allowed Class 2A Claims (including the face amount of any letters of credit outstanding under the Existing Credit Facility) outstanding on the Filing Date divided by (B) $______ [assumed per share stock value, to be specified prior to the hearing on confirmation of the Plan]; (3) 460,000 of such shares shall be distributed to the Exit Lenders on a pro rata basis determined in accordance with their respective Exit Facility commitments on the Effective Date, and such distribution shall reduce the number of shares received by each holder of an Allowed Class 2A Claim on an allocable basis; and (4) in the event that Class 3A, Class 4A or Class 5A rejects the Plan and to the extent no Adverse Determination is made on or before the Confirmation Date, there shall be added to the number of shares of New Payless Common Stock otherwise distributable to Allowed Class 2A Claims under this clause (ii) the number of shares of such Stock otherwise distributable to Allowed Class 4A Interests and/or Class 5A Interests to the extent provided in Sections 3.6 and 3.7 of the Plan. (b) Class 2B Claims are impaired. Consistent with Section 1124 of the Code, each holder of an Allowed Class 2B Claim shall receive in full satisfaction in respect thereof, on the Effective Date, in accordance with Articles IV and V hereof, such holder's Pro Rata share of New Prudential Notes. -12- 13 (c) Class 2C Claims are not impaired. Consistent with Section 1124 of the Code, the holder of each Allowed Class 2C Claim shall receive treatment on the Effective Date, in accordance with Article IV and V hereof, at the option of the Debtor with the consent of the Required Existing Lenders and the Required Exit Lenders in their respective judgments reasonably exercised, of one of the following three types: (i) the Debtor shall execute a written undertaking in favor of the holder of such Class 2C Claim, whereby the Debtor assumes such Claim and leaves unaltered such holder's legal, equitable and contractual rights with respect to such Claim; or (ii)notwithstanding any contractual provision or applicable law that entitles the holder of such Class 2C Claim to demand or receive accelerated payment of such Claim after the occurrence of a default, the Debtor shall (1) cure any such default that occurred before or after the Filing Date, other than a default of a kind specified in Section 365(b)(2) of the Code, (2) reinstate the maturity of such Claim as such maturity existed before such default, (3) compensate the holder of such Claim for any damages incurred as a result of any reasonable reliance by such holder on such contractual provision or such applicable law, and (4) execute a written undertaking in favor of such holder, whereby the Debtor assumes such Claim and, except as permitted in clauses (1), (2) and (3) hereof, does not otherwise alter the legal, equitable or contractual rights of such holder with respect to such Claim; or (iii) the Debtor shall pay the holder thereof Cash equal to the Allowed Amount of such holder's Class 2C Claim. (d) Notwithstanding the foregoing, the holder of a Class 2B Claim or a Class 2C Claim may receive such other less favorable treatment as may be agreed upon by such holder and the Debtor. 3.5. Treatment of general unsecured Claims. Class 3A Claims are impaired. Each holder of an Allowed Class 3A Claim shall receive, in accordance with Articles IV and V hereof, New Payless Common Stock equal to such holder's Pro Rata portion of the Class 3A Entitlement. 3.6. Treatment of Old Payless Preferred Stock. Class 4A Interests are impaired. Each holder of an Allowed Class 4A Interest shall, in accordance with Articles IV and V hereof, receive its Pro Rata share of 3% of all the shares of New Payless Common Stock to be issued pursuant to the Plan (i.e., 600,000 shares); provided, however, that the percentage of such New Payless Common Stock to be distributed to holders of Class 4A Interests shall be (i) increased from 2% to 5% in the event of a rejection of the Plan by Class 5A and the acceptance of the Plan by Class 4A and Class 3A and (ii) decreased to no distribution whatsoever in the event of a rejection of the Plan by Class 4A or Class 3A, in which event all of the shares of New Payless -13- 14 Common Stock otherwise to be distributed to Class 4A Interest holders and Class 5A Interest holders shall instead be distributed to holders of (1) Allowed Class 2A Claims to the extent an Adverse Determination is not made on or before the Confirmation Date, or (2) Allowed Class 3A Claims to the extent an Adverse Determination is made on or before the Confirmation Date, as provided in Sections 3.4(a) and 3.5 of the Plan. Holders of Class 4A Interests shall not retain or receive any additional property for or on account of their Class 4A Interests. 3.7. Treatment of Old Payless Common Stock. Class 5A Interests are impaired. Each holder of an Allowed Class 5A Interest shall, in accordance with Articles IV and V hereof, receive its Pro Rata share of 2% of all the shares of New Payless Common Stock to be issued pursuant to the Plan (i.e., 400,000 shares); provided, however, that the percentage of such New Payless Common Stock to be distributed to holders of Class 5A interests shall be decreased to no distribution whatsoever upon rejection of the Plan by Class 5A, Class 4A or Class 3A, in which event all of the shares of New Payless Common Stock otherwise to be distributed to Class 5A Interest holders shall instead be distributed to (i) holders of Allowed Class 4A Interests, if Class 4A and Class 3A votes to accept the Plan, as provided in Section 3.6 of the Plan, or (ii) holders of (1) Allowed Class 2A Claims to the extent an Adverse Determination is not made on or before the Confirmation Date, or (2) Allowed Class 3A Claims to the extent an Adverse Determination is made on or before the Confirmation Date, if Class 4A or Class 3A votes to reject the Plan, as provided in Sections 3.4(a) and 3.5 of the Plan. Holders of Class 5A Interests shall not retain or receive any additional property for or on account of their Class 5A Interests. 3.8. Treatment of Stock Options. Any stock option relating to Old Payless Preferred Stock or Old Payless Common Stock which is outstanding and unexercised on the Filing Date may be exercised at any time on or prior to the Consummation Date, and immediately after the Consummation Date, all such stock options shall be deemed to have been rejected and shall be of no further force or effect. 3.9. Changes in the Treatment of any Claims or Interests. Any changes or other modifications to the treatment of any claim or interest under the Plan must be acceptable to the Debtor, the Required Existing Lenders and the Required Exit Lenders in their respective judgments reasonably exercised. ARTICLE IV. DISTRIBUTION OF PROPERTY TO HOLDERS OF ALLOWED CLAIMS AND ALLOWED INTERESTS 4.1. Distributions to holders of Administrative Expenses and Priority Tax Claims. The Debtor shall distribute to each holder of an Administrative Expense or a Priority Tax Claim for which an Allowed Amount has been determined as of the Effective Date, an amount, in cash, equal to one hundred percent (100%) of the Allowed Amount of such holder's Claim, unless such holder and the Debtor have otherwise agreed on less favorable treatment of such Claim (in which case such holder shall be paid in accordance with such agreement), and, in either case, at such time as the Debtor elects pursuant to Section 3.1 or 3.2 of the Plan. -14- 15 4.2. Distributions to holders of Class 1 Claims. The Debtor shall distribute to each holder of a Class 1 Claim for which an Allowed Amount has been determined as of the Effective Date, an amount, in cash, equal to one hundred percent (100%) of the Allowed Amount of such holder's Claim, unless such holder and the Debtor have otherwise agreed on less favorable treatment of such Claim (in which case such holder shall be paid in accordance with such agreement), and, in either case, at such time as the Debtor elects pursuant to Section 3.3 of the Plan. 4.3. Distributions to holders of Class 2 Claims: Secured Claims. (a) Class 2A. The provisions of this Section 4.3(a) shall apply only to Allowed Class 2A Claims. On the Effective Date, the Debtor shall distribute to each holder of a Allowed Class 2A Claim such holders' allocable portion (rounded in accordance with Section 5.8 of the Plan) of the Class 2A Effective Date Payments, New Term Notes and New Payless Common Stock to be distributed in accordance with the provisions of Section 3.4(a) of the Plan. (b) Class 2B. The provisions of this Section 4.3(b) shall apply only to Class 2B Claims. On the Effective Date, the Debtor shall distribute to each holder of a Class 2B Claim for which an Allowed Amount has been determined as of the Effective Date, such holder's Pro Rata share of the New Prudential Notes to be distributed in accordance with the provisions of Section 3.4(b) of the Plan. (c) Class 2C. The provisions of each of the following subsections of this Section 4.3(c) shall apply only to distributions made with respect to Class 2C Claims: (i) Election of option. On or prior to the Effective Date, the Debtor shall notify the holder of each Class 2C Claim in writing as to the Treatment Option (each of which is set forth in Section 3.4(c) of the Plan) which the Debtor has elected in accordance with the procedures set forth in Section 3.4(c) of the Plan. (ii)Determination of amounts due. A list of all Class 2C Claims is contained in the Debtor's Schedules. The failure of a holder of a Class 2C Claim to file an objection with the Bankruptcy Court, prior to the Confirmation Date or such other date as the Bankruptcy Court may fix, to the amounts set forth in the Debtor's Schedules with respect to such holder's Class 2C Claim, shall forever bar such holder from asserting any additional or other amounts against the Debtor with respect to such Claim. In making whatever election they deem appropriate in accordance with Section 3.4(c) of the Plan, the Debtor shall be entitled to rely solely upon the amounts set forth in the Debtor's Schedules, unless a timely objection has been filed with respect thereto. -15- 16 (iii)Treatment of Class 2C Claims under Section 3.4(c)(i) election. In the event the Debtor elects, in accordance with Section 3.4(c) of the Plan to treat a particular Class 2C Claim in accordance with Section 3.4(c)(i) of the Plan, on the Effective Date, the Debtor shall execute an undertaking binding it to repay such Class 2C Claim in full, in accordance with the tenor and terms of the agreement underlying such Class 2C Claim, and without altering the legal, equitable and contractual rights to which such Class 2C Claim entitles the holder thereof, including, without limitation, the retention by such holder of the property of the Debtor securing such Claim. (iv)Treatment of Class 2C Claim under Section 3.4(c)(ii) election. In the event the Debtor elects, in accordance with Section 3.4(c) of the Plan to treat a particular Class 2C Claim in accordance with Section 3.4(c)(ii) of the Plan, on the Effective Date (1) the Debtor shall cure any defaults with respect to such Claim by making payment to the holder of such Class 2C Claim of an amount, in cash, equal to the Allowed Amount due in respect of defaults, and (2) the Debtor shall execute an undertaking binding it to repay such Class 2C Claim in full, in accordance with the tenor and terms of the agreement underlying such Class 2C Claim, without (except as permitted by Section 1124(2) of the Code) altering the legal, equitable and contractual rights to which such Class 2C Claim entitles the holder thereof, includin, without limitation, the retention by such holder of the property of the Debtor securing such Claim. The execution by the Debtor of such undertaking shall automatically reinstate the maturity of such Class 2C Claim as such maturity existed immediately before occurrence of defaults subject to cure with respect to such Class 2C Claim and any acceleration resulting therefrom. (v) Treatment of Class 2C Claims under Section 3.4(c)(iii) election. In the event the Debtor elects, in accordance with Section 3.4(c) of the Plan to treat a particular Class 2C Claim in accordance with Section 3.4(c)(iii) of the Plan, on the Effective Date, the Debtor shall distribute to each holder of a Class 2C Claim for which an Allowed Amount has been determined as of the Effective Date, an amount, in cash, equal to one hundred percent (100%) of the Allowed Amount of such holder's Class 2C Claim, unless less favorable treatment of such Claim is otherwise agreed upon by such holder and the Debtor, in which case such holder shall be paid in accordance with such agreement. 4.4. Distributions to holders of Class 3A Claims; general unsecured Claims. On the Effective Date, the Debtor shall distribute, to each holder of a Class 3A Claim for which an Allowed Amount has been determined as of the Effective Date, such holder's Pro Rata share -16- 17 (rounded in accordance with Section 5.8 of the Plan) of the New Payless Common Stock to be distributed in accordance with the provisions of Section 3.5 of the Plan. 4.5. Distributions to holders of Class 4A Interests; Old Payless Preferred Stock. On the Effective Date, the Debtor shall distribute to each holder of a Class 4A Interest for which an Allowed Amount has been determined as of the Effective Date, such holder's Pro Rata share (rounded in accordance with Section 5.8 of the Plan) of the New Payless Common Stock, if any, to be distributed in accordance with the provisions of Section 3.6 of the Plan. 4.6. Distributions to holders of Class 5A Interests; Old Payless Common Stock. On the Effective Date, the Debtor shall distribute to each holder of a Class 5A Interest for which an Allowed Amount has been determined as of the Effective Date, such holder's Pro Rata share (rounded in accordance with Section 5.8 of the Plan) of the New Payless Common Stock, if any, to be distributed in accordance with the provisions of Section 3.7 of the Plan. 4.7. Stock Options. Any stock options referred to in Section 3.8 of the Plan that have not been exercised on or before the Consummation Date shall be deemed to have been rejected and shall be of no further force or effect immediately after the Consummation Date. 4.8. Record Date. For the purpose of establishing the ownership of Claims and Interests so as to determine to whom distributions shall be made under the Plan, the Debtor shall establish a record date therefor, which record date shall either be approved by the Prepetition Agent and the Unsecured Creditors' Committee or by a Final Order. ARTICLE V. DISPUTED CLAIMS, DISPUTED INTERESTS, RESERVES AND MISCELLANEOUS DISTRIBUTION PROVISIONS 5.1. Objections. An objection to the allowance of a Claim or Interest shall be in writing and may be filed with the Bankruptcy Court by the Debtor or by any other party in interest at any time on or before the later of (x) sixty days after the Confirmation Date, or (y) such other time period as may be fixed by the Bankruptcy Court. 5.2. Amendment of Claims. A Claim may be amended prior to the Effective Date only as agreed upon by the Debtor and the holder of such Claim or as otherwise permitted by the Bankruptcy Court and Bankruptcy Rules. After the Effective Date, a Claim may be amended to decrease, but not to increase, the Face Amount thereof. 5.3. Reserves for Disputed Claims and Disputed Interests. On the Effective Date, unless the Bankruptcy Court otherwise agrees, the Debtor shall establish a reserve account for the account of the holders of Disputed Claims or Disputed Interests, and shall from time to time on or after the Effective Date put into such reserve account that property (Cash and/or securities) which would otherwise be distributable to such holders on or after the Effective Date were such Disputed Claims or Disputed Interests to be Allowed Claims or Allowed Interests respectively, -17- 18 on the Effective Date or on such later dates on which such distributions would otherwise be made, or such other property (Cash and/or securities) as the holders of such Disputed Claims or Disputed Interests and the Debtor may agree upon. The Debtor reserves the right to seek an order of the Bankruptcy Court estimating the amount of any Disputed Claim or Disputed Interest for the purposes of making distributions into the reserve account established pursuant to this Section 5.3. The property so reserved for the holder of such Disputed Claims or Disputed Interests shall be distributed to the relevant holders, only to the extent such Disputed Claims or Disputed Interests are allowed, and only after such Disputed Claims become Subsequently Allowed Claims or such Disputed Interests become Subsequently Allowed Interests. To the extent interest is earned on reserved Cash, such interest shall be held by the Debtor as additional reserved Cash for the account of the holder for whom such reserved Cash is held; reserved Cash shall be distributed to the holder of a Subsequently Allowed Claim in accordance with Section 5.5 of the Plan. To the extent a permitted dividend payment is received for or on account of a reserved security, such dividend payment shall be held by the Debtor as additional reserved property for the account of the holder for whom such reserved security is held, and shall be distributed to such holder to the extent such holder becomes entitled to the reserved security with respect to which the dividend payment was received. 5.4. Investment of reserves. Except as otherwise provided in an order of the Bankruptcy Court, the Debtor shall deposit or invest all Cash held from time to time in reserve consistent with Section 345 of the Code or as otherwise permitted by an order of the Bankruptcy Court dated as of the Filing Date, in each case consistent with the DIP Facility, giving due regard for the Debtor's likely need for such monies to satisfy Subsequently Allowed Claims. 5.5. Distributions to holders of Subsequently Allowed Claims or Subsequently Allowed Interests. Unless another date is agreed on by the Debtor and the holder of a particular Subsequently Allowed Claim or Subsequently Allowed Interest, the Debtor shall, on the later of the Effective Date and the tenth (10th) day after the Allowed Amount of such theretofore Disputed Claim or Disputed Interest is determined, distribute to such holder with respect to such Subsequently Allowed Claim or Subsequently Allowed Interest (as the case may be): (a) Distribution of cash. To the extent such holder is entitled to a distribution of Cash, that amount, in Cash, from the Cash held in reserve for such holder with respect to such theretofore Disputed Claim and, to the extent such reserve is insufficient, from any other source of Cash otherwise available to the Debtor, equal to that amount of Cash which would have been distributed to such holder on the Effective Date (or on such other date or dates of distribution as provided in Article III) had such holder's Subsequently Allowed Claim been an Allowed Claim on the Effective Date or on any such later date plus interest thereon calculated at the average rate of interest actually earned by the Debtor from time to time (net of any costs of investment) on all Cash reserved pursuant to Section 5.4 of the Plan from the Effective Date (or from such other date or dates of distribution as provided in Article III) through the date on or about which distribution is made to such holder; and -18- 19 (b) Distribution of New Payless Common Stock. To the extent such holder is entitled to a distribution of New Payless Common Stock, from the New Payless Common Stock held in reserve with respect to such theretofore Disputed Claims or Disputed Interests, that number of shares (rounded in accordance with paragraph 5.8 of the Plan) of New Payless Common Stock reserved equal to the number of shares allocable to such holder based on the Face Amount of its Claim or Interest multiplied by the Subsequent Allowance Fraction. Except as hereinabove provided, the holder of a Subsequently Allowed Claim or Subsequently Allowed Interest shall not be entitled to any interest on the Allowed Amount of its Claim or Interest, regardless of when distribution thereon is made to or received by such holder. 5.6. Fluctuation in value of securities. The market value of securities held in reserve for distribution by the Debtor is likely to fluctuate; the Debtor does not represent or warrant that the value of any such securities will not decline after the Effective Date (or after such other date of distribution as provided in Article III) or otherwise assume any risk of loss which the holder of a Subsequently Allowed Claim or Subsequently Allowed Interest may suffer by reason of any decline in value of a reserved security pending determination of the Allowed Amount of a Disputed Claim or Disputed Interest. Any appreciation or depreciation in the value of any reserved securities shall be borne by the party to whom such security is ultimately distributed. 5.7. Excess reserves; Subsequent Distributions. As each Disputed Claim becomes a Subsequently Allowed Claim, the Debtor shall become obligated to distribute on the next Distribution Date to the holders of Allowed Claims of the Class that would have been entitled to receive such property had such Disputed Claim never been a Disputed Claim, all property reserved for, but not distributed to, the holder of such Subsequently Allowed Claim (including interest, if any earned thereon) as a consequence of the Allowed Amount of such Claim having been fixed at less than the Face Amount thereof. 5.8. Rounding; Fractional Shares. Whenever any payment of a fraction of a cent in Cash would otherwise be called for, the actual payment shall reflect a rounding of such fraction to the nearest whole cent (rounding down in case of fractions of .5 or less). Whenever any delivery of a fractional share of New Payless Common Stock shall otherwise be called for, no such fractional shares shall be so delivered, but rather the provisions of paragraph 5.13 of the Plan shall be applicable. 5.9. Unclaimed Property. The Debtor shall make distributions of property to holders of Claims and Interests at those times and in the manner set forth in the Plan. Subject to the provision of paragraph 5.16 of the Plan, in the event that any distribution of property remains unclaimed for a period of two years (or if said second anniversary is not a Business Day, then the next Business Day after said second anniversary) after it has been delivered (or after such delivery has been attempted) or otherwise made available in accordance with the Plan to the holder entitled thereto, such unclaimed property shall, on the next Business Day after such second anniversary, be forfeited by such holder, whereupon all such unclaimed property shall be distributed on the next Distribution Date to the holders of Allowed Claims or Allowed Interests of the Class -19- 20 that would have been entitled to receive such property had such holder theretofore entitled thereto never been such a holder. 5.10. Transmittal of distributed property and notices. Except as may otherwise be agreed to by the Debtor and the holder of a particular Claim or Interest, any property or notice to which such holder shall become entitled under the provisions of this Plan, shall be delivered to such holder by regular mail, postage prepaid, in an envelope addressed to such holder as he or his authorized agent may direct in a request filed, on or before the Effective Date, with the Court (or filed, after the Effective Date with the Company), but if no such request is filed, to the address shown in the Debtor's Schedules, or, if a different address is stated in a proof of claim duly filed, to such address. In all cases where delivery or distribution is effectuated by mail, the date of delivery or distribution shall be the date of mailing. Property delivered in accordance with this paragraph will be deemed delivered to the holder regardless of whether such property is actually received by such holder. Notwithstanding any provision of the Plan to the contrary, any payment or other distribution which the Debtor is required, by this Plan, to make to the holder of an Allowed Claim on the Distribution Date or on any other date, shall be deemed timely made if made on the Distribution Date or on such other date, as the case may be, or within three (3) Business Days thereafter; however, any interest calculations required to be made, shall continue to be made only through the Distribution Date or such other date, as the case may be. Notwithstanding the foregoing or any other provision of the Plan, Class 2A Effective Date Payments shall be made by wire transfer on the Effective Date without offset, reduction or credit of any kind whatsoever. 5.11. Full and final satisfaction. All payments and distributions under this Plan shall be in full and final satisfaction, settlement, release and discharge of all Claims and Interests. 5.12. Allocation of distribution with respect to certain Claims. All payments and distributions made under this Plan with respect to a particular Claim shall be allocated first to the principal and then to the accrued and unpaid interest components of the Allowed Amount of such Claim; provided, however, that this Section 5.12 shall not be applicable to Class 1, Class 2A, Class 2B or Class 2C. 5.13. Fractional Shares and De Minimis Distributions. Whenever the Plan would require the distribution to any holder of a Claim or Interest of a fractional share of New Payless Common Stock, the fraction will not be issued to the holder. Instead, on the 180th day after the Effective Date, the Debtor will pay to the holder Cash equal to the value of the fractional share the holder would otherwise receive. The value of each fraction shall be computed by multiplying the fraction by the average of the closing prices of New Payless Common Stock on the New York Stock Exchange (or, if the New Payless Common Stock is not listed on the New York Stock Exchange, such other listing for such Stock as is otherwise obtained in accordance with Section 12.4 of the Plan) for the period of twenty trading days ending on or immediately before the 170th day after the Effective Date. Notwithstanding any other provision of the Plan, no distribution of less than $5 shall be made pursuant to this Section 5.13. -20- 21 5.14. De Minimis Distributions. Notwithstanding any provision of the Plan otherwise requiring that a distribution be made of Cash and/or securities on any Distribution Date, if the Company determines that the amount of Cash or quantity of securities required to be so distributed does not warrant (given the anticipated time and expenses to be incurred to accomplish the distribution) making such distribution, the Cash and/or securities otherwise available for distribution shall be held by the Company and shall be added to the distribution to be made on the next Distribution Date. 5.15. Cramdown. In the event any Class of Claims votes against the Plan, and such Plan is not revoked or withdrawn in accordance with Section 14.7 of the Plan, the terms of this Plan may be modified or amended by the Debtor with the consent of the Required Existing Lenders and the Required Exit Lenders in their respective judgments reasonably exercised to the extent necessary to effect a "cramdown" on such dissenting Class. The Debtor may make such modifications or amendments to this Plan with such consent and such modifications or amendments shall be filed with the Court and served on all parties in interest entitled to receive notice of the hearing on the confirmation of the Plan at least 10 days prior to such hearing. 5.16. Surrender of Outstanding Securities. (a) Except as otherwise provided herein, each holder of a certificated security evidencing an Allowed Interest (including Class 4A and Class 5A) shall surrender such certificated security to the Debtor or the Company with a duly executed letter of transmittal. No distribution hereunder shall be made to or on behalf of any holder of such Interest unless and until such certificated security is received or the nonavailability of such certificated security is established to the satisfaction of the Debtor or the Company. The Debtor or the Company may reasonably require security and/or indemnity from the purported holder of such certificated security to hold it harmless in respect of such certificated security and any distributions made in respect thereof. (b) Each holder of an existing debt security (including the holders of Class 2B Claims and the holders of Class 3A Claims in respect of the Senior Subordinated Notes, but not including the holders of Allowed Class 2A Claims) will surrender instruments representing such existing debt security held by it to the Debtor or the Company, as applicable in exchange for the distributions to be made to such holders under the Plan. No distribution shall be made to any holder of such an existing debt security that has not so surrendered such instruments held by it, subject, however to section 5.16(c). (c) Any holder of a Claim based on an existing debt security which has been lost, stolen, mutilated, or destroyed shall, in lieu of surrendering such existing debt security as provided in this paragraph, deliver to the Debtor or the Company (i) evidence satisfactory to the Debtor or the Company of the loss, theft, mutilation or destruction of such existing debt security and (ii) such security or indemnity as may be reasonably required by the Debtor or the Company to save it harmless with respect thereto. Upon compliance with this subparagraph by a holder of a Claim based on an existing -21- 22 debt security, such holder shall, for all purposes under this Plan, be deemed to have surrendered such existing debt security. (d) Any holder of an existing debt security who shall not have surrendered or be deemed to have surrendered instruments representing its existing debt security within two years after the Effective Date shall receive no distributions on such claim under this Plan and shall be forever barred from asserting any claim thereon. (e) At any time after the initial distribution to the holders of existing debt securities contemplated by the Plan, the Company shall hold the New Payless Common Stock not so distributed because the holder of an existing debt security has not surrendered to the Debtor or the Company its instrument or certificate representing its existing debt security. Until the second year after the Effective Date, any property so held by the Company will be held in trust for the benefit of holders of existing debt securities entitled to receive such property. 5.17. Disputed Payments. If any dispute arises as to the identity of a holder of an Allowed Claim or an Allowed Interest who is to receive any distribution, the Company may, in lieu of making such distribution to such person, make such distribution into an escrow account until the disposition thereof shall be determined by the Bankruptcy Court or by written agreement among the interested parties to such dispute. 5.18. Withholding Taxes. Any federal or state withholding taxes or other amounts required to be withheld under any applicable law shall be deducted and withheld from any distributions hereunder. 5.19. Voting of Certain Securities. New Payless Common Stock that is unclaimed or is property held in Disputed Claims reserves shall be voted at any meeting of the stockholders of the Company in proportion to the vote of the publicly held shares of New Payless Common Stock voted at any such meeting. 5.20. Claims Incurred After the Confirmation Date. Claims incurred after the date and time of entry of the Confirmation Order shall not be subject to application or proof of claim and may be paid by the Company in the ordinary course of business and without further Bankruptcy Court approval. ARTICLE VI. MEANS OF IMPLEMENTATION OF PLAN 6.1. On the Effective Date, the Company's certificate of incorporation shall be amended to authorize the issuance of shares of New Payless Common Stock, and shall be adopted in form and substance similar to that to be annexed as Exhibit B to the Plan on or prior to the Confirmation Date, which document shall be satisfactory in form and substance to the Debtor, the Required Existing Lenders and the Required Exit Lenders in their respective judgments reasonably exercised. The Company's bylaws shall be adopted in form and substance similar to those to be annexed as Exhibit C to the Plan on or prior to the Confirmation Date, which document shall be satisfactory in form and substance to the Debtor, the Required Existing Lenders and the Required Exit Lenders in their respective judgments reasonably exercised. -22- 23 6.2. On the Effective Date, the Company's certificate of incorporation shall be amended so as to permit the Company to distribute shares of New Payless Common Stock in sufficient amounts to satisfy the Debtor's obligations under the Plan. 6.3. On the Effective Date, the Company shall continue to operate its businesses, except as otherwise contemplated hereby. 6.4. On the Effective Date, the "Closing" (as defined in the Exit Facility) shall take place and the Exit Facility shall become available to the Company for its financing requirements. 6.5. Payments to be Made on Account of Allowed Class 2A Claims. The manner of disposition of the inventory at the 29 stores to be closed pursuant to the Business Plan shall be satisfactory to the Required Existing Lenders in their judgment reasonably exercised. Notwithstanding any term or provision of this Plan, between the Confirmation Date and the Effective Date, the Debtor shall continue to pay all interest (on a current basis), and the letter of credit and other fees and amounts owing (including, without limitation, cash management fees, overdraft repayments and all reasonable out-of-pocket expenses and reasonable attorneys' and advisors' fees and disbursements) as adequate protection to the holders of Allowed Class 2A Claims. ARTICLE VII. CONDITIONS TO EFFECTIVENESS OF THE PLAN 7.1. Conditions to Effective Date of Plan. Except as otherwise provided in Section 7.2 of the Plan, it shall be a condition to the occurrence of the Effective Date that: (a) The Debtor and the Exit Lenders shall have closed (as such term is used therein) the Exit Facility contemporaneously with the Effective Date and all conditions thereto shall have been satisfied or waived by the requisite Exit Lenders; (b) The DIP Facility shall have terminated, and all amounts owing thereunder shall have been paid in full, in cash; and (c) The Confirmation Order shall have been entered, in form and substance acceptable to the Debtor, the Required Existing Lenders and the Required Exit Lenders, in their respective judgments reasonably exercised, and shall have become a Final Order. 7.2. Waiver of Conditions. The conditions contained in Section 7.1 of the Plan may be waived on or before the Effective Date by the Debtor, the Required Existing Lenders and the Required Exit Lenders and the Unsecured Creditors' Committee in their respective judgments reasonably exercised. To be effective any such waiver must be in writing and filed with the Bankruptcy Court. -23- 24 ARTICLE VIII. TREATMENT OF EXECUTORY CONTRACTS 8.1. Assumption. On the Confirmation Date (but subject to the occurrence of the Effective Date), the Debtor shall be deemed to have assumed, in accordance with Section 365 of the Code, any and all executory contracts and unexpired leases to which the Debtor is a party, except those which: (a) prior to the Confirmation Date shall have been rejected; (b) at the Confirmation Date are the subject of pending motions to reject or are included on a list to be delivered to the Bankruptcy Court at or before the hearing on the confirmation of the Plan or (c) are stock options referred to in Section 3.8 of the Plan . The dollar amount of any monetary default of the Debtor existing (as of the Confirmation Date) under a particular unexpired lease or executory contract, as may be agreed to by the parties thereto or as may be determined by the Bankruptcy Court, shall constitute an Administrative Expense upon the assumption of such executory contract or unexpired lease. ARTICLE IX. MANAGEMENT OF THE COMPANY 9.1. Officers and Directors. (a) On the Effective Date, by the adoption of the amended certificate of incorporation for the Company which is annexed to the Plan as Exhibit A, the Company's Board of Directors shall be reconstituted to consist of two individuals designated by the Unsecured Creditors' Committee; five individuals designated by the Required Existing Lenders; and two individuals designated by the Board of Directors of the Debtor, the term of each director to be acceptable to the Debtor, the Prepetition Agent and the Required Existing Lenders, and the identity of the directors shall be disclosed at or prior to the hearing before the Bankruptcy Court to consider the confirmation of the Plan. (b) The persons who will serve as the Chief Executive Officer, the President and the Chief Financial Offer of the Company commencing on the Effective Date will be disclosed at or prior to the hearing before the Bankruptcy Court to consider the confirmation of the Plan. The capability and expertise of all proposed executive officers and directors of the Company must be satisfactory to the Prepetition Agent, the Required Existing Lenders and the Required Exit Lenders. 9.2. Management Stock Option Program. The Company may adopt a management stock option program on terms approved by the Company's Board of Directors providing for the issuance of stock options to the Company's management from time to time on or after the Effective Date exercisable into New Payless Common Stock. -24- 25 ARTICLE X. WAIVER OF RIGHTS OF SUBORDINATION 10.1. Each holder of a Claim against the Debtor (a) by virtue of the acceptance of the Plan by the requisite majority in number and amount of its Class, or (b) by virtue of the acceptance of the Plan by such holder, waives, releases and relinquishes any and all rights arising under any Prepetition subordination agreement, whether arising out of contract or under applicable law, including, without limitation, Section. 510 of the Code (other than Section 510(c)), to the payment and distributions of consideration made or to be made under the Plan or otherwise to any other holder of a Claim against the Debtor. Notwithstanding anything contained herein to the contrary, all rights of subordination arising under Section 509 of the Code shall be preserved and shall be unaffected by operation of this Section 10.1 of the Plan. ARTICLE XI. DISCHARGE, RELEASE OF CLAIMS AND COLLATERAL 11.1. Discharge; Injunction. Except as otherwise provided in the Confirmation Order or in the Plan (e.g., with respect to Allowed Class 2A Claims and Allowed Class 2B Claims), upon the Effective Date the Debtor shall be discharged, pursuant to Section 1141(d)(1) of the Code, from all Claims and all debts that arose before the Confirmation Date and from any liability of a kind specified in Section 502(g), Section 502(h) or Section 502(i) of the Code, whether or not: (a) a proof of the Claim is filed or deemed filed under Section 502 of the Code; (b) such Claim is allowed under Section 502 of the Code; or (c) the holder of such Claim has accepted the Plan. In accordance with Section 524 of the Code, the discharge provided by this Section 11.1 and Section 1141 of the Code, inter alia, acts as an injunction against the commencement or continuation of any action, employment of process or act to collect, offset or recover the Claims or Interests discharged hereby. 11.2. Release of collateral for Class 2C Claims. Unless otherwise agreed between the Debtor and the holder of a particular Class 2C Claim, each holder of a Class 2C Claim shall on or immediately before the Effective Date turn over and release to the Debtor any and all property of the Debtor which secures such holder's Class 2C Claim. Such holder shall execute whatever documents or forms the Debtor may reasonably require to evidence, as a matter of record, such holder's release of the collateral; provided, however, that such collateral will be deemed released for all purposes, whether or not any such documents or forms have been executed. On the Confirmation Date, the property of the debtor-in-possession shall revert to the Company free and clear of any and all liens or encumbrances, except as otherwise provided in the Plan or as agreed by the Debtor and the holder of a particular Class 2C Claim. -25- 26 11.3. Revesting. Except as otherwise provided in the Confirmation Order or in the Plan (e.g., with respect to Allowed Class 2A Claims and Allowed Class 2B Claims), on the Effective Date all property comprising the estate created in the Chapter 11 Case by Section 541 of the Code shall revest in the Company, free and clear of all Claims, liens, charges, encumbrances and Interests of creditors and equity security holders. As of the Effective Date, the Company may operate its businesses and use, acquire and dispose of property and settle and compromise claims or interests without supervision of the Bankruptcy Court free of any restrictions of the Code or Bankruptcy Rules, other than those restrictions expressly imposed by the Plan, the Confirmation Order, the Post-Consummation Facility and the Exit Facility. Without limiting the foregoing, the Company may pay the charges it incurs after the Effective Date for reasonable professional fees, disbursements, expenses or related support services without any application to the Bankruptcy Court. 11.4. Release by the Debtor of certain potential claims. On the date that is 90 days after the Confirmation Date, but subject to the occurrence of the Effective Date, the Debtor shall be deemed to have released, waived and relinquished any and all rights or claims they may have or had to avoid, pursuant to Sections 544, 547 and 548 of the Code, any transfer made by the Debtor of an interest in its property prior to the Filing Date, or to offset any such right or claim against any Claim made or asserted against the Debtor; provided, however, that no such right or claim shall be deemed released in connection with any adversary proceeding or contested matter pending on such 90th day after the Confirmation Date. Notwithstanding anything to the contrary contained herein or in the Existing Credit Facility or the Exit Facility, any recoveries received by or on behalf of the Debtor in respect of any such adversary proceeding or contested matter shall be used to reduce the then outstanding balance of revolving credit loans, if any, under the DIP Facility or the Exit Facility (as the case may be) (without any reduction in the amount of the commitment thereunder) and the balance, if any, shall be paid to the Debtor and used by it for general corporate purposes. 11.5. Release of directors and officers. On the Confirmation Date, but subject to the occurrence of the Effective Date, the Debtor, on its own behalf, and on behalf of all the Debtor's stockholders derivatively, hereby waives, releases and discharges all current directors, officers, employees, agents, advisors, professional persons and representatives of the Debtor and all persons who were directors, officers, employees, agents, advisors, professional persons and representatives of the Debtor since the Filing Date, from all liability based upon any act or omission related to past service with or for or on behalf of the Debtor or its affiliates. The immediately preceding sentence shall not, however, apply to (i) any indebtedness of any person to the Debtor for money borrowed by such person, or (ii) any set-off or counterclaim that the Debtor may have or assert against any person, provided that the aggregate amount thereof shall not exceed the aggregate amount of any claims (excluding any indemnification claims contemplated by Section 11.6 of the Plan) held or asserted by such person against the Debtor. Holders of Claims and Interests against the Debtor shall be enjoined from commencing or continuing any action, employment of process or act to collect, offset or recover any such claim that could be brought on behalf of or in the name of the Debtor, without any independent cause of action belonging to such holder asserting such claim. -26- 27 11.6. Survival of indemnification obligations; Maintenance of Liability Insurance. The obligations of the Debtor to indemnify those directors, officers, employees, agents, advisors, professional persons and representatives of the Debtor, who have served in such capacity since the Filing Date, pursuant to the Debtor's certificate of incorporation, bylaws and applicable statutes in respect of all present and future actions, suits and proceedings against any of such officers, directors, employees, agents, advisors, professional persons and representatives, based upon any act or omission related to service with or for or on behalf of the Debtor, shall not be discharged or impaired by confirmation or consummation of the Plan but shall survive unaffected by the reorganization contemplated by the Plan, regardless of such confirmation, consummation and reorganization. To the extent practicable, the current directors and officers liability insurance policies maintained by the Debtor, or replacement policies affording substantially similar coverage and protection, shall be continued in effect after the Effective Date. 11.7. Certain Other releases. On the Confirmation Date, but subject to the occurrence of the Effective Date, each holder of a Claim or Interest (i) who has accepted the Plan; (ii) whose Claim or Interest is in a Class that has accepted the Plan, as determined in accordance with Sections 1126(c) and (d) of the Code, respectively, or that is deemed to have accepted the Plan in accordance with Section 1126(f) of the Code; or (iii) who is entitled to receive a distribution of property pursuant to the Plan, shall be deemed, by virtue of such holder's acceptance of the Plan, acceptance of the Plan by such holder's Class, or such holder's receipt of a distribution of property or acceptance of rights granted under the Plan, to have unconditionally waived, discharged and released all rights, claims, and causes of action which such holder had or might have had against the Debtor and every other holder of a Claim or Interest (including the Debtor's and each such holder's officers, directors, employees, agents, advisors, professional persons and representatives and whether as stockholder, creditor, director or insider of the Debtor or otherwise) in respect of the Debtor and its business affairs prior to the Effective Date; provided, however, that such waiver, discharge and release shall not apply to any debt instruments or securities of the Debtor distributed pursuant to the Plan or any oral or written contractual rights against non-Debtor third parties whether or not such non-Debtor third parties hold Claims against or Interests in the Debtor. 11.8. Release of Existing Lenders and Prepetition Agent; Release of DIP Lenders and Agent. On the Confirmation Date, but as of, and subject to the occurrence of, the Effective Date, the Debtor, on its own behalf, and on behalf of all the Debtor's stockholders derivatively, hereby irrevocably waives, releases and discharges all current and former Existing Lenders and DIP Lenders, the Underwriters, the Prepetition Agent and the Agent and any predecessor Prepetition Agent or Agent, and all persons or entities who were their respective directors, officers, employees, agents, advisors, professional persons, representatives, parent corporations, subsidiaries and affiliates, from any and all causes of action, claims and other liabilities based upon any act or omission related to any extensions of credit or other financial services or involvement. The Confirmation Order shall specifically provide for the foregoing release and shall enjoin the prosecution of any such released claim, causes of action or liability. -27- 28 ARTICLE XII. PROVISIONS RELATING TO CORPORATE STRUCTURE OF THE COMPANY UPON CONSUMMATION 12.1. Certificate of incorporation. The certificate of incorporation of the Company shall, as of Effective Date, be amended in its entirety as provided in Section 6.1 of the Plan. The certificate of incorporation of the Company shall as of the Effective Date be amended, consistent with Section 1123(a)(6) of the Code, to prohibit the issuance of non-voting equity securities. 12.2. Cancellation of Agreements and Interests. On the Effective Date, all Old Payless Preferred Stock, Old Payless Common Stock, any unexercised rights to purchase Old Payless Preferred Stock or Old Payless Common Stock and agreements relating to the Existing Credit Facility and the Existing Prudential Facility then outstanding (other than any mortgages, deeds of trust and security and pledge agreements which may be amended and restated or otherwise remain in effect) shall be deemed cancelled and of no further force or effect, except as evidence of the entitlement of the holder thereof to receive distributions of property from the Debtor under the Plan. 12.3. Cancellation of Senior Subordinated Note Indentures. The rights and obligations of Payless under the Senior Subordinated Note Indenture and the Senior Subordinated Notes issued thereunder shall be terminated and cancelled as of the Effective Date. 12.4. Cancellation of Stock Options. Immediately after the Consummation Date, all stock options referred to in Section 3.8 of the Plan shall be deemed cancelled and of no further force or effect. 12.5. Stock Exchange Listing. The Company shall use its best efforts to obtain a New York Stock Exchange listing for the New Payless Common Stock. ARTICLE XIII. RETENTION OF JURISDICTION 13.1. After the Effective Date, the Bankruptcy Court shall retain jurisdiction of the Chapter 11 Cases pursuant to and for the purposes of Sections 105(a) and 1127 of the Code and for the following purposes, inter alia: (a) To consider any modification of the Plan under Section 1127 of the Code; (b) To determine any and all objections to the allowance of Claims and/or Interests; (c) To determine any and all fee requests of professionals made pursuant to Sections 330 and 503(b) of the Code: -28- 29 (d) To determine any and all applications pending on the Confirmation Date for the rejection and disaffirmance or assumption or assignment of executory contracts, or any such items contained in the list referred to in Section 8.1 of the Plan, and the allowance of Claims resulting therefrom; (e) To determine all controversies and disputes arising under, or in connection with the Plan and all agreements or releases referred to in the Plan; (f) To determine any and all applications, contested matters or adversary proceedings pending on the Confirmation Date or filed thereafter seeking to adjudicate the relative interests and priorities in and to property of the Debtor's estate or otherwise; (g) To effectuate payments under, and performance of, the provisions of the Plan; and (h) To determine such other matters and for such other purposes as may be provided for in the Confirmation Order. ARTICLE XIV. MISCELLANEOUS PROVISIONS 14.1. Governing Law. Except to the extent the Code or Bankruptcy Rules are applicable, the rights and obligations arising under this Plan shall be governed by and construed and enforced in accordance with, the laws of the State of Missouri. 14.2. Headings. The headings of the Articles, Sections and subsections of this Plan are inserted for convenience only and shall not affect the interpretation of the Plan. 14.3. Successors and assigns. This Plan and all the provisions hereof shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns. 14.4. Notices. Any notice, demand, claim, or other communication under this Plan shall be in writing and shall be deemed to have been given upon personal delivery thereof, or upon the fifth (5th) day following mailing thereof, if sent by registered mail, return receipt requested, postage prepaid to the last known address of the party to whom such notice is given. 14.5. Amendment and modification. (a) Preconfirmation Amendment. The Debtor may modify the Plan at any time prior to the entry of the Confirmation Order, with the consent of the Required Existing Lenders and the Required Exit Lenders in their respective judgments reasonably exercised; provided that the Plan, as modified, and the disclosure statement pertaining thereto meet applicable Bankruptcy Code requirements. (b) Postconfirmation Amendment Not Requiring Resolicitation. After the entry of the Confirmation Order, the Debtor may modify the Plan to remedy any defect or omission or to reconcile -29- 30 any inconsistencies in the Plan or in the Confirmation Order, as may be necessary to carry out the purposes and effects of the Plan, provided that: (i) the Debtor obtains approval of the Bankruptcy Court for such modification, after notice and a hearing; and (ii) such modification shall not materially and adversely affect the interests, rights, treatment, or distributions of any Class of Allowed Claims or Allowed Interests under the Plan. Any waiver under Section 7.3 of the Plan shall not be considered to be a modification of this Plan and no further Court approval need be obtained. (c) Postconfirmation/Preconsummation Amendment Requiring Resolicitation. After the Confirmation Date and before the Effective Date of the Plan, the Debtor may modify the Plan in a way that materially and adversely affects the interests, rights, treatment, or distributions of a class of Claims or Interests; provided, however, that: (i) the Plan, as modified, meets applicable Bankruptcy Code requirements; (ii) the Debtor obtains Court approval for such modification, after notice and a hearing; (iii) such modification is accepted by at least two-thirds in amount, and more than one-half in number, of Allowed Claims and by at least two-thirds in amount of Allowed Interests voting in each Class adversely affected by such modification; and (iv) the Debtor complies with Section 1125 of the Code with respect to the Plan as modified. 14.6. Severability. Should any provision in the Plan be determined to be unenforceable, such determination shall in no way limit or affect the enforceability and operative effect of any or all other provisions of the Plan. In the event that any provision of the Plan would, by its inclusion in the Plan, prevent or preclude the Bankruptcy Court from signing the Confirmation Order, the Bankruptcy Court, on its own initiative or upon the request of a party in interest, may modify or amend or permit the modification or amendment of such provision, in whole or in part, as necessary to cure any defect or remove any impediment to the confirmation of the Plan existing by reason of such provision; provided, however, that any such modification or amendment shall in no way limit or affect the enforceability and operative effect of any or all other provisions of this Plan; and provided further that in the event of such modification or amendment the Debtor reserves its right to revoke and withdraw the Plan. 14.7. Revocation and Withdrawal. The Debtor reserves the right to revoke and withdraw this Plan prior to the Confirmation Date. If the Debtor revokes or withdraws this Plan, then this Plan shall be deemed null and void and nothing contained herein shall be deemed to constitute a waiver or release of any claims by or against the Debtor or any other person or to prejudice in any manner the rights of the Debtor or any person in any further proceedings involving the Debtor. 14.8. Time. In computing any period of time prescribed or allowed by this Plan, the day of the act or event from which the designated period begins to run shall not be included. The last day of the period so computed shall be included, unless it is not a Business Day, in which event the period runs until the end of the next succeeding Business Day. 14.9. Rules of Construction. As used in the Plan, singular terms shall include the plural, plural terms shall include the singular, and masculine pronouns shall include all pronouns. -30- 31 Unless the Plan expressly provides otherwise, the rules set forth in Section 102 of the Code shall govern interpretation of the provisions of the Plan. 14.10. Consent. Wherever the Plan requires that a particular act be taken (or a particular act not be taken) with the consent of any person or persons, such consent shall be valid only if such consent has been given in writing and has been signed by the person or persons whose consent is required, or by such person's or persons' duly authorized representative; provided, however, that any consents given pursuant to Section 7.2 of the Plan may be given orally at any court hearing at which a transcript is taken, in lieu of any requirement of a writing. Consent given by a majority of the voting members of the Unsecured Creditors' Committee shall be deemed to be the consent of the Unsecured Creditors' Committee. Consent given by the holders of Allowed Claims and Allowed Interests of a Class meeting the acceptance standards set forth in Section 1126 of the Code shall be deemed to be the consent of such Class. 14.11. Dissolution of Unsecured Creditors' Committee. Except as otherwise provided in any order of the Bankruptcy Court, on the Effective Date, the duties of the Unsecured Creditors' Committee shall terminate, except with respect to any appeal of any order in the Chapter 11 Case, fee applications and any matters related to any proposed modifications of the Plan. 14.12. Corporate Action. The adoption of any new or amended and restated certificates of incorporation and by-laws of the Debtor and the other matters provided for under the Plan involving the corporate structure of the Debtor, or corporate action, as the case may be, to be taken by or required of the Debtor shall be deemed to have occurred and be effective as provided herein and shall be authorized and approved in all respects, without any requirement of further action by stockholders or directors of the Debtor. Without limiting the foregoing, the Debtor shall be authorized, without any further act or action required, to issue all securities and any instruments required to be issued hereunder, including sufficient New Payless Common Stock in respect of any exercise of stock options referenced in Section 9.2 of the Plan. 14.13. Effectuating Documents and Further Transactions. The Debtor shall be authorized to execute, deliver, file or record such documents, contracts, instruments, releases, and other agreements and take such other action as may be necessary to effectuate and further evidence the terms and conditions of the Plan. 14.14. Limitation of Liability. Neither the Debtor, the Unsecured Creditors' Committee (including its members) the Existing Lenders, the Prepetition Agents, the DIP Lenders, the Agent, the Underwriters or the Exit Lenders or their agents, nor any of their respective officers, directors, employees, agents, advisors, professional persons and representatives shall have or incur any liability to any entity for any action taken or omitted to be taken in connection with or related to the formulation, preparation, dissemination, implementation, confirmation, or consummation of the Plan, the Disclosure Statement, or any contract, release, or other agreement or document created or entered into, or any other action taken or omitted to be taken, in connection with the Plan; provided, however, that the provision of this section shall have no effect on the liability of any entity that would otherwise result from any action or omission to the extent that such action -31- 32 or omission is determined in a final order of a court of competent jurisdiction to have constituted gross negligence or willful misconduct. Dated: Kansas City, Missouri July 21, 1997 Submitted by: PAYLESS CASHWAYS, INC. By: /s/ David Stanley ----------------------- David Stanley Chief Executive Officer -32- EX-10.1 3 EMPLOYMENT AGREEMENT 1 EMPLOYMENT AGREEMENT THIS AGREEMENT, made and entered into as of May 8, 1997 between PAYLESS CASHWAYS, INC., an Iowa corporation (the "Company"), and STANLEY K. BOYD (the "Executive"). WHEREAS, the Company desires to employ the Executive and the Executive desires to be employed by the Company on the terms and conditions set forth in this Agreement; NOW, THEREFORE, in consideration of the mutual covenants of the parties herein made, it is hereby agreed: 1. Employment and Duties. The Company hereby agrees to employ the ----------------------- Executive, and the Executive hereby accepts employment, to perform such duties and responsibilities of a senior vice president as are, from time to time, assigned to the Executive by the Board of Directors, the Company's Chief Executive Officer or the Company's President/Chief Operating Officer. The Executive agrees to devote full business time and effort to the diligent and faithful performance of the Executive's duties under the direction of the President/Chief Operating Officer of the Company or such other person as designated by the Company's Board of Directors. Such duties shall be performed from the Company's principal executive offices in Kansas City, Missouri. 2. Compensation. ------------ (a) Base Salary. As compensation for the Executive's services, the Executive shall be paid a base salary at a minimum annual rate of $250,000 payable in equal bi-weekly installments, which salary shall be reviewed and may be adjusted from time to time at the discretion of the Board of Directors (the "Base Salary"); provided that the Base Salary shall not be less than the amount stated in this Paragraph 2(a). (b) Incentive Compensation. The Executive shall, in addition to the Base Salary, also be eligible to receive incentive compensation under the Company's management and executive incentive compensation program or such other program or plan for executive officers of the Company as from time to time in effect and as determined by the Compensation Committee of the Board of Directors (the "Incentive Compensation"). (c) Other Benefits. The Executive shall be entitled to participate in the Company's regular health, life, pension, vacation and disability plans in accordance with their respective terms. The Company will also provide 2 employee benefits to the Executive in respect of the Executive's employment as the Company customarily provides, from time to time, to its senior officers, including the Company's Supplemental Retirement Plan dated January 1, 1988, as amended (the "Supplemental Retirement Plan") and other benefits for senior officers set forth in Exhibit A hereto. Nothing herein shall be construed to limit the Company's discretion to amend, terminate or otherwise modify any such plans or benefits subject to the Executive's rights under Paragraph 5(c)(iii) below. (d) Non-Qualified Stock Grant. The Executive is hereby granted a non-qualified stock option on 30,000 shares of the Company's Class A Common Stock and 5,000 shares of the Company's Restricted Stock, which stock option and restricted stock will be governed under the terms and provisions of the stock option agreement attached hereto as Exhibit "B" (the "Stock Option Agreement") and the restricted stock grant agreement attached hereto as Exhibit "C" (the "Restricted Stock Grant Agreement"), respectively, except as may otherwise be provided in this Agreement. 3. Confidentiality and Solicitation Provisions. ------------------------------------------- (a) Confidentiality of Proprietary Information. The Executive agrees that, at all times, both during the Executive's employment with the Company and after the termination thereof, the Executive shall not divulge to any other person, firm or corporation, or in any way use for the Executive's own benefit, except as required in the conduct of the Company's business or as authorized in writing on behalf of the Company, any trade secrets or confidential information (the "Proprietary Information") obtained during the course of the Executive's employment with the Company. The Proprietary Information includes, but is not limited to, customer or client lists (including the names and/or positions of persons employed by such customers or clients who play a role in the decisions of such customers or clients concerning products or services of the type provided by the Company), financial matters, inventory techniques and programs, Company records of accounts, business projections, Company contracts, sales or marketing plans and strategies, pricing information and formulas, matters contained in unpublished records and correspondence, planned expansion programs (including areas of expansion and potential customer lists) and any and all information concerning the business or affairs of the Company which is not known by or generally available to the public. All papers and records of every kind relating to the Proprietary Information, including any such papers and records which shall at any time come into the possession of the Executive, shall be the sole and exclusive property of the Company and shall be surrendered to the Company upon termination of the Executive's employment for any reason or upon request by the Company at any time either during or after the termination of such employment. All information relating to or owned by customers of the Company of which the Executive 3 becomes aware or with which the Executive becomes familiar through the Executive's employment with the Company shall be kept confidential and not disclosed to others or used by the Executive directly or indirectly except in the course of the Company's business. (b) Solicitation Prohibition. During the Executive's employment with the Company and for a period of one (1) year after the termination of the Executive's employment with the Company for any reason, the Executive shall not directly or indirectly, whether as an individual for the Executive's own account or with any other person, firm, corporation, partnership, joint venture or entity whatsoever, solicit or endeavor to entice away from the Company any employee who is or was employed by the Company during the period that the Executive is employed by the Company. Additionally, the Executive shall not, during the Executive's employment with the Company or for a period of one (1) year after the termination of the Executive's employment with the Company for any reason directly or indirectly, through any other individual or entity solicit, entice, persuade or induce any individual or entity to terminate, reduce or refrain from renewing or extending its contractual or prospective relationship or other relationship with the Company. (c) Definition of "Company". For the purposes of Paragraph 3, the term "Company" shall mean the Company and any of its direct or indirect subsidiaries. 4. Covenant Not to Compete. During the Executive's employment with the Company and for a period of one year after termination of the Executive's employment with the Company if such termination is as a result of a voluntary termination by the Executive under Paragraph 5(d) or a termination by the Company for Cause under Paragraph 5(b), the Executive agrees not to engage in or act as an officer or director, or on an individual basis as an employee, consultant or agent, of any other person, firm, corporation, partnership, joint venture or other entity which is engaged in the business of building materials retailing if the annual sales of such business (including any related or commonly owned entity on a combined basis) from the sale of building materials and all related products and services for the most recently completed fiscal year exceeds $500,000,000. The foregoing provisions shall not prohibit the Executive from investing in any securities of any corporation whose securities, or any of them, are listed on a national securities exchange or traded in the over-the-counter market if the Executive shall own less than 1% of the outstanding voting stock of such corporation. The Executive agrees that a breach of the covenants contained herein will result in irreparable and continuing damage to the Company for which there will be no adequate remedy at law and in the event of any breach of such agreement, the Company shall be entitled to injunctive and such other and further relief, including damages, as may be proper. 4 5. Termination. ----------- (a) Death or Disability. In the event of the Executive's death or disability as defined in the Company's disability plan then in effect, the Company's obligation to make further Base Salary payments hereunder shall thereupon terminate. Executive shall be entitled to receive any Incentive Compensation which the Executive has earned, prorated to the date of the termination of the Executive's employment by reason of death or disability, and the Executive's rights to other compensation and benefits shall be determined under the Company's benefit plans and policies applicable to Company executives then in effect. (b) Termination for Cause by the Company. By following the procedure set forth in Paragraph 5(f), the Company shall have the right to terminate the employment of the Executive for "Cause" in the event Executive: (i) has committed a significant act of dishonesty, deceit or breach of fiduciary duty in the performance of the Executive's duties as an employee of the Company; (ii) grossly neglected or willfully failed in any way to perform substantially the duties of the Executive's employment hereunder, including but not limited to an act of insubordination; (iii) acted or failed to act in any other way that reflects materially and adversely upon the Company, including but not limited to the Executive's conviction of or plea of nolo contendere to (A) any felony (other than any felony arising out of negligence) or any misdemeanor involving moral turpitude, or (B) any crime or offense involving dishonesty with respect to the Company; or (iv) has knowingly and for the Executive's own benefit failed to comply with the covenants contained in Paragraphs 3 or 4 of this Agreement. If the employment of the Executive is terminated by the Company for Cause, this Agreement and the Company's obligation to make further Base Salary and Incentive Compensation payments hereunder shall thereupon terminate. The Executive's rights to other compensation and benefits shall be determined under the Company's benefit plans and policies applicable to Company executives then in effect. (c) Termination for Good Reason by the Executive. By following the procedure set forth in Paragraph 5(f), the Executive shall have the right to terminate the Executive's employment with the Company for "Good Reason" in the event (i) the Executive is not at all times a duly elected senior vice president of the Company; (ii) there is any material reduction in the scope of the Executive's authority and responsibility (provided, however, in the event of any illness or injury which disables the Executive from performing the Executive's duties, the Company may reassign the Executive's duties to one or more other employees until the Executive is able to perform such duties); (iii) there is a reduction in the Executive's Base Salary below the minimum amount specified in Paragraph 2(a) above, a reduction in the percentage of Base Salary which is the Incentive Compensation opportunity of the Executive under 5 Paragraph 2(b), an amendment to the Supplemental Retirement Plan which is materially adverse to the Executive or a material reduction in the other benefits to which the Executive is entitled under Paragraph 2(c) above; (iv) the Company requires the Executive's principal place of employment to be anywhere other than the Company's principal executive offices, or there is a relocation of the Company's principal executive offices outside of Kansas City, Missouri; or (v) the Company otherwise fails to perform its obligations under this Agreement. If the employment of the Executive is terminated by the Executive for Good Reason, the Executive shall be entitled to the severance benefits set forth in Paragraph 5(g) below. (d) Termination Without Cause or Without Good Reason. The Company may terminate the Executive's employment without Cause at any time, and in such event the Executive shall be entitled to the severance benefits set forth in Paragraph 5(g) below. The Executive may voluntarily terminate the Executive's employment without Good Reason at any time, and in such event the Executive's rights to further Base Salary payments and Incentive Compensation (except Incentive Compensation prorated to the date of termination) shall terminate on the effective date of such resignation and the Executive's rights to other compensation and benefits shall be determined under the Company's benefit plans and policies applicable to Company executives then in effect. (e) Termination Upon Change in Control. In the event of a Change of Control (as defined below), the Executive may terminate the Executive's employment hereunder upon thirty (30) days' prior written notice to the Company; provided that (i) such notice of termination under this Paragraph 5(e) must be given, if at all, during the sixty (60) day period, immediately following the first anniversary of the date of the Change of Control, and (ii) until the termination of the Executive's employment pursuant to this Paragraph 5(e) (subject to the continued right of the Executive to terminate employment for Good Reason pursuant to Paragraph 5(c) above) the Executive shall continue to perform the Executive's duties and responsibilities under this Agreement. In the event the Executive terminates the Executive's employment hereunder pursuant to this Paragraph 5(e), the Executive shall be entitled to the severance benefits set forth in Paragraph 5(g) below; provided, however, in the event that any payment or benefit received or to be received by the Executive in connection with a termination of the Executive's employment pursuant to this Paragraph 5(e) (collectively, the "Termination Payments") would (i) constitute a "parachute payment" within the meaning of Section 280G of the Internal Revenue Code of 1986, as amended (the "Code"), or any similar or successor provision to Section 280G (the "Termination Parachute Payments") and (ii) but for this proviso, be subject to the excise tax imposed by Section 4999 of the Code or any similar or successor provisions to Section 4999 (the "Excise Tax"), then such Termination Payments shall be reduced to the largest amount which the Company, in the 6 Company's reasonable discretion, determines would result in no portion of the Termination Parachute Payments being subject to the Excise Tax. The term "Change in Control" shall occur when and if: (i) any person, as defined in Sections 3(a)(9) and 13(d) of the Securities Exchange Act of 1934 (the "Exchange Act"), becomes the "beneficial owner" (as defined in Rule 13d-3 promulgated pursuant to the Exchange Act), directly or indirectly, of securities of the Company having 25% or more of the voting power in the election of directors of the Company, excluding, however, any person or an "affiliate" (as defined in the Exchange Act) of such person who is the beneficial owner of any shares of any class (preferred or common) of the Company's capital stock on the date hereof; or (ii) the occurrence within any twelve-month period while this Agreement is in effect of a change in the Board of Directors of the Company with the result that the Incumbent Members (as defined below) do not constitute a majority of the Company's Board of Directors. The term "Incumbent Members" shall mean the members of the Board on the date immediately preceding the commencement of such twelve-month period, provided that any person becoming a director during such twelve-month period whose election or nomination for election was approved by a majority of the directors who, on the date of such election or nomination for election, comprised the Incumbent Members shall be considered one of the Incumbent Members in respect of such twelve-month period. (f) Notice and Right to Cure. The party proposing to terminate the employment of the Executive for Cause or Good Reason, as the case may be, under Paragraph 5(b) or 5(c) above shall give written notice to the other, specifying the reason therefor with particularity. In the case of a termination pursuant to Paragraphs 5(b)(i), (iii) or (iv), or 5(c)(i), such termination shall be effective immediately upon delivery of such notice. In the case of any other proposed termination for Cause or Good Reason, as the case may be, the notice shall be given with sufficient particularity so that the other party will have an opportunity to correct any curable situation to the reasonable satisfaction of the party giving the notice within the period of time specified in the notice which shall not be less than thirty (30) days. If such correction is not so made or the circumstances or situation is such that it is not curable, the party giving such notice may, within thirty (30) days after the expiration of the time so fixed within which to correct such situation, give written notice to the other party that the employment is terminated effective forthwith. 7 (g) Severance Benefits. If the Executive's employment with the Company is terminated by the Company without Cause, by the Executive for Good Reason or by the Executive after a Change of Control in accordance with Paragraph 5(e), then the Executive shall be entitled to the following benefits: (i) Base Salary. The Company shall continue to pay to the Executive the Executive's Base Salary when and as such Base Salary would have been paid for a period of one (1) year after the date the Executive's employment with the Company is terminated, as if the Executive continued to be employed during such period and regardless of the death or disability of the Executive subsequent to the date of termination (the "Severance Period"). (ii) Incentive Compensation. If the effective date of such termination occurs before Incentive Compensation for any preceding fiscal year has been paid, the Company shall pay to the Executive the amount of the Executive's Incentive Compensation for the preceding fiscal year when and as it would have been paid if the Executive remained employed by the Company. (iii) Insurance Coverage. During the Severance Period, the Company shall provide the Executive with health, life and disability insurance substantially similar to the coverage of the benefits which the Executive was receiving or entitled to receive under Paragraph 2(c) immediately prior to the date of termination, the cost of which was paid by the Company. Such insurance coverage shall be provided to the Executive for the longer of (A) the Severance Period, or (B) the period during which such benefits would have been provided, at the Company's expense, to the Executive under the applicable health, life and disability insurance plans of the Company in effect immediately prior to the date of termination. (iv) Stock Incentives. All of the Executive's stock options and restricted stock grants shall continue to vest or be earned and be exercisable in accordance with their respective terms as if the Executive continued to be employed by the Company during the Severance Period (regardless of the death or disability of the Executive subsequent to the date of termination of employment). (v) Retirement Benefits. To the extent that benefits under each of the Company's pension plans and the Company's Supplemental Retirement Plan are computed on the 8 basis of either the salary and benefits paid while in the Company's employ or the term of the Executive's employment with the Company, the benefits payable and the Executive's eligibility therefor shall be determined as though the Executive were employed by the Company during the Severance Period. (vi) Outplacement Benefits. The Company, at its expense, will provide to the Executive such outplacement benefits as would be appropriate for a senior officer of a company substantially equivalent in size to the Company in terms of sales, profits, number of employees, geographic location and organizational structure, as determined by a national outplacement service provider selected by Company. (h) Survival of Certain Provisions. Notwithstanding any termination of the Executive's employment with the Company under this Agreement, the provisions of Paragraphs 3 and 4 shall, to the extent provided therein, survive any such termination shall be binding upon the Executive in accordance with the provisions thereof. 6. Arbitration. The parties hereby agree that any dispute arising hereunder or any claim for breach or violation of any item hereof shall be submitted to arbitration pursuant to the rules of the American Arbitration Association ("AAA") to a panel of three arbitrators selected by mutual agreement of the parties or, if the parties do not mutually agree on the arbitration, in accordance with the rules of the AAA. The award determination of the arbitrators shall be final and binding upon the parties without right of appeal. Either party shall have the right to bring an action in any court of competent jurisdiction to enforce this Paragraph and to enforce any arbitrators' award rendered pursuant to this Paragraph. The venue for all proceedings in arbitration hereunder and for any judicial proceedings related thereof shall be in Kansas City, Missouri. 7. Business Expenses. The Company shall reimburse the Executive for entertainment and travel expenses related to the Company's business in accordance with the practices of the Company in effect on the date hereof with respect to the Executive, subject to the right of the Company to modify its general policies relating to expense reimbursement for employees to the extent such modifications do not materially reduce the extent of reimbursement for the Executive as in effect on the date hereof. 8. Severability. If any one or more of the provisions of this Agreement shall be held invalid or unenforceable, the validity and enforceability of all other provisions of this agreement shall not be affected thereby. 9 9. Binding Effect. This Agreement shall be binding upon and inure to the benefit of the personal representatives, heirs and assigns of Executive and any successors in interest and assigns of the Company. 10. Notices. All notices required or permitted to be given hereunder shall be registered or certified mail addressed to the respective parties at their addresses set forth below: To the Executive: Stanley K. Boyd 4039 Histead Way Evergreen, CO 80439 To the Company: Payless Cashways, Inc. Two Pershing Square 2300 Main, P. O. Box 419466 Kansas City, MO 64141-0466 Attn: Senior Vice President - Administration/ Secretary or such other address as a party hereto may notify the other in writing. 12. Applicable Law. This Agreement, or any portion thereof, shall be interpreted in accordance with the laws of the State of Missouri. 13. Board of Directors' Approval. This Agreement will not become effective until approved by the Company's Board of Directors and then executed by both of the parties hereto. IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the day and year first written above. STANLEY K. BOYD PAYLESS CASHWAYS, INC. /s/ Stanley K. Boyd By: /s/ David Stanley - ------------------- --------------------------------- David Stanley, Chairman and Chief Executive Officer Approval of the foregoing Agreement by the Compensation Committee of the Board of Directors of the Company is hereby confirmed. /s/ John Weitnauer, Jr. ----------------------------- John Weitnauer, Jr., Chairman EX-11.1 4 COMPUTATION OF LOSS PER SHARE 1 Exhibit 11.1 PAYLESS CASHWAYS, INC. COMPUTATION OF PER SHARE EARNINGS (LOSS) - ---------------------------------------- (In thousands, except per share amounts)
Thirteen Weeks Ended Twenty-Six Weeks Ended ------------------------------ ---------------------------- May 31, May 25, May 31, May 25, 1997 1996 1997 1996 ------------ ------------ ------------ ---------- PRIMARY - ------- Net Income (Loss) $ (13,229) $ 5,866 $ (21,364) $ (1,757) Less: Preferred stock dividends (1,603) (1,481) (3,174) (2,932) ------------ ------------ ------------ ---------- Net income (loss) available to common shareholders $ (14,832) $ 4,385 $ (24,538) $ (4,689) ------------ ------------ ------------ ---------- Weighted average common and dilutive common equivalent shares outstanding 39,963 (1) 40,063 39,961 (1) 39,933 (1) ------------ ------------ ------------ ---------- Net income (loss) per common share $ (.37) $ .11 $ (.61) (.12) ============ ============ ============ ========== FULLY DILUTED - ------------- Net Income (Loss) $ (13,229) $ 5,866 $ (21,364) $ (1,757) Less: Preferred stock dividends (1,603) (1,481) (3,174) (2,932) ------------ ------------ ------------ ---------- Net income (loss) available to common shareholders $ (14,832) $ 4,385 $ (24,538) $ (4,689) ------------ ------------ ------------ ---------- Weighted average common and dilutive common equivalent shares outstanding 39,963 (1) 40,079 39,961 (1) 39,933 (1) ------------ ------------ ------------ ---------- Net income (loss) per common share $ (.37) $ .11 $ (.61) (.12) ============ ============ ============ ========== (1) Due to a loss being incurred for the period, dilutive common equivalent shares have not been computed as the resulting earnings per share would be antidilutive.
EX-15.1 5 LETTER RE UNAUDITED FINANCIAL INFORMATION 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 May 31, 1997 and May 25, 1996 and the related condensed statements of operations and cash flows for the thirteen and twenty-six 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. The accompanying condensed financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the condensed financial statements, in connection with a planned financial restructuring, on July 21, 1997 the Company commenced a reorganization proceeding under Chapter 11. Such circumstances indicate that the Company may be unable to continue as a going concern. Management's plans in regard to these matters are also described in Note 1 to the condensed financial statements. The condensed financial statements do not include any adjustments that might result from the outcome of this uncertainty. We have previously audited, in accordance with generally accepted auditing standards, the balance sheet of Payless Cashways, Inc. as of November 30, 1996 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 13, 1997, we expressed an unqualified opinion on those financial statements. As discussed in note H to the financial statements, the Company adopted Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," in fiscal 1996. In our opinion, the information set forth in the accompanying condensed balance sheet as of November 30, 1996 is fairly presented, in all material respects, in relation to the balance sheet from which it has been derived. /s/ KPMG Peat Marwick LLP Kansas City, Missouri July 21, 1997 2 [Letterhead of KPMG Peat Marwick LLP] EXHIBIT 15.1 Payless Cashways, Inc. Kansas City, Missouri Gentlemen: With respect to the subject registration statements on Form S-8 and Form S-3, we acknowledge our awareness of the use therein of our report dated July 21, 1997 related to our review of interim financial information. Pursuant to Rule 436(c) under the Securities Act of 1933, such report is not considered a part of a registration statement prepared or certified by an accountant or a report prepared or certified by an accountant within the meaning of Sections 7 and 11 of the Securities Act. /s/ KPMG Peat Marwick LLP Kansas City, Missouri July 21, 1997 EX-27.1 6 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from the May 31, 1997, financial statements and is qualified in its entirety by reference to such financial statements. 1000 6-MOS NOV-29-1997 MAY-31-1997 7847 0 0 0 419275 486497 794450 292336 1317475 334503 647187 0 40600 400 227477 1317475 1148741 1151210 831840 831840 0 0 32329 (27854) (6490) (21364) 0 0 0 (21364) (.61) 0
EX-99.1 7 PRESS RELEASE ANNOUNCING CHAPTER 11 FILING 1 Exhibit 99.1 Contact: Sitrick And Company Sandra Sternberg Ann Julsen (816) 234-6183 (310) 788-2850 FOR IMMEDIATE RELEASE PAYLESS CASHWAYS FILES CHAPTER 11 AND PLAN OF REORGANIZATION TO FACILITATE RESTRUCTURING; RECEIVES COMMITMENT FOR $125 MILLION IN FINANCING KANSAS CITY, MO. -- JULY 21, 1997 -- Payless Cashways, Inc. (NYSE:PCS) said today that, in order to facilitate the restructuring of its debt, the Company has simultaneously filed a voluntary petition to reorganize under Chapter 11 of the Bankruptcy Code and a plan of reorganization for its emergence from Chapter 11. The Company said that the proposed restructuring plan would significantly reduce its burdensome debt structure and enable it to compete more effectively in the future. Payless Cashways said that the plan, which provides some recovery for all the Company's constituencies upon completion of the restructuring, has the required support of its bank group. The Company said that it would be contacting its other key constituencies in an attempt to obtain their approval of the plan of reorganization, as well. In the meantime, the filing of the Chapter 11 petition will allow Payless Cashways to continue to operate its business without interruption while it obtains necessary approval of its plan of reorganization. -more- 2 In conjunction with the filing, the Company said that it has received a commitment from a group of financial institutions led by Canadian Imperial Bank of Commerce (CIBC), the Company's agent bank, for $125 million in debtor-in-possession (DIP) financing. The post-petition financing, which is subject to Court approval, is expected to provide adequate funding for all post-petition trade and employee obligations, as well as the Company's ongoing operating needs during the restructuring process. "Key to improving Payless Cashways' competitive position is to improve our balance sheet," said David Stanley, chairman and chief executive officer. "The Company has operated with an extremely burdensome level of debt which has limited capital expenditures during a period of unprecedented competitive pressure. The plan of reorganization we filed today is critical to establishing a more appropriate capital structure and a strong competitive future for Payless Cashways. Importantly, the Company has secured a commitment for $150 million of financing from a group of lenders for use upon completion of the reorganization." Although the Company was profitable on an EBITDA (earnings before interest, taxes, depreciation and amortization) basis in its second quarter ended May 31, 1997, and had sufficient liquidity to fund current operations, Mr. Stanley said that the Company was unlikely to be able to meet the requirements of its principal credit agreements at the end of the current fiscal year. As a result, the Company has been working with its senior lenders over the past several weeks in an attempt to restructure its debt. "In the course of these negotiations and after considering all other alternatives, including the sale of the Company and liquidation, it became clear that Chapter 11 provided the best approach for a comprehensive restructuring of the Company. Our plan will finally create a capital structure to support the operation of our business after a decade of dealing with a highly leveraged balance sheet," he said. -more- 3 "Our consumer research and the more than one million customers who shop with us each week clearly indicate a demand for our stores," Mr. Stanley continued. "Our challenge is to continue to offer an appealing, easy-to-shop environment to do-it-yourselfers and professional customers who want an alternative to warehouse shopping. In markets where we have implemented our Dual Path Strategy, converting existing store formats to provide facilities for both do-it-yourselfers and professionals, we have seen meaningful improvements in results. We are confident that we will see the same sort of success in other markets as we roll out this strategy across the country, and we intend to concentrate our energies on doing just that." Concurrently, the Company announced that it intends to close 29 stores, eliminating about 1,900 positions, and to implement an approximately 100-person reduction in force at the Company's headquarters and regional administrative centers. The Company said that neither Payless Cashways' employees nor its customers at its 165 ongoing stores should notice any difference in operations as a result of the filing. Daily operations will continue, stores will remain open, and transactions which occur in the normal course of business will go on as before. Policies regarding returns, exchanges, special orders, deposits, credit purchases and gift certificates will remain unchanged. During the reorganization proceeding, employees will be paid as usual. The Company has been in contact with many of its suppliers, and believes that they will continue to support Payless Cashways during the reorganization period, Mr. Stanley said. "With our current liquidity and the DIP financing, once approved by the Court, we are confident we will have adequate financial resources to purchase the goods and services we need for the relatively short duration of the Chapter 11 process expected by the Company. We anticipate that the vast majority of our suppliers will recognize the value of doing business with us long term." -more- 4 He said that with the support of its suppliers and the hard work of its employees, Payless Cashways is optimistic it will emerge from the restructuring process as a stronger, profitable, more competitive enterprise. "We are extremely grateful to the customers, employees and suppliers who have supported the Company through these challenging times, and we believe this restructuring will set the Company on a path of future growth and profitability." Payless Cashways, Inc. is a full-line building materials specialty retailer concentrating on remodelers, residential and commercial contractors, property management and industrial firms, and do-it-yourselfers. The Company currently operates 194 building materials stores in 22 states located in the Midwestern, Southwestern, Pacific Coast, Rocky Mountain, and New England areas. The stores operate under the names of Payless Cashways, Furrow, Lumberjack, Hugh M. Woods, Somerville Lumber, Knox Lumber, and Contractor Supply. Payless Cashways currently employs approximately 17,000 people in its stores, headquarters offices and distribution centers. The Company filed its petition and plan of reorganization in the U.S. Bankruptcy Court for the Western District of Missouri in Kansas City. This paragraph is included in this release to comply with 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 risk and uncertainty. Among the factors that could cause different results are: consumer spending and debt levels, interest rates, housing activity, lumber prices, product mix, growth of certain market segments, competitor activities, an excess of retail space devoted to the sale of building materials, success of the Dual Path strategy, the need for Bankruptcy Court approvals, the adequacy of and compliance with the DIP financing, stability of customer demand and supplier support, and the many uncertainties involved in operating a business in a Chapter 11 bankruptcy environment. Additional information concerning those and other factors is contained in the company's SEC filings, copies of which are available from the Company without charge or on the Company's web site, payless.cashways.com. # # # -----END PRIVACY-ENHANCED MESSAGE-----