<PAGE> 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 March 1, 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 March 31, 1997:
Voting -- 37,710,528 shares
Non-Voting Class A -- 2,250,000 shares
<PAGE> 2
PAYLESS CASHWAYS, INC.
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
STATEMENTS OF OPERATIONS (Unaudited) (1)
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Thirteen Weeks Ended
----------------------------------------------------
March 1, February 24,
1997 1996
----------------------------------------------------
<S> <C> <C>
Income
Net sales $ 487,550 $ 526,767
Other income 1,205 1,597
----------------------------------------------------
488,755 528,364
Costs and Expenses
Cost of merchandise sold 348,247 372,916
Selling, general and administrative 138,407 141,405
Provision for depreciation and amortization 12,804 13,184
Interest expense 16,055 15,352
----------------------------------------------------
515,513 542,857
----------------------------------------------------
LOSS BEFORE INCOME TAXES (26,758) (14,493)
Federal and state income taxes (18,623) (6,870)
NET LOSS $ (8,135) $ (7,623)
====================================================
Net loss per common share (2) $ (.24) $ (.23)
====================================================
Weighted average common shares outstanding 39,959 39,916
====================================================
<FN>
See notes to condensed financial statements
</TABLE>
<PAGE> 3
CONDENSED BALANCE SHEETS (Unaudited) (1)
<TABLE>
<CAPTION>
March 1, November 30, February 24,
(In thousands) 1997 1996 1996
---------------------------------------------------------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 8,509 $ 425 $ 23,165
Merchandise inventories (3) 386,812 399,010 388,584
Prepaid expenses and other current assets 18,889 22,281 19,896
Income taxes receivable 34,464 15,200 --
Deferred income taxes 13,104 13,681 19,083
---------------------------------------------------------
TOTAL CURRENT ASSETS 461,778 450,597 450,728
OTHER ASSETS
Real estate held for sale 16,639 18,529 9,224
Cost in excess of net assets acquired, less
accumulated amortization of $107,568
$105,198 and $97,856, respectively 290,910 292,946 322,686
Deferred financing costs 12,867 12,837 11,014
Other 13,626 12,917 15,054
LAND, BUILDINGS AND EQUIPMENT 787,318 782,935 797,795
Allowance for depreciation and amortization (285,808) (277,643) (261,665)
---------------------------------------------------------
TOTAL LAND, BUILDINGS AND EQUIPMENT 501,510 505,292 536,130
---------------------------------------------------------
$ 1,297,330 $ 1,293,118 $ 1,344,836
=========================================================
<FN>
See notes to condensed financial statements
</TABLE>
<PAGE> 4
CONDENSED BALANCE SHEETS - Continued (Unaudited) (1)
<TABLE>
<CAPTION>
March 1, November 30, February 24,
(In thousands) 1997 1996 1996
---------------------------------------------------------
<S> <C> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt $ 18,765 $ 18,340 $ 14,798
Trade accounts payable 107,516 121,891 179,622
Other current liabilities 152,659 172,918 147,090
Income taxes payable 6,249 6,444 5,304
---------------------------------------------------------
TOTAL CURRENT LIABILITIES 285,189 319,593 346,814
LONG-TERM DEBT, less portion
classified as current liability (4) 664,572 618,667 614,222
NON-CURRENT LIABILITIES
Deferred income taxes 41,729 41,665 59,631
Other 24,177 23,462 23,507
SHAREHOLDERS' EQUITY
Preferred Stock, $1.00 par value, 25,000,000
shares authorized; issued:
Cumulative Preferred Stock, 406,000 shares,
$80,134, $78,563 and $74,032 aggregate
liquidation preference, respectively 40,600 40,600 40,600
Common Stock, $.01 par value:
Voting, 150,000,000 shares authorized,
37,711,528, 37,709,028, and 37,668,206
shares issued, respectively 377 377 376
Non-Voting Class A, 5,000,000 shares
authorized, 2,250,000 shares issued 23 23 23
Additional paid-in capital 487,795 487,728 487,206
Accumulated deficit (247,132) (238,997) (227,543)
---------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 281,663 289,731 300,662
---------------------------------------------------------
$ 1,297,330 $ 1,293,118 $ 1,344,836
=========================================================
<FN>
See notes to condensed financial statements
</TABLE>
<PAGE> 5
CONDENSED STATEMENTS OF CASH FLOWS (Unaudited) (1)
<TABLE>
<CAPTION>
Thirteen Weeks Ended
----------------------------------------------
March 1, February 24,
(In thousands) 1997 1996
----------------------------------------------
<S> <C> <C>
Cash Flows from Operating Activities
Net loss $ (8,135) $ (7,623)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 12,804 13,184
Deferred income taxes 641 294
Non-cash interest 700 600
Other 851 394
Changes in assets and liabilities (38,376) 20,975
----------------------------------------------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES (31,515) 27,824
Cash Flows from Investing Activities
Additions to land, buildings and equipment (6,875) (4,375)
Proceeds from sale of land, buildings and equipment 1,985 11,893
Acquisition of business, excluding working capital:
Land, buildings and equipment -- (193)
Purchase price in excess of net assets acquired (334) (1,351)
Increase in other assets (708) (129)
----------------------------------------------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES (5,932) 5,845
Cash Flows from Financing Activities
Retirements of long-term debt (3,670) (20,079)
Proceeds from long-term debt 50,000 9,000
Sale of Common Stock under stock option plan -- 10
Other (799) (395)
----------------------------------------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 45,531 (11,464)
----------------------------------------------
Net increase in cash and cash equivalents 8,084 22,205
Cash and cash equivalents, beginning of period 425 960
----------------------------------------------
Cash and cash equivalents, end of period $ 8,509 $ 23,165
==============================================
<FN>
See notes to condensed financial statements
</TABLE>
<PAGE> 6
NOTES TO CONDENSED FINANCIAL STATEMENTS
Thirteen weeks ended March 1, 1997, and February 24, 1996.
(1) The accompanying condensed financial statements have been prepared in
accordance with the instructions to Form 10-Q. To the extent that
information and footnotes required by generally accepted accounting
principles for complete financial statements are contained in or
consistent with the audited financial statements incorporated by
reference in the Company's Form 10-K for the year ended November 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.
(2) Net 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 loss was adjusted for
dividend requirements on preferred stock.
(3) 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 $25.5 million, $24.3 million and $29.0
million higher than reported at March 1, 1997, November 30, 1996, and
February 24, 1996, respectively.
(4) Long-term debt consisted of the following:
<TABLE>
<CAPTION>
March 1, November 30, February 24,
(In thousands) 1997 1996 1996
----------------------------------------------------------
<S> <C> <C> <C>
Amended Credit Agreement $ 404,000 $ 354,000 $ 335,000
Mortgage loan payable to insurance company 104,358 108,000 118,934
Senior subordinated notes 173,655 173,655 173,655
Other senior debt 1,324 1,352 1,431
----------------------------------------------------------
683,337 637,007 629,020
Less portion classified as current liability (18,765) (18,340) (14,798)
----------------------------------------------------------
$ 664,572 $ 618,667 $ 614,222
==========================================================
</TABLE>
<PAGE> 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
RESULTS OF OPERATIONS
- ---------------------
INCOME
Net sales for the quarter ended March 1, 1997, decreased 7.4% from the same
period of 1996 in total and 4.5% on a same-store sales basis. (Same stores are
those open one full year.) The sales decline for the first quarter is primarily
due to the impact of a large number of competitive warehouse openings in the
Company's markets during the past year. Sales were also negatively impacted by
the two midweek holidays in December and winter weather in certain markets.
Same-store sales to do-it-yourself customers declined 13.0% and same-store sales
to professional customers increased 6.1%. 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 $17.0 million of sales in
the first quarter of 1996.
COSTS AND EXPENSES
Cost of merchandise sold as a percent of sales was 71.4% and 70.8% for the first
quarter of 1997 and 1996, respectively. The increase for the first quarter of
1997 was primarily due to the growth in sales to the professional customer whose
merchandise purchases include a higher percentage of commodity goods at margin
rates somewhat lower than the Company's average.
Selling, general and administrative expenses were 28.4% and 26.8% of sales for
the first quarter of 1997 and 1996, respectively. The increase as a percent of
sales for the 1997 period was due to lower sales. Selling, general and
administrative expenses for the first quarter of 1997 decreased approximately
$3.0 million compared to the same period of the prior year. The Company's
advertising costs increased approximately $2.8 million compared to the same
quarter of 1996, with the introduction of a new television and radio campaign
undertaken in the first quarter of 1997.
The provision for depreciation and amortization decreased from the first quarter
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 first quarter of 1997 increased compared to the same
period of 1996 primarily due to higher borrowing levels in 1997. Higher interest
rates in 1997 also contributed to the increase in interest expense for the first
quarter.
The income tax benefit for the first quarter of 1997 was $18.6 million compared
to $6.9 million for the first quarter 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.
NET LOSS
Net loss for the quarter ended March 1, 1997, was $8.1 million compared to $7.6
million for the same period of 1996. The increase in net loss was primarily the
result of decreased same-store sales.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Cash used in operating activities was $31.5 million for the first quarter of
1997 compared to cash provided by operating activities of $27.8 million for the
same period of 1996. The decrease in cash from operating activities was
primarily caused by a decrease in other current liabilities and an increase in
income taxes receivable. Other current liabilities decreased primarily due to
the timing of payroll and insurance payments and a decrease in sales taxes as a
result of decreased sales. Income taxes receivable increased due to an $18.6
million income tax benefit for the first quarter of 1997. During the first
quarters of 1997 and 1996, the Company used cash of approximately $1.8 million
and $3.7 million, respectively, in operating activities related to the execution
of the 1996 and 1995 restructuring plans. Due to seasonally lower sales in the
winter months, cash flow in the first quarter represents a small amount of
annual operating cash flow.
<PAGE> 8
MANAGEMENT'S DISCUSSION AND ANALYSIS - Continued
Borrowings are available under the Amended Credit Agreement to supplement cash
generated by operations. At March 1, 1997, $49.3 million was available for
borrowing under the Amended Credit Agreement. At March 1, 1997, working capital
was $176.6 million compared to $131.0 million and $103.9 million at November 30,
1996 and February 24, 1996, respectively. The current ratios at March 1, 1997,
November 30, 1996, and February 24, 1996, were 1.62 to 1, 1.41 to 1, and 1.30 to
1, respectively.
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 Amended Credit Agreement governs the
amount of capital expenditures which can be made ($72 million in 1997, $81
million in 1998, $100 million in 1999 and $59 million in 2000). The Company
spent approximately $7.2 million and $5.9 million during the first quarter 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, renovation of existing stores, and additional equipment. The
Company intends to finance the remaining fiscal 1997 capital expenditures of
approximately $65 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 Amended
Credit 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.
The Company's most significant financing activity is and will continue to be the
retirement of indebtedness. In connection with the sale of the distribution
center, discussed above, and in anticipation of selling real estate related to
certain closed stores, the Company repaid approximately $16.5 million of related
indebtedness during the first quarter of 1996. Although the Company's
indebtedness is and will continue to be substantial, management believes that,
based upon its analysis of the Company's financial condition, the cash flow
generated from operations during the past 12 months and the expected results of
operations in the future, cash flow from operations and borrowing availability
under the Amended Credit Agreement should provide sufficient liquidity to meet
all cash requirements for the next 12 months without additional borrowings. The
Amended Credit Agreement contains a number of financial covenants with which the
Company must comply. Several of these require that the Company's operating
performance improves over the remaining term of the Amended Credit Agreement.
Certain of these covenants are detailed in Note B to the Financial Statements
contained in the Company's Annual Report for fiscal 1996. Management currently
expects that it will achieve compliance with these covenants throughout fiscal
1997.
Forward-looking statements included in the subsection entitled "Cost and
Expenses" and in this subsection of this Quarterly Report are made pursuant to
the safe harbor provisions of the Private Securities Litigation Reform Act of
1995. There are certain important factors that could cause results to differ
materially from those anticipated by some of the statements made above.
Investors are cautioned that all forward-looking statements involve risks and
uncertainty. In addition to the factors discussed above, among the other factors
that could cause actual results to differ materially are the following: consumer
spending and debt levels; interest rates; housing activity, including existing
home turnover and new home construction; lumber prices; product mix; sales of
real estate held for sale; growth of certain market segments; competitor
activities; and an excess of retail space devoted to the sale of building
materials. Additional information concerning those and other factors is
contained in the Company's Securities and Exchange Commission filings, including
but not limited to the Form 10-K, copies of which are available from the Company
without charge or on the Company's web site, payless.cashways.com.
<PAGE> 9
REVIEW BY INDEPENDENT AUDITORS
The condensed consolidated financial statements of Payless Cashways, Inc. for
the thirteen week periods ended March 1, 1997 and February 24, 1996, have been
reviewed by KPMG Peat Marwick LLP, independent auditors. Their report is
included in this filing.
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings.
A group of terminated employees and others have filed a lawsuit against
the Company and other named defendants in the United States District Court for
the Southern District of Iowa. (See the full description of the lawsuit in Item
3-Legal Proceedings contained in the Company's Form 10-K for the year ended
November 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.
None.
Item 6. Exhibits and Reports on Form 8-K.
a. Exhibits.
4.0 Long-term debt instruments of Payless in amounts not
exceeding ten percent (10%) of the total assets of
Payless will be furnished to the Commission upon
request.
11.1 Computation of per share loss.
15.1 Letter re unaudited financial information - KPMG Peat
Marwick LLP.
27.1 Financial data schedule.
b. Reports on Form 8-K.
No reports on Form 8-K were filed by Payless during the quarter
ended March 1, 1997.
<PAGE> 10
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: April 8, 1997 By: s/Stephen A. Lightstone
------------------------------------------
A. Lightstone, Senior Vice President,
Finance and Chief Financial Officer
(Principal Financial Officer and Principal
Accounting Officer)
<PAGE> 1
Exhibit 11.1
PAYLESS CASHWAYS, INC.
COMPUTATION OF PER SHARE LOSS
- -----------------------------
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Thirteen Weeks Ended
--------------------------------
March 1, February 24,
1997 1997
------------ ------------
<S> <C> <C>
PRIMARY
- -------
Net loss $ (8,135) $ (7,623)
Less:
Preferred stock dividends (1,571) (1,452)
---------- ----------
Net loss attributable to Common Stock $ (9,706) $ (9,075)
Weighted average common shares outstanding 39,959 (1) 39,916 (1)
---------- ----------
Net loss per common share $ (.24) $ (.23)
========== ==========
FULLY DILUTED
- -------------
Net loss attributable to Common Stock $ (9,706) $ (9,075)
Weighted average common shares outstanding 39,959 (1) 39,916 (1)
---------- ----------
Net loss per common share $ (.24) $ (.23)
========== ==========
<FN>
(1) Due to a loss being incurred for the period, dilutive common equivalent shares have not been computed as the resulting loss per
share would be antidilutive.
</TABLE>
<PAGE> 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 March 1, 1997 and February 24, 1996 and the related condensed
statements of operations and cash flows for the thirteen week periods then
ended. These condensed financial statements are the responsibility of the
Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to the accompanying condensed financial statements for them to be in
conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the balance sheet of Payless Cashways, Inc. as of November 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
March 14, 1997
<PAGE> 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 March 14, 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
March 14, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the March 1,
1997, financial statements and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> NOV-29-1997
<PERIOD-END> MAR-01-1997
<CASH> 8509
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 386812
<CURRENT-ASSETS> 461778
<PP&E> 787318
<DEPRECIATION> 285808
<TOTAL-ASSETS> 1297330
<CURRENT-LIABILITIES> 285189
<BONDS> 664572
0
40600
<COMMON> 400
<OTHER-SE> 240663
<TOTAL-LIABILITY-AND-EQUITY> 1297330
<SALES> 487550
<TOTAL-REVENUES> 488755
<CGS> 348247
<TOTAL-COSTS> 348247
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 16055
<INCOME-PRETAX> (26758)
<INCOME-TAX> (18623)
<INCOME-CONTINUING> (8135)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8135)
<EPS-PRIMARY> (.24)
<EPS-DILUTED> 0
</TABLE>
