<PAGE>1
UNITED STATES
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 29, 1999
or
/ / Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from to
Commission file number 0-4437
PAYLESS CASHWAYS, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 42-0945849
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
Two Pershing Square
2300 Main, P.O. Box 419466
Kansas City, Missouri 64141-0466
(Address of Principal Executive Offices) (Zip Code)
(816) 234-6000
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES / X / NO / /
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. YES / X / NO / /
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
There were 19,996,494 shares of Common Stock, $.01 par value, outstanding as of
July 2, 1999.
<PAGE>2
PAYLESS CASHWAYS, INC.
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements.
<TABLE>
STATEMENTS OF OPERATIONS (Unaudited) (1)
<CAPTION>
Thirteen Weeks Ended Twenty-Six Weeks Ended
-------------------------------- --------------------------------
May 29, May 30, May 29, May 30,
(In thousands, except per share amounts) 1999 1998 1999 1998
-------------------------------- --------------------------------
<S> <C> <C> <C> <C>
Income
Net sales $ 492,728 $ 505,919 $ 884,601 $ 900,190
Other income 719 991 1,064 1,780
-------------------------------- --------------------------------
493,447 506,910 885,665 901,970
Costs and expenses
Cost of merchandise sold 366,713 374,971 652,652 666,880
Selling, general and administrative 109,449 112,196 216,623 224,366
Special (credits) charges, net (2) and (3) (5,400) -- (5,400) 5,584
Provision for depreciation and amortization 8,457 8,855 16,736 17,167
Interest expense 8,909 9,915 17,522 20,150
-------------------------------- --------------------------------
488,128 505,937 898,133 934,147
-------------------------------- --------------------------------
INCOME (LOSS) BEFORE INCOME TAXES 5,319 973 (12,468) (32,177)
Federal and state income taxes 2,503 241 (5,323) (7,947)
-------------------------------- --------------------------------
NET INCOME (LOSS) $ 2,816 $ 732 $ (7,145) $ (24,230)
================================ ================================
Weighted average common shares outstanding 20,000 20,000 20,000 20,000
-------------------------------- --------------------------------
Net income (loss) per common share-basic (4) $ 0.14 $ 0.04 $ (0.36) $ (1.21)
================================ ================================
Weighted average common and dilutive
common equivalent shares outstanding 20,156 20,111 20,000 20,000
-------------------------------- --------------------------------
Net income (loss) per common share-diluted (4) $ 0.14 $ 0.04 $ (0.36) $ (1.21)
================================ ================================
<FN>
See notes to condensed financial statements
</FN>
</TABLE>
<PAGE>3
<TABLE>
CONDENSED BALANCE SHEETS (Unaudited) (1)
<CAPTION>
May 29, November 28, May 30,
(In thousands) 1999 1998 1998
---------------------------------------------------------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 7,054 $ 1,950 $ 7,610
Merchandise inventories (5) 385,934 349,452 371,943
Prepaid expenses and other current assets 21,917 17,506 16,379
Income taxes receivable 773 1,338 9,706
Deferred income taxes 2,138 8,026 5,930
---------------------------------------------------------
TOTAL CURRENT ASSETS 417,816 378,272 411,568
OTHER ASSETS
Real estate held for sale 13,247 14,144 20,974
Deferred financing costs 2,572 3,319 2,217
Other 12,131 6,897 8,757
LAND, BUILDINGS AND EQUIPMENT 392,690 377,868 368,107
Allowance for depreciation and amortization (47,475) (32,146) (16,482)
---------------------------------------------------------
TOTAL LAND, BUILDINGS AND EQUIPMENT 345,215 345,722 351,625
---------------------------------------------------------
$ 790,981 $ 748,354 $ 795,141
=========================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt $ 10,156 $ 11,068 $ 3,139
Trade accounts payable 74,210 52,325 51,687
Other current liabilities 100,350 116,345 114,249
Income taxes payable 2,013 2,350 2,960
---------------------------------------------------------
TOTAL CURRENT LIABILITIES 186,729 182,088 172,035
LONG-TERM DEBT, less portion
classified as current liability (6) 395,736 336,557 392,160
NON-CURRENT LIABILITIES
Deferred income taxes 35,931 47,142 50,476
Other 18,297 21,134 20,900
SHAREHOLDERS' EQUITY
Common Stock, $.01 par value, 50,000,000 shares
authorized, 20,000,000 shares issued 200 200 200
Additional paid-in capital 183,600 183,600 183,600
Accumulated deficit (29,512) (22,367) (24,230)
---------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 154,288 161,433 159,570
---------------------------------------------------------
$ 790,981 $ 748,354 $ 795,141
=========================================================
<FN>
See notes to condensed financial statements
</FN>
</TABLE>
<PAGE>4
<TABLE>
CONDENSED STATEMENTS OF CASH FLOWS (Unaudited) (1)
<CAPTION>
Twenty-Six Weeks Ended
----------------------------------------------
May 29, May 30,
(In thousands) 1999 1998
----------------------------------------------
<S> <C> <C>
Cash Flows from Operating Activities
|
Net loss $ (7,145) $ (24,230)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Non-cash special credits (2) (10,600) --
Depreciation and amortization 16,736 17,167
Deferred income taxes (5,323) (5,577)
Non-cash interest 797 350
Other 480 218
Changes in assets and liabilities (27,492) 17,501
----------------------------------------------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES (32,547) 5,429
Cash Flows from Investing Activities
Additions to land, buildings and equipment (23,710) (6,186)
Proceeds from sale of land, buildings and equipment 8,378 28,900
Decrease (increase) in other assets (5,234) 5,559
----------------------------------------------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES (20,566) 28,273
Cash Flows from Financing Activities
Principal payments on long-term debt (13,733) (59,086)
Net proceeds from revolving credit facility 72,000 21,000
Other (50) 33
-----------------------------------------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 58,217 (38,053)
-----------------------------------------------
Net increase in cash and cash equivalents 5,104 (4,351)
Cash and cash equivalents, beginning of period 1,950 11,961
-----------------------------------------------
Cash and cash equivalents, end of period $ 7,054 $ 7,610
===============================================
<FN>
See notes to condensed financial statements
</FN>
</TABLE>
<PAGE>5
NOTES TO CONDENSED FINANCIAL STATEMENTS
Twenty-six weeks ended May 29, 1999, and May 30, 1998.
(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 28,
1998, 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 28, 1998,
condensed balance sheet has been derived from the audited financial
statements as of that date.
(2) The Company recorded a $10.6 million ($5.6 million after tax) non-cash
curtailment gain in connection with its non-contributory defined benefit
pension plan. Benefits under the pension plan were frozen effective June
17, 1999. The curtailment gain is included in special (credits) charges,
net, in the accompanying statements of operations for the periods ended
May 29, 1999.
(3) A special charge of $5.2 million ($2.8 million after tax) was recorded in
the second quarter of fiscal 1999 in connection with the closing of five
stores. In addition, the Company recorded an inventory write-down of $3.4
million ($1.8 million after tax), included in cost of merchandise sold,
in connection with the store closings. The 1999 special charge includes:
<TABLE>
<CAPTION>
Amount Amount Reserve
Charged Utilized at
(In millions) 1999 Through 5/29/99 5/29/99
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Real estate disposal costs $ 3.7 $ -- $ 3.7
Other costs 1.5 -- 1.5
--------------------------------------------------------------------------------------------------------------------
$ 5.2 $ -- $ 5.2
===========================================================================================================================
</TABLE>
(4) Basic earnings per common share have been computed based on the
weighted-average number of common shares outstanding during the period.
Dilutive earnings per common share are computed based on the
weighted-average number of common shares plus potential common shares
outstanding during the period, when dilutive, consisting of certain stock
options. Given the net loss reported for the twenty-six weeks ended May
29, 1999, and May 30, 1998, the impact of considering such stock options
would be antidilutive.
(5) Approximately 80% of the Company's inventories are valued using the LIFO
(last-in, first-out) method. Because inventory determination under the
LIFO method is only made at the end of each fiscal year based on the
inventory levels and costs at that time, interim LIFO determinations must
necessarily be based on management's estimates of expected year-end
inventory levels and costs. Since future estimates of inventory levels
and costs are subject to change, interim financial results reflect the
Company's most recent estimate of the effect of inflation and are subject
to final year-end LIFO inventory amounts. If the FIFO (first-in,
first-out) method of inventory accounting had been used by the Company,
inventories would have been $1.4 million lower than reported at May 29,
1999, and $1.0 million higher than reported at May 30, 1998,
respectively.
(6) Long-term debt consisted of the following:
<TABLE>
<CAPTION>
May 29, November 28, May 30,
(In thousands) 1999 1998 1998
----------------------------------------------------------
<S> <C> <C> <C>
1997 Credit Agreement, variable interest rate $ 313,220 $ 251,458 $ 295,158
Mortgage loan, variable interest rate 91,654 95,078 98,984
Other senior debt 1,018 1,089 1,157
----------------------------------------------------------
405,892 347,625 395,299
Less portion classified as current liability (10,156) (11,068) (3,139)
----------------------------------------------------------
$ 395,736 $ 336,557 $ 392,160
==========================================================
</TABLE>
<PAGE>6
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
RESULTS OF OPERATIONS
Income
Net sales for the quarter ended May 29, 1999, decreased 2.6% from the same
period of 1998 in total and increased 1.6% on a same-store sales basis. (Same
stores are those open one full year.) Net sales for the first half of 1999
decreased 1.7% from the same period of 1998 in total and increased 2.0% on a
same-store sales basis. Same-store sales to professional customers during the
second quarter of 1999 increased 12.8% and same-store sales to do-it-yourself
customers declined 8.3%. Sales decreases in total for both periods are a result
of closing 8 stores in the past twelve months whose sales were $10.6 million and
$43.2 million in the first half of 1999 and 1998, respectively. The Company also
intends to close 5 stores by the end of the 1999 third quarter.
Costs and Expenses
Cost of merchandise sold as a percent of sales was 74.4% and 74.1% for the
second quarter of 1999 and 1998, respectively. For the first half of 1999 and
1998, cost of merchandise sold as a percent of sales was 73.8% and 74.1%,
respectively. An inventory write-down of $3.4 million ($1.8 million after tax)
related to the closing of 5 stores in the third quarter of 1999 was 0.7% and
0.4% of sales for the second quarter and the first half of 1999, respectively.
Excluding the effects of inventory write-downs related to store closings, the
improvement for the second quarter and first half of 1999 was due to increased
supplier support as the Company moves farther from the Chapter 11 filing and
improved margin management.
Selling, general and administrative expenses were 22.2% of sales for the second
quarter of 1999 and 1998. For the first half of 1999 and 1998, selling, general
and administrative expenses were 24.4% and 24.9% of sales, respectively. The
decrease as a percent of sales for the first half of 1999 was due primarily to
the closing of stores. Selling, general and administrative expenses for the
second quarter and first half of 1999 decreased approximately $2.7 million and
$7.7 million, respectively, compared to the same periods of the prior year also
primarily because of closing stores.
During the second quarter of 1999, the Company recorded a $10.6 million ($5.6
million after tax) non-cash curtailment gain in connection with freezing its
non-contributory defined benefit pension plan. In addition, a special charge of
$5.2 million ($2.8 million after tax) was recorded in connection with the
closing of five stores. Also in connection with the store closings, the Company
recorded an inventory write-down of $3.4 million ($1.8 million after tax),
included in cost of merchandise sold. A special charge of $5.6 million ($4.2
million after tax), primarily a cash charge, was recorded in the first quarter
of 1998 to reflect severance costs related to the elimination of staff at the
Company's headquarters and regional administrative centers.
The provision for depreciation and amortization was 1.7% of sales and 1.8%
of sales for the second quarter of 1999 and 1998, respectively and 1.9% of sales
for the first half of 1998 and 1999.
Interest expense for the second quarter and first half of 1999 decreased
compared to the same periods of 1998 primarily due to lower borrowing levels in
1999 and, to some extent, lower interest rates in 1999.
The income tax benefit for the first half of 1999 was $5.3 million compared to
$7.9 million for the first half of 1998. The effective tax rates for both
periods were different from the 35% statutory rate primarily due to various
expenses that are permanently 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 and are subject to change throughout the year.
Net Income (Loss)
Net income for the quarter ended May 29, 1999, was $2.8 million compared to $0.7
million for the same period of 1998. Excluding the effect of non-routine items,
net income for the second quarter 1999 was $1.6 million. For the first half of
1999, net loss was $7.1 million compared to $24.2 million for the same period of
1998. Excluding the effect of non-routine items, net loss for the first half of
1999 and 1998 would have been $8.3 million and $20.0 million, respectively. Net
<PAGE>7
earnings for the second quarter and first half improved in 1999 primarily due to
improved gross margin management and continued expense control. Basic and
diluted income per common share were $0.14 and $0.04 for the second quarters of
1999 and 1998, respectively, while basic and diluted loss per common share were
$0.36 and $1.21 for the first halves of 1999 and 1998, respectively.
THE YEAR 2000 ISSUE
The Year 2000 issue is the result of computer programs being written using two
digits rather than four digits to define the applicable year. Any programs that
have time-sensitive software may recognize a date using "00" as the year 1900
rather than the Year 2000. If not remedied, this could result in system failure
or miscalculations.
The Company has completed an assessment of the impact of the Year 2000 on its
computer systems, both hardware and software, and has developed a plan to timely
address the Year 2000 issue. Systems that interact with customers and that focus
on the core business functions of buying, selling and accounting have been given
the highest priority. Some of the Company's current systems are being renovated
and others are being replaced with Year 2000-compliant systems. All renovation
code and system replacements are being unit-tested as they are completed.
Integrated full-system testing has begun and is expected to continue through the
third quarter of 1999. Code renovation was completed as of March 1, 1999. All
core business systems requiring replacement are approximately 90% complete and
this activity is expected to continue through the remainder of 1999. The Company
has spent approximately $4.0 million, to-date, in the execution of the Year 2000
plan and estimates that expenditures to complete execution of the Year 2000 plan
will range from $1.0 million to $1.5 million. Most of such expenditures are
being charged to expense as incurred. The Company currently believes that it
will complete all phases of the plan without any material adverse consequences
to its business, operations, or financial condition.
All non-information technology, which contains or might contain imbedded
software chips that utilize a date function, such as distribution conveyance
systems, security systems, climate controls, and other electronic devices used
in daily business operations, have been inventoried and assessed. All
non-compliant systems are being upgraded and tested as compliant versions become
available. This work is expected to continue throughout 1999.
The Company is in the process of assessing the extent to which the Company is
vulnerable to the failure of significant suppliers and other third parties to
remediate their own Year 2000 issues. The Company expects that this assessment
will be completed in the third quarter and believes testing of interfaces with
business partners and vendors will continue through 1999. The Company does not
anticipate the cost of Year 2000 compliance by suppliers to be passed on to the
Company. However, there can be no assurances that failure to address the Year
2000 issue by a third party on whom the Company's systems rely would not have a
material adverse effect on the Company.
As testing and assessment of third parties is completed, the Company is
developing contingency plans for possible Year 2000 problems and expects to
complete these plans by the end of the third quarter of 1999. The costs of the
Company's Year 2000 project and the date on which it will be completed are based
on management's best estimates. However, there can be no assurance that these
estimates will be achieved and actual results could differ materially from those
anticipated.
NEW ACCOUNTING PRONOUNCEMENTS
In June of 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). This statement establishes accounting and
reporting standards for derivative instruments and all hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities at their fair market values. Accounting for changes in the fair
value of a derivative depends on its designation and effectiveness. For
derivatives that qualify as effective hedges, the change in fair value will have
no impact on earnings until the hedged item affects earnings. For derivatives
that are not designated as hedging instruments, or for the ineffective portion
of a hedging instrument, the change in fair value will affect current period
earnings. The Company will adopt SFAS 133 during the first quarter of fiscal
2000 and does not presently believe that it will have a significant effect on
its financial statements.
<PAGE>8
LIQUIDITY AND CAPITAL RESOURCES
Cash used in operating activities was $32.5 million for the first half of 1999
compared to cash provided by operating activities of $5.4 million for the same
period of 1998. The decrease in cash from operating activities was primarily
caused by increased merchandise inventories. During the first half of 1999 and
1998, the Company used cash of approximately $6.7 million and $0.7 million,
respectively, in operating activities related to the execution of the 1998, 1997
and 1996 restructuring plans and $9.6 million in the first half of 1998 for
costs related to the Chapter 11 filing. In addition, the Company used $5.3
million in the first half of 1998 to pay severance costs related to the
elimination of staff at the Company's headquarters and regional administrative
centers.
Borrowings are available under the 1997 Credit Agreement to supplement cash
generated by operations. At May 29, 1999, $20.5 million was available for
borrowing under the 1997 Credit Agreement. At May 29, 1999, working capital was
$231.1 million compared to $196.2 million and $239.5 million at November 28,
1998 and May 30, 1998, respectively. The current ratios at May 29, 1999,
November 28, 1998, and May 30, 1998, were 2.24 to 1, 2.08 to 1, and 2.39 to 1,
respectively.
The Company's primary investing activities are capital expenditures for the
renovation of existing stores, improved technology, and additional equipment.
The 1997 Credit Agreement governs the amount of capital expenditures that can be
made and permitted levels are as follows: $52.1 million (plus a carry-forward
amount from 1998) in 1999, $41.2 million in 2000, $51.3 million in 2001 and
$52.3 million in 2002. The Company spent approximately $23.7 million and $6.2
million during the first half of 1999 and 1998, respectively, for renovation of
existing stores and additional equipment; 1999 expenditures also include those
for improved technology as well as the purchase of ten previously leased stores
for approximately $14.4 million. The Company intends to finance the remaining
fiscal 1999 capital expenditures of approximately $16 million, consisting
primarily of improved technology and investments to improve the Company's
capabilities to service the Pro customer (including store remodels and new
stores) with funds generated from operations and borrowings under the 1997
Credit Agreement. During the first halves of 1999 and 1998, the Company sold six
and 17 real estate properties, respectively, related to stores previously closed
for approximately $7.1 million and $28.9 million of cash proceeds, respectively,
which were applied to outstanding debt. Additionally, in the first half of 1998,
the Company received $5.8 million from the surrender of certain life insurance
policies related to a terminated benefit plan.
The Company's most significant financing activity is and will continue to be the
retirement of indebtedness. Although the Company's consolidated indebtedness is
and will continue to be substantial, management believes that, based upon its
analysis of the Company's financial condition, the cash flow generated from
operations during the past 12 months and the expected results of operations in
the future, cash flow from operations and borrowing availability under the 1997
Credit Agreement should provide sufficient liquidity to meet all cash
requirements for the next 12 months without additional financing. As a result of
the Chapter 11 filing, trade creditors significantly shortened credit terms. The
Company believes that progress with regard to lengthening terms and
reestablishing trade credit is continuing, but availability of trade credit
cannot be assured. The 1997 Credit Agreement contains a number of financial
covenants with which the Company must comply. Management currently expects that
it will achieve compliance with these covenants throughout fiscal 1999; however,
factors beyond management's control, including competitive conditions, economic
conditions, supplier support, lumber prices, and weather, could cause
noncompliance. If compliance with these covenants is not achieved, the Company
may be required to renegotiate its existing covenants with lenders or to
refinance borrowings. Success in achieving any such renegotiations or
refinancing, or the specific terms thereof, including interest rates, capital
expenditure limits or borrowing capacity, cannot be assured. If the Company
fails to achieve compliance with these covenants or, in the absence of such
compliance, if the Company fails to amend such financial covenants on terms
favorable to the Company, the Company may be in default under such covenants. If
such default occurred, it would permit acceleration of its debt under the 1997
Credit Agreement which, in turn, would permit acceleration of substantially all
of the Company's other long-term debt.
Since the first quarter of fiscal 1999, the Company has been involved in
discussions with new, as well as existing, lenders regarding restructuring a
major portion of its 1997 Credit Agreement. This action is intended to improve
the Company's operating flexibility through elimination of certain of its
current restrictive covenants. In addition, the current commercial and consumer
credit provider contracts will not be renewed after November 1999. Approximately
40% of the Company's fiscal 1998 sales were made pursuant to these programs. The
Company is negotiating with a replacement provider of commercial and consumer
credit, although the Company's ability to complete such an agreement and the
terms thereof cannot be assured. If the Company were unable to complete this
agreement or to secure a replacement provider for these
<PAGE>9
services by November 1999, it would be in default of the 1997 Credit Agreement.
The Company believes that it will obtain satisfactory terms and complete the
conversion in a timely manner. Commercial credit is a key component of the
services the Company offers to the professional customer, and the Company
believes that this transition creates an opportunity to enhance customer
satisfaction.
FORWARD-LOOKING STATEMENTS
Statements above in the subsections entitled "Costs and Expenses," and in this
subsection of this report such as "estimated", "believe", "expect" and similar
expressions, which are not historical, are forward-looking statements that
involve risks and uncertainties. Such statements include, without limitation,
the Company's expectation as to future performance.
Such forward-looking statements are made pursuant to the safe harbor provisions
of the Private Securities Litigation Reform Act of 1995. There are certain
important factors that could cause results to differ materially from those
anticipated by the forward-looking statements made above. These statements are
based on the current plans and expectations of the Company and investors are
cautioned that all forward-looking statements involve risks and uncertainty.
Among the factors that could cause actual results to differ materially are the
following: competitor activities; stability of customer demand; stability of the
work force; supplier support; consumer spending and debt levels; interest rates;
housing activity; lumber prices; product mix; growth of certain market segments;
weather; an excess of retail space devoted to the sale of building materials;
the success of the Company's strategy; and success of the Company's remediation
for the year 2000 issue. Additional information concerning these 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.
REVIEW BY INDEPENDENT AUDITORS
The condensed consolidated financial statements of Payless Cashways, Inc. for
the thirteen week and twenty-six week periods ended May 29, 1999 and May 30,
1998, have been reviewed by KPMG LLP, independent auditors. Their report is
included in this filing.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
No material changes in the Company's exposure to certain market risks have
occurred from the discussion contained in Item 7A, Quantitative and Qualitative
Disclosures About Market Risk, filed as part of the Company's Annual Report on
Form 10-K for the fiscal year ended November 28, 1998.
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 28, 1998.) 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
<PAGE>10
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 plaintiffs' motion for class certification has been denied on all claims
except the age discrimination claims. The court granted the plaintiffs' motion
for class certification of certain age discrimination claims. As a result of
this ruling, eight additional individuals chose to participate in the age claims
asserted in this suit. Each of the parties has conducted discovery pursuant to
the court's scheduling order and discovery plan. The lawsuit was formally stayed
pursuant to the automatic stay issued by the Bankruptcy Court following the
voluntary Chapter 11 reorganization filing on July 21, 1997. During the Chapter
11 reorganization, plaintiffs timely filed proofs of claim, including a
purported claim on behalf of the potential Age Discrimination in Employment Act
opt-in class, for an aggregate of $37 million, which was limited by the
Bankruptcy Court to a maximum of $22 million. The case has been returned to the
United States District Court for the Southern District of Iowa for resolution.
Unsuccessful mediation was held in April 1999 and a trial date is currently
scheduled for July 19, 1999. Any recovery for the plaintiffs against the Company
would be treated as a general unsecured claim entitling the plaintiffs to their
pro rata share of 8,269,329 shares of New Common Stock reserved for such claims.
The Company denies any and all claimed liability and is vigorously defending
this litigation, but is unable to estimate the likely outcome of this matter.
Item 4. Submission of Matters to a Vote of Security Holders.
The Annual Meeting of Stockholders was held April 21, 1999. Stockholders voted
in favor of the nominees for director: Max D. Hopper ( 16,021,862 for, 138,569
withheld) and Peter M. Wood ( 16,019,377 for, 141,054 withheld). Directors who
were previously elected and whose term of office as a director continued after
the meeting were Peter G. Danis, David G. Gundling, Donald E. Roller, Millard E.
Barron, and H. D. Cleberg.
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.
15.1 Letter re unaudited financial information - KPMG 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 May 29, 1999.
<PAGE>11
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 9, 1999 By: /s/Richard G. Luse
------------------------------------------
Richard G. Luse, Senior Vice President-
Finance and Chief Financial Officer
(Principal Financial Officer and Principal
Accounting Officer)
<PAGE> 1
[Letterhead of KPMG 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 29, 1999 and May 30, 1998, and the related condensed
statements of operations for the thirteen and twenty-six week periods then
ended and condensed statements of cash flows for the 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.
We have previously audited, in accordance with generally accepted auditing
standards, the balance sheet of Payless Cashways, Inc. as of November 28, 1998
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 15, 1999, we expressed an unqualified opinion on those financial
statements. In our opinion, the information set forth in the accompanying
condensed balance sheet as of November 28, 1998 is fairly presented, in all
material respects, in relation to the balance sheet from which it has been
derived.
s/ KPMG LLP
Kansas City, Missouri
June 15, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the May 29,
1999, 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-27-1999
<PERIOD-END> MAY-29-1999
<CASH> 7054
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 385934
<CURRENT-ASSETS> 417816
<PP&E> 392690
<DEPRECIATION> (47475)
<TOTAL-ASSETS> 790981
<CURRENT-LIABILITIES> 186729
<BONDS> 395736
0
0
<COMMON> 200
<OTHER-SE> 154088
<TOTAL-LIABILITY-AND-EQUITY> 790981
<SALES> 492728
<TOTAL-REVENUES> 493447
<CGS> 366713
<TOTAL-COSTS> 366713
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8909
<INCOME-PRETAX> 5319
<INCOME-TAX> 2503
<INCOME-CONTINUING> 2816
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2816
<EPS-BASIC> 0.14
<EPS-DILUTED> 0.14
</TABLE>
