<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 Secu-
rities Exchange Act of 1934
For the quarterly period ended August 26, 2000
or
/ / Transition report pursuant to Section 13 or 15(d) of the Secu-
rities 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.)
800 NW Chipman Road, Suite 5900
P.O. Box 648001
Lee's Summit, Missouri 64064-8001
(Address of Principal Executive Offices) (Zip Code)
(816) 347-6000
(Registrant's Telephone Number, Including Area Code)
None
(Former Name,Former Address and Former Fiscal Year,if Changed Since Last Report)
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 regis-
trant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES / X / NO / /
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
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 / /
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. There were 20,000,000 shares of
Common Stock, $.01 par value, outstanding as of September 15, 2000.
<PAGE>2
PAYLESS CASHWAYS, INC.
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements.
STATEMENTS OF OPERATIONS (Unaudited) (1)
<TABLE>
<CAPTION>
Thirteen Weeks Ended Thirty-Nine Weeks Ended
------------------------------- --------------------------------
August 26, August 28, August 26, August 28,
(In thousands, except per share amounts) 2000 1999 2000 1999
------------------------------- --------------------------------
<S> <C> <C> <C> <C>
Income
Net sales $ 391,815 $ 492,160 $ 1,160,658 $ 1,376,761
Other income 403 523 1,738 1,587
------------------------------- --------------------------------
392,218 492,683 1,162,396 1,378,348
Costs and expenses
Cost of merchandise sold (3) 284,866 362,217 846,390 1,014,869
Selling, general and administrative (4) 84,732 108,052 267,933 323,252
Special charges (credits), net (2) and (3) --- --- --- (5,400)
Provision for depreciation and amortization (5) 7,605 10,563 22,678 28,722
Interest expense 10,606 8,636 31,328 26,158
------------------------------- --------------------------------
387,809 489,468 1,168,329 1,387,601
------------------------------- --------------------------------
INCOME (LOSS) BEFORE INCOME TAXES 4,409 3,215 (5,933) (9,253)
Federal and state income taxes 2,056 1,502 (4,278) (3,821)
------------------------------- ---------------------------------
NET INCOME (LOSS) $ 2,353 $ 1,713 $ (1,655) $ (5,432)
================================ ================================
Weighted average common shares outstanding 20,000 20,000 20,000 20,000
-------------------------------- --------------------------------
Net income (loss) per common share-basic (6) $ 0.12 $ 0.09 $ (0.08) $ (.27)
================================ ================================
Weighted average common and dilutive
common equivalent shares outstanding 20,082 20,170 20,000 20,000
-------------------------------- --------------------------------
Net income (loss) per common share-diluted (6) $ 0.12 $ 0.09 $ (0.08) $ (.27)
================================ ================================
See notes to condensed financial statements
</TABLE>
<PAGE>3
CONDENSED BALANCE SHEETS (Unaudited) (1)
<TABLE>
<CAPTION>
August 26, November 27, August 28,
(In thousands) 2000 1999 1999
----------------------------------------------------------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 990 $ 1,111 $ 2,241
Merchandise inventories (7) 337,576 349,332 361,687
Prepaid expenses and other current assets 17,263 22,013 22,716
Income taxes receivable --- 679 773
Deferred income taxes --- --- 69
---------------------------------------------------------
TOTAL CURRENT ASSETS 355,829 373,135 387,486
OTHER ASSETS
Real estate held for sale 5,680 8,851 4,730
Deferred financing costs 3,114 3,944 2,202
Other 1,474 1,549 1,505
LAND, BUILDINGS, EQUIPMENT & SOFTWARE 422,412 407,812 413,902
Allowance for depreciation and amortization (89,047) (66,900) (61,486)
--------------------------------------------------------
TOTAL LAND, BUILDINGS, EQUIP. AND SOFTWARE 333,365 340,912 352,416
---------------------------------------------------------
$ 699,462 $ 728,391 $ 748,339
=========================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt (8) $ 5,178 $ 3,265 $ 10,160
Trade accounts payable 46,505 51,480 68,000
Other current liabilities 68,546 88,645 96,407
Income taxes payable 1,037 1,851 1,924
Deferred income taxes 10,931 2,157 ---
---------------------------------------------------------
TOTAL CURRENT LIABILITIES 132,197 147,398 176,491
LONG-TERM DEBT, less portion
classified as current liability (8) 373,500 374,154 362,185
NON-CURRENT LIABILITIES
Deferred income taxes 18,232 31,263 35,364
Other 23,891 22,279 18,298
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 (32,158) (30,503) (27,799)
---------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 151,642 153,297 156,001
---------------------------------------------------------
$ 699,462 $ 728,391 $ 748,339
=========================================================
See notes to condensed financial statements
</TABLE>
<PAGE>4
CONDENSED STATEMENTS OF CASH FLOWS (Unaudited) (1)
<TABLE>
<CAPTION>
Thirty-Nine Weeks Ended
----------------------------------------------
August 26, August 28,
(In thousands) 2000 1999
---------------------------------------------
<S> <C> <C>
Cash Flows from Operating Activities
Net loss $ (1,655) $ (5,432)
Adjustments to reconcile net loss to net cash
(used in) provided by operating activities:
Non-cash special credits (2) --- (10,600)
Depreciation and amortization 22,678 28,722
Deferred income taxes (4,257) (3,821)
Non-cash interest 990 1,217
Other (1,066) 481
Changes in assets and liabilities (8,703) (12,046)
----------------------------------------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 7,987 (1,479)
Cash Flows from Investing Activities
Additions to land, buildings, equipment and software (14,240) (38,757)
Proceeds from sale of land, buildings and equipment 5,740 15,920
(Increase) decrease in other assets 75 (13)
----------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (8,425) (22,850)
Cash Flows from Financing Activities
Principal payments on long-term debt (8,275) (21,280)
Net proceeds from revolving credit facility 9,534 46,000
Other (942) (100)
----------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 317 24,620
----------------------------------------------
Net increase (decrease) in cash and cash equivalents (121) 291
Cash and cash equivalents, beginning of period 1,111 1,950
---------------------------------------------
Cash and cash equivalents, end of period $ 990 $ 2,241
=============================================
See notes to condensed financial statements
</TABLE>
<PAGE>5
NOTES TO CONDENSED FINANCIAL STATEMENTS (Unaudited) Thirty-nine weeks ended
August 26, 2000, and August 28, 1999.
(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 27,
1999, 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 27, 1999,
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 the second quarter of 1999 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 charges (credits), net, in the accompanying
statements of operations for the thirty-nine weeks ended August 28, 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 in the second quarter of 1999
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.
(4) Insurance expense in the third quarter of fiscal 2000 was favorably
impacted by a change in estimate in liability reserves for worker's
compensation claims, as a result of recent settlements with insurance
carriers. The approximate effect of this change in estimate on the
thirteen weeks ended August 26, 2000 was a $1.9 million reduction in
selling, general and administrative expense. Conversely, operating
expense was unfavorably impacted by non-recurring commercial credit
account write-offs, resulting from final conversion issues associated
with the Company's change in third party credit providers at the
beginning of fiscal 2000.
(5) A charge of $1.1 million for accelerated depreciation on certain
leasehold improvements was recorded in the third quarter of 1999.
Additionally, the Company reassessed the useful lives of certain classes
of fixed assets during the second quarter of fiscal 2000. The approximate
effect of this change in estimate on the thirteen weeks and thirty-nine
weeks ended August 26, was a $0.7 million and $2.5 million reduction in
the provision for depreciation and amortization, respectively.
(6) 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 thirty-nine weeks ended
August 26, 2000, and August 28, 1999, the impact of considering such
stock options would be antidilutive.
(7) 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 $3.3 million lower and $1.7 million lower
than reported at August 26, 2000, and August 28, 1999, respectively.
<PAGE>6
(8) Long-term debt consists of the following:
<TABLE>
<CAPTION>
August 26, November 27, August 28,
(In thousands) 2000 1999 1999
----------------------------------------------------
<S> <C> <C> <C>
1999 Credit Agreement, variable interest rate $ 192,920 $ 183,386 $ ---
1997 Credit Agreement, variable interest rate 106,048 109,415 286,088
Mortgage loan, variable interest rate 78,875 83,686 85,279
Other senior debt 835 932 978
----------------------------------------------------
378,678 377,419 372,345
Less portion classified as current liability (5,178) (3,265) (10,160)
----------------------------------------------------
$ 373,500 $ 374,154 $ 362,185
====================================================
</TABLE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
RESULTS OF OPERATIONS
Income
Net sales for the third quarter of fiscal 2000, decreased 20.4% from the same
period of fiscal 1999 in total and 18.6% on a same-store sales basis. (Same
stores are those open one full year.) Net sales for the first three quarters of
2000 decreased 15.7% from the same period of 1999 in total and decreased 13.4%
on a same-store sales basis. The same store sales decrease for the quarter and
the first three quarters of 2000 is primarily due to significant deflation in
lumber and wallboard prices, competitive pressures and ongoing business
restructuring designed to create a sustainable profit model. This business
restructuring included a change in the Company's mass marketing programs to
target more specific customer segments, a shift in product mix to higher margin
items and elimination of certain unprofitable customer relationships and
products. Same-store sales to professional customers during the third quarter of
2000 decreased 14.3% and same-store sales to do-it-yourself customers declined
23.8%. Sales decreases in total for both periods are partially a result of
closing 6 stores in the past twelve months whose sales were $1.3 million and
$41.2 million in the first three quarters of 2000 and 1999, respectively.
Costs and Expenses
Cost of merchandise sold as a percent of sales was 72.7% and 73.6% for the third
quarter of fiscal 2000 and 1999, respectively. For the first three quarters of
2000 and 1999, cost of merchandise sold as a percent of sales was 72.9% and
73.7%, respectively. The improvement for the third quarter and first three
quarters of 2000 was due to improvements in sourcing and vendor-support programs
and fewer inventory write-downs and markdowns versus the prior year. These
improvements were partially offset by price deflation in lumber and wallboard
products in comparison to the prior year and the Company's continued shift in
sales mix to the lower margin professional customer.
Selling, general and administrative expenses were 21.6% and 22.0% of sales for
the third quarter of fiscal 2000 and 1999, respectively. For the first three
quarters of 2000 and 1999, selling, general and administrative expenses were
23.1% and 23.5% of sales, respectively. The decrease as a percent of sales for
the third quarter and the first three quarters of 2000 was due primarily to
reductions in personnel expenses, decreases in the cost of risk management
programs and lower advertising and marketing costs. Selling, general and
administrative expenses for the third quarter and first three quarters of 2000
decreased approximately $23.3 million and $55.3 million, respectively, compared
to the same periods of the prior year also primarily due to reductions in the
aforementioned items.
The provision for depreciation and amortization was 2.0% and 2.1% of sales for
the third quarter of fiscal 2000 and 1999, respectively. For the first three
quarters of 2000 and 1999, the provision was 2.0% and 2.1% of sales,
respectively. The decrease as a percent of sales for the third quarter and the
first three quarters of 2000 resulted from a $1.1 million depreciation charge
for accelerated depreciation on certain leasehold improvements recorded in the
third quarter of 1999, a reassessment of the useful lives of certain fixed asset
classes during 2000 which reduced the provision for depreciation and
amortization by $0.7 million and $2.5 million for the third quarter and first
three quarters of 2000, respectively, and an overall decrease in depreciation
expense due to store closures in 1999.
<PAGE>7
Interest expense for the third quarter and first three quarters increased
compared to the same periods of 1999 primarily due to higher interest rates in
2000 and, to a lesser extent, higher average borrowing levels in 2000.
The income tax benefit for the first three quarters of fiscal 2000 was $4.3
million compared to $3.8 million for the first three quarters of fiscal 1999.
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. In addition, the effective tax rate for 2000 reflects the
utilization of a long-term capital loss carry-forward resulting from the sale of
a certain partnership interest. 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 August 26, 2000, was $2.4 million compared to
$1.7 million for the same period of fiscal 1999. For the first three quarters of
2000, net loss was $1.7 million compared to $5.4 million for the same period of
1999. Net earnings for the first three quarters of 2000 improved compared to
1999 primarily due to improved gross margin management, continued expense
control, a reduction in depreciation expense due to the reassessment of
estimated useful lives for certain fixed asset classes, the tax benefit from the
capital loss carry-forward and special charges recorded in the second quarter of
1999. The increase in third quarter net earnings was due to significant expense
reductions and a decrease in depreciation expense due to the aforementioned and
a charge for accelerated depreciation recorded in the third quarter of 1999.
These items were offset somewhat by higher interest expense in the third quarter
of 2000. Basic and diluted net income per common share were $0.12 and $0.09 for
the third quarter of 2000 and 1999, respectively, while basic and diluted net
loss per common share were $0.08 and $.27 for the first three quarters of 2000
and 1999, respectively.
NEW ACCOUNTING PRONOUNCEMENTS
In June of 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("FAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS 133"). This statement, as
amended by FAS No. 138, "Accounting for Certain Derivative Instruments and
Certain Hedging Activities- an Amendment of FASB Statement No. 133", 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 FASB has delayed the effective date of implementing the standard
until January 1, 2001, and therefore, the Company will not be required to adopt
SFAS 133 until the first quarter of fiscal 2001. The Company does not presently
believe that it will have a significant effect on its financial statements.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities was $8.0 million for the first three
quarters of fiscal 2000 compared to cash used in operating activities of $1.5
million for the same period of fiscal 1999. The increase in cash from operating
activities was primarily caused by decreases in merchandise inventories and
improved earnings in 2000. During the first three quarters of 2000 and 1999, the
Company used cash of approximately $2.6 million and $3.4 million, respectively,
in operating activities related to the execution of the 1999 and 1998
restructuring plans.
Borrowings are available under the 1999 Credit Agreement to supplement cash
generated by operations. At August 26, 2000, $5.3 million was available for
borrowing under the 1999 Credit Agreement. At August 26, 2000, working capital
was $223.6 million compared to $225.7 million and $211.0 million at November 27,
1999, and August 28, 1999, respectively. The current ratios at August 26, 2000,
November 27, 1999, and August 28, 1999, were 2.69 to 1, 2.53 to 1, and 2.20 to
1, respectively.
The Company's primary investing activities are capital expenditures for the
renovation of existing stores, improved technology, and additional equipment.
The Company spent approximately $14.2 million and $38.8 million during the first
three quarters of fiscal 2000 and 1999, respectively, for renovation of existing
stores, additional equipment and technological improvements; 1999 expenditures
also included the purchase of ten previously leased stores for approximately
<PAGE>8
$14.4 million. The Company intends to fund the remaining estimated fiscal 2000
capital expenditures of approximately $6 million, consisting primarily of
improved technology, 10 to 15 store remodels, new stores, additional
manufacturing capabilities and routine capital improvements, with funds
generated from operations. During the first three quarters of 2000 and 1999, the
Company sold three and thirteen real estate properties, respectively, related to
stores previously closed for approximately $4.2 million and $14.4 million of
cash proceeds, respectively, which were applied to outstanding debt.
The Company's most significant financing activity is and will continue to be the
retirement of indebtedness. 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 1999 Credit
Agreement should provide sufficient liquidity to meet all cash requirements for
the next 12 months without additional financing sources.
FORWARD-LOOKING STATEMENTS
Statements made above in Item 2, Management Discussion and Analysis of Financial
Condition and Results of Operations, such as "estimate", "believe", "expect",
"anticipate", "intend" 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; commodity prices; new and existing housing
activity; consumer spending and debt levels; product and customer mix; interest
rates; growth of certain market segments; weather; an excess of retail space
devoted to the sale of building materials; and the success of the Company's
strategy. Additional information concerning these and other 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, www.payless.cashways.com.
REVIEW BY INDEPENDENT AUDITORS
The condensed financial statements of Payless Cashways, Inc. for the thirteen
week and thirty-nine week periods ended August 26, 2000, and August 28, 1999,
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 27, 1999.
<PAGE>9
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings.
There are presently no material legal proceedings to which Payless is a party or
of which its property is subject.
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 the Company in amounts
not exceeding ten percent (10%) of the total assets of
the Company will be furnished to the Commission upo
request.
10.1(b)*Form of Employment Agreement (Form B) between the Com-
pany and certain executive officers.
15.1 Letter re unaudited financial information - KPMG LLP.
27.1 Financial data schedule.
* 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 the Company during the
quarter ended August 26, 2000.
<PAGE>10
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: September 25, 2000 By: /s/Richard B. Witaszak
Richard B. Witaszak, Senior Vice
President-Finance and Chief Fin-
ancial Office (Principal Finan-
cial Officer and Principal
Accounting Officer)
