<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 May 27, 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)
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 / /
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 20,000,000 shares of Common Stock, $.01 par value, outstanding as of
July 2, 2000
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PAYLESS CASHWAYS, INC.
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements.
STATEMENTS OF OPERATIONS (Unaudited) (1)
<TABLE>
<CAPTION>
Thirteen Weeks Ended Twenty-Six Weeks Ended
------------------------------ -------------------------------
May 27, May 29, May 27, May 29,
(In thousands, except per share amounts) 2000 1999 2000 1999
------------------------------ -------------------------------
<S> <C> <C> <C> <C>
Income
Net sales $ 421,730 $ 492,728 $ 768,843 $ 884,601
Other income 871 719 1,335 1,064
------------------------------- -------------------------------
422,601 493,447 770,178 885,665
Costs and expenses
Cost of merchandise sold 311,818 366,713 561,524 652,652
Selling, general and administrative 89,378 108,683 183,201 215,200
Special (credits) charges, net (2) and (3) -- (5,400) -- (5,400)
Provision for depreciation and amortization (4) 6,137 9,223 15,073 18,159
Interest expense 10,636 8,909 20,722 17,522
------------------------------- ------------------------------
417,969 488,128 780,520 898,133
------------------------------- -------------------------------
INCOME (LOSS) BEFORE INCOME TAXES 4,632 5,319 (10,342) (12,468)
Federal and state income taxes 3,398 2,503 (6,334) (5,323)
------------------------------- --------------------------------
NET INCOME (LOSS) $ 1,234 $ 2,816 $ (4,008) $ (7,145)
=============================== ================================
Weighted average common shares outstanding 20,000 20,000 20,000 20,000
------------------------------- --------------------------------
Net income (loss) per common share-basic (5) $ 0.06 0.14 $ (0.20) (0.36)
=============================== ================================
Weighted average common and dilutive
common equivalent shares outstanding 20,224 20,156 20,000 20,000
------------------------------- --------------------------------
Net income (loss) per common share-diluted (5) $ 0.06 0.14 $ (0.20) (0.36)
=============================== ================================
See notes to condensed financial statements
</TABLE>
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CONDENSED BALANCE SHEETS (Unaudited) (1)
<TABLE>
<CAPTION>
May 27, November 27, May 29,
(In thousands) 2000 1999 1999
---------------------------------------------------------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 1,135 $ 1,111 $ 7,054
Merchandise inventories (6) 374,111 349,332 385,934
Prepaid expenses and other current assets 15,849 22,013 21,917
Income taxes receivable 675 679 773
Deferred income taxes -- -- 2,138
--------------------------------------------------------
TOTAL CURRENT ASSETS 391,770 373,135 417,816
OTHER ASSETS
Real estate held for sale 5,898 8,851 13,247
Deferred financing costs 3,443 3,944 2,572
Other 1,433 1,549 1,569
LAND, BUILDINGS, EQUIPMENT AND SOFTWARE 414,267 407,812 406,814
Allowance for depreciation and amortization (81,467) (66,900) (51,037)
--------------------------------------------------------
TOTAL LAND, BUILDINGS, EQUIPMENT AND SOFTWARE 332,800 340,912 355,777
--------------------------------------------------------
$ 735,344 $ 728,391 $ 790,981
========================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt $ 174 $ 3,265 $ 10,156
Trade accounts payable 51,881 51,480 74,210
Other current liabilities 74,433 88,645 100,350
Income taxes payable 1,646 1,851 2,013
Deferred income taxes 7,923 2,157 --
--------------------------------------------------------
TOTAL CURRENT LIABILITIES 136,057 147,398 186,729
LONG-TERM DEBT, less portion
classified as current liability (7) 407,881 374,154 395,736
NON-CURRENT LIABILITIES
Deferred income taxes 19,163 31,263 35,931
Other 22,954 22,279 18,297
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 (34,511) (30,503) (29,512)
---------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 149,289 153,297 154,288
--------------------------------------------------------
$ 735,344 $ 728,391 $ 790,981
========================================================
See notes to condensed financial statements
</TABLE>
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CONDENSED STATEMENTS OF CASH FLOWS (Unaudited) (1)
<TABLE>
<CAPTION>
Twenty-Six Weeks Ended
---------------------------------------------
May 27, May 29,
(In thousands) 2000 1999
---------------------------------------------
<S> <C> <C>
Cash Flows from Operating Activities
Net loss $ (4,008) $ (7,145)
Adjustments to reconcile net loss to net cash
Used in operating activities:
Non-cash special credits (2) -- (10,600)
Depreciation and amortization 15,073 18,159
Deferred income taxes (6,334) (5,323)
Non-cash interest 660 797
Other (678) 480
Changes in assets and liabilities (32,627) (27,492)
----------------------------------------------
NET CASH USED IN OPERATING ACTIVITIES (27,914) (31,124)
Cash Flows from Investing Activities
Additions to land, buildings and equipment (8,049) (30,293)
Proceeds from sale of land, buildings and equipment 5,630 8,378
Decrease (increase) in other assets 116 (74)
-----------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (2,303) (21,989)
Cash Flows from Financing Activities
Principal payments on long-term debt (8,121) (13,733)
Net proceeds from revolving credit facility 38,757 72,000
Other (395) (50)
----------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 30,241 58,217
----------------------------------------------
Net increase in cash and cash equivalents 24 5,104
Cash and cash equivalents, beginning of period 1,111 1,950
---------------------------------------------
Cash and cash equivalents, end of period $ 1,135 $ 7,054
=============================================
See notes to condensed financial statements
</TABLE>
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NOTES TO CONDENSED FINANCIAL STATEMENTS
Twenty-six weeks ended May 27, 2000, and May 29, 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 (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.
(4) 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 ended May 27, 2000 was a
$2.8 million reduction in the provision for depreciation and
amortization.
(5) 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
27, 2000, and May 29, 1999, the impact of considering such stock options
would be antidilutive.
(6) 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 than reported at May 27,
2000, and $1.4 million lower than reported at May 29, 1999, respectively.
(7) Long-term debt consisted of the following:
<TABLE>
<CAPTION>
May 27, November 27, May 29,
(In thousands) 2000 1999 1999
----------------------------------------------------------
<S> <C> <C> <C>
1999 Credit Agreement, variable interest rate $ 222,143 $ 183,386 $ --
1997 Credit Agreement, variable interest rate 106,169 109,415 313,220
Mortgage loan, variable interest rate 78,875 83,686 91,654
Other senior debt 868 932 1,018
----------------------------------------------------------
408,055 377,419 405,892
Less portion classified as current liability (174) (3,265) (10,156)
----------------------------------------------------------
$ 407,881 $ 374,154 $ 395,736
==========================================================
</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 27, 2000, decreased 12.2% on a same store
basis and 14.4% from the same period in 1999 in total. (Same stores are those
open one full year.) Net sales for the first half of 2000 decreased 10.6% on a
same-store basis and 13.1% from the same period of 1999 in total. The same-store
sales decrease for the quarter and the first half of 2000 is primarily due to
price deflation in lumber and wallboard products, competitive pressures and
certain actions taken during the first half of fiscal 2000 to continue
developing a sustainable profit model. These actions included a shift in product
mix to higher margin items, elimination of certain non-profitable customer
relationships and products, and a shift in certain of the Company's mass
marketing programs to target more specific customer segments. Same-store sales
to professional customers during the second quarter of 2000 decreased 6.8% and
same-store sales to do-it-yourself customers declined 18.2%. 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 $29.2 million in the first half
of 2000 and 1999, respectively.
Costs and Expenses
Cost of merchandise sold as a percent of sales was 73.9% and 74.4% for the
second quarter of 2000 and 1999, respectively. For the first half of 2000 and
1999, cost of merchandise sold as a percent of sales was 73.0% and 73.8%,
respectively. The improvement for the second quarter and first half of 2000 was
due to fewer inventory write-downs and markdowns versus the prior year and lower
costs associated with sourcing programs. Increased supplier support was also a
positive factor in the first half of 2000. The aforementioned benefits 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 21.2% and 22.1% of sales for
the second quarter of 2000 and 1999, respectively. For the first half of 2000
and 1999, selling, general and administrative expenses were 23.8% and 24.3% of
sales, respectively. The decrease as a percent of sales for the second quarter
and first half 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 second
quarter and first half of 2000 decreased approximately $19.3 million and $32.0
million, respectively, compared to the same periods of the prior year also
primarily because of reductions in the aforementioned items.
The provision for depreciation and amortization was 1.5% of sales and 1.9% of
sales for the second quarter of 2000 and 1999, respectively. For the first half
of 2000 and 1999, the provision for depreciation and amortization was 2.0% and
2.1% of sales respectively. The decrease as a percent of sales for the second
quarter and first half of 2000 resulted from a reassessment of the estimated
useful lives of certain fixed asset classes and an overall decrease in
depreciation expense due to store closures during 1999.
Interest expense for the second quarter and first half of 2000 increased
compared to the same periods of 1999 primarily due to higher interest rates and,
to a lesser extent, higher borrowing levels in 2000.
The income tax benefit for the first half of 2000 was $6.3 million compared to
$5.3 million for the first half of 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 May 27, 2000, was $1.2 million compared to $2.8
million for the same period of 1999. Excluding the effect of special
charges/credits and the reassessment of depreciable asset lives, the results for
the second quarter of 2000 and 1999, were net income of $0.5 million and a net
loss of $0.1 million, respectively. For the first half of
<PAGE>7
2000, net loss was$4.0 million compared to $7.1 million for the same period of
1999. Excluding the effect of special charges/credits and the reassessment of
depreciable asset lives, net loss for the first half of 2000 and 1999 would
have been $5.1 million and $9.9 million, respectively. Net earnings for the
first half 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 and the tax benefit from the capital loss carry-forward. The de-
crease in second quarter net earnings was due to the effects of non-routine
items recorded in 1999 and the higher effective tax rate in the current pe-
riod, somewhat offset by lower depreciation expense in the current period.
Basic and diluted income per common share were $0.06 and $0.14 for the second
quarters of 2000 and 1999, respectively, while basic and diluted loss per
common share were $0.20 and $0.36 for the first halves 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 used in operating activities was $27.9 million for the first half of 2000
compared to $31.1 million for the same period of 1999. The decrease in cash used
in operating activities was primarily due to cash generated from regular
operating activities, an approximate $9.6 million improvement over fiscal 1999.
This improvement was partially offset by a reduction in working capital items
compared to the first half of 1999. The primary use of cash from operations
during the first half of both periods was seasonal additions to merchandise
inventories. During the first half of 2000 and 1999, the Company used cash of
approximately $1.8 million and $6.7 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 May 27, 2000, $18.5 million was available for
borrowing under the 1999 Credit Agreement. At May 27, 2000, working capital was
$255.7 million compared to $225.7 million and $231.1 million at November 27,
1999 and May 29, 1999, respectively. The current ratios at May 27, 2000,
November 27, 1999, and May 29, 1999, were 2.88 to 1, 2.53 to 1, and 2.24 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 $8.0 million and $30.3 million during the first
half of 2000 and 1999, respectively, for renovation of existing stores and
additional equipment; 1999 expenditures also included the purchase of ten
previously leased stores for approximately $14.4 million. The Company intends to
finance the remaining fiscal 2000 capital expenditures of approximately $15
million, consisting primarily of improved technology, 20 to 25 store remodels,
new stores, additional manufacturing capabilities and routine maintenance with
funds generated from operations, sales of real estate, and borrowings under the
1999 Credit Agreement. During the first halves of 2000 and 1999, the Company
sold three and six real estate properties, respectively, related to stores
previously closed for approximately $4.2 million and $7.1 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. 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
<PAGE>8
expected results of operations in the future, cash flow from operations and bor-
rowing availability under the 1999 Credit Agreement should provide suffi-
cient liquidity to meet all cash requirements for the next 12 months without
additional financing sources. As a result of the Chapter 11 filing in July
1997, trade creditors significantly shortened credit terms. The Company
believes that progress with regard to lengthening terms and reestablishin
trade credit is continuing, but availability of trade credit cannot be assured.
FORWARD-LOOKING STATEMENTS
Statements above in the subsections entitled "Costs and Expenses," and
"Liquidity and Capital Resources" 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; the successful implementation of an Internet
ordering system; consumer spending and debt levels; interest rates; new and
existing housing activity; commodity prices; product mix; 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, including its
e-commerce opportunities. 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 financial statements of Payless Cashways, Inc. for the thirteen
week and twenty-six week periods ended May 27, 2000 and May 29, 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.
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.
The Annual Meeting of Stockholders was held April 19, 2000. Stockholders voted
in favor of the nominees for director: Peter G. Danis(17,417,344 for, 161,220
withheld) David G Gundling (17,416,776 for, 161,788 withheld) and Donald E.
<PAGE>9
Roller (17,417,341 for, 161,223 withheld). Directors who were previously
elected and whose term of office as a director continued after the meeting
were Max D. Hopper, Peter M. Wood, 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 Pay-
less will be furnished to the Commission upon request.
10.1(a)* Form of Employment Agreement (Form A) between Payless
and certain executive officers.
10.1(b)* Form of Employment Agreement (Form B) between Payless
and certain executive officers.
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 27, 2000.
*Represents a management contract or a compensatory plan or
arrangement.
<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: July 6, 2000 By: /s/Richard B. Witaszak
Richard B. Witaszak, Senior Vice
President-Finance and Chief Finan-
cial Officer (Principal Financial
Officer and Principal Accounting
Officer)
