-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Brz45D4Ck86OzfhfbcP6WThz6JuqTWbk+JuQTMCenKwWht+8sYCLwdc7npq2tmUV wYAn4u2OykaZljF5tAVpAQ== 0000076744-01-000012.txt : 20010410 0000076744-01-000012.hdr.sgml : 20010410 ACCESSION NUMBER: 0000076744-01-000012 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20010224 FILED AS OF DATE: 20010404 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PAYLESS CASHWAYS INC CENTRAL INDEX KEY: 0000076744 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-LUMBER & OTHER BUILDING MATERIALS DEALERS [5211] IRS NUMBER: 420945849 STATE OF INCORPORATION: DE FISCAL YEAR END: 1130 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-08210 FILM NUMBER: 1595468 BUSINESS ADDRESS: STREET 1: 800 NW CHIPMAN ROAD STREET 2: P O BOX 648001 CITY: LEES SUMMIT STATE: MO ZIP: 64064-8001 BUSINESS PHONE: 8163476000 10-Q 1 0001.txt 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 February 24, 2001 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.) 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 re- ports required to be filed by Section 12, 13, or 15(d) of the Securities Ex- change 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 March 31, 2001. 2 PAYLESS CASHWAYS, INC. PART I -- FINANCIAL INFORMATION Item 1. Financial Statements STATEMENTS OF OPERATIONS (Unaudited) (1) (In thousands, except per share amounts)
Thirteen Weeks Ended --------------------------------------------------- February 24, February 26, 2001 2000(a) --------------------------------------------------- Net sales $ 232,885 $ 347,113 Cost of merchandise sold (2) 166,952 248,027 --------------------------------------------------- Gross Profit 65,933 99,086 Selling, general and administrative expenses 62,339 93,629 Other income (342) (464) Special charges --- 194 Provision for depreciation and amortization 6,957 8,936 --------------------------------------------------- OPERATING LOSS (3,021) (3,209) Interest expense 9,848 10,086 --------------------------------------------------- LOSS BEFORE INCOME TAXES (12,869) (13,295) Federal and state income taxes (3) (13,148) (9,077) --------------------------------------------------- NET INCOME/(LOSS) $ 279 $ (4,218) =================================================== Net income/(loss) per common share-basic (4) $ 0.01 $ (0.21) =================================================== Weighted average common shares outstanding (4) 20,000 20,000 =================================================== Weighted average common and dilutive common equivalent shares outstanding 20,009 20,000 --------------------------------------------------- Net income (loss) per common share-diluted (4) $ 0.01 $ (0.21) =================================================== (a) As adjusted-see note (2) See notes to condensed financial statements
3 CONDENSED BALANCE SHEETS (Unaudited) (1)
February 24, November 25, February 26, (In thousands) 2001 2000 (a) 2000 (a) ---------------------------------------------------------- ASSETS CURRENT ASSETS Cash and cash equivalents $ 843 $ 1,485 $ 1,150 Merchandise inventories (2) 291,406 314,061 382,075 Prepaid expenses and other current assets 19,857 19,246 15,669 Income taxes receivable -- -- 675 -------------------------------------------------------- TOTAL CURRENT ASSETS 312,106 334,792 399,569 OTHER ASSETS Real estate held for sale 23,422 3,785 6,312 Deferred financing costs 3,221 3,051 3,707 Other 2,787 3,090 1,538 LAND, BUILDINGS, EQUIPMENT AND SOFTWARE 393,145 430,971 410,703 Allowance for depreciation and amortization (95,563) (95,459) (75,737) -------------------------------------------------------- NET LAND, BUILDINGS AND EQUIPMENT 297,582 335,512 334,966 -------------------------------------------------------- $ 639,118 $ 680,230 $ 746,092 ======================================================== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Current portion of long-term debt (5) $ 10,185 $ 10,181 $ 168 Trade accounts payable 68,134 38,633 63,866 Other current liabilities 51,232 76,537 64,160 Income taxes payable 899 927 1,846 Deferred income taxes 2,362 5,510 4,682 -------------------------------------------------------- TOTAL CURRENT LIABILITIES 132,812 131,788 134,722 LONG-TERM DEBT, less portion classified as current liability (5) 331,348 363,432 402,345 NON-CURRENT LIABILITIES Deferred income taxes 3,192 13,192 20,768 Other 37,073 37,404 37,194 STOCKHOLDERS' 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 (49,107) (49,386) (32,737) -------------------------------------------------------- TOTAL STOCKHOLDERS' EQUITY 134,693 134,414 151,063 -------------------------------------------------------- $ 639,118 $ 680,230 $ 746,092 ======================================================== (a) As adjusted-see note (2) See notes to condensed financial statements
4 CONDENSED STATEMENTS OF CASH FLOWS (Unaudited) (1)
Thirteen Weeks Ended ---------------------------------------------- February 24, February 26, (In thousands) 2001 2000 (a) ---------------------------------------------- Cash Flows from Operating Activities Net income/(loss) $ 279 $ (4,218) Adjustments to reconcile net income/(loss) to net cash provided by operating activities: Depreciation and amortization 6,957 8,936 Deferred income taxes (13,148) (9,077) Non-cash interest 430 330 Other (1,014) (489) Changes in assets and liabilities 24,083 (20,843) ---------------------------------------------- NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 17,587 (25,361) Cash Flows from Investing Activities Additions to land, buildings and equipment (1,551) (2,522) Proceeds from sale of land, buildings and equipment 16,026 2,998 Decrease in other assets 303 11 --------------------------------------------- NET CASH PROVIDED BY INVESTING ACTIVITIES 14,778 487 Cash Flows from Financing Activities Principal payments on long-term debt (13,994) (5,493) Net proceeds from/(payments on) revolving credit facility (18,086) 30,587 Other (927) (181) --------------------------------------------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (33,007) 24,913 --------------------------------------------- Net increase (decrease) in cash and cash equivalents (642) 39 Cash and cash equivalents, beginning of period 1,485 1,111 --------------------------------------------- Cash and cash equivalents, end of period $ 843 $ 1,150 ============================================= (a) As adjusted-see note (2) See notes to condensed financial statements
5 NOTES TO CONDENSED FINANCIAL STATEMENTS Thirteen weeks ended February 24, 2001, and February 26, 2000 (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 25, 2000, 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 25, 2000, condensed balance sheet has been derived from the audited financial statements as of that date except for those amounts which were impacted by the change in accounting method discussed in note (2). Certain reclassifications have been made to the February 26, 2000, financial statements to conform to the current presentation. (2) In the first quarter of fiscal 2001 the Company changed its method of accounting for certain hardware inventories from the last-in, first-out (LIFO) method to the first-in, first-out (FIFO) method. As a result of the trend towards declining unit costs of this merchandise, the Company believes that the new method is preferable because the FIFO method of valuing inventory more closely matches current costs and revenues in periods of declining prices. The Company's method of accounting for lumber and related merchandise is the FIFO method, which remains unchanged. Prior period financial statements have been restated to apply the method retroactively. The impacts of the change on previously reported results for the thirteen weeks ended February 26, 2000 are as follows (in thousands): Net loss as previously reported $(5,242) Adjustment for effect of change in accounting method for inventory 1,024 ----- Net income as adjusted $(4,218) Net loss per common share-basic and diluted, as previously reported $(.26) Adjustment for effect of change in accounting method for inventory .05 ---- Net loss per common share-basic and diluted, as adjusted $(.21) ==== The impacts of the change on the previously reported accumulated deficit are as follows (in thousands): Accumulated deficit at February 26, 2000 as previously reported $(35,745) Adjustment for effect of change in accounting method for inventory 3,008 ------ Accumulated deficit at February 26, 2000 as adjusted $(32,737) ====== Accumulated deficit at November 25, 2000 as previously reported $(51,054) Adjustment for effect of change in accounting method for inventory 1,668 ------ Accumulated deficit at November 25, 2000 as adjusted $(49,386) ====== (3) A non-cash, non-recurring income tax benefit of $8.0 million ($.40 per share) was recorded in the first quarter of fiscal 2001. The benefit resulted from an adjustment to non-current deferred income tax liabilities that was prompted by settlements of numerous prior year income tax examinations. In addition, the effective tax rate for the first quarter of 2000 reflected the utilization of a long-term capital loss carry-forward resulting from the sale of a certain partnership interest (approximately $3.8 million or $.19 per share). 6 (4) Basic earnings per common share has been computed based on the weighted-average number of common shares outstanding during the period. Dilutive earnings per common share is 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 in the first quarter of fiscal 2000, the impact of such stock options was antidilutive. (5) A special charge of $20.4 million ($11.6 million after tax) was recorded in the fourth quarter of fiscal 2000 in connection with the closing of 23 stores. In addition, the Company recorded an inventory write-down of $11.8 million ($7.4 million after tax), included in cost of merchandise sold in the fourth quarter, in connection with the store closings. The 2000 special charge included:
Amount Amount Reserve Charged Utilized at (In millions) 2000 Through 2/24/01 2/24/01 --------------------------------------------------------- Severance $ 2.5 $ 2.5 $ --- Other costs 17.9 11.0 6.9 --------------------------------------------------------- $ 20.4 $ 13.5 $ 6.9
(6) Long-term debt consisted of the following:
February 24, November 25, February 26, (In thousands) 2001 2000 2000 --------------------------------------------------------- 1999 Credit Agreement, variable interest rate $ 171,770 $ 189,856 $ 213,973 1997 Credit Agreement, variable interest rate 106,048 106,048 107,314 Mortgage loan, variable interest rate 62,967 76,906 80,310 Other senior debt 748 803 916 --------------------------------------------------------- 341,533 373,613 402,513 Less portion classified as current liability (10,185) (10,181) (168) --------------------------------------------------------- $ 331,348 $ 363,432 $ 402,345 =========================================================
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. RESULTS OF OPERATIONS Sales Net sales for the quarter ended February 24, 2001, decreased 28.9% on a same-store sales basis and decreased 32.9% from the same period of 2000 in total. (Same stores are those open one full year.) The same-store sales decrease for the first quarter is primarily due to significant commodity deflation, unusually adverse weather conditions in various parts of the country, some degree of general industry economic slowdown and reductions in mass advertising activity. Same-store sales to professional customers decreased 22.8% while same-store sales to do-it-yourself customers declined 36.9%. The sales mix by customer type was approximately 62% professional and 38% do-it-yourself compared with 57% professional and 43% do-it-yourself for the quarter last year. During the first quarter of 2001, the Company closed 23 stores. Sales from these 23 stores were $12.1 million and $36.5 million in the first quarter of 2001 and 2000, respectively. Costs and Expenses Cost of merchandise sold, as a percent of sales, was 71.7% and 71.5% for the first quarter of 2001 and 2000, respectively. The increase for the first quarter of 2001 was due primarily to the negative impact of the 23 store closings (1.6%). Sales at these locations were recorded at a 0% gross margin. Cost of merchandise sold in the first quarter of 2000 was decreased by $1.7 million 7 (0.5%) from the previously reported results to reflect the restatement of inventory value from LIFO to FIFO. See note (2) to condensed financial statements. Selling, general and administrative expenses were 26.8% and 27.0% of sales for the first quarter of 2001 and 2000, respectively. Selling, general and administrative expenses for the first quarter of 2001 decreased $31.3 million compared to the same period of the prior year. This decrease primarily reflects the impact of significant expense control measures (approximately $20.5 million) and store closings ($10.8 million). The provision for depreciation and amortization was 3.0% and 2.5% of sales for the first quarter of 2001 and 2000, respectively. Interest expense for the first quarter of 2001 decreased compared to the same period of 2000 primarily due to lower borrowing levels combined with lower interest rates in 2001. The income tax benefit for the first quarter of 2001 was $13.1 million compared to $9.1 million for the first quarter of 2000. The effective tax rate for 2001 was different from the 35% statutory rate primarily due to a non-cash, non-recurring income tax benefit of $8.0 million ($.40 per share) recorded in the first quarter of fiscal 2001. The benefit resulted from an adjustment to non-current deferred income tax liabilities that was prompted by settlements of numerous prior year income tax examinations. In addition, the effective tax rate for the first quarter of 2000 reflected the utilization of a long-term capital loss carry-forward resulting from the sale of a certain partnership interest (approximately $3.8 million or $.19 per share). 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 Net income for the quarter ended February 24, 2001, was $0.3 million compared to a net loss of $4.2 million for the same period of 2000. The increase in net income was primarily the result of the income tax benefit described above and improved gross margin management coupled with continued expense control. Income per common share was $0.01 for the first quarter of fiscal 2001, an increase of $.22 from a loss of $.21 per common share for the same period of fiscal 2000. 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 delayed the effective date of implementing the standard until January 1, 2001, and therefore the Company was required to adopt SFAS 133 in the first quarter of fiscal 2001. The Company does not presently engage in hedging activities or own any derivative instruments that require the described treatment. 8 In September 2000, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities", which replaces SFAS 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities". This standard revises the methods for accounting for securitizations and other transfers of financial assets and collateral as outlined in SFAS 125, and requires certain additional disclosures. For transfers and servicing of financial assets and extinguishments of liabilities, this standard will be effective for transfers occurring after March 31, 2001. However, for disclosure regarding securitizations and collateral, as well as recognition and reclassification of collateral, this standard will be effective for fiscal years ending after December 15, 2000. The Company is currently evaluating the impact of the adoption of this standard. The Company does not presently believe that the adoption of this standard will have a material effect on its financial position or results of operation. LIQUIDITY AND CAPITAL RESOURCES Cash provided by operating activities was $17.6 million for the first quarter of 2001 compared to cash used of $25.4 million for the same period of 2000. The increase in cash provided by operating activities was primarily due to a decrease in merchandise inventories versus increases in the prior year quarter. During the first quarters of 2001 and 2000, the Company used cash of approximately $8.0 million and $1.0 million, respectively, in operating activities related to the execution of the 2000 and 1999 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. Borrowings are available under the 1999 Credit Agreement to supplement cash generated by operations. At February 24, 2001, $10.2 million was available for borrowing. At February 24, 2001, working capital was $179.3 million compared to $203.0 million and $264.8 million at November 25, 2000, and February 26, 2000, respectively. The current ratios at February 24, 2001, November 25, 2000, and February 26, 2000, were 2.35 to 1, 2.54 to 1, and 2.97 to 1, respectively. The primary reasons for the decrease in working capital and the current ratio were decreases in merchandise inventories. The 1999 Credit Agreement contains certain customary operational covenants and events of default for financing of this type as well as a minimum adjusted net worth covenant set at $135 million for the term of the agreement. The minimum adjusted net worth covenant excludes the effects of certain non-cash charges and credits. The cumulative amount of such non-cash charges at February 24, 2001, was $9.7 million. The Company's business is seasonal, with the winter months being the lowest sales months and the spring/summer months being the strongest sales period. As such, the Company typically generates a loss during the first quarter, and requires additional borrowings to fund operations, as well as to finance seasonal inventory transition in anticipation of the peak-selling season. Accordingly, the Company's liquidity is mostly dependent on its ability to secure seasonal borrowings during the slow months, and its ability to generate sufficient sales to repay these borrowings during its peak-selling season. On January 31, 2001, the Company seasonally expanded its revolving line of credit with supplemental loan participation from a third party. On January 31, borrowing availability under the Company's $260 million existing line of credit increased by 5% for a six-month time period. This additional participation of $15.0 million by the aforementioned third party as part of the 1999 Credit Agreement will support the 5% advance rate increase through July 31, 2001. During the first four months of 2001, the Company experienced a softening in its sales compared to the same period of fiscal 2000. This softness is attributable to three primary factors: significant commodity deflation, unusually adverse weather conditions in various parts of the country, and some degree of general industry economic slowdown. While management does not believe this softening will persist throughout the balance of fiscal 2001, the Company's liquidity position and its ability to comply with covenants contained in its loan agreements and to service its future obligations could be impacted if these conditions were to persist or become more severe. The Company's primary investing activities are capital expenditures for the renovation of existing stores, improved technology and additional equipment. The Company spent approximately $1.6 million and $2.5 million during the first quarter of 2001 and 2000, respectively, for renovation of existing stores, improved technology and additional equipment. The Company intends to finance the remaining fiscal 2001 capital expenditures of approximately $8.5 million, consisting primarily of 10 to 15 store remodels, additional manufacturing capabilities and routine maintenance with funds generated from operations. During the first quarter of 2001 and 2000, the Company sold 8 and 2 real estate properties, respectively, related to stores previously closed for approximately $15.1 million and $2.8 million of cash proceeds, respectively, which were used to reduce outstanding debt. Based on current real estate contracts and estimates, the Company expects to receive approximately $15.0 to $20.0 million in additional proceeds in the last three quarters of fiscal 2001 as a result of sales from the remaining properties. 9 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 1999 Credit Agreement should provide sufficient liquidity to meet all cash requirements through the end of fiscal 2001 without additional financing. FORWARD-LOOKING STATEMENTS Statements above in the subsections of this report entitled "Costs and Expenses," "New Accounting Pronouncements" and "Liquidity and Capital Resources" such as "unlikely", "intend", "estimates", "believe", "expect", "anticipate" and similar expressions, which are not historical, are forward-looking statements that involve risks and uncertainties. Such statements include, without limitation, the Company's expectation as to future performance. Such forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. There are certain important factors that could cause results to differ materially from those anticipated by 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 and lender support; consumer spending and debt levels; interest rates; new and existing housing activity; commodity prices, specifically lumber and wallboard; product and customer 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, www.payless.cashways.com. 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 to Stockholders on Form 10-K for the fiscal year ended November 25, 2000. REVIEW BY INDEPENDENT AUDITORS The condensed financial statements of Payless Cashways, Inc. for the thirteen week periods ended February 24, 2001, and February 26, 2000, have been reviewed by KPMG LLP, independent auditors. 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 the subject. Item 4. Submission of Matters to a Vote of Security Holders. None. Item 5. Other Information. None Item 6. Exhibits and Reports on Form 8-K. 10 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 upon request. 18.0 Letter on change in accounting principles - KPMG LLP. b. Reports on Form 8-K. The Registrant has filed two reports on Form 8-K during the quarter ended February 24, 2001. The reports were dated January 11, 2001 and February 1, 2001, and both contained information under Item 7, Financial Statements and Exhibits, and Item 9, Regulation FD Disclosure. 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: April 4, 2001 By: /s/ Richard B. Witaszak -------------------------------------------- Richard B. Witaszak, Senior Vice President- Finance and Chief Financial Officer (Princi- pal Financial Officer and Principal Account- ing Officer) EX-18 2 0002.txt Exhibit 18.0 Payless Cashways, Inc. Lee's Summit, Missouri Ladies and Gentlemen: We have been furnished with a copy of the quarterly report on Form 10-Q of Payless Cashways, Inc. (the Company) for the three months ended February 24, 2001, and have read the Company's statements contained in Note 2 to the condensed financial statements included therein. As stated in Note 2, the Company changed its method of accounting for the costs of certain inventories from the last-in first-out (LIFO) method to the first-in first-out (FIFO) method, and states that the newly adopted accounting principle is preferable in the circumstances because the FIFO method of valuing inventory more closely matches current costs and revenues in periods of declining prices. In accordance with your request, we have reviewed and discussed with Company officials the circumstances and business judgment and planning upon which the decision to make this change in the method of accounting was based. We have not audited any financial statements of Payless Cashways, Inc. as of any date or for any period subsequent to November 25, 2000, nor have we audited the information set forth in the aforementioned Note 2 to the condensed financial statements; accordingly, we do not express an opinion concerning the factual information contained therein. With regard to the aforementioned accounting change, authoritative criteria have not been established for evaluating the preferability of one acceptable method of accounting over another acceptable method. However, for purposes of the Company's compliance with the requirements of the Securities and Exchange Commission, we are furnishing this letter. Based on our review and discussion, with reliance on management's business judgment and planning, we concur that the newly adopted method of accounting is preferable in the Company's circumstances. /S/ KPMG LLP Kansas City, Missouri March 12, 2001 -----END PRIVACY-ENHANCED MESSAGE-----