<PAGE>1

                               UNITED STATES
                     SECURITIES AND EXCHANGE COMMISSION
                          Washington, D.C.  20549
                                 FORM 10-K
    (Mark One)
    / X /    Annual report pursuant to Section 13 or 15(d) of the Securities
             Exchange Act of 1934 [No fee required]

             For the fiscal year ended November 27, 1999
                                        OR
    /   /    Transition report pursuant to Section 13 or 15(d) of the Securities
             Exchange Act of 1934 [No fee required]

             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)

           Securities  registered pursuant to Section 12 (b) of the Act:

                                                      Name of Each Exchange on
        Title of Each Class                                Which Registered

  Common Stock, $.01 par value                                   None


       Securities registered pursuant to Section 12 (g) of the Act:
                     Common Stock, $.01 par value

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 if disclosure of delinquent  filers  pursuant to Item 405
of Regulation  S-K is not contained  herein,  and will not be contained,  to the
best of registrant's  knowledge,  in definitive proxy or information  statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / X /

The aggregate market value of the Common Stock, par value $.01 per share, of the
registrant held by  nonaffiliates of the registrant as of February 14, 2000, was
$47,193,430.

Indicate  by check mark  whether  the  registrant  has filed all  documents  and
reports  required  to be filed by  Sections  12,  13 or 15(d) of the  Securities
Exchange Act of 1934 subsequent to the  distributions of securities under a plan
confirmed by a court.
YES / X /       NO /     /

Indicate the number of shares outstanding of each of the registrant'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 February 14, 2000.

                 DOCUMENTS INCORPORATED BY REFERENCE:

         Portions  of the  Annual  Proxy  Statement  for the  Annual  Meeting of
Stockholders to be held April 19, 2000 -- Part III.



<PAGE>2

                                   PART I
Item 1.  BUSINESS.

General

         Payless  Cashways,  Inc.  ("Payless"  or the  "Company")  is the fourth
largest  retailer of building  materials  and home  improvement  products in the
United States as measured by sales. The Company operates 150 building  materials
stores,  excluding a store that is  currently  in the process of closing,  in 18
states  located in the Midwest,  Southwest,  Pacific  Coast,  and Rocky Mountain
areas under the names  Payless  Cashways  Building  Materials,  Furrow  Building
Materials, Lumberjack Building Materials, Hugh M. Woods Building Materials, Knox
Lumber, and Contractor Supply.  Each store is designed as a one-stop source that
provides the professional builder, remodel and repair contractor,  institutional
buyer, and project-oriented do-it-yourself customer with a dominant selection of
quality  products  and services  needed to build,  improve,  and maintain  home,
business,  farm  or  ranch  properties  at  competitive  prices.  The  Company's
merchandise  assortment in each store currently  averages  approximately  31,000
items in the  following  categories:  lumber,  plywood and  building  materials;
millwork;  farm and ranch products;  tools; hardware and housewares;  electrical
and  plumbing  products;  paint;  lighting;  home  decor;  kitchens;  decorative
plumbing  and bath;  heating,  ventilating  and  cooling  (HVAC);  apparel;  and
seasonal  items.  The  Company  believes  that the  combination  of a  full-line
lumberyard,  an attractive hardware store/showroom  offering, a deep product mix
tailored to serve the professional  customer,  a high level of in-store customer
assistance  concerning  product  usage and  installation,  an array of  services
including credit,  delivery,  estimating and design services as well as targeted
marketing distinguishes Payless from many competitors.

         The  Company's   primary  focus  is  on  the   professional   customer.
Professionals  ("Pros")  include  professional  builders,   remodel  and  repair
contractors, and institutional buyers. The Company also serves do-it-yourselfers
("DIY-ers") who enjoy shopping  "where the Pros shop" for both  project-oriented
projects and for  convenience  items.  With a full-line  lumberyard,  a complete
hardware store and outstanding  customer service, the Company is well positioned
to grow.  The Company's 1999 revenues were  approximately  54% from sales to the
Pro customer and 46% from sales to the DIY customer.

         During the peak selling months of May through  September,  inventory is
financed  by cash  from  operations  and  trade  accounts  payable.  During  the
seasonally low sales months of December through February,  inventory is financed
by cash from  operations,  trade accounts  payable and borrowings under the 1999
Credit  Agreement,  as  needed.  An  average  Payless  store  currently  carries
approximately  $2.0  million of  inventory,  and during  fiscal  1999,  sales at
Payless stores averaged approximately $12.0 million per store.


Industry Overview

         Building  materials and home  improvement  products are sold  primarily
through two distribution  channels -- wholesale supply outlets and retail units.
Retail distribution channels include neighborhood hardware stores, home centers,
warehouse  stores,  specialty  stores  (such  as  paint  and  tile  stores)  and
lumberyards.  Although  the  industry  remains  highly  fragmented,  the  retail
distribution   channel  has  consolidated   somewhat  in  the  last  ten  years,
particularly in metropolitan areas.

         In  general   terms,   customers   may  be   characterized   as  either
wholesale-oriented  (professional) or retail-oriented  (consumer).  Purchases by
professionals  tend to be larger in volume and require  specialized  merchandise
assortments, personal service representatives, competitive bid pricing, superior
lumber  quality,  telephone  order  placement,  commercial  credit and  job-site
delivery.  The  consumer  segments,  as defined by the  Company,  include  light
DIY-ers  who spend  less than  $200  annually  on  building  materials  and home
improvement  products;  moderate  DIY-ers who make annual  purchases  of $200 to
$1,000;  and  project-oriented  DIY-ers who make annual  purchases  in excess of
$1,000.


Mission

         It is  our  mission  at  Payless  Cashways,  Inc.  to be  the  building
materials  and home  improvement  supplier of first choice for the  professional
builder,    remodel   and   repair   contractor,    institutional   buyer,   and
project-oriented  consumers.  Our team will leverage our merchandising expertise
and vendor partnerships to provide professional quality assortments and superior
customer service while growing revenue, earnings, and stockholder value.



<PAGE>3


Business Strategy

         Objectives

         The Company's principal objectives are to:
1)  increase market share in the professional segment,
2)  maintain  a  substantial  share  of business  with the  project-oriented DIY
    segment,
3)  continue to improve its balance sheet, and
4)  grow revenue, earnings and stockholder value.

         Strategy

         The Company  believes it is particularly  well-positioned  to serve the
needs of professional  customers. It enjoys economies of scale, buying power and
professional  management that the traditional outlets supplying the professional
customer  commonly do not have.  These  advantages,  along with the deep product
assortment,  full service package and outside sales force,  position the Company
well to supply local Pros as well as national professional businesses seeking to
centralize their purchasing needs.

         A sales and service  staff is  dedicated  to serving  the  professional
customer.  Professional sales  representatives  have assigned customers for whom
they  provide  service  tailored  to  the  customer's   business  needs.   Sales
representatives  call on professional  customers at their places of business and
job sites. The sales representatives have detailed information regarding account
purchases and the  profitability  of their accounts.  The Company  believes that
this level of customer service and type of sales management system are effective
in increasing  purchases and improving  profitability from current  professional
customers as well as building customer loyalty. These sales people work from the
contractor  sales  offices and serve by phone  customers  who do not require job
site  presence.  In certain  markets,  this  activity  has been  centralized  by
establishing  call-centers.  The Company also has national  account managers who
target businesses, often with geographically dispersed sites, that utilize large
amounts  of  building   materials  and  improvement   products  for  repair  and
maintenance, new construction projects, and insurance rehabilitation work.

         Each store has a separate  commercial  sales area for the  professional
customer to use. These offices speed the purchase  process for the Pro,  provide
professional  estimating services including blueprint  take-offs,  allow private
discussions between customers and their sales  representatives,  and offer small
amenities to these  customers  such as coffee and phone access.  The Company has
drive-through  lumberyards  that  significantly  reduce  the  time  required  to
complete  a  purchase  and meet the  Pro's  requirement  for fast and  efficient
service.

         The Company's  merchandise  assortment is specifically  tailored to the
Pro.  Preferred brands,  commercial grade items,  contractor packs and extensive
special   order   capabilities   ensure  that  the  Company  meets  the  product
requirements  of this  customer  segment.  The Company has  negotiated  purchase
arrangements  with key lumber suppliers that ensure a consistent  source of high
quality lumber.

         The Company  offers a number of special  services  that are tailored to
meet  the  needs of  various  professional  and  commercial  customer  segments.
Delivery  services  include  on-time  job-site  delivery and roof top  delivery.
Credit programs include a full-service  commercial  credit program that provides
job-based billing and other more  sophisticated  credit features.  Additionally,
all  stores  offer  automated  blueprint  estimating  services  featuring  rapid
turnaround. This estimating system utilizes a digitizer that ensures accuracy in
the measurement  process,  and it is fully  integrated into the store's point of
sale  ("POS")  system.  The Company also  supports the Pro with joint  marketing
programs such as its contractor referral database.

         Strategic Initiatives

         The Company's ongoing market research regarding the Pro indicates that,
while  the  Company  has  established  significant  business  with  this  group,
substantial  growth  opportunities  remain.  Industry research  indicates that a
significant  number of customers prefer a distinctly  different type of shopping
experience   (human  scale;   finished,   well-lighted   showrooms;   full-line,
drive-through  lumberyards)  as compared to a  warehouse-store  format.  Payless
Cashways offers such a shopping experience. The Company expects the professional
builder,  the remodel and repair contractor and institutional  buyer to continue
to be the primary source of growth. In order to increase market share with these
customers,  the Company  has  planned to attract  and retain  more  large-volume
accounts whose business is often job-site direct.

         The  Company is also  planning to utilize  its  e-commerce  strategy to
generate  sales using the Internet.  The  evolution of  e-commerce  provides the
Company many  additional  opportunities  to interact with customers and increase
sales.  The Company  believes  it is already  strategically  positioned  to take
advantage  of this  evolving  convergence  of "bricks  and  clicks"  and is well
positioned to provide order  fulfillment  with its  under-utilized  sourcing and
distribution  capabilities  to deliver its goods and  services on a  nation-wide
basis.  The Company intends to roll out an  Internet-based  special order system
throughout its stores in the second half of fiscal 2000,  followed by e-catalogs
of category-specific products and service offerings.

<PAGE>4


         Manufacturing capabilities have been added in certain markets to better
serve the needs of high-volume  professional  customers.  The Company recognizes
significant opportunity in this area and owns and operates three facilities that
manufacture  doors and trim  products and a plant that  manufactures  engineered
roof and floor trusses,  wall and floor panels,  and stair systems.  The Company
believes that these  capabilities  help position it to be the supplier of choice
for the large-volume professional and plans to continue developing and acquiring
these types of capabilities in additional markets.

         The  Company's  strategy of focusing on the Pro customer has the effect
of  drawing  project-oriented  consumers  as  well.  Sales  to  project-oriented
consumers  make up about 46% of the Company's  current  revenues,  and while the
Company  will focus on the Pro, it intends to continue to serve this  profitable
segment of customers.  Knowledgeable employees, high quality products with brand
names, full-line,  drive-through lumberyards,  consistent in-stock position, all
the  products  needed to  complete a project  and a well  merchandised  shopping
environment are important to the project-oriented  DIY customer,  as well as the
Pro. Project-oriented DIY-ers are similar to the Pro customer with regard to the
brands preferred and the importance of stocking high quality lumber. The Company
believes that many of the steps it has taken to serve the Pro customer have also
had a positive impact on sales to the project-oriented DIY customer. The Company
also recognizes that the lifestyle of the target Pro customer  includes products
for the Pro's own home and family.  Most of these Pro  customers  are already in
the  Company's  locations  on a regular  basis,  and the Company  intends,  as a
convenience to that customer,  to identify and stock items that may otherwise be
purchased  elsewhere.  These products are also appealing to the project-oriented
do-it-yourselfer who likes to shop where the Pro shops.

         Payless  Cashways  is  known  for  its  well-trained  work  force.  The
Company's  knowledgeable  employees  study,  take tests, and become certified in
various product categories.  Employees who successfully master product areas can
become  certified  and wear a symbol of that  achievement  on their name badges.
Customer service is a priority for the Company.  The outside sales force, inside
sales  representatives  and employees who staff the service  counter and product
departments  in each  store  location  are among the most  knowledgeable  in the
industry.  They are trained to build  customer  relationships  by supporting the
customer  through  delivery,   credit,  special  orders,  and  attentiveness  to
customers'  needs.  A  recognition  program  is in  place to  promote  excellent
customer service, which drives a higher average ticket and repeat business.


Merchandising and Marketing

         During 1999,  Payless'  full-line stores sold a broad range of building
material products, currently averaging approximately 31,000 items, many of which
are nationally advertised brand-name items. The Company continues to improve its
attractiveness to customers  through  reviewing its assortment,  bringing in new
products,  determining the best supplier, and updating displays. The focus is on
categories where the Company can be dominant such as lumber, building materials,
hardware,  tools,  plumbing,  electrical,  and paint.  Payless  categorizes  its
product offerings into the classes described below:

         Lumberyard - Dimensional lumber,  plywood,  siding,  roofing materials,
             fencing materials,  windows, doors and moldings,  paneling, ceiling
             tiles, insulation materials, and drywall.

         Hardware - Electrical wire and wiring  materials,  plumbing  materials,
             power and hand tools, paint and painting supplies,  lawn and garden
             products,  door locks,  fasteners,  heating  and cooling  products,
             housewares, and work apparel.

         Showroom  - Interior  and  exterior  lighting,  bathroom  fixtures  and
             vanities, kitchen cabinets, flooring, and wallcoverings.

         During the last three fiscal years,  the three product  classifications
accounted for the following percentages of Payless' sales:

                                          1999              1998            1997
                                          ----              ----            ----
           Lumberyard                      53%               51%             51%
           Hardware                        37                38              35
           Showroom                        10                11              14
                                          ----              ----            ----
                                          100%              100%            100%
                                          ====              ====            ====

         Payless  addresses  its  primary  target  customers  through  a mix  of
targeted  mailings,   special  customer  events,   and  newspaper   advertising.
Additionally,  the  Company  participates  in or hosts a variety of  Pro-focused
events,  national trade association shows, and conferences.  During fiscal 1999,
the  Company's  expenditures  on all forms of marketing,  net of vendor  program
allowances, totaled approximately $20.0 million or 1.1% of sales.

<PAGE>5


Store Management and Personnel

         Payless  coordinates the operation of its 150 building materials stores
through 150 Store Managers,  each of whom reports directly to one of 17 District
Managers who in turn reports to one of two  Regional  Vice  Presidents/Managers.
Supervision  and control over the individual  stores are facilitated by means of
detailed operating reports. Most of Payless' Store Managers, and all of Payless'
District Managers and Regional Vice  Presidents/Managers have been promoted from
within Payless or from within the stores Payless has acquired. In addition,  the
Company  continues  to attract new  talented  store  management  from the retail
industry.  District Managers and Store Managers have, on average,  more than ten
years of experience with the Company.

         The stores  utilize a  departmental  management  structure  designed to
provide a superior level of service to customers. Sales personnel are trained in
customer service, product knowledge, selling skills, and systems and procedures.
Formal classroom  training  sessions are  supplemented  with product clinics and
special assignments.


Information Systems

         The Company has invested substantial time, effort, and dollars ensuring
that technology and  information are used to the maximum benefit  throughout its
entire enterprise.  In-store-processors  based upon current technology standards
are an integral  part of store  management  and support  customer  services with
programs  designed  to enhance  the  shopping  experience.  Each of the  Company
facilities  transmits daily transaction  detail data including  item-level sales
from point-of-sale  terminals  equipped with the latest in scanning  technology.
This network also serves to provide  automatic check  authorization  and on-line
credit card  processing.  In addition to sales support and data  gathering,  the
Company  has  built  merchandising,   inventory  management,  distribution,  and
promotional systems which are utilized at the store support center to manage the
purchasing, movement, and marketing of product lines.


Distribution and Suppliers

         The  Company  operates a total of seven  distribution  centers and four
manufacturing  locations. The distribution centers maintain inventories and ship
product  to  stores  one  to  three  times  per  week.  The  Sedalia,  Missouri,
distribution center handles  small-sized,  conveyable,  high value items such as
hardware,  plumbing  and  electrical  supplies,  and  hand  tools.  The  Sedalia
distribution   center   serves  all  150  stores  with  some  or  all  of  their
distribution-center-sourced  replenishment,  utilizing  computerized  receiving,
storage and selection  technology.  The other six  distribution  centers  handle
commodity  products and bulky manufactured  products such as tubs,  paneling and
ceiling  tile,   operating  with  manual  storage  and  selection  systems.  The
manufacturing locations assemble pre-hung doors, customized windows,  engineered
roof and floor trusses, wall and floor panels, and stair systems.

         In  fiscal  1999,  53%  of  merchandise   was  channeled   through  the
distribution  centers for redistribution to individual stores. This benefits the
Company  in the  areas  of  product  costs,  in-stock  positions  and  inventory
turnover.

         Payless   purchases   substantially   all  of  its   merchandise   from
approximately 3,100 suppliers, no one of which accounted for more than 5% of the
Company's purchases during fiscal 1999.


Credit

         The Company offers credit to both its DIY and Pro customers.  Purchases
under national credit cards and the Company's  private-label credit card program
as a percentage of sales represented 27.0% in fiscal 1999, 27.1% in fiscal 1998,
and 28.3% in  fiscal  1997.  Purchases  under the  Company's  commercial  credit
program as a percentage  of sales  represented  37.7% in fiscal  1999,  34.8% in
fiscal 1998, and 32.7% in fiscal 1997.

         The Company's  private-label  credit card program and commercial credit
program are administered by a third-party  administrator.  In the fourth quarter
of fiscal 1999, the Company  entered into new agreements  with a new third-party
administrator to service the Company's  credit programs.  The Company expects to
process  approximately  $800 million in annual sales under these  agreements and
incur savings in excess of $6 million in fees on an annualized basis.  Under the
new agreements,  the costs of the credit programs  represent a fixed  percentage
fee of charge sales. In addition,  the Company substantially absorbs the cost of
commercial accounts written-off.  Accounts written off (net of recoveries) under
the   commercial   credit   program  for  the  last  three   fiscal  years  were
approximately:  $10.9 million or 1.61% of net commercial  credit sales for 1999,
$4.0 million or 0.6% of net  commercial  credit sales for 1998, and $9.8 million
or 1.3% of net commercial sales for 1997.

<PAGE>6


         In addition to the traditional  commercial program,  effective with the
conversion to the new  third-party  administrator,  the Company began offering a
business  revolving  charge account as an alternative for commercial  customers.
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 while reducing costs.


Competition

         The business of Payless is highly competitive. As a result of its focus
on the  professional  customer,  the  Company  competes  with local  independent
lumberyards,  independent  wholesalers,  supply houses,  distributors who market
primarily to commercial and professional  users, and, with regard to remodel and
repair  contractors and industrial  buyers,  the Company  competes with national
chains. On the consumer side, Payless  encounters  competition from national and
regional  chains,  including  those  with a  warehouse  format,  and from  local
independent  wholesalers,  supply houses and distributors.  In recent years, the
building  materials  retailing  industry  has  experienced  increased  levels of
competition as several national chains have expanded their  operations.  Certain
of these  competitors  are larger in terms of capital and sales  volume and have
been operating longer than Payless in particular areas. Although there are three
national  chains larger than  Payless,  its size and  capabilities  give Payless
significant  advantages  over  the  many  smaller  distributors  in  the  highly
fragmented retail building materials  industry.  Payless'  competition varies by
geographical  area,  Payless continues to differentiate  itself by targeting the
professional  customer  and  the  project-oriented   DIY-er.  Payless  offers  a
full-line  lumberyard,  a deep mix of high  quality  products,  high  levels  of
customer service by  knowledgeable  employees and a well  merchandised  shopping
environment.


Employees

         At November 27, 1999,  Payless employed  approximately  10,000 persons,
approximately  29% of whom were part-time,  although the number of employees may
fluctuate seasonally.  Payless believes its employee relations are satisfactory.
Payless' employees are primarily nonunion with less than 1% being represented by
a union.


                               _______________

         Forward-looking  statements in the "Business" section of this Form 10-K
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  successful
implementation  of an Internet  ordering  system;  the success of the  Company's
strategy,  including its e-commerce opportunities;  and successful completion of
the new credit service agreement implementation.

<PAGE>7


EXECUTIVE OFFICERS OF THE REGISTRANT

         The  following  table  sets  forth  the name  and age of all  executive
officers of Payless and their present positions and recent business experience.

                                            Principal Occupation and
Name                      Age             Five-Year Employment History
--------------------   -------   -----------------------------------------------
Millard E. Barron.........50     President  and   Chief   Executive  Officer  of
First elected a director:        Payless since June 1998;  President of Zellers,
1998                             Inc. and Executive Vice President  of  Hudson's
                                 Bay  Company  from  September  1996 to February
                                 1998; Senior Vice President and Chief Operating
                                 Officer of the  International  Division of Wal-
                                 Mart Stores,  Inc.from August 1994 to September
                                 1996;  Vice  President - Operations of Wal-Mart
                                 Stores, Inc. from November 1992 to August 1994;
                                 and  currently a Director of American  Homestar
                                 Corporation.

David J. Krumbholz........45     Senior  Vice  President - Store  Operations  of
                                 Payless since  February 2000;  Vice  President-
                                 Store Operations of Payless from August 1999 to
                                 February  2000;  Vice  President - Professional
                                 Business  of  Payless  from July 1998 to August
                                 1999;  and Regional  Vice  President of Payless
                                 from  August 1988 to July 1998.  Mr.  Krumbholz
                                 joined Payless in January 1976.

Edward L. Zimmerlin.......53     Senior   Vice   President -  Merchandising  and
                                 Marketing  of Payless  since March  1999;  Vice
                                 President-General  Manager of B B M bed, bath &
                                 more, a division of Hudson's Bay Company,  from
                                 February   1998   to   February   1999;    Vice
                                 President-Hardlines  of Zellers,  a division of
                                 Hudson's  Bay   Company,   from  June  1997  to
                                 February  1998;   Executive  Vice  President  -
                                 Merchandising   and  Advertising  of  Homeplace
                                 Stores from May 1996 to March 1997;  and Senior
                                 Vice President - Merchandising and Marketing of
                                 Family  Dollar  Stores  from  February  1995 to
                                 April 1996.

Kelly R. Abney............45     Vice  President - Logistics and  Facilities  of
                                 Payless  since  June  1998;  Vice  President  -
                                 Distribution and Transportation of Payless from
                                 February  1997 to June 1998;  Vice  President -
                                 Logistics  of  Pamida  from  September  1994 to
                                 February 1997; and Director of  Distribution of
                                 Payless from April 1990 to September 1994.

James L. Deats..........  51     Vice   President  -   Information   Systems  of
                                 Payless since October  1998;  Vice  President -
                                 Information  Services  of One  Price  Clothing,
                                 Inc.  from  July 1997 to April  1998;  and Vice
                                 President  -  Information  Services  of  Pier 1
                                 Imports,  Inc. from  September 1990 to February
                                 1997.

Renae G. Gonner...........37     Vice  President - Marketing   and   Advertising
                                 of Payless  since  October  1998;  Director  of
                                 Advertising  and  Marketing  Communications  of
                                 Payless   from  July  1996  to  October   1998;
                                 Creative   Services  Manager  of  Payless  from
                                 November  1993 to July 1996;  and Print Manager
                                 of Payless  from March 1993 to  November  1993.
                                 Mr. H. D.  Cleberg,  a Director of the Company,
                                 is Ms. Gonner's father.

Louise R. Iennaccaro......55     Vice  President - Human  Resources  of  Payless
                                 since  February  1998;  and  Director  of Field
                                 Human  Resources  of Payless from April 1989 to
                                 February 1998. Ms. Iennaccaro joined Payless in
                                 January 1987.

Ronald D. Long............43     Vice    President   -    Merchandising-Building
                                 Products  since August 1999;  Vice  President -
                                 Merchandising   Display  and   Productivity  of
                                 Payless from August 1998 to August  1999;  Vice
                                 President - Merchandising  Planning and Control
                                 of Payless  from May 1998 to August  1998;  and
                                 Vice    President   -    Merchandising/Building
                                 Materials of Payless from  November 1993 to May
                                 1998. Mr. Long joined Payless in December 1975.

Timothy R. Mertz..........48     Acting Chief Financial Officer of Payless since
                                 December  1999;  Vice  President  - Treasury of
                                 Payless since September  1998;  Director of Tax
                                 and Risk  Management  of Payless from  December
                                 1995 to  September  1998;  and Tax  Director of
                                 Payless from October 1987 to December 1995.


<PAGE>8


Item 2.  PROPERTIES.

         The Company's 150 building  materials  stores,  excluding  a store that
is currently in the process of closing,  are located in the following states:

                Number of Stores
                ----------------

                Arizona...................  9      Missouri..................  8
                California................ 13      Nebraska..................  4
                Colorado.................. 18      Nevada....................  6
                Illinois..................  3      New Mexico................  2
                Indiana...................  8      Ohio...................... 11
                Iowa...................... 10      Oklahoma..................  5
                Kansas.................... 11      Oregon....................  2
                Kentucky..................  5      Tennessee.................  3
                Minnesota.................  5      Texas..................... 27

         Payless  owns 138 of its store  facilities  and 130 of the 150 sites on
which such stores are  located.  The  remaining 12  facilities  and 20 sites are
leased. The leases provide for various terms. Mortgages or deeds of trust on 139
store parcels secure existing indebtedness.

         Payless has generally  located  retail stores  adjacent to  residential
areas of major  metropolitan  cities or  adjacent  to major  arteries in smaller
communities  that  are  convenient  to the Pro and DIY  customer.  Operation  of
multiple stores in a trade area permits more effective supervision of stores and
provides certain economies in distribution  expenses and advertising costs. Each
of  Payless'  150 stores has an average  total  selling  space of  approximately
179,000 square feet consisting of 32,000 square feet of indoor display space and
147,000  square feet of  lumberyard.  In addition,  each store has an average of
51,000  square feet of  warehouse  space.  The average  Payless  store  occupies
approximately nine acres of land.

         During  fiscal 1999,  two stores were opened and 12 stores were closed.
One and two stores were opened during fiscal years 1998 and 1997,  respectively,
and four and 30 stores were closed, respectively.

         Five of the Company's seven distribution  centers are owned and, of the
remaining  two, one is leased for land only and the facility and land are leased
for the other.  Mortgages or deeds of trust on five distribution  center parcels
secure existing indebtedness. Three of the Company's manufacturing locations are
owned  and one is  leased.  Mortgages  or deeds of trust on three  manufacturing
parcels secure existing indebtedness. The Sedalia, Missouri, distribution center
is a 592,000  square foot  facility,  while the other six  distribution  centers
average 143,000 square feet of warehouse space on an average of 16 acres.

         A substantial portion of the administrative,  purchasing,  advertising,
accounting  and  information  system  functions is centralized at Payless' store
support  center in Lee's  Summit,  Missouri,  a suburb of Kansas  City.  Payless
leases its store support  center under a lease expiring on October 31, 2009. The
store  support  center   occupies   approximately   156,000  square  feet  of  a
single-story building.

         See also "Strategic  Initiatives,"  and "Distribution and Suppliers" in
Item 1, above.


Item 3.  LEGAL PROCEEDINGS.

         There are presently no material legal proceedings to which Payless is a
party or of which any of its property is the subject.


Item 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

         None.

<PAGE>9



                                     PART II

Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
        STOCKHOLDER MATTERS.

         Payless Cashways,  Inc. Common Stock is traded on the  over-the-counter
bulletin  board (ticker  symbol PCSH).  The number of registered  holders of the
Company's  Common Stock at November 27, 1999, was 4,852.  No cash dividends have
been  declared on the Common  Stock since 1988.  Certain of the  Company's  debt
instruments contain restrictions on the declaration and payment of dividends on,
or the making of any  distribution to the holders of, or the acquisition of, any
shares of Common Stock.

                                           1999                      1998
         -----------------------------------------------------------------------
           Price range of           High          Low         High          Low
           Common Stock
         -----------------------------------------------------------------------

              First quarter         2.688        1.188        3.875        1.000

              Second quarter        2.531        1.375        5.250        2.531

              Third quarter         2.438        1.562        3.188        1.125

              Fourth quarter        2.000        1.281        1.938        0.781


Item 6.  SELECTED FINANCIAL DATA.


<TABLE>
FIVE-YEAR FINANCIAL SUMMARY
<CAPTION>
In thousands, except per share                        Reorganized Company          |              Predecessor Company
amounts, percentages and ratios          ------------------------------------------|-----------------------------------------------
                                               1999           1998           1997  |        1997           1996            1995
-----------------------------------------------------------------------------------|-----------------------------------------------
<S>                                      <C>              <C>          <C>         |  <C>            <C>              <C>
Net sales and other income (a)           $   1,813,347    $ 1,909,860  $        N/A|  $  2,290,215   $   2,650,905    $  2,685,670
Cost of merchandise sold                     1,333,968      1,420,787           N/A|     1,676,658       1,906,734       1,912,620
Selling, general and administrative            420,382        443,031           N/A|       555,745         611,357         616,775
Reorganization items (b)                            --             --           N/A|        25,455              --              --
Fresh-start revaluation (b)                         --             --           N/A|       355,559              --              --
Special charges (credits),                                                         |
   net (c) and (d)                              (4,315)         7,421           N/A|        73,539          68,151         153,667
Depreciation and amortization                   40,167         37,044           N/A|        54,182          59,125          63,170
Interest expense                                35,763         37,162           N/A|        61,251          60,488          61,067
Interest income (e)                                 --             --           N/A|            --           4,900              --
                                         ------------------------------------------|-----------------------------------------------
Income (loss) before income taxes              (12,618)       (35,585)          N/A|      (512,174)        (49,780)       (121,629)
Federal and state income taxes (e)              (5,211)       (13,218)          N/A|       (90,406)        (30,702)         (4,911)
                                         ------------------------------------------|-----------------------------------------------
Income (loss) before equity in loss of                                             |
   joint venture and extraordinary item         (7,407)       (22,367)          N/A|      (421,768)        (19,078)       (116,718)
Equity in loss of joint venture (f)                 --             --           N/A|            --              --         (11,831)
Extraordinary items (g)                           (729)            --           N/A|       133,176              --              --
                                         ------------------------------------------|-----------------------------------------------
Net income (loss)                        $      (8,136)   $   (22,367) $        N/A|  $   (288,592)  $     (19,078)   $   (128,549)
                                         ==========================================|===============================================
                                                                                   |
Net loss per common share-basic and                                                |
   diluted                               $       (0.41)   $     (1.12)          N/A|
Weighted average common                                                            |
   shares outstanding                           20,000         20,000           N/A|
Current ratio                                     2.53           2.09          2.15|           N/A            1.41            1.29
Working capital                          $     225,737    $   197,226  $    258,405|           N/A   $     131,004    $     98,400
Total assets                             $     728,391    $   747,312  $    911,341|           N/A   $   1,293,118    $  1,344,436
Long-term debt                           $     374,154    $   336,557  $    424,031|           N/A   $     618,667    $    608,627
Stockholders' equity                     $     153,297    $   161,433  $    183,800|           N/A   $     289,731    $    308,163
Capital expenditures                     $      47,213    $    26,864  $        N/A|  $     65,601   $      43,985    $     70,706
Income from operations before interest,                                            |
   depreciation and amortization (h)     $      62,847    $    50,482  $        N/A|  $     68,505   $     138,661    $    156,275

<FN>

(a)  Net sales and other income include gains of $2.3 million in 1996 related to
     settlements of 1995 fire losses.

(b)  In  connection  with its Chapter 11 filing on July 21,  1997,  discussed at
     Note B, the Company recorded reorganization items in 1997. The Company also
     adopted  fresh-start  accounting,  discussed  at Note C, as of November 29,
     1997,  as a result  of its  emergence  from  bankruptcy  under  its plan of
     reorganization effective date, December 2, 1997.

(c)  In 1999,  special charges consisted of costs associated with the closing of
     six stores and the  elimination of  administrative  staff;  special credits
     consisted of a curtailment gain as a result of freezing  benefits under the
     Company's  pension  plan.  Special  charges  for  1998  consisted  of costs

<PAGE>10


     associated with the elimination of staff at the Company's  headquarters and
     regional  administration  centers and the closing of eight stores.  Special
     charges for 1997 and 1996 consisted of costs associated with the closing of
     29 stores and nine stores, respectively. Special charges for 1995 consisted
     of restructure costs associated with the closing of six stores, the sale of
     a  distribution   center  and  the   reorientation  of  several  stores  to
     concentrate on the professional customer.

(d)  Asset  impairment  charges  for 1997 and 1996  consist  of a  reduction  of
     goodwill and certain real estate carrying values,  net of amounts estimated
     to be recoverable,  and the recording of a liability for future store lease
     payments.

(e)  During  1996,  the Company  recorded a federal  income tax benefit of $23.7
     million and related interest income of $4.9 million pursuant to legislation
     and a settlement with the Internal Revenue Service.

(f)  During 1995, the Company recorded an $8.0 million loss on the sale of its
     Mexican joint venture investment.

(g)  During 1999 and 1997, the Company  recorded a $0.7 million and $5.0 million
     charge,   after  tax,  related  to  the  early   extinguishment   of  debt,
     respectively,  and a $138.2 million  extraordinary gain, after tax, related
     to debts discharged in its Chapter 11 reorganization during 1997.

(h)  Income from operations  before  interest,  depreciation and amortization is
     utilized by the Company as a measure for managing cash flow in its  day-to-
     day  operations.  The amounts are before the special  charges  and asset
     impairment  charges,  reorganization items,  and fresh-start  revaluation.
     Inventory  write-downs in 1999,  1998, 1997 and 1996 of $3.4 million,  $4.4
     million,  $10.7  million  and $5.8 million,  respectively,  related to the
     closing of five, eight, 29 and nine underperforming stores, respectively,
     are also excluded.  Income from operations  before interest,  depreciation
     and  amortization is presented  because it is a widely accepted  financial
     indicator used by certain  investors and analysts to analyze and compare
     companies on  the  basis of  operating  performance.  As presented,  this
     indicator may not be comparable to similarly titled measures  reported  by
     other companies and may not  necessarily be an accurate means of comparison
     between all companies,  since not all companies necessarily  calculate this
     indicator in an identical manner. Income from  operations  before interest,
     depreciation  and  amortization is not intended to represent cash flows for
     the period or funds  available for management's discretionary  use. Nor has
     it been  represented  as  an  alternative  to  operating   income  as  an
     indicator of operating  performance  and should not be  considered  in
     isolation  or as a substitute for  measures of  performance  prepared in
     accordance with generally accepted accounting principles.
</FN>

</TABLE>

<TABLE>

FIVE-YEAR OPERATIONAL SUMMARY
<CAPTION>
Average sales per facility, number
of customers, gross square feet and                 Reorganized Company         |                Predecessor Company
retail square feet are in thousands            ---------------------------------|-------------------------------------------------
                                                    1999             1998       |     1997            1996 (a)           1995
--------------------------------------------------------------------------------|-------------------------------------------------
<S>                                             <C>              <C>            |  <C>              <C>               <C>
                                                                                |
Number of retail facilities                            151              161     |         164              192               206
Average same-store sales per facility           $   11,975       $   11,711     |  $   12,600       $   13,107        $   13,114
Number of customers                                 38,769           42,741     |      50,743           56,736            59,685
Average sales per customer                      $    46.72       $    44.61     |  $    45.04       $    45.81        $    44.91
Number of employees                                 10,146           10,930     |      12,782           16,664            18,122
Average sales per employee                      $  174,740       $  171,316     |  $  162,099       $  152,228        $  147,894
Gross square feet (total)                           14,080           14,491     |      15,550           17,578            19,453
Retail square feet (inside)                          4,854            5,251     |       5,334            6,209             6,740
Sales per retail square foot                    $   365.25       $   356.59     |  $   388.44       $   408.56        $   397.65
Percent decrease in same-store sales                (0.8)%           (7.3)%     |      (6.6)%           (2.5)%            (4.5)%

<FN>

(a) Fiscal 1996 was a 53-week year.  All 1996 data  has  been  computed  on   a
    52-week basis.
</FN>

</TABLE>

<PAGE>11


Item 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS.

Results of Operations

         The  following  discussion  of the  Company's  financial  condition and
results  of  operations  should  be  read  in  conjunction  with  the  Financial
Statements and notes thereto found  beginning at page F-1 in this Form 10-K. The
Company has  implemented  the required  accounting  for entities  emerging  from
bankruptcy  under Chapter 11, Title 11 of the United States Code  ("Chapter 11")
in  accordance  with the American  Institute of  Certified  Public  Accountants'
Statement of Position  90-7 ("SOP  90-7"),  "Financial  Reporting by Entities in
Reorganization   Under  the  Bankruptcy  Code"  ("fresh-start   reporting")  and
reflected  the effects of such  adoption in the balance sheet as of November 29,
1997.  Under  fresh-start  reporting,  the balance  sheet of November  29, 1997,
became the opening  balance  sheet of the  Reorganized  Company.  The  financial
statements  of the  Predecessor  Company  prior to November  29,  1997,  are not
comparable in material  respects to the financial  statements of the Reorganized
Company.
<TABLE>

Operating Data
<CAPTION>
                                                                                                              |      Predecessor
                                                                                    Reorganized  Company      |       Company
                                                                               -------------------------------|--------------------
                                                                                     Fiscal Year Ended        |  Fiscal Year Ended
                                                                               -------------------------------|--------------------
percent of net sales                                                            Nov. 27,         Nov. 28,     |      Nov. 29,
                                                                                  1999             1998       |        1997
                                                                               -------------------------------|--------------------
<S>                                                                               <C>               <C>       |      <C>
                                                                                                              |
Net sales.......................................................                  100.0 %           100.0 %   |      100.0 %
Other income....................................................                    0.1               0.1     |        0.2
Cost of merchandise sold........................................                   73.6              74.5     |       73.4
Selling, general and administrative.............................                   23.2              23.2     |       24.3
Special charges (credits), net..................................                   (0.2)              0.4     |        3.2
Reorganization items............................................                    --                --      |        1.1
Fresh-start revaluation.........................................                    --                --      |       15.6
Provision for depreciation and amortization.....................                    2.2               1.9     |        2.3
Interest expense................................................                    2.0               2.0     |        2.7
Loss before income taxes........................................                   (0.7)             (1.9)    |      (22.4)
                                                                                                              |
Federal and state income taxes..................................                   (0.3)             (0.7)    |       (4.0)
Loss before extraordinary items.................................                   (0.4)             (1.2)    |      (18.4)
                                                                                                              |
Extraordinary items.............................................                    --                --      |        5.8
Net loss........................................................                   (0.4) %           (1.2) %  |      (12.6) %

</TABLE>

Sales

         Net sales for fiscal 1999  decreased  0.8% on a  same-store  basis from
fiscal 1998 and  decreased  5.0% in total.  Same-stores  are those open one full
year. The sales  decrease,  in total, is a result of closing 12 stores in fiscal
1999 and four stores in fiscal  1998 whose  sales were $38.4  million and $120.1
million for fiscal 1999 and 1998, respectively.  On a same-store basis, sales to
professional  customers  increased  7.3%,  while  sales  to  the  do-it-yourself
customer declined by 9.0%. Same-store sales for the second half of the year were
negatively  impacted by competitive  pressures,  particularly from store closing
activities  related to a major  competitor,  and falling wood prices. To address
the  decrease  in  same-store  sales to  do-it-yourself  customers,  the Company
intends to improve its assortments and in-stock position.

         Net sales for fiscal 1998 decreased 16.6% in total from fiscal 1997 and
7.3% on a same-store basis. The sales decrease, in total, is a result of closing
four  stores in fiscal  1998 and 30 stores in fiscal 1997 whose sales were $34.4
million and $269.2  million for fiscal 1998 and 1997,  respectively.  Management
believes  continuing  competitive  pressure  and the  lingering  effects  of the
Chapter  11 filing  contributed  to sales  declines  throughout  1998,  although
same-store sales have improved steadily in the last three quarters of 1998--from
a 13.2% decrease in the second quarter, to a 6.7% decrease in the third quarter,
to a 1.1%  decrease  in the fourth  quarter.  On a  same-store  basis,  sales to
professional  customers  were flat,  while sales from the  consumer  side of the
business decreased 13.7% in fiscal 1998.

<PAGE>12


Costs and Expenses

         The cost of  merchandise  sold,  as a percent  of  sales,  was 73.6% in
fiscal  1999,  74.5% in  fiscal  1998,  and  73.4%  in  fiscal  1997.  Inventory
write-downs related to store closings of $3.9 million,  $4.4 million,  and $10.7
million for fiscal 1999, 1998 and 1997, respectively, was 0.2%, 0.2% and 0.5% of
sales,  respectively.  Excluding the effects of inventory write-downs related to
store closings,  the decrease in cost of merchandise  sold as a percent of sales
during 1999 was primarily due to improved product  acquisition costs and reduced
promotional  activities.  Excluding the effects of inventory write-downs related
to store  closings,  the  increase in cost of  merchandise  sold as a percent of
sales during 1998 was  primarily  due to more  competitive  pricing  designed to
regain  customer  traffic  lost  during the  Chapter 11 period of 1997.  Cost of
merchandise  sold in fiscal 1999,  1998, and 1997 benefited from a $0.9 million,
$2.4  million,  and  a  $0.7  million  LIFO  credit,  respectively,  related  to
liquidations of LIFO inventories and deflation.

         Selling,  general and administrative  expenses,  as a percent of sales,
were 23.2%, 23.2%, and 24.3% for fiscal 1999, 1998, and 1997, respectively.  The
1999 reductions in selling,  general and  administrative  expenses,  in dollars,
were  primarily  the result of closed  stores.  The 1998  reductions in selling,
general and administrative  expenses, both in dollars and as a percent of sales,
were primarily the result of closed stores, as well as initiatives undertaken in
1998 to reduce store as well as corporate level personnel costs.

         During the second quarter of 1999, a non-cash curtailment gain of $10.6
($6.2 million after tax) was recorded in connection  with freezing the Company's
non-contributory  defined  benefit plan.  Special  charges of $5.2 million ($3.1
million  after tax) and $1.1 million  ($0.6  million after tax) were recorded in
the second and fourth  quarters of 1999,  respectively,  in connection  with the
closing of five  stores and the  closing of an  additional  store as well as the
elimination  of  administrative  staff,  respectively.  A special charge of $5.6
million  ($3.5  million after tax) was recorded in the first quarter of 1998 for
severance costs related to the elimination of staff at the Company's home office
and  regional  administrative  centers.  In  addition,  special  charges of $0.8
million  ($0.5 million after tax) and $1.0 million ($0.6 million after tax) were
recorded in the third and fourth quarters of 1998,  respectively,  in connection
with the closing of three and five  stores,  respectively.  A special  charge of
$13.1 million ($8.1 million after tax), primarily a cash charge, was recorded in
the third  quarter of fiscal 1997 to reflect real estate  disposal and severance
costs  related  to the  closing  of 29  underperforming  stores  as  part of the
Company's  reorganization  under  Chapter 11. The Company also recorded an asset
impairment  charge  of $60.5  million  ($43.9  million  after  tax) in the third
quarter  of  1997.  The  Company  included  in its  review  of  impaired  assets
underperforming  stores and  determined  that  certain  additional  assets  were
impaired,  including assets related to 29 stores,  which the Company closed. The
asset impairment  charges were recorded after  considering  current and expected
future  operating cash flows for certain  stores  together with the proceeds the
Company could expect to receive upon the sale of these assets.  The Company will
continue  to review  assets  for  impairment,  particularly  given  the  ongoing
competitive environment for building materials retailing.  Additional details on
the special charges are set forth in Note J to the Financial Statements.

         In  connection  with  its  Chapter  11  filing,  the  Company  recorded
reorganization items of $25.5 million during fiscal 1997.  Additional details on
the  reorganization  items are set forth in Note I to the Financial  Statements.
The Company also recorded  fresh-start  revaluation charges of $355.6 million in
fiscal  1997.  See  Note C to the  Financial  Statements  for  more  details  on
fresh-start reporting and these related charges.

         The  provision  for  depreciation  and  amortization  for  fiscal  1999
increased  compared to fiscal 1998 primarily due to a $3.1 million ($1.8 million
after tax) depreciation charge for accelerated depreciation on certain leasehold
improvements and assets related to closed stores. The provision for depreciation
and  amortization  for fiscal 1998  decreased  compared to fiscal 1997 primarily
because  goodwill was written off and assets were  written  down in  fresh-start
reporting related to the Company's emergence from  reorganization  under Chapter
11. In  addition,  assets were removed  from  service in  connection  with store
closings mentioned above.

         Interest expense  decreased to $35.8 million in fiscal 1999 compared to
$37.2  million in fiscal 1998 due  primarily to lower  borrowing  levels in 1999
and, to some  extent,  lower rates in 1999.  Interest  expense  decreased  $24.1
million in fiscal 1998  compared to fiscal 1997 due primarily to lower levels of
debt resulting from the  cancellation  of  indebtedness  in connection  with the
Chapter 11 reorganization.

         The  effective tax rates for fiscal 1999 and 1998 were  different  from
the 35% statutory  rate primarily  because of state income taxes.  The effective
tax rates for fiscal 1997 differed from the 35% statutory  rate primarily due to
the effect of goodwill amortization and the write-off of goodwill, both of which
are non-deductible for income tax purposes.

<PAGE>13


Net Income (Loss)

         The Company had losses  before  extraordinary  items of $7.4 million in
1999 compared to $22.4 million in 1998 and $421.8 million in 1997. The 1999 loss
before  extraordinary  items  reflects  special  charges for store  closings,  a
special credit related to the freezing of the defined  benefit pension plan, and
accelerated  depreciation,  discussed above. The 1998 loss before  extraordinary
items reflects the special charges for severance and store  closings,  discussed
above. The 1997 loss before extraordinary items reflects  reorganization  items,
fresh-start  revaluation charges, store closing charges, and an asset impairment
charge,  all discussed  above.  Excluding the non-routine  items recorded during
fiscal  1999,  1998,  and 1997,  net loss for these  years  would have been $5.8
million, $14.9 million and $35.5 million, respectively.

<TABLE>
Comparative Operating Data
<CAPTION>
                                                       Reorganized Company                        |       Predecessor Company
                            ----------------------------------------------------------------------|---------------------------------
                                                       Fiscal Year Ended                          |         Fiscal Year Ended
                            ----------------------------------------------------------------------|---------------------------------
                                     November 27, 1999                   November 28, 1998        |         November 29, 1997
                            ----------------------------------- ----------------------------------|---------------------------------
In thousands                    Pro Forma         Historical          Pro Forma      Historical   |    Pro Forma      Historical
                               (Excluding         (Including         (Excluding      (Including   |   (Excluding      (Including
                                Non-Routine        Non-Routine        Non-Routine    Non-Routine  |    Non-Routine     Non-Routine
                                Items)             Items)             Items)         Items)       |    Items)          Items)
                            ----------------   ---------------- ------------------ ---------------|----------------  ---------------
<S>                           <C>               <C>                  <C>             <C>          |  <C>              <C>
Net sales and other income    $ 1,811,365       $ 1,811,365          $ 1,906,862     $ 1,906,862  |  $ 2,290,215      $ 2,290,215
Income (loss) from operations                                                                     |
 before interest, depreciation                                                                    |
 and amortization             $    62,847       $    58,997          $    50,482     $    46,042  |  $    68,505      $  (396,741)
Net income (loss)             $    (5,837)      $    (8,136)         $   (14,913)    $   (22,367) |  $   (35,451)     $  (288,592)
</TABLE>

Financing Activities

         On November 17, 1999, the Company  completed a three-year  $260 million
revolving   secured  loan   agreement  with  a  new  lender  (the  "1999  Credit
Agreement"). A portion of the proceeds was used to retire the existing revolving
credit  facility  and to  reduce  its  existing  term  loan  (the  "1997  Credit
Agreement").  These  payments  allowed the Company to secure an amendment to the
1997 Credit Agreement that removed all current and future financial  performance
covenants,  thereby  improving  its  operating  flexibility.  Also,  semi-annual
principal  payments on the remainder of the 1997 Credit Agreement term loan were
deferred  to the  year  2001.  The 1999  Credit  Agreement  and the 1997  Credit
Agreement are described in more detail in Note D to the Financial Statements.

         At  November  27,  1999,   and  November  28,  1998,  the  Company  had
approximately $377.4 million and $347.6 million,  respectively, of indebtedness.
The Company expects from time to time to incur additional seasonal indebtedness.


Liquidity and Capital Resources

         The Company's principal source of cash is from operations. Cash used in
operating  activities was $2.4 million in fiscal 1999, compared to cash provided
by operating  activities of $53.1 million for fiscal 1998, and $35.1 million for
fiscal 1997. The 1999 decrease in cash from  operating  activities was primarily
caused by decreased other current  liabilities  due to store closings.  The 1998
increase in cash  provided by operating  activities  was  primarily due to lower
1998  interest  costs  resulting  from  the   cancellation  of  indebtedness  in
connection  with the  Chapter 11  reorganization.  Cash  provided  by  operating
activities in 1997 benefited from the compromise and  extinguishment  of general
unsecured  claims,  including  trade accounts  payable,  pursuant to the Plan of
Reorganization  that would have otherwise  required cash. During 1999, 1998, and
1997, the Company used cash of approximately  $1.9 million,  $12.5 million,  and
$14.2 million, respectively, in operating activities related to special charges.
In fiscal 1998,  the Company used cash of $10.2 million for costs related to the
Chapter 11 filing. Additionally, $5.7 million of cash was used in fiscal 1998 to
pay  severance  costs  related  to the  elimination  of staff  at the  Company's
headquarters  and  regional  administrative  centers  and to  effect  the  store
closings announced in September 1998.

         Borrowings are available under the 1999 Credit  Agreement to supplement
cash generated by operations.  At November 27, 1999, $35.0 million was available
for borrowing.  Working capital was $225.7 million and $197.2 million at the end
of fiscal 1999 and 1998, respectively.  The current ratio was 2.53 to 1 and 2.09
to 1 at the end of fiscal 1999 and 1998,  respectively.  The primary reasons for
the  increase  in working  capital  and the current  ratio was  decreased  other
current  liabilities.  During the peak selling months of May through  September,
inventory is financed by cash from operations and trade accounts payable. During
the  seasonally  low sales  months of December  through  February,  inventory is
financed by cash from  operations,  trade accounts  payable and borrowings under
the 1999 Credit Agreement, as needed.

         During fiscal 1999 and 1998, the Company's primary investing activities
were capital expenditures  principally for the renovation of existing stores and
additional  equipment.  The Company spent  approximately  $47.2  million,  $26.9
million,  and $65.6 million in fiscal 1999,  1998, and 1997,  respectively,  for

<PAGE>14


renovation of existing stores,  additional  equipment and software.  Fiscal 1999
expenditures  also include  those for improved  technology as well as the second
quarter  purchase  of ten  previously  leased  stores  for  approximately  $14.4
million. For fiscal 1998, the Company ceased spending for strategic  initiatives
while it analyzed its competitive  positioning in the market and related capital
expenditures.  During  1999 and 1998,  the  Company  sold 17 and 26 real  estate
properties,  respectively, related to stores previously closed for approximately
$20.9  million  and $41.6  million of cash  proceeds,  respectively,  which were
applied to outstanding  debt.  Sale of closed store  properties will continue in
fiscal 2000.  In fiscal 1998,  the Company also  received  $5.8 million from the
surrender of certain life  insurance  policies  related to a terminated  benefit
plan. The Company's  approximately $29.0 million 2000 capital expenditure budget
consists primarily of improved technology,  30 to 35 store remodels, new stores,
additional   manufacturing   capabilities  and  routine   maintenance.   Capital
expenditures  in 2000 will be financed  with funds  generated  from  operations,
sales of real estate, and borrowings under the 1999 Credit Agreement.

         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  cash  flow
generated from operations, borrowings available under the 1999 Credit Agreement,
and other lease financing  sources should provide  sufficient  liquidity to meet
all cash  requirements  for the next 12  months.  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.


Petition For Relief Under Chapter 11

         On July 21, 1997, the Company filed a voluntary  petition to reorganize
under  Chapter  11 and filed a plan of  reorganization  for its  emergence  from
Chapter  11 (the  "Plan" or "Plan of  Reorganization")  as well as a  Disclosure
Statement. The Company operated its business as a debtor-in-possession,  subject
to the  jurisdiction  of the Court,  while pursuing its  reorganization  plan to
restructure the Company's  capitalization.  The Chapter 11 filing resulted in an
automatic stay of the  commencement or prosecution of claims against the Company
that arose before the petition date. The Plan became effective  December 2, 1997
(the "Effective Date").
For a summary description of the Plan, see Note B to the Financial Statements.


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
2001 and does not presently  believe that it will have a  significant  effect on
its financial statements.


Effects of Inflation

         The Company experienced slight deflation in its non-lumber  inventories
during fiscal 1999, 1998, and 1997. Approximately 79% of the Company's inventory
is valued using the LIFO inventory accounting method;  therefore,  current costs
are  reflected  in the  cost of  merchandise  sold,  rather  than  in  inventory
balances.


The Year 2000 Issue

The Year 2000 issue was 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 have recognized a date using "00" as the year
1900 rather than the year 2000.  If not  remedied,  this could have  resulted in
system failure or miscalculations.

         The  Company  assessed  the  impact  of the Year  2000 on its  computer
systems, both hardware and software,  and developed a plan to timely address the
Year 2000 issue. The Company spent  approximately  $4.7 million in the execution
of the Year 2000  plan.  Most of such  expenditures  were  charged to expense as
incurred. To date there have been no material adverse consequences, nor does the
Company believe that there will be any future material  adverse  consequences to
the Company's  business,  operations,  or financial condition from the Year 2000
issue. 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,  will not have a
material adverse effect on the Company.

<PAGE>15


Forward-Looking Statements

         Statements  above  in the  subsections  entitled  "Sales,"  "Costs  and
Expenses,"  "Liquidity and Capital Resources," "New Accounting  Pronouncements,"
and "The Year 2000 Issue," such as "unlikely", "intend", "estimated", "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 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 successful implementation of an Internet ordering system; the success of the
Company's  strategy,  including its  e-commerce  opportunities;  and  successful
completion  of the  new  credit  service  agreement  implementation.  Additional
information  concerning  these and other  factors is contained in the  Company's
Securities and Exchange Commission  filings,  copies of which are available from
the    Company    without    charge    or   on   the    Company's    web   site,
www.payless.cashways.com.


Item 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

         The  Company's  most  significant  market  risk  exposure  is  changing
interest rates. To manage this potential risk, the Company may use interest rate
swap  agreements  to limit the  effect of  increases  in the  interest  rates on
variable  debt by  fixing  the  rate  without  the  exchange  of the  underlying
principal  or  notional  amount.  Net amounts  paid or received  are added to or
deducted from interest  expense in the period accrued.  The table below provides
information  about the  Company's  variable rate debt  obligations  and presents
principal  cash flows and related  weighted  average  interest rates by expected
maturity dates.  The Company does not hold or issue  derivative  instruments for
trading purposes.

  Expected                Principal Due on                       Weighted
 Maturity Date           Variable Rate Debt                Average Interest Rate
--------------           ------------------                ---------------------
                           In thousands

    2000                   $     3,100                                  10.48  %
    2001                        10,000                                   8.11  %
    2002                       282,801                                   8.67  %
    2003                            --                                     --  %
    2004                        80,586                                  10.48  %
                           -----------                                  --------
   Total                   $   376,487                                   9.06  %
                           ===========                                 =========

   Fair Value              $   376,487                                   9.06  %
                           ===========                                 =========


Item 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

         The  independent  auditors'  report,  financial  statements,  and notes
thereto are listed in the Index to Financial  Statements and Financial Statement
Schedule at page F-1 of this report and begin on page F-2.


Item 9.  CHANGES IN  AND  DISAGREEMENTS  WITH  ACCOUNTANTS  ON  ACCOUNTING  AND
         FINANCIAL DISCLOSURE.

         None.


                                    PART III

Item 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

         The  information  required by this item with respect to  directors  and
compliance  with  Section  16(a)  of the  Securities  Exchange  Act of  1934  is
incorporated  herein by reference to the  Registrant's  Proxy  Statement for the
2000 Annual Meeting of  Stockholders to be filed pursuant to Regulation 14A. The
required information as to executive officers is set forth in Part I hereof.

<PAGE>16


Item 11.  EXECUTIVE COMPENSATION.

         The  information  required  by this  item  is  incorporated  herein  by
reference to the  Registrant's  Proxy  Statement for the 2000 Annual  Meeting of
Stockholders to be filed pursuant to Regulation 14A.


Item 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

         The  information  called  for by this  item is  incorporated  herein by
reference to the  Registrant's  Proxy  Statement for the 2000 Annual  Meeting of
Stockholders to be filed pursuant to Regulation 14A.


Item 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

         The  information  called  for by this  item is  incorporated  herein by
reference to the  Registrant's  Proxy  Statement for the 2000 Annual  Meeting of
Stockholders to be filed pursuant to Regulation 14A.


                                     PART IV

Item 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.

         14 (a) (1)   Financial Statements.

         The financial  statements  and notes thereto are listed in the Index to
Financial Statements and Financial Statement Schedule on page F-1 of this report
and begin on page F-2.

         14 (a) (2)   Financial Statement Schedule.

         The  financial  statement  schedule is listed in the Index to Financial
Statements  and Financial  Statement  Schedule on page F-1 of this report and is
found on page F-23.

         14 (a) (3)   Exhibits.

         Exhibits  are as set forth in the Index to Exhibits on page E-1 of this
report.

         14 (b)       Reports on Form 8-K.

         The  Registrant  has filed one report on Form 8-K  during  the  quarter
ended  November 27, 1999.  The report was dated November 17, 1999, and contained
Item 5,  Other  Events,  and  Item 7,  Financial  Statements  and  Exhibits.  No
financial statements were filed with this report.

         14 (c)       Exhibits.

         Exhibits  are as set forth in the Index to Exhibits on page E-1 of this
report.

         14 (d)       Financial Statement Schedule.

         The  financial  statement  schedule is listed in the Index to Financial
Statements  and Financial  Statement  Schedule on page F-1 of this report and is
found on page F-23.

<PAGE>17


                                   SIGNATURES

Pursuant to the  requirements of Section 13 or 15(d) of the Securities  Exchange
Act of 1934,  Payless  has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.

                             PAYLESS CASHWAYS, INC.
                             (Registrant)
                              By /s/Millard E. Barron
                              Millard E. Barron, Principal Executive Officer

Dated:  February 16, 2000

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the  following  persons on behalf of Payless and in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>

              Signature                                        Title                                     Date
             ---------------------------           ---------------------------------------           -----------------
              <S>                                  <C>                                               <C>
              /s/Millard E. Barron
              Millard E. Barron                    President, Chief Executive Officer and            February 16, 2000
                                                   Director
                                                   (Principal Executive Officer)

              /s/Peter G. Danis
              Peter G. Danis                       Non-Executive Chairman of the                     February 16, 2000
                                                   Board

              /s/H. D. Cleberg
              H. D. Cleberg                        Director                                          February 16, 2000

              /s/David G. Gundling
              David G. Gundling                    Director                                          February 16, 2000

              /s/Max D. Hopper
              Max D. Hopper                        Director                                          February 16, 2000

              /s/Donald E. Roller
              Donald E. Roller                     Director                                          February 16, 2000

              /s/Peter M. Wood
              Peter M. Wood                        Director                                          February 16, 2000

              /s/Timothy R. Mertz
              Timothy R. Mertz                     Vice President-Treasury                           February 16, 2000
                                                   and Acting Chief Financial Officer
                                                   (Principal Financial Officer and
                                                   Principal Accounting Officer)
</TABLE>

<PAGE>F-1



        INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE


FINANCIAL STATEMENTS:

Independent Auditors' Report.                                                F-2

Management's Letter re Responsibility for Financial Statements               F-3

Statements of Operations--fiscal years ended November 27, 1999,
   November 28, 1998, and November 29, 1997.                                 F-4

Balance Sheets--November 27, 1999, and November 28, 1998.                    F-5

Statements of Cash Flows--fiscal years ended November 27, 1999,
   November 28, 1998, and November 29, 1997.                                 F-6

Statements of Stockholders' Equity--fiscal years ended November 27, 1999,
   November 28, 1998, and November 29, 1997.                                 F-7

Notes to Financial Statements.                                               F-8


FINANCIAL STATEMENT SCHEDULE:

II - Valuation and Qualifying Accounts.                                     F-23

         All other  schedules  for  which  provision  is made in the  applicable
accounting regulation of the Securities and Exchange Commission are not required
under the related  instructions  or are  inapplicable,  and therefore  have been
omitted.

<PAGE>F-2




                            [Letterhead of KPMG LLP]


                          INDEPENDENT AUDITORS' REPORT


The Board of Directors
Payless Cashways, Inc.:

We have audited the accompanying balance sheets of Payless Cashways,  Inc. as of
November  27,  1999  and  November  28,  1998  and  the  related  statements  of
operations, stockholders' equity, and cash flows for each of the fiscal years in
the three-year  period ended November 27, 1999. In connection with our audits of
the financial statements,  we have also audited the financial statement schedule
for each of the years in the three-year  period ended  November 27, 1999.  These
financial  statements and financial statement schedule are the responsibility of
the Company's  management.  Our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits.

We  conducted  our  audits  in  accordance  with  generally   accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosure in the financial  statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion,  the financial  statements  referred to above present fairly, in
all material respects,  the financial  position of Payless Cashways,  Inc. as of
November 27, 1999 and November  28, 1998 and the results of its  operations  and
its cash  flows for each of the  fiscal  years in the  three-year  period  ended
November 27, 1999, in conformity with generally accepted accounting  principles.
Also in our opinion,  the related financial statement schedule,  when considered
in relation to the basic financial statements taken as a whole, presents fairly,
in all material respects, the information set forth therein.

As discussed in Note C to the financial  statements,  the  financial  statements
reflect the  application of  fresh-start  reporting as of November 29, 1997 and,
therefore,  are not  comparable in all respects to the financial  statements for
periods prior to such date.


                                    /S/ KPMG  LLP

January 14, 2000

<PAGE>F-3






RESPONSIBILITY FOR FINANCIAL STATEMENTS


The  financial  statements  of Payless  Cashways,  Inc.  have been  prepared  by
management in accordance  with  generally  accepted  accounting  principles  and
necessarily  include amounts based on management's  judgment and best estimates.
The presentation,  integrity and consistency of the financial statements are the
responsibility of management.

The financial  statements have been audited by KPMG LLP,  independent  auditors.
Their   responsibility  is  to  audit  the  Company's  financial  statements  in
accordance  with  generally  accepted  auditing  standards  and to express their
opinion on these  statements  with  respect to fairness of  presentation  of the
Company's financial position, results of operations and cash flows.

To fulfill its  responsibilities,  management has developed a system of internal
controls designed to provide  reasonable  assurance that assets are safeguarded,
transactions  are executed in accordance with  management's  authorizations  and
financial  records provide a reliable basis for preparing  financial  statements
and other data.  Management  believes  the controls in place are  sufficient  to
provide this reasonable  assurance.  The controls include careful  selection and
training of  qualified  personnel,  appropriate  division  of  responsibilities,
communication  of written  policies and procedures  throughout the Company and a
program of internal audits.

The Board of Directors,  through its Audit  Committee  composed of Directors who
are neither  officers  nor  employees  of the Company,  is  responsible  for the
maintenance of a strong control environment and quality financial reporting. The
Board, on the  recommendation  of the Audit  Committee,  selects and engages the
independent  auditors.  The Audit Committee meets  periodically with management,
the  independent  auditors and internal  auditors to discuss the results of both
independent and internal audits, the adequacy of internal controls and financial
reporting  matters.  The  independent  auditors and the internal  auditors  have
direct access to the Audit  Committee  without the presence of management,  when
deemed appropriate.

<PAGE>F-4


<TABLE>

STATEMENTS OF OPERATIONS
<CAPTION>
                                                                                    Reorganized              |     Predecessor
                                                                                      Company                |       Company
                                                                       --------------------------------------|--------------------
                                                                                 Fiscal Year Ended           |Fiscal Year Ended
                                                                       --------------------------------------|--------------------
                                                                        November 27,         November 28,    |    November 29,
In thousands, except per share amounts                                      1999                 1998        |        1997
-------------------------------------------------------------------------------------------------------------|--------------------
<S>                                                                    <C>                   <C>             |    <C>
                                                                                                             |
Income                                                                                                       |
     Net sales                                                         $    1,811,365        $   1,906,862   |    $   2,285,281
     Other income                                                               1,982                2,998   |            4,934
                                                                       --------------------------------------|--------------------
                                                                            1,813,347            1,909,860   |        2,290,215
Costs and expenses                                                                                           |
     Cost of merchandise sold                                               1,333,968            1,420,787   |        1,676,658
     Selling, general and                                                                                    |
         administrative--Notes G and H                                        420,382              443,031   |          555,745
     Special (credits) charges, net--Notes G and J                             (4,315)               7,421   |           73,539
     Reorganization items--Note I                                                  --                   --   |           25,455
     Fresh-start revaluation--Note C                                               --                   --   |          355,559
     Provision for depreciation and amortization                               40,167               37,044   |           54,182
     Interest expense (contractual interest of                                                               |
         $66,973 in 1997)--Note D                                              35,763               37,162   |           61,251
                                                                       --------------------------------------|--------------------
                                                                            1,825,965            1,945,445   |        2,802,389
                                                                       --------------------------------------|--------------------
                                                                                                             |
                                       LOSS BEFORE INCOME TAXES               (12,618)             (35,585)  |         (512,174)
                                                                                                             |
Federal and state income taxes--Note F                                         (5,211)             (13,218)  |          (90,406)
                                                                       --------------------------------------|--------------------
                                                                                                             |
                                LOSS BEFORE EXTRAORDINARY ITEMS                (7,407)             (22,367)  |         (421,768)
                                                                                                             |
Extraordinary items, net of income taxes--Notes C and D                          (729)                  --   |          133,176
                                                                       --------------------------------------|--------------------
                                                                                                             |
                                                       NET LOSS        $       (8,136)       $     (22,367)  |    $    (288,592)
                                                                       ======================================|====================
                                                                                                             |
Weighted average common shares outstanding                                     20,000        $      20,000   |
                                                                       --------------------------------------|
                                                                                                             |
Loss per common share before extraordinary item-basic and diluted      $        (0.37)       $       (1.12)  |
                                                                                                             |
Extraordinary items, net of income taxes                                        (0.04)                  --   |
                                                                       --------------------------------------|
                                                                                                             |
Net loss per common share-basic and diluted--Notes A and E             $        (0.41)       $       (1.12)  |
                                                                       ======================================|
</TABLE>





See notes to financial statements

<PAGE>F-5




<TABLE>
BALANCE SHEETS
<CAPTION>
                                                                                                Reorganized Company
                                                                                      -----------------------------------
                                                                                       November 27,          November 28,
In thousands                                                                               1999                  1998
-------------------------------------------------------------------------------------------------------------------------
<S>                                                                                   <C>                   <C>

ASSETS
     CURRENT ASSETS
         Cash and cash equivalents                                                    $      1,111          $      1,950
         Merchandise inventories--Notes A and D                                            349,332               349,452
         Prepaid expenses and other current assets                                          22,013                17,506
         Income taxes receivable--Note F                                                       679                 1,338
         Deferred income taxes--Note F                                                          --                 8,026
                                                                                      -----------------------------------
                                                      TOTAL CURRENT ASSETS                 373,135               378,272

     OTHER ASSETS
         Real estate held for sale--Notes A and J                                            8,851                13,102
         Deferred financing costs--Notes A and D                                             3,944                 3,319
         Other                                                                               1,549                 1,677

     LAND, BUILDINGS, EQUIPMENT AND SOFTWARE--Notes A and D
         Land and land improvements                                                        100,741                99,402
         Buildings                                                                         225,945               225,426
         Equipment                                                                          46,865                39,114
         Capitalized software                                                               19,382                 7,367
         Automobiles and trucks                                                             11,916                 8,439
         Construction in progress                                                            2,963                 5,487
         Allowance for depreciation and amortization                                       (66,900)              (34,293)
                                                                                      -----------------------------------
                             TOTAL LAND, BUILDINGS, EQUIPMENT AND SOFTWARE                 340,912               350,942
                                                                                      -----------------------------------
                                                                                      $    728,391          $    747,312
                                                                                      ===================================

LIABILITIES AND STOCKHOLDERS' EQUITY
     CURRENT LIABILITIES
         Current portion of long-term debt--Note D                                    $      3,265          $     11,068
         Trade accounts payable                                                             51,480                52,325
         Salaries, wages and bonuses                                                        11,899                12,253
         Accrued vacation expense                                                            9,471                12,045
         Accrued pension expense--Note G                                                    14,765                24,298
         Other accrued expense--Notes G and J                                               40,732                53,432
         Taxes, other than income taxes                                                     11,778                13,275
         Income taxes payable--Note F                                                        1,851                 2,350
         Deferred income taxes--Note F                                                       2,157                    --
                                                                                      -----------------------------------
                                                 TOTAL CURRENT LIABILITIES                 147,398               181,046

     LONG-TERM DEBT, less portion classified as current
         liability--Note D                                                                 374,154               336,557

     NON-CURRENT LIABILITIES
         Deferred income taxes--Note F                                                      31,263                47,142
         Other--Note G                                                                      22,279                21,134

     STOCKHOLDERS' EQUITY--Notes A, B and E
         Common stock, $.01 par value, 50,000,000 shares authorized,
           20,000,000 shares issued                                                            200                   200
         Additional paid-in capital                                                        183,600               183,600
         Accumulated deficit                                                               (30,503)              (22,367)
                                                                                      -----------------------------------
                                                TOTAL STOCKHOLDERS' EQUITY                 153,297               161,433
                                                                                      -----------------------------------
     COMMITMENTS AND CONTINGENCIES--Notes G and H
                                                                                      $    728,391          $    747,312
                                                                                      ===================================
</TABLE>

See notes to financial statements

<PAGE>F-6


<TABLE>

STATEMENTS OF CASH FLOWS
<CAPTION>

                                                                                       Reorganized           |      Predecessor
                                                                                         Company             |        Company
                                                                         ------------------------------------|----------------------
                                                                                    Fiscal Year Ended        |   Fiscal Year Ended
                                                                         ------------------------------------|----------------------
                                                                            November 27,       November 28,  |     November 29,
In thousands                                                                    1999               1998      |         1997
-------------------------------------------------------------------------------------------------------------|----------------------
<S>                                                                      <C>                   <C>           |     <C>
                                                                                                             |
Cash Flows from Operating Activities                                                                         |
      Net loss                                                           $     (8,136)         $    (22,367) |     $   (288,592)
      Adjustments to reconcile net loss                                                                      |
          to net cash provided by operating activities:                                                      |
        Depreciation and amortization                                          40,167                37,044  |           54,182
        Deferred income taxes                                                  (5,696)              (11,007) |          (72,237)
        Non-cash interest                                                       2,079                   829  |            5,031
        Special charges (credits), net--Note J                                 (4,315)                7,421  |           73,539
        Non-cash extraordinary items--Notes C and D                               729                    --  |         (133,176)
        Non-cash reorganization items--Note I                                      --                    --  |            2,481
        Fresh-start revaluation--Notes B and C                                     --                    --  |          355,559
        Other                                                                     392                   452  |           (1,467)
      Changes in assets and liabilities:                                                                     |
        Decrease in merchandise inventories                                       120                65,430  |            7,462
        (Increase) decrease in prepaid expenses                                                              |
             and other assets                                                  (4,507)                 (901) |            6,926
        Decrease (increase) in income taxes receivable                            659                30,882  |          (14,505)
        (Decrease) increase in trade accounts payable                            (845)              (23,258) |           44,252
        Decrease in other current liabilities                                 (23,096)              (31,380) |           (4,359)
                                                                         ------------------------------------|----------------------
    NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES                        (2,449)               53,145  |           35,096
                                                                                                             |
Cash Flows from Investing Activities                                                                         |
      Additions to land, buildings, equipment and software                    (47,213)              (26,864) |          (65,601)
      Proceeds from sale of land, buildings and equipment                      22,457                43,987  |           18,775
      Acquisition of business, excluding working capital:                                                    |
        Purchase price in excess of net assets acquired                            --                    --  |           (1,015)
      Decrease (increase) in other assets                                         128                 7,029  |           (1,141)
                                                                         ------------------------------------|----------------------
    NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES                       (24,628)               24,152  |          (48,982)
                                                                                                             |
Cash Flows from Financing Activities                                                                         |
      Net (payments) proceeds related to revolving credit                                                    |
        facility--Note D                                                      251,386                (2,000) |           62,386
      Principal payments on long-term debt--Note D                           (221,592)              (83,760) |          (32,795)
      Fees and financing costs paid in connection with debt                                                  |
        refinancing--Notes A and D                                             (3,433)               (1,548) |           (3,365)
      Other                                                                      (123)                   --  |             (804)
                                                                         ------------------------------------|----------------------
    NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES                        26,238               (87,308) |           25,422
                                                                         ------------------------------------|----------------------
                                                                                                             |
Net (decrease) increase in cash and cash equivalents                             (839)              (10,011) |           11,536
Cash and cash equivalents, beginning of period                                  1,950                11,961  |              425
                                                                         ------------------------------------|----------------------
Cash and cash equivalents, end of period                                 $      1,111          $      1,950  |     $     11,961
                                                                         ====================================|======================
</TABLE>

See notes to financial statements


<PAGE>F-7

<TABLE>

STATEMENTS OF STOCKHOLDERS' EQUITY
<CAPTION>
                                            Preferred       Common    Additional   Adjustment for
                                              Stock          Stock      Paid-in    Minimum Pension   Accumulated
In thousands                            $1.00 Par Value $.01 Par Value  Capital       Liability        Deficit        Total
------------------------------------------------------------------------------------------------------------------------------
<S>                                         <C>           <C>          <C>           <C>            <C>            <C>
Balance at November 30, 1996                $  40,600     $    400     $ 487,728     $       --     $ (238,997)    $  289,731

   Net loss for the year                                                                              (288,592)      (288,592)
   Restricted Stock                                             --           131                                          131
   Issuance of Voting Common Stock
     under Director Deferred
     Compensation Plan                                          --            17                                           17
   Conversion of Non-Voting Class A
     Common Stock to Voting Common
     Stock--Note E                                              --                                                         --
   Minimum pension liability
     adjustment--Note G                                                                  (1,287)                       (1,287)
   Eliminate predecessor equity accounts
     in connection with fresh start
     reporting--Note C                        (40,600)        (400)     (487,876)         1,287        527,589             --
   Issuance of New Common
     Stock pursuant to Plan of
     Reorganization--Notes B, C and E                          200       183,600                                      183,800
                                            ----------------------------------------------------------------------------------

Balance at November 29, 1997                $      --     $    200     $ 183,600     $       --     $       --     $  183,800

   Net loss for the year                                                                               (22,367)       (22,367)
                                            ----------------------------------------------------------------------------------------

Balance at November 28, 1998                $      --     $    200     $ 183,600     $       --     $  (22,367)    $  161,433

   Net loss for the year                                                                                (8,136)        (8,136)
                                            ----------------------------------------------------------------------------------------

Balance at November 27, 1999                $      --     $    200     $ 183,600     $       --     $  (30,503)    $  153,297
                                            ========================================================================================
</TABLE>


See notes to financial statements



<PAGE>F-8


NOTES TO FINANCIAL STATEMENTS

Note A-Summary of Significant Accounting Policies

Description   of  Business:   The  Company  is  engaged  in  only  one  line  of
business--the  retail sale of building  materials and supplies.  At November 27,
1999,  the  Company  operated  151 stores in 18 states  located in the  Midwest,
Southwest,  Pacific  Coast,  and Rocky  Mountain  areas.  The Company's  primary
customers  include  professionals  and  project-oriented  do-it-yourselfers.  In
recent  years,  the  building  materials   retailing  industry  has  experienced
increased  levels of competition as several  national chains have expanded their
operations.

Fresh-Start  Reporting:  The Company has implemented the required accounting for
entities  emerging from bankruptcy in accordance with the American  Institute of
Certified  Public   Accountants'   Statement  of  Position  90-7  ("SOP  90-7"),
"Financial  Reporting by Entities in Reorganization  Under the Bankruptcy Code,"
and  reflected  the effects of such adoption in the balance sheet as of November
29, 1997. Under fresh-start  reporting,  the balance sheet of November 29, 1997,
became the opening  balance  sheet of the  Reorganized  Company.  The  financial
statements of the Predecessor Company are not comparable in material respects to
the financial  statements of the Reorganized  Company.  Accordingly,  a vertical
line is shown to separate financial  information of the Predecessor  Company and
the Reorganized Company.

Use of Estimates and Other Uncertainties:  In preparing the financial statements
in conformity with generally accepted accounting principles, management has made
estimates  and  assumptions  that  affect  the  reported  amounts  of assets and
liabilities at the date of the financial  statements and the reported amounts of
revenues and expenses during the reporting  period.  Actual results could differ
from those estimates.

The Company's future results could be adversely affected by a number of factors,
including:  competitive  pressure  on sales and  pricing  from  well-capitalized
warehouse-format  home centers; the Company's ability to effectively execute its
business  strategy;  weather  conditions;  consumer  spending  and debt  levels;
interest rates; housing activity,  including existing-home turnover and new-home
construction;  lumber  prices;  product mix; sales of real estate held for sale;
and growth of certain market segments.

Merchandise   Inventories:   Inventories   are  stated  at  the  lower  of  cost
(approximately 79% at last-in,  first-out method, and the remainder at first-in,
first-out  method) or market.  Had the first-in,  first-out method been used for
all inventories,  the carrying value of these  inventories  would have decreased
approximately  $3.3 million and $2.4 million at November 27, 1999,  and November
28, 1998, respectively.

Property and  Depreciation:  Provisions for  depreciation of land  improvements,
buildings and equipment are computed primarily by the straight-line  method over
the  estimated  useful  lives of the assets or the terms of the related  leases,
which range from three to 39 years.

Provisions for  amortization  of capitalized  software costs are computed by the
straight-line  method over the estimated useful lives of the assets, which range
from two to 10 years. During 1999 and 1998, the Company capitalized  software of
$12.0 million and $3.5 million,  respectively,  and amortized $3.4 million, $3.9
million and $3.1  million of  capitalized  software  expense for 1999,  1998 and
1997,  respectively.  Accumulated amortization was $5.4 million and $2.1 million
at November 27, 1999 and November 28, 1998, respectively.

Deferred Financing Costs: Deferred financing costs are being amortized over the
respective borrowing terms using the interest method.

Impairment of  Long-Lived  Assets and  Long-Lived  Assets to Be Disposed Of: The
Company  accounts for  long-lived  assets in accordance  with the  provisions of
Statement  of  Financial  Accounting  Standards  No.  121,  "Accounting  for the
Impairment of Long-Lived  Assets and for  Long-Lived  Assets to Be Disposed Of."
This  Statement  requires  that  long-lived  assets  and  certain   identifiable
intangibles   be  reviewed  for  impairment   whenever   events  or  changes  in
circumstances  indicate  that  the  carrying  amount  of an  asset  may  not  be
recoverable.  Recoverability  of  assets  to be held and used is  measured  by a
comparison of the carrying  amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired,  the
impairment  to be  recognized  is measured  by the amount by which the  carrying
amount of the assets exceed the fair value of the assets.  Assets to be disposed
of are reported at the lower of the carrying  amount or fair value less costs to
sell.

Earnings Per Common  Share:  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 for the fiscal  years ended  November 27,
1999 and November 28, 1998, the impact of  considering  such stock options would
be antidilutive.

<PAGE>F-9

Earnings per common share have not been  computed  for the  Predecessor  Company
because,  as described at Note B, Old Preferred  Stock and Old Common Stock were
canceled on the Plan Effective  Date.  Presentation of earnings per common share
based on Predecessor  Company average shares  outstanding would therefore not be
meaningful. New Common Stock was not outstanding during fiscal year 1997.

Income Taxes:  Deferred tax assets and liabilities are recognized for the future
tax  consequences  attributable to differences  between the financial  statement
carrying  amounts of existing assets and  liabilities  and their  respective tax
bases.  Deferred tax assets and liabilities are measured using enacted tax rates
applied to taxable income in the years in which those temporary  differences are
expected  to be  recovered  or settled.  The effect on  deferred  tax assets and
liabilities  of a change in tax rates is recognized in income in the period that
includes the enactment date.

Statement  of Cash Flows:  For  purposes  of the  statement  of cash flows,  the
Company  considers  investments in debt instruments with original  maturities of
three months or less to be cash equivalents.

During fiscal 1999, 1998, and 1997, federal and state income tax refunds, net of
payments,  were $0.2 million,  $32.9 million, and $0.6 million, respectively.

Cash paid for interest,  net of interest capitalized,  was $36.3 million,  $35.2
million,  and $55.4 million during fiscal 1999, 1998, and 1997, respectively.

Sale of  Receivables:  The Company  sells its  commercial  credit  accounts to a
third-party administrator pursuant to an agreement. A substantial portion of the
Company's  commercial credit sales are to remodelers and contractors.  Under the
agreement,  the Company  pays a servicing  fee and assumes the credit  risk.  At
November 27, 1999, and November 28, 1998, the outstanding  balance of commercial
credit accounts sold to the third-party  administrator was approximately  $102.4
million and $95.6 million,  respectively.  The Company has provided a reserve of
$3.8  million and $5.9  million at November  27,  1999,  and  November 28, 1998,
respectively,  which is believed to adequately  cover its credit risk related to
these accounts.

Under  a  third-party  administrative  servicing  agreement  for  the  Company's
private-label  charge  card  program,  charge  card  accounts  are  sold  to the
administrator and the Company assumes no credit risk.

Real Estate Held for Sale:  Real estate held for sale,  consisting  primarily of
closed store  facilities,  is  reflected  at the lower of cost less  accumulated
depreciation or estimated fair value less cost to sell.

Advertising Costs: Advertising costs, which are expensed as incurred, aggregated
$20.0 million, $23.2 million, and $27.5 million for fiscal 1999, 1998, and 1997,
respectively.

Fair Value of Financial  Instruments:  Based on the  borrowing  rates  currently
available to the Company for debt issuances  with similar terms and  maturities,
the fair value of long-term debt including the current portion is  approximately
$377.4  million and $347.6  million at November 27, 1999, and November 28, 1998,
respectively.  The  Company  believes  the  carrying  amounts  of cash  and cash
equivalents,  trade receivables, trade accounts payable and accrued expenses are
a reasonable estimate of their fair value.

Derivative Financial Instruments:  Premiums paid for purchased interest rate cap
agreements  are  amortized to interest  expense over the term of the  agreement.
Unamortized  premiums  are included in deferred  financing  costs in the balance
sheets.  If  amounts  were  received  under  the cap  agreement,  they  would be
reflected as a reduction of interest expense. Amounts received or paid under the
interest  rate  swap  agreement  discussed  at Note H have been  reflected  as a
reduction or increase of rent expense prior to fresh-start accounting.

Accounting  Period:  The Company's fiscal year ends on the last Saturday in Nov-
ember.  Fiscal years 1999, 1998 and 1997 consisted of 52 weeks each.

Reclassifications:  Certain  reclassifications  have  been  made to the 1998 and
1997  financial  statements  to  conform  to the 1999 presentation.


Note B-Reorganization and Emergence From Chapter 11

On July 21, 1997 (the "Petition  Date"),  the Company commenced a reorganization
case (the "Case") by filing a voluntary  petition  for relief under  Chapter 11,
Title 11 of the United States Code ("Chapter 11") in the U.S.  Bankruptcy  Court
for the Western District of Missouri in Kansas City (the "Court").

<PAGE>F-10


On the Petition  Date,  the Company  filed a Disclosure  Statement and a Plan of
Reorganization  (the  "Plan")  with the  Court.  The Plan,  as  amended,  became
effective December 2, 1997 (the "Effective  Date").  Under the Plan, the Company
reincorporated  as a Delaware  corporation  and canceled  outstanding  shares of
common and preferred stock and issued  approximately  20,000,000 shares of newly
reorganized Payless Cashways, Inc. (the "Reorganized Company") common stock (the
"New Common Stock"), as described below.

The Plan generally provided for the following:  (I) The secured bank group under
the credit  agreement  in  existence  at the  Petition  Date (the "Prior  Credit
Agreement"),  on or prior to the Effective Date, received (a) payment of accrued
interest, fees and expenses, (b) Net Cash Proceeds (as defined in the Plan) from
the sale of certain  collateral  securing  the Prior  Credit  Agreement  and the
collection of certain  promissory  notes pledged to the secured bank group,  (c)
their  allocable  portion of $283.1 million of new term loans and (d) 10,730,671
shares  of New  Common  Stock  (approximately  54% of the  shares  of the  newly
reorganized  Company),  of which 460,000 shares were  distributed to the lenders
providing a $150  million  revolving  credit  facility to supply  post-emergence
working capital  financing in consideration for their commitment to provide such
facility.  See Note D for a  description  of the term  loans  and the  revolving
credit facility (together,  the "1997 Credit Agreement").  (II) On the Effective
Date, UBS Mortgage Finance,  Inc. ("UBS"), the holders of notes under a mortgage
loan in  existence at the Petition  Date,  received new notes  pursuant to a new
mortgage  loan.  See Note D for a description  of the new mortgage  loan.  (III)
Unsecured  claims  against  the  Company  by  vendors  and  suppliers  for goods
delivered and services rendered prior to the Petition Date, claims in respect of
the 9-1/8% senior subordinated notes,  contingent unliquidated claims and claims
for damage arising from the rejection by the Company  pursuant to Section 365 of
the Bankruptcy Code of executory  contracts and unexpired leases  (collectively,
"General  Unsecured  Claims")  are  receiving  their pro rata share of 8,269,329
shares  of New  Common  Stock or  approximately  41% of the  shares of the newly
reorganized  Company.  The  remaining  shares of New  Common  Stock are held for
future  distributions to holders of General Unsecured Claims,  pending the final
resolution of disputed claims.  (IV) The holder of issued and outstanding shares
of existing  preferred stock ("Old Preferred  Stock") received 600,000 shares of
New  Common  Stock  (approximately  3% of the  shares of the  newly  reorganized
Company).  (V) Holders of issued and outstanding shares of existing common stock
("Old Common Stock") are receiving their pro rata share of 400,000 shares of New
Common Stock  (approximately 2% of the shares of the newly reorganized  Company)
upon  surrender  of their Old  Common  Stock.  In  addition,  any stock  options
relating to outstanding  Old Preferred  Stock and Old Common Stock were canceled
on the Effective Date.

See Notes I and J for a  description  of related  charges  recorded in the third
quarter of 1997.


Note C-Fresh Start Reporting

On December 2, 1997, the Company emerged from bankruptcy. In accordance with SOP
90-7, the Company adopted fresh-start  reporting.  For accounting purposes,  the
Effective Date was deemed to be November 29, 1997.

In fresh-start  reporting,  an aggregate value of $183.8 million was assigned to
the  Company's  New Common  Stock.  Management  established  this value with the
assistance of its financial  advisors.  This valuation  considered the Company's
expected future  performance,  relevant  industry and economic  conditions,  and
analyses and comparisons with comparable companies.

The  reorganization  value of the Company has been allocated to the  Reorganized
Company's  assets and  liabilities in a manner similar to the purchase method of
accounting  for a business  combination.  Management  obtained  valuations  from
independent third parties which, along with other market and related information
and analyses, were utilized in assigning fair values to assets and liabilities.


<PAGE>F-11


A summary of the impact of the Plan and the related  fresh-start  adjustments is
presented below:
<TABLE>
<CAPTION>
                                                                               November 29, 1997
                                         -------------------------------------------------------------------------------------------
                                             Predecessor       Discharge of       Fresh-Start            Other          Reorganized
                                               Company       Indebtedness (a)   Adjustments (b)     Adjustments (c)       Company
                                         -----------------  ----------------  ------------------  -----------------  ---------------
<S>                                      <C>                <C>               <C>                 <C>                <C>
Current Assets:
    Cash and cash equivalents            $     11,961       $                 $                   $                  $     11,961
    Merchandise inventories                   391,548                                 23,334                              414,882
    Prepaid expenses and
       other current assets                    15,702                                   (997)                              14,705
    Income taxes receivable                    29,705              2,527                                                   32,232
    Deferred income taxes                      24,070             (9,448)             (5,957)                               8,665
                                         -----------------  ----------------  ------------------  -----------------  ------------
       Total Current Assets                   472,986             (6,921)             16,380                --            482,445

Other Assets:
    Real estate held for sale                  37,078                                 11,484                               48,562
    Cost in excess of net
       assets acquired                        265,949                               (265,949)                                  --
    Deferred financing costs                    8,690             (7,590)              1,500                                2,600
    Other                                      14,663                                   (347)                              14,316

Land, Buildings and Equipment, net            456,736                                (93,318)                             363,418
                                         -----------------  ----------------  ------------------  -----------------  ---------------
    TOTAL ASSET                          $  1,256,102       $    (14,511)     $     (330,250)     $         --       $    911,341
                                         =================  ================  ==================  =================  ===============

Current Liabilities:
    Current portion of long-term debt  $     492,930        $                 $     (483,576)     $                  $      9,354
    Trade accounts payable                    54,203              21,380                                                   75,583
    Other current liabilities                128,755                                   7,986                              136,741
    Income taxes payable                       8,711                                  (6,349)                               2,362
                                       -------------------  ----------------  ------------------  -----------------  ---------------
       Total Current Liabilities             684,599              21,380            (481,939)               --            224,040

Long-Term Debt                                    --                                 424,031                              424,031

Non-Current Liabilities:
    Deferred income taxes                     16,961              84,928             (43,101)                              58,788
    Other                                     24,272                                  (3,590)                              20,682
                                       -------------------  ----------------  ------------------  -----------------  ---------------
       Total Non-Current Liabilities          41,233              84,928             (46,691)               --             79,470

Liabilities Subject to Compromise            351,381            (329,990)            (21,391)                                  --

Stockholders' Equity:
    Old Preferred Stock                       40,600                                                   (40,600)                --
    Old Common Stock                             400                                                      (400)                --
    New Common Stock                              --                  83                 117                                  200
    Additional paid-in capital               487,876              75,912             107,688          (487,876)           183,600
    Adjustment for minimum pension
       liability                              (1,287)                                                    1,287                 --
    Accumulated deficit                     (348,700)            133,176            (312,065)          527,589                 --
                                       -------------------  ----------------  ------------------  -----------------  ---------------
       Total Stockholders' Equity            178,889             209,171            (204,260)               --            183,800
                                       -------------------  ----------------  ------------------  -----------------  ---------------

    TOTAL LIABILITIES AND
       STOCKHOLDERS' EQUITY            $   1,256,102        $    (14,511)     $     (330,250)     $         --       $    911,341
                                       ===================  ================  ==================  =================  ===============
<FN>

(a)  To  record  the  discharge  of  indebtedness  pursuant  to the  Plan and to
     write-off deferred  financing costs related to the early  extinguishment of
     certain predecessor company debt; see Note D. The discharge of indebtedness
     relates  to all  general  unsecured  claims,  as  described  in  Note B. It
     includes the elimination and, in certain cases, the reclassification of the
     liabilities  subject to compromise related to these claims, the issuance of
     New Common Stock in  settlement  of unsecured  claims,  and the related tax
     effect of these  transactions.  The excess of indebtedness  eliminated over
     the estimated  fair value of  securities  issued in settlement

<PAGE>F-12


     of claims is reflected as an extraordinary  gain of $232.6 million ($138.2
     million after tax) in the accompanying 1997 statement of operations.

(b)  To record transactions with the secured creditors and holders of Old Common
     Stock and Old Preferred Stock, as described at Note B, and to adjust assets
     and liabilities to fair values.

     Transactions  include the  extinguishment  of old debt; the issuance of new
     debt and New Common  Stock;  the  reclassification  of accrued  interest to
     principal and the reclassification of debt between current and non-current,
     based upon debt agreement terms.

     Significant   elements  of  the  fair  value   adjustments  to  assets  and
     liabilities are summarized below:

     - Adjustment to reflect  inventories  at current market value
     - Adjustments to write-up real estate held for sale to fair market value
     - Adjustment to eliminate cost in excess of net assets acquired
     - Adjustments to eliminate accumulated depreciation and to write-down land,
       buildings, and equipment to fair market value
     - Adjustments to reflect  liabilities at fair market value  including:  the
       reversal of unrecognized prior service costs and  unrecognized  gains and
       losses  on  the  Company's pension and post-retirement benefit plans (see
       also Note G);  the write-off of deferred  rent liabilities  due to  lease
       amendments  and terminations; and the elimination  of insurance  accruals
       covered by bank letters of credit
     - Adjustments to deferred and currently  payable tax accounts to record the
       tax effect of all fresh-start reporting adjustments

     Fresh-start  adjustments of $355.6 million  ($312.1 million net of tax) are
     reflected  as  fresh-start  revaluation  charges in the  accompanying  1997
     statement of operations.

(c)  To record the elimination of the Old Preferred Stock, Old Common Stock, and
     predecessor  company  additional  paid-in-capital  and accumulated  deficit
     after reflecting the adjustments at (a) and (b) above.
</FN>
</TABLE>


Note D--Long-Term Debt

Long-term debt consisted of the following:
<TABLE>
<CAPTION>

       In thousands                                                   1999                  1998
                                                                 ------------------------------------
<S>                                                              <C>                   <C>

       1999 Credit  Agreement,  secured by  inventory  and
           certain  real  estate,  variable interest rate,
           payable in varying amounts through 2002               $    183,386          $         --

       1997 Credit  Agreement,  secured by  certain  real
           estate and  equipment, variable interest rate,
           payable in varying amounts through 2002                    109,415               251,458

       Mortgage loan, secured by certain real estate,
           variable interest rate, payable in varying
           amounts through 2004                                        83,686                95,078

       Other senior debt, 11% to 12%, payable in varying
           amounts through 2004                                           932                 1,089
                                                                 ------------------------------------
                                                                      377,419               347,625
       Less portion classified as current liability                    (3,265)              (11,068)
                                                                 ------------------------------------
                                                                 $    374,154          $    336,557
                                                                 ====================================
</TABLE>

In November 1999, the Company entered into a new $260 million  revolving  credit
facility  with  a $35  million  letters-of-credit  sublimit  (the  "1999  Credit
Agreement"). A portion of the proceeds was used to retire the existing revolving
credit  facility  and to reduce the term loan under the 1997  Credit  Agreement,
described below. At November 27, 1999, there were borrowings under the agreement
of $183.4  million as well as  outstanding  stand-by  letters of credit of $17.5
million.  The Company  had $35.0  million  available  for  borrowing  under this
agreement at November 27, 1999. This facility  matures on November 17, 2002. The
loans bear  interest  at

<PAGE>F-13


fluctuating  rates of either the Prime Rate (8.25% at  November  27,  1999),  as
defined,  plus 3/4% per annum or the Euro Dollar  Rate  (6.48% at  November  27,
1999), as defined,  plus 2-3/4% per annum.  The 1999 Credit Agreement is secured
by substantially all merchandise inventories and certain real estate,  including
second priority liens on all real estate pledged to other  creditors.  Under the
1999 Credit  Agreement,  the Company is  prohibited  from  incurring  additional
indebtedness,  with certain limited exceptions, and making dividend,  redemption
and  certain  other  payments on its capital  stock.  The 1999 Credit  Agreement
contains  certain  customary  operational  covenants  and events of default  for
financing  of this type as well as a  minimum  net  worth  covenant  set at $135
million for the term of the agreement.

The 1997  Credit  Agreement  currently  includes  only term loans as a result of
payments,   described   above,   that  occurred  in  November  1999.  The  early
extinguishment of this debt resulted in an extraordinary charge of approximately
$0.7 million, net of tax, in the accompanying 1999 statement of operations.  The
term loans require semiannual principal payments of $5 million beginning May 15,
2001, with final maturity on November 30, 2002. In addition, the Company will be
required to repay  borrowings  under the 1997 Credit  Agreement with proceeds of
certain collateral sales and certain other transactions. The loans bear interest
at  fluctuating  rates of either the alternate  base rate (8.50% at November 27,
1999) plus 1-1/2% per annum or LIBOR  (5.61% at November  27,  1999) plus 2-1/2%
per  annum.  The 1997  Credit  Agreement  is secured  by  certain  real  estate,
including  second priority liens on all real estate pledged to other  creditors,
and substantially all the equipment of the Company.

In connection  with the November 1999  prepayment of the 1997 Credit  Agreement,
this  agreement was amended to eliminate all  financial  performance  covenants.
Under the 1997  Credit  Agreement,  the  Company is  prohibited  from  incurring
additional indebtedness,  with certain limited exceptions,  and making dividend,
redemption  and certain  other  payments on its capital  stock.  The 1997 Credit
Agreement contains certain customary operational covenants and events of default
for financing of this type, including a change of control covenant.

The Company's  mortgage loan is secured by certain real estate having a net book
value of  approximately  $194.4  million at November 27, 1999. The mortgage loan
bears  interest at LIBOR plus 4% per annum and interest is paid monthly.  Annual
principal  payments of $4 million are required,  with final maturity on December
2, 2004.  Prepayments are required when collateral is sold and such  prepayments
have been applied as a credit toward the scheduled annual payments.

The early  extinguishment  of the Prior Credit  Agreement and the prior mortgage
loan,  part of the Plan of  Reorganization  described at Note B,  resulted in an
extraordinary  charge  of  approximately  $5.0  million,  net  of  tax,  in  the
accompanying 1997 statement of operations.

On the  Effective  Date,  in  settlement  of the  secured  portion of the claims
arising from a lease  agreement  involving five store  facilities,  described at
Note H, the Company issued a note for $16 million. The note contained prepayment
provisions  that  allowed  the  Company to prepay  the note by certain  dates at
various discounts.  On February 26, 1998, the Company borrowed an additional $13
million under the mortgage loan and prepaid this note in full.

Scheduled  maturities of long-term debt,  including  sinking fund  requirements,
are:

      In thousands
                     2000                    $       3,265
                     2001                           10,185
                     2002                          283,008
                     2003                              232
                     2004                           80,723
                     Thereafter                          6
                                             ---------------
                                             $     377,419


Note E--Stockholders' Equity

The Company has the  authority to issue  50,000,000  shares of New Common Stock,
$.01 par value.  Each  outstanding  share of New Common Stock is entitled to one
vote on each matter on which  stockholders are entitled to vote. As discussed at
Note B, the Company  canceled  existing  shares of Old  Preferred  Stock and Old
Common Stock and issued  approximately  20,000,000 shares of New Common Stock on
or about the Effective Date. Holders of Old Common Stock and Old Preferred Stock
received  approximately  2% and 3%,  respectively,  of the  shares of New Common
Stock issued under the Plan. During fiscal 1997, 2,250,000 outstanding shares of
Non-Voting  Class A Common Stock were  converted into a like number of shares of
Voting Common Stock under a right of conversion.

<PAGE>F-14


The Payless  Cashways 1998 Omnibus  Incentive  Plan (the  "Incentive  Plan") was
established  January 15, 1998, to attract and retain outstanding  individuals in
certain key  positions.  The Incentive  Plan provides for the grant of incentive
stock  options,   non-qualified  stock  options,   stock  appreciation   rights,
restricted  stock awards and performance  awards.  There are 2,400,000 shares of
Common  Stock  reserved  for  issuance  under the  Incentive  Plan,  subject  to
adjustment as provided by the Incentive  Plan.  The exercise price for any stock
options  will be at least 100% of the fair market  value of the Common  Stock at
the date of grant.

The fair value of each option  grant is estimated on the date of the grant using
the Black-Scholes  option-pricing  model. For options granted in fiscal 1999 and
1998,  the  following  assumptions  were used to price the options:  no dividend
yield;  expected volatility of 123% and 144%,  respectively;  risk-free interest
rate of 6.64%and 5.04%,  respectively;  and an expected life of eight years. The
weighted-average  fair value of options  granted during fiscal 1999 and 1998 was
$1.55 per share and $2.40 per share,  respectively.  The options granted to date
vest ratably over four years.

The following is a summary of the Incentive Plan:
<TABLE>
<CAPTION>
                                                       Number             Weighted-Average
                                                      of Shares            Exercise Price
                                                   -----------------------------------------
                                                    In thousands
<S>                                                   <C>                       <C>

       Fiscal Year 1999:
          Options granted                               555                     $   1.65
          Options exercised                              --                          --
          Options forfeited                            (450)                        2.56
                                                   -----------------------------------------

       Options outstanding at November 27, 1999       2,225                     $   2.19
                                                   =========================================

       Options exercisable at November 27, 1999         481                     $   2.44
                                                   =========================================


       Fiscal Year 1998:
          Options granted                             2,360                     $   2.49
          Options exercised                              --                          --
          Options forfeited                            (240)                        3.13
                                                   -----------------------------------------

       Options outstanding at November 28, 1998       2,120                     $   2.41
                                                   =========================================

       Options exercisable at November 28, 1998          --                     $    --
                                                   =========================================
</TABLE>

The following table summarizes  information  about stock options at November 27,
1999:
<TABLE>
<CAPTION>
                                         Options Outstanding                                        Options Exercisable
                      -----------------------------------------------------------   ---------------------------------------------
<S>                      <C>                <C>                 <C>                          <C>                 <C>
                           Number           Weighted-Average                                   Number
     Range of            Outstanding            Remaining       Weighted -Average            Exercisable         Weighted-Average
  Exercise Prices        at 11/27/99        Contractual Life      Exercise Price             at 11/27/99          Exercise Price
------------------    -----------------    -----------------   ------------------   ---------------------    --------------------
    $0.88 - $1.94         1,130,000                9.28                 $1.46                 143,750                  $1.27
    $2.50 - $3.03         1,095,000                8.25                 $2.95                 337,500                  $2.94
------------------    -----------------    -----------------   ------------------   ---------------------    --------------------
    $0.88 - $3.03         2,225,000                8.77                 $2.19                 481,250                  $2.44
==================    =================    =================   ==================   =====================    ====================
</TABLE>

As  permitted  under  Statement  of  Financial  Accounting  Standards  No.  123,
"Accounting for Stock-Based  Compensation" ("SFAS 123"), the Company applies APB
No.  25 and  related  interpretations  in  accounting  for the  Incentive  Plan.
However,  pro forma disclosure,  as if the Company adopted the  fair-value-based
method of  measurement  for  stock-based  compensation  plans under SFAS 123, is
presented below.

Had  compensation  cost for the Company's  grants for  stock-based  compensation
plans been determined  using the fair value method under SFAS 123, the Company's
pro forma net loss and net loss per common  share for fiscal 1999 and 1998 would
approximate the amounts below:
<TABLE>
<CAPTION>
                                                                 Fiscal Year Ended
                                      ------------------------------------------------------------------------
In thousands, except per share data           November 27, 1999                     November 28, 1998
                                      ----------------------------------   -----------------------------------
                                          As Reported       Pro Forma          As Reported         Pro Forma
                                      -----------------   --------------   -------------------  --------------
<S>                                       <C>               <C>                 <C>              <C>

Net loss                                  $    (8,136)      $   (8,673)         $  (22,367)      $  (22,896)
Net loss per common share                 $     (0.41)      $   (0.43)          $    (1.12)      $    (1.14)
</TABLE>


<PAGE>F-15


Note F-Income Taxes

Income taxes for the year ended November 27, 1999, were allocated to loss before
extraordinary   items,  and  to   extraordinary   items  related  to  the  early
extinguishment of debt. See Note D. The income tax benefit allocated to the loss
before extraordinary items was $5.2 million and the income tax benefit allocated
to the  extraordinary  item  was $0.5  million.  The  Company  has  federal  net
operating  loss  carry-forwards  totaling  $84.9  million,  which expire through
fiscal 2019, and federal tax credit carry-forwards totaling $17.9 million, which
begin to expire in fiscal 2006 and expire over an indefinite period. The Company
believes,  based upon  future  earnings  coupled  with  recognition  of existing
taxable temporary differences, that it is more likely than not, that the Company
will be able to utilize tax benefits  accumulated  through November 27, 1999, in
future periods.

For the year ended November 28, 1998, an income tax benefit of $13.2 million was
recorded.  The Company has federal net  operating  loss  carryforwards  totaling
$77.6  million,  which  expire  through  fiscal  2018,  and  federal  tax credit
carry-forwards  totaling $17.3 million, which begin to expire in fiscal 2006 and
expire over an indefinite period.

Income taxes for the year ended November 29, 1997, were allocated to loss before
extraordinary items, and to extraordinary items related to the discharge of debt
pursuant to the  consummation  of the Plan and for the early  extinguishment  of
debt;  see  Note  D.  The  income  tax  benefit  allocated  to the  loss  before
extraordinary  items was $90.4 million;  the income tax expense allocated to the
extraordinary  items was $91.8  million.  Included  in the  income  tax  benefit
allocated  to the loss  before  extraordinary  items are income tax  benefits of
$43.5 million resulting from the fresh-start revaluation; see Note C. The income
tax expense allocated to the extraordinary  items of $91.8 million was comprised
of $2.5 million current tax benefit related to the early  extinguishment of debt
and $94.3 million tax expense related to the discharge of debt which resulted in
deferred  tax  balance  changes  from the  write-down  of the tax basis of fixed
assets in accordance with the Internal Revenue Code of 1986, as amended.

Income  tax  expense   (benefit)   attributable  to  the  income  (loss)  before
extraordinary items consisted of the following:

           In thousands          1999           1998          1997
                            -------------------------------------------

     Currently receivable

                  Federal   $        --    $     (959)    $   (17,169)
                    State            --        (1,252)         (1,000)
                            -------------------------------------------
                                     --        (2,211)        (18,169)

     Deferred

                  Federal        (4,545)      (10,124)        (63,129)
                    State          (666)         (883)         (9,108)
                            -------------------------------------------
                                 (5,211)      (11,007)        (72,237)
                            -------------------------------------------
                            $    (5,211)   $  (13,218)    $   (90,406)
                            ===========================================

The  differences  between  actual income tax expense and the amount  computed by
applying the statutory  federal  income tax rate to the loss before income taxes
and extraordinary items were as follows:
<TABLE>
<CAPTION>
                                                                 1999           1998          1997
                                                             ------------------------------------------
     <S>                                                       <C>             <C>            <C>
     Federal statutory rate                                    (35.0)%         (35.0)%        (35.0)%
     State income taxes, net of federal tax benefit             (3.6)           (3.9)          (2.0)
     Permanent tax differences                                  (1.9)            0.5            0.7
     Amortization and write-off of goodwill                      --              --            20.1
     Benefit from new law and tax settlements                    --              --            (1.8)
     Difference between statutory and carry-back tax rates       --              --             0.3
     Other                                                      (0.8)            1.3            --
                                                             ------------------------------------------
                                                               (41.3)%         (37.1)%        (17.7)%
                                                             ==========================================
</TABLE>


<PAGE>F-16


The tax  effects of  temporary  differences  and tax  credits  that give rise to
significant portions of the deferred tax assets and deferred tax liabilities are
as follows:
<TABLE>
<CAPTION>
                               In thousands                                        1999                1998
                                                                             -------------------------------------
     <S>                                                                     <C>                   <C>
     Deferred tax assets:
       Tax credit and net operating loss carry-forwards                      $      51,850         $     47,097
       Insurance reserves                                                            6,088                7,990
       Retirement benefits                                                           5,906                9,719
       Post-retirement benefits                                                      7,264                7,069
       Vacation reserves                                                             2,959                3,764
       Reserves for bad debts                                                        1,909                2,155
       Lease liability                                                                  --                1,366
       Other                                                                         4,134                7,978
                                                                             -------------------------------------

                                           Total deferred tax assets                80,110               87,138
                                           Less valuation allowance                  6,909                7,981
                                                                             -------------------------------------
                                           Net deferred tax assets                  73,201               79,157
                                                                             -------------------------------------

     Deferred tax liabilities:
       Land, buildings and equipment                                               (79,711)             (96,637)
       Inventory basis difference                                                  (20,766)             (19,100)
       Other                                                                        (6,144)              (2,536)
                                                                             -------------------------------------
                                           Total deferred tax liabilities         (106,621)            (118,273)
                                                                             -------------------------------------
                                           Net deferred tax liability        $     (33,420)        $    (39,116)
                                                                             =====================================
</TABLE>

The decrease in the valuation  allowance of  approximately  $1.1 million relates
primarily  to  adjustment  of recorded net  operating  loss  carryforwards  upon
examination of the Company's prior period federal tax returns.


Note G--Pension and Other Postretirement Benefit Plans

The  Company  has a  non-contributory  defined  benefit  pension  plan  covering
substantially  all  full-time  employees.  Benefits  under the plan are based on
years of service and an employee's average  compensation.  The Company's funding
policy is to contribute  annually the amount  actuarially  determined to provide
the plan with  sufficient  assets to meet future benefit  payment  requirements.
Assets of the pension plan are maintained in trust funds.

The  Company  recorded  a  $10.6  million  ($6.2  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 1999 statement of operations; see Note J.

Effective  July 21, 1997,  the Company  terminated a  supplemental  pension plan
covering  certain of its  officers.  The plan was an unfunded,  non-contributory
defined  benefit  pension plan.  Benefits  under the plan were based on years of
service, age and the employees' average  compensation.  The supplemental pension
plan was terminated as part of the Plan of Reorganization. Net pension costs for
the supplemental pension plan were $0.9 million in 1997.

A  curtailment  gain of $0.2  million and $37,000 was recorded in the year ended
November 29, 1997, for pension benefits and other benefits,  respectively. These
gains were  recorded as a result of the closing of 29 stores and are included in
special charges in the accompanying  1997 statements of operations;  see Note J.
The Company wrote off $15.9  million and  recognized a $531,000 gain for pension
benefits  and  other  benefits,  respectively,   related  to  the  write-off  of
unrecognized  prior service cost and  unrecognized net loss from past experience
different  from  that  assumed  as part of the  fresh-start  revaluation  in the
accompanying 1997 statement of operations; see Note C.

At November  29,  1997,  an  additional  minimum  liability  of $1.6 million was
recorded to reflect the excess of the unfunded  accumulated  benefit  obligation
over accrued pension costs.  This amount,  along with a  corresponding  asset of
$0.3  million and a charge to  additional  paid-in-capital  of $1.3 million were
eliminated in applying fresh-start reporting; see Note C.

The Company has certain  unfunded  post-retirement  defined  benefit  plans that
provide health and life insurance benefits for retirees and eligible dependents.
The health plan is  contributory  and  contains  cost-sharing  features  such as
deductibles and coinsurance.

<PAGE>F-17


Effective for participants retiring after November 30, 1999, the Company changed
the plan  structure to  eliminate  life  insurance  benefits for retirees and to
eliminate  the Company's  subsidy of premiums on  health insurance for retirees.
The following provides a reconciliation of benefit obligations,  plan assets and
funded status of the plans:
<TABLE>
<CAPTION>
                                                                     Pension Benefits                   Other Benefits
                                                              --------------------------         --------------------------
In thousands                                                       1999         1998                  1999         1998
                                                              --------------------------         --------------------------
<S>                                                              <C>          <C>                   <C>           <C>

      Change in Benefit Obligation
Benefit obligation at beginning of year                          $  81,798    $  76,693             $  17,431     $ 16,689
Service cost-benefits earned during the period                       2,662        4,915                   411          701
Interest cost                                                        5,012        5,254                   987        1,134
Plan participants' contributions                                        --           --                   136          166
Curtailments                                                       (10,590)          --                    --           --
Plan structure changes                                                  --           --                (6,980)          --
Actuarial (gain) loss                                              (17,452)         804                (2,004)        (289)
Benefits paid                                                       (5,246)      (5,868)                 (827)        (970)
                                                              --------------------------         --------------------------
Benefit obligation at end of year                                   56,184       81,798                 9,154       17,431
                                                              --------------------------         --------------------------

      Change in Plan Assets
Fair value of plan assets at beginning of year                      53,746       54,260                    --           --
Actual return on plan assets                                         8,116        1,540                    --           --
Employer contributions                                               2,068        3,814                    --           --
Benefits paid                                                       (5,246)      (5,868)                   --           --
                                                              --------------------------         --------------------------
Fair value of plan assets at end of year                            58,684       53,746                    --           --
                                                              --------------------------         --------------------------

Funded status                                                        2,500      (28,052)               (9,154)     (17,431)
Unrecognized net actuarial (gain) loss                             (17,265)       3,754                (2,293)        (289)
Unrecognized prior service cost                                         --           --                (6,762)          --
                                                              --------------------------         --------------------------
Accrued benefit cost included in other accrued expenses
      and/or non-current liabilities                             $ (14,765)   $ (24,298)            $ (18,209)    $(17,720)
                                                              ==========================         ==========================
</TABLE>


In fiscal 1999,  1998, and 1997, the health-care  cost trend rate was assumed to
decrease gradually to 5.9% by the year 2001 and remain at that level thereafter.
The effect of a 1.0% annual  increase in these  assumed  health-care  cost trend
rates would  increase the  November 27, 1999 and November 28, 1998,  accumulated
post-retirement   benefit   obligation   by  $0.7  million  and  $1.0   million,
respectively,  and the aggregate of the service and interest cost  components of
net periodic  post-retirement  benefit cost for the fiscal years ended  November
27, 1999 and November 28, 1998, by $71,000 and $62,000, respectively. The effect
of a 1.0% annual  decrease in these assumed  health-care  cost trend rates would
decrease  the   November   27,  1999  and   November   28,   1998,   accumulated
post-retirement   benefit   obligation   by  $0.7  million  and  $0.8   million,
respectively,  and the aggregate of the service and interest cost  components of
net periodic  post-retirement  benefit cost for the fiscal years ended  November
27, 1999 and November 28, 1998, by $67,000 and $57,000, respectively.

The  accumulated  benefit  obligation  was $62.1  million  and $68.4  million at
November 27, 1999 and November 28, 1998, respectively.

<TABLE>
Components of Net Periodic Benefit Cost
<CAPTION>
In thousands                                         Pension Benefits                                Other Benefits
                                     --------------------------------------------    ----------------------------------------------
                                          1999          1998           1997                1999           1998           1997
                                     --------------------------------------------    ----------------------------------------------
<S>                                     <C>           <C>           <C>                  <C>            <C>             <C>

Service cost - benefits earned
   during the period                    $ 2,752       $4,915        $ 4,190              $  411         $  701          $  636
Interest cost                             5,012        5,254          4,256                 987          1,134           1,019
Expected return on plan assets           (4,638)      (4,490)        (4,139)                 --             --              --
Amortization of prior service cost           --           --            119                (218)            --              37
Amortization of unrecognized loss            --           --             --                  --             --             (99)
                                     --------------------------------------------    ----------------------------------------------
Net periodic post-retirement
   benefit cost                         $ 3,126       $5,679        $ 4,426              $1,180         $1,835          $1,593
                                     ============================================    =============================================
</TABLE>


<PAGE>F-18

<TABLE>
Weighted Average Assumptions
<CAPTION>
In thousands                                         Pension Benefits                                Other Benefits
                                     --------------------------------------------    ----------------------------------------------
                                          1999          1998           1997                1999           1998           1997
                                     --------------------------------------------    ----------------------------------------------
<S>                                         <C>        <C>             <C>                 <C>            <C>            <C>
Discount rate                               8.00%      6.75%           7.00%               8.00%          6.75%          7.00%
Expect return on plan assets                9.50%      8.50%           8.50%                 --%            --%            --%
Rate of increase in future
   compensation levels                      2.00%(a)   5.00%           6.00%                 --%            --%            --%
Healthcare cost trend rate                    --%        --%             --%               6.30%          6.70%          7.10%
<FN>
  (a) Assumed 2.00% for 1999 and, since the pension plan was frozen as of
      June 17, 1999, no further assumptions on salary are needed.
</FN>
</TABLE>

In addition, the Company has sponsored several defined contribution plans. Under
the Payless Cashways, Inc. Employee Savings Plan, which covers substantially all
employees, the Company contributed an amount equal to a percentage of the amount
contributed  by employees  into the plan.  The  aggregate  contributions  to all
defined  contribution  plans were $1.9  million,  $2.1 million and $2.8 in 1999,
1998 and 1997, respectively.


Note H--Leases

The Company  leases  certain stores and other  facilities  under  non-cancelable
operating  leases.   Aggregate  minimum  future  rentals  under   non-cancelable
operating  leases for the next five years are:  2000 -- $13.8  million;  2001 --
$12.3  million;  2002 --  $10.2  million;  2003 --  $7.2  million;  2004 -- $5.8
million;  thereafter -- $24.0 million. Rental expense under operating leases was
$14.4  million,  $20.8  million,  and $29.3  million for 1999,  1998,  and 1997,
respectively.

During 1995, the Company  entered into an agreement  providing for the operating
lease of five stores,  including a new store that opened in 1997. Under the Plan
of  Reorganization,  the Company  acquired three of the stores and issued a note
payable to the lessor as described at Note D. Rental  payments  under this lease
varied with the level of interest  rates. To reduce the impact of changes in the
interest rates related to this lease, the Company,  during 1995, entered into an
interest rate swap  agreement,  which expired  December 1, 1999,  under which it
paid a 6-9/16%  fixed rate of  interest  quarterly,  in exchange  for  quarterly
receipt  of LIBOR on $36  million.  The fair  value of this  interest  rate swap
agreement  was  estimated  to be $0.0  million and $0.4  million at November 27,
1999, and November 28, 1998, respectively.


Note I--Reorganization Items

In connection with its Chapter 11 filing on July 21, 1997,  discussed at Note B,
reorganization  items of $25.5  million are  reflected in the 1997  statement of
operations.  Reorganization items for this period consisted of professional fees
and case  administrative  expenses of $17.6  million,  the write-off of deferred
financing costs of $2.5 million, retention bonuses of $5.7 million, and interest
income of $0.3 million.


Note J--Special Charges

Included in special  charges is a credit of $10.6  million  ($6.2  million after
tax)  recorded in the second  quarter of fiscal 1999 for a non-cash  curtailment
gain in connection with freezing the Company's  non-contributory defined benefit
pension plan; see Note G. Also included in special  charges are costs related to
store closures and asset impairment charges discussed below.

Store closing  charges of $1.5 million ($0.9 million after tax) were recorded in
the second quarter of fiscal 1999 in connection with the closing of five stores.
All five stores  were closed in the fourth  quarter.  In  addition,  the Company
recorded an  additional  $0.8  million  ($0.5  million  after tax) in the fourth
quarter of fiscal 1999 in connection with the closing of one store.  Included in
this amount is approximately $0.6 ($0.4 million after tax) million for severance
related to  approximately  20  administrative  employees at the Company's  store
support center.  In connection with these store closings,  the Company  recorded
inventory  write-downs of $3.4 million ($2.0 million after tax) and $0.5 million
($0.3 million after tax) in cost of  merchandise  sold for the second and fourth
quarters of fiscal 1999, respectively. The related store exit plans are expected
to be completed during fiscal year 2000 and the remaining  accruals are expected
to be fully utilized.


<PAGE>F-19



Historical  financial  data for the  closing of the six stores is as follows for
the fiscal years presented:

    In thousands               1999         1998       1997
                            ---------------------------------
    Net sales               $  28,138   $  46,093  $  60,780
    Net operating loss      $   3,991   $   1,783  $     562


The fiscal 1999 special charge includes:
<TABLE>
<CAPTION>
                                                                  Amount                  Amount
                                                                  Charged              Paid Through             Accrual at
       In millions                                                 1999                Nov. 27, 1999           Nov. 27, 1999
                                                              --------------------------------------------------------------
<S>                                                            <C>                      <C>                    <C>

       Severance                                               $       0.6              $      --              $      0.6
       Other costs                                                     1.7                     1.0                    0.7
                                                              ---------------------------------------------------------------
                                                               $       2.3              $      1.0             $      1.3
                                                              ===============================================================
</TABLE>


The Company recorded special charges of $5.6 million ($3.5 million after tax) in
the first quarter of fiscal 1998 for severance  costs related to the elimination
of approximately 70 administrative  employees at the Company's store support and
regional administrative  centers.  Special charges of $0.1 million ($0.1 million
after tax) and $1.0 million  ($0.6 million after tax) were recorded in the third
and fourth quarters of fiscal 1998, respectively, in connection with the closing
of three and five  stores,  respectively.  One of the eight stores was closed at
November  28,  1998,  and the other seven were  closed  during the first half of
fiscal 1999.  In  connection  with these store  closings,  the Company  recorded
inventory  write-downs of $1.3 million ($0.8 million after tax) and $3.1 million
($1.9 million after tax) in cost of merchandise sold during the third and fourth
quarters of fiscal 1998, respectively. The related store exit plans are expected
to be completed during fiscal year 2000 and the remaining  accruals are expected
to be fully utilized.

Historical  financial data for the closing of the eight stores is as follows for
the fiscal years presented:

     In thousands                  1998             1997
                              -------------------------------
     Net sales                $    60,103       $    67,809
     Net operating loss       $     4,027       $       114


The fiscal 1998 special charge includes:
<TABLE>
<CAPTION>
                                                                  Amount                  Amount
                                                                  Charged              Paid Through             Accrual at
       In millions                                                 1998                Nov. 27, 1999           Nov. 27, 1999
                                                              --------------------------------------------------------------
       <S>                                                     <C>                      <C>                    <C>
       Severance costs                                         $       5.6              $        5.6           $       --
       Other costs                                                     1.1                       0.9                  0.2
                                                              ---------------------------------------------------------------
                                                               $       6.7              $        6.5           $      0.2
                                                              ===============================================================
</TABLE>


A special  charge of $6.3 million  ($5.2  million after tax) was recorded in the
third quarter of fiscal 1997 in connection with the closing of 29 stores as part
of the  Company's  reorganization  under  Chapter  11. All 29 stores were closed
prior to November  29,  1997.  In  addition,  the Company  recorded an inventory
write-down  of $10.7  million  ($8.8  million  after  tax),  included in cost of
merchandise sold, in connection with the store closings.  The related store exit
plans were completed by November 27, 1999.

Historical financial data for the closing of the 29 stores is as follows for the
fiscal years presented:

     In thousands                       1997
                                   --------------
     Net sales                      $    209,898
     Net operating loss             $      9,153


In  connection  with the  above  store  closings,  the  Company  recorded  asset
impairment  charges  pursuant  to SFAS 121 of $4.0  million  ($2.3 after tax) in
1999,  $0.7 million ($0.4  million  after tax) in 1998 and $67.3 million  ($55.4
million  after  tax) in 1997.  These

<PAGE>F-20


impairment charges were recorded  after considering  current and expected future
operating cash flows for certain stores together  with the proceeds the Company
could expect to receive upon the sale of these assets based upon an appraisal.

During 1997,  primarily because the environment for building materials retailing
continued  to be  increasingly  competitive,  the Company  conducted a review of
underperforming  stores and  determined  that  certain  additional  assets  were
impaired,  including  assets  related to  twenty-nine  stores  which the Company
determined  to close (see  above).  These assets  included  certain real estate,
including  future store lease  obligations,  and  associated  goodwill  which is
attributable  to those assets and which was  established  in 1988 as part of the
Company's  leveraged  buyout.  Accordingly,  certain real estate carrying values
were  reduced  $28.8  million,  goodwill was reduced  $18.7  million and a $13.0
million liability for future store lease payments was recorded.

The Company will continue to review assets for  impairment,  particularly  given
the ongoing competitive environment for building materials retailing.


<PAGE>F-21



Note K--Quarterly Financial Data (unaudited)
<TABLE>
<CAPTION>
In thousands, except per share amounts
                                                                     First           Second             Third           Fourth
Fiscal Year Ended November 27, 1999                                 Quarter          Quarter           Quarter          Quarter
--------------------------------------------------------------------------------------------------------------------------------
<S>                                                             <C>               <C>              <C>               <C>
Income
    Net sales                                                   $  391,873        $  492,728       $  492,160        $  434,604
    Other income                                                       345               719              523               395
                                                                ----------------------------------------------------------------
                                                                   392,218           493,447          492,683           434,999

Costs and expenses
    Cost of merchandise sold                                       285,939           366,713          362,217           319,099
    Selling, general and administrative                            106,517           108,683          108,052            97,130
    Special charges (credits), net                                      --            (5,400)              --             1,085
    Provision for depreciation and amortization                      8,936             9,223           10,563            11,445
    Interest expense                                                 8,612             8,909            8,636             9,606
                                                                ----------------------------------------------------------------
                                                                   410,004           488,128          489,468           438,365
                                                                ----------------------------------------------------------------
                 INCOME (LOSS) BEFORE INCOME TAXES                 (17,786)            5,319            3,215            (3,366)

Federal and state income taxes                                      (7,826)            2,503            1,502            (1,390)
                                                                ----------------------------------------------------------------

           INCOME (LOSS) BEFORE EXTRAORDINARY ITEM                  (9,960)            2,816            1,713            (1,976)

Extraordinary item, net of income taxes                                 --                --               --               729
                                                                ----------------------------------------------------------------

                                 NET INCOME (LOSS)              $   (9,960)       $    2,816       $    1,713        $   (2,705)
                                                                ================================================================


Weighted average common shares outstanding                          20,000            20,000           20,000            20,000
                                                                ----------------------------------------------------------------

Income (loss) per common share
    before extraordinary item-basic                             $    (0.50)       $    0.14        $     0.09        $   (0.10)

Extraordinary item, net of income taxes                                 --                --               --             0.04
                                                                ----------------------------------------------------------------

Net income (loss) per common share-basic                        $    (0.50)       $    0.14        $     0.09        $   (0.14)
                                                                ================================================================


Weighted average common and dilutive
    common equivalent shares outstanding                            20,000            20,156           20,170            20,000
                                                                ----------------------------------------------------------------

Income (loss) per common share
    before extraordinary item-diluted                           $    (0.50)       $    0.14        $     0.09        $   (0.10)

Extraordinary item, net of income taxes                              --               --                --                0.04
                                                                ----------------------------------------------------------------

Net income (loss) per common share-diluted                      $    (0.50)       $    0.14        $     0.09        $   (0.14)
                                                                ================================================================
</TABLE>

A  lower-than-anticipated   rate  of  inflation  decreased  the  LIFO  inventory
provision,  after tax, by $0.8 million in the fourth  quarter.  A special credit
($6.2  million  after tax)  recorded  in the second  quarter  reflects a pension
benefit  curtailment  gain recorded as a result of freezing  benefits  under the
Company's  pension plan.  Special charges were recorded in the second and fourth
quarter ($3.1 million and $0.6 million,  respectively,  after tax) in connection
with store closings and the  elimination of  administrative  staff. In addition,
second  and  fourth  quarter  cost  of  merchandise   sold  reflects   inventory
write-downs  ($2.0  million  and  $0.3  million,  respectively,  after  tax)  in
connection  with  these  store  closings.  Accelerated  depreciation  on certain
leasehold  improvements  and assets related to closed stores was recorded in the
third and fourth  quarter ($0.6 million and $1.2  million,  respectively,  after
tax).  An  extraordinary  charge ($0.7  million  after tax) related to the early
extinguishment of debt was recorded in the fourth quarter.


<PAGE>F-22

<TABLE>
<CAPTION>
In thousands, except per share amounts
                                                                     First           Second             Third           Fourth
Fiscal Year Ended November 28, 1998                                 Quarter          Quarter           Quarter          Quarter
--------------------------------------------------------------------------------------------------------------------------------
<S>                                                             <C>               <C>              <C>               <C>
Income
    Net sales                                                   $  394,271        $  505,919       $  523,508        $  483,164
    Other income                                                       789               991              908               310
                                                                ----------------------------------------------------------------
                                                                   395,060           506,910          524,416           483,474

Costs and expenses
    Cost of merchandise sold                                       291,909           374,971          393,021           360,886
    Selling, general and administrative                            111,427           111,456          111,667           108,481
    Special charges                                                  5,584                --              837             1,000
    Provision for depreciation and amortization                      9,055             9,595            8,550             9,844
    Interest expense                                                10,235             9,915            8,994             8,018
                                                                ----------------------------------------------------------------
                                                                   428,210           505,937          523,069           488,229
                                                                ----------------------------------------------------------------
                 INCOME (LOSS) BEFORE INCOME TAXES                 (33,150)              973            1,347            (4,755)

Federal and state income taxes                                      (8,188)              241              332            (5,603)
                                                                --------------------------------------------------------------------


                                 NET INCOME (LOSS)              $  (24,962)       $      732       $    1,015        $      848
                                                                ================================================================

Weighted average common shares outstanding                          20,000            20,000           20,000            20,000
                                                                ----------------------------------------------------------------

Net income (loss) per common share-basic                        $    (1.25)       $     0.04       $     0.05        $     0.04
                                                                ================================================================

Weighted average common and dilutive
    common equivalent shares outstanding                            20,000            20,111           20,004            20,034
                                                                ----------------------------------------------------------------

Net income (loss) per common share-diluted                      $    (1.25)       $     0.04       $     0.05        $     0.04
                                                                ================================================================
</TABLE>

A  lower-than-anticipated   rate  of  inflation  decreased  the  LIFO  inventory
provision,  after tax, by $1.7 million in the fourth  quarter.  Special  charges
($3.5 million after tax) reflected in the first quarter consist of costs related
to  the  elimination  of  staff  at  the  Company's  headquarters  and  regional
administrative  centers.  Special  charges  were also  recorded in the third and
fourth  quarter  ($0.5  million and $0.6  million,  respectively,  after tax) in
connection  with store closings.  In addition,  third and fourth quarter cost of
merchandise sold reflect  inventory  write-downs ($0.8 million and $1.9 million,
respectively,  after tax) in connection  with these store  closings.  The fourth
quarter  income tax benefit  includes a $3.8  million tax benefit to reflect the
effect of a fourth quarter revision of the effective tax rate on the first three
quarters.



<PAGE>F-23

<TABLE>
                                            SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS

                                                            (In thousands)
<CAPTION>
                        COL. A                         COL. B                COL. C               COL. D                   COL. E
-----------------------------------------------------------------------------------------------------------------------------------
                                                     Balance at            Charged to                                    Balance at
                                                      beginning             cost and                                       end of
                      Description                     of period             expenses            Deductions                 period
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                                  <C>                   <C>                   <C>                     <C>
YEAR ENDED NOVEMBER 27, 1999:
              Reserve for Inventory Shrink
              and Obsolescence.................      $  11,892             $  21,667             $  22,150               $  11,409

              Reserves for Special Charges.....      $   1,100             $   2,235             $   1,912               $   1,513

              Reserve for Bad Debt.............      $   5,881             $   8,848             $  10,960               $   3,769

YEAR ENDED NOVEMBER 28, 1998:
              Reserve for Inventory Shrink
              and Obsolescence.................      $  15,031             $  22,667             $  25,806               $  11,892

              Reserves for Special Charges.....      $   6,876             $   6,700             $  12,476               $   1,100

              Reserve for Bad Debt.............      $   5,879             $   5,450             $   5,448               $   5,881

YEAR ENDED NOVEMBER 29, 1997:
              Reserve for Inventory Shrink
              and Obsolescence.................      $  13,604             $  21,960             $  20,533               $  15,031

              Reserves for Special Charges.....      $   7,637             $  13,437             $  14,198               $   6,876

              Reserve for Bad Debt.............      $   5,740             $   6,765             $   6,626               $   5,879
</TABLE>


<PAGE>E-1



                                   INDEX TO EXHIBITS


 2.1          First Amended Plan of Reorganization, as modified  October 9, 1997
              (incorporated  by  reference  to  Exhibit  2.1  filed  as  part of
              Payless'  Quarterly  Report  on Form  10-Q for the  quarter  ended
              August 30, 1997).

 2.2          Agreement  and  Plan of  Merger in connection   with  the Reincor-
              poration  from Iowa to  Delaware  (incorporated  by  reference  to
              Exhibit 2.2 filed as part of Payless'  Current  Report on Form 8-K
              dated December 2, 1997).

 3.1(a)       Amendment to Bylaws of the Company.

 3.1(b)       Amended and Restated Bylaws of the Company.

 3.2          Certificate of Incorporation (incorporated by reference to Exhibit
              4.1  filed as part of  Payless'  Current  Report on Form 8-K dated
              December 2, 1997).

 4.0          Long-term debt  instruments of  the Registrant in  amounts not ex-
              ceeding ten percent  (10%) of the total  assets of the  Registrant
              will be furnished to the Commission upon request.

 4.1          Loan and Security Agreement dated  November 17, 1999, by and among
              Payless and Congress Financial  Corporation  (Central),  as Lender
              and Agent for Lenders  (incorporated  by  reference to Exhibit 4.2
              filed  as part of  Payless'  Current  Report  on  Form  8-K  dated
              November 17, 1999).

 4.2(a)       Amended and  Restated  Credit  Agreement  dated  December 2, 1997,
              among Payless, the Banks listed on the signature pages thereof and
              Canadian   Imperial  Bank  of  Commerce,   New  York  Agency,   as
              Coordinating  and Collateral  Agent  (incorporated by reference to
              Exhibit  4.1(a)  filed as part of Payless'  Annual  Report on Form
              10-K for the year ended November 29, 1997).

 4.2(b)       First  amendment to Amended and Restated  Credit  Agreement  dated
              August 13, 1998, among Payless,  the Banks listed on the signature
              pages  thereof and Canadian  Imperial  Bank of Commerce,  New York
              Agency,  as Coordinating  and Collateral  Agent  (incorporated  by
              reference  to  Exhibit  4.1  filed as part of  Payless'  Quarterly
              Report on Form 10-Q for the quarter ended August 29, 1998).

 4.2(c)       Second  amendment to Amended and Restated  Credit  Agreement dated
              November  17,  1999,  among  Payless,  the  Banks  listed  on  the
              signature  pages  thereof and Canadian  Imperial Bank of Commerce,
              New  York   Agency,   as   Coordinating   and   Collateral   Agent
              (incorporated  by  reference  to  Exhibit  4.1  filed  as  part of
              Payless' Current Report on Form 8-K dated November 17, 1999).

 4.3(a)       Amended and Restated Loan Agreement dated December 2, 1997, by and
              among  Payless and UBS  Mortgage  Finance,  Inc  (incorporated  by
              reference  to  Exhibit  4.2(a)  filed as part of  Payless'  Annual
              Report on Form 10-K for the year ended November 29, 1997).

 4.3(b)       First  Amendment  to Amended and  Restated  Loan  Agreement  dated
              February 26, 1998, by and among Payless and UBS Mortgage  Finance,
              Inc  (incorporated by reference to Exhibit 4.2(d) filed as part of
              Payless'  Annual  Report on Form 10-K for the year ended  November
              28, 1998).

10.1*         Amended and Restated Payless Cashways, Inc. 1998 Omnibus Incentive
              Plan  effective  February 17, 1999  (incorporated  by reference to
              Exhibit 10.1 filed as part of Payless'  Annual Report on Form 10-K
              for the year ended November 28, 1998).

10.2*         Form of Employment Agreement between Payless and certain executive
              officers.

10.3*         Form  of  Indemnification  Agreement between  Payless and  various
              officers and directors.


<PAGE>E-2

10.4*         Payless Cashways, Inc. Store Support Center Management Bonus Plan,
              dated as of December 1999.

10.5*         Payless Cashways, Inc. Supplemental Disability Plan  (incorporated
              by  reference  to Exhibit  10.13 filed as part of Payless'  Annual
              Report on Form 10-K for the fiscal year ended November 27, 1993).

23.1          Consent of KPMG LLP.

27.1          Financial data schedule.

* Represents a management contract or a compensatory plan or arrangement.