<PAGE>   1



                                                                     EXHIBIT 2.1




                      In The United States Bankruptcy Court
                      For the Western District of Missouri


                                     )
In re                                )     Chapter 11
                                     )
PAYLESS CASHWAYS, INC.,              )     Case No.
                                     )
                       Debtor.       )

                             PLAN OF REORGANIZATION

         The  Debtor (as  hereafter  defined)  proposes  the  following  plan of
reorganization pursuant to the provisions of 11 U.S.C. Section 1101, et seq.

                                   ARTICLE I.
                                   DEFINITIONS

         The  terms  set  forth in this  Article  I shall  have  the  respective
meanings  hereinafter  set forth.  Any  capitalized  term used but not otherwise
defined  herein  shall  have  the  meaning  given  to that  term in the Code (as
hereinafter defined).

         1.1. "Administrative  Expenses" shall mean, collectively,  (a) any cost
or expense of  administration  of the  Chapter 11 Cases  allowed  under  Section
503(b) or 507(a)(1) of the Code including,  without limitation, any such allowed
item  constituting  (i) an actual  and  necessary  post-Filing  Date  expense of
preserving the Debtor's  estate,  (ii) an actual and necessary  post-Filing Date
expense of operating the businesses of the Debtor including, without limitation,
post-Filing  Date loans or other advances or extensions of credit to the Debtor,
including  amounts  advanced  to, or credited  to the account of the Debtor,  or
(iii) the amount of any  Allowed  Claims  for  reclamation  pursuant  to Section
546(c) of the Code,  and (b) and fees or charges  assessed  against the Debtor's
estate under title 28, United States Code, section 1930.

         1.2.  "Adverse  Determination"  shall  mean a ruling by the  Bankruptcy
Court that  including,  in the  distribution  under the Plan to Allowed Class 2A
Claims,  all or a specified  portion of the shares of New Payless  Common  Stock
otherwise  distributable to Allowed Class 4A Interests and/or Class 5A Interests
to the extent provided in Sections 3.4(a), 3.6 and 3.7 of the Plan would violate
applicable  provisions  of the Code and  thereby  render the Plan not capable of
being confirmed under Section 1129 of the Code.

         1.3.  "Agent" shall mean, CIBC as coordinating and collateral agent for
the DIP Facility.

         1.4.  "Allowed Amount" shall mean, with respect to a particular  Claim,
(a) the amount of a Claim that is listed in the Debtor's Schedules,  as they may
from time to time be  amended  in 

<PAGE>   2

         accordance  with Rule 1009 of the  Bankruptcy  Rules,  as not disputed,
contingent or unliquidated, if the holder of such Claim has not filed a proof of
claim with the Bankruptcy Court within the applicable period of limitation fixed
by the Bankruptcy Court pursuant to Rule 3003(c)(3) of the Bankruptcy  Rules, or
(b) if a holder of a Claim has filed a proof of claim with the Bankruptcy  Court
within  the  applicable  period  of  limitation  fixed by the  Bankruptcy  Court
pursuant to Rule  3003(c)(3) of the Bankruptcy  Rules:  (i) the amount stated in
such proof of claim if no objection  to such proof of claim has been  interposed
within the  applicable  period of  limitations  fixed by the Code or  applicable
Bankruptcy  Rules or as otherwise  fixed by the Bankruptcy  Court,  or (ii) such
amount as shall be fixed by an order of the Bankruptcy  Court which has become a
Final Order if an objection has been interposed  within the applicable period of
limitations  fixed by the Code,  applicable  Bankruptcy Rules, or the Bankruptcy
Court.  "Allowed  Amount" shall not include any interest on or fees with respect
to a Claim which have accrued after the Filing Date except with respect to Class
2 Claims to the extent (i) permitted by Section  506(b) of the Code or (ii) made
as adequate  protection  payments  under  Section  363(e) of the Code.  "Allowed
Amount" shall mean,  with respect to a particular  Interest,  (a) that number of
shares  represented by such Interest as set forth in the Debtor's stock transfer
agent's  records,  as they may be amended and updated  from time to time,  if no
objection to such Interest has been interposed  within the applicable  period of
limitations  fixed  by the  Bankruptcy  Court,  or (b)  that  number  of  shares
represented  by such  Interest  as shall be fixed by an order of the  Bankruptcy
Court which has become a Final Order,  if an objection to such Interest has been
interposed  within the applicable  period of limitations fixed by the Bankruptcy
Court.

         1.5.  "Allowed Claim" or "Allowed Class  ___________  Claim" shall mean
any such Claim for which an Allowed Amount has been determined.

         1.6.  "Allowed  Interest" or "Allowed Class  _________  Interest" shall
mean any such Interest for which an allowed Amount has been determined.

         1.7.  "Bankruptcy  Court"  shall  mean that unit of the  United  States
District  Court  for the  Western  District  of  Missouri  consisting  of  those
bankruptcy judges in regular active service in such district, or any other court
having competent jurisdiction to enter an order confirming the Plan.

         1.8.  "Bankruptcy  Rules"  shall mean the Federal  Rules of  Bankruptcy
Procedure,  as amended from time to time, as the same shall be applicable to the
Chapter 11 Case.

         1.9. "Business Day" shall mean any day except Saturday,  Sunday and any
other day on which commercial banks in New York City are authorized to close.

         1.10.  "Cash"  shall  mean cash,  cash  equivalents  and other  readily
marketable  direct  obligations of the United States of America and certificates
of deposit issued by banks.

         1.11.  "Chapter  11 Case"  shall mean the case under  chapter 11 of the
Code commenced by the Debtor on the Filing Date.

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         1.12. "CIBC" shall mean Canadian Imperial Bank of Commerce.

         1.13. "Class" shall mean a group of Claims or Interests,  consisting of
Claims or Interests which are substantially similar to each other, as classified
pursuant to the Plan.

         1.14.  "Class 2A Effective Date Payments" shall mean the payments to be
distributed  to the holders of Allowed Class 2A Claims on the Effective  Date in
accordance with the provisions of Sections 3.4(a)(i) and 3.4(a)(ii) of the Plan.
        
         1.15.  "Class  3A  Entitlement"  shall  mean a number  of shares of New
Payless Common Stock equal to (a) 19,000,000,  minus (b) the number of shares of
New Payless  Common Stock to be  distributed to the holders of the Allowed Class
2A Claims pursuant to Section 3.4(a) of the Plan (i.e., 10,800,000 shares,
subject to adjustment as provided in clauses (1), (2) and (4) of the proviso to
Section 3.4(a)(iv)), plus (c) the  number of any  additional  shares of New
Payless Common  Stock to be  distributed  to the holders of Class 3A Claims
pursuant to Sections 3.4(a), 3.6 and 3.7 of the Plan.

         1.16.  "Code" shall mean the Bankruptcy  Reform Act of 1978 as amended,
11 U.S.C.  Sections 101 et seq., as the same shall be applicable to the Chapter
11 Case.

         1.17.  "Collateral"  shall have the meaning set forth in the definition
of "New Term Notes."

         1.18. "Company" shall mean Payless Cashways, Inc., an Iowa corporation,
as reorganized pursuant to the Plan.

         1.19. "Confirmation Date" shall mean the date the Confirmation Order is
entered.

         1.20.   "Confirmation  Order"  shall  mean  an  order  entered  by  the
Bankruptcy Court confirming the Plan under Section 1129 of the Code.

         1.21. "Debtor" shall mean Payless, as debtor and debtor-in-possession.

         1.22. "Designated Collateral" shall mean (i) inventory at the 29 stores
to be closed pursuant to the Debtor's June 27, 1997  Restructuring  Presentation
(the "Business Plan"),  (ii) the real estate interests in 9 of such stores to be
closed (and the 7 properties  currently held for sale) and any related  fixtures
and equipment which presently  secure the Existing Credit Facility (iii) the tax
refund  projected  to be  received  by the  Debtor  during the Case and (iv) the
proceeds  of  the  promissory  notes  (in  the  aggregate  principal  amount  of
approximately   $1,050,000)   presently  pledged  to  the  Existing  Lenders  in
connection with prior store dispositions and which mature on December 1, 1997.

         1.23. "Designated  Consummation Date" shall mean a particular day to be
designated on or before the tenth (10th) day following the Confirmation  Date by
the Debtor,  in its judgment
   
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<PAGE>   4


reasonably  exercised after consultation with the Pre-petition Agent, the Agent,
and the  Underwriters,  which  is not more  than  thirty  (30)  days  after  the
Confirmation Date.

         1.24.  "DIP  Facility"  shall  mean that  certain  debtor-in-possession
financing   agreement   and   documents   related   thereto  (each  as  amended,
supplemented,  or modified from time to time), entered into between the Company,
CIBC, as Agent, and certain other financial institutions, authorized pursuant to
an order of the Bankruptcy Court.

         1.25. "DIP Lenders" shall mean those financial institutions  referenced
in the definition of DIP Facility.

         1.26. "Disallowed  Amount"  shall mean,  with  respect to a particular
Disputed Claim,  that amount which is equal to the difference,  if any,  between
the  Face  Amount  of  such  Disputed  Claim  and  the  Allowed  Amount  of  the
Subsequently Allowed Claim related thereto.

         1.27.  "Disallowed  Interest"  shall mean, with respect to a particular
Disputed  Interest,  that  number of  shares  equal to the  difference,  if any,
between the Face Amount of the Disputed  Interest and the Allowed  Amount of the
Subsequently Allowed Interest related thereto.

         1.28.   "Disclosure  Statement"  shall  mean  that  certain  disclosure
statement for the Debtor filed with the Bankruptcy  Court on the Filing Date, as
the same may be amended from time to time.

         1.29.  "Disputed Claim" or "Disputed [Class ________] Claim" shall mean
any Claim for which an  Allowed  Amount  has not yet been  determined,  and with
respect  to  which  an  objection  has  been  interposed  on  or  prior  to  the
Confirmation Date or such other date as may be fixed by the Bankruptcy Court and
not  subsequently  withdrawn  or  finally  resolved.  An  application,   motion,
complaint or any other legal pleading to subordinate or dismiss a Claim shall be
deemed an objection thereto.

         1.30.  "Disputed  Interest" or "Disputed  [Class  _________]  Interest"
shall mean any Interest for which an Allowed Amount has not yet been determined,
and with respect to which an objection  has been  interposed  on or prior to the
Confirmation Date or such other date as may be fixed by the Bankruptcy Court and
not  subsequently  withdrawn  or  finally  resolved.  An  application,   motion,
complaint or any other legal  pleading  seeking to subordinate an Interest shall
be deemed an objection thereto.

         1.31.  "Distribution  Date"  shall  mean  the  Effective  Date and each
subsequent date as may be chosen by the Debtor (but,  subject to Section 5.14 of
the Plan,  not more than six calendar  months after the  preceding  Distribution
Date) for the making of distributions under the Plan.

         1.32.  "Effective Date" shall mean the first Business Day:

         (a)    after the Designated Consummation Date;

         (b)    on which no stay of the Confirmation Order is in effect; and


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         (c)    on which all conditions set forth in Section 7.1 of the Plan 
                have occurred or been waived as provided in the Plan.
                
         1.33.  "Existing  Credit  Facility" shall mean (i) the Amended and
Restated Credit  Agreement,  dated as of October 3, 1996 among the Debtor,
certain banks and financial  institutions  party thereto,  CIBC, as
administrative  agent and collateral  agent, and The Bank of Nova Scotia,
NationsBank of Texas,  N.A. and Bank of America  National Trust and Savings
Association,  as co-agents and (ii) documentation with respect to cash
management obligations, interest rate swap obligations and foreign exchange
obligations owing to Existing Lenders, as each of the same may have been
subsequently amended, modified or supplemented.

         1.34.   "Existing   Lenders"   shall  mean  those   certain   financial
institutions party to the Existing Credit Facility.

         1.35.  "Existing  Prudential  Facility"  shall mean the Loan  Agreement
dated June 20, 1989 among the Debtor, Knox Home Centers, Inc., Somerville Lumber
and Supply Co., Inc. and The  Prudential  Insurance  Company of America,  as the
same may have been subsequently amended, modified or supplemented.

         1.36. "Exit Facility" shall mean a revolving credit facility  evidenced
by a credit  agreement among the Company,  CIBC, as coordinating  and collateral
agent  and  certain  financial  institutions  party  thereto,  having  the terms
described in Section XIV of the Term Sheet attached hereto as Exhibit A.

         1.37.  "Exit Lenders" shall mean those certain  financial  institutions
party to the Exit Facility.

         1.38.  "Exit Notes" shall mean the notes issued by the Company pursuant
to the Exit Facility.

         1.39. "Face Amount" shall mean, with respect to a particular Claim, (a)
if the holder of such  Claim has not filed a proof of claim with the  Bankruptcy
Court within the applicable  period of limitation  fixed by the Bankruptcy Court
pursuant to Rule  3003(c)(3) of the Bankruptcy  Rules,  the amount of such Claim
that  is  listed  in the  Debtor's  Schedules,  as not  disputed,  continent  or
unliquidated; or (b) if the holder of such Claim has filed a proof of claim with
the  Bankruptcy  Court within the applicable  period of limitation  fixed by the
Bankruptcy Court pursuant to Rule 3003(c)(3) of the Bankruptcy Rules, either (i)
the liquidated  amount,  if any,  stated in such proof of claim if the amount of
such Claim has not been  estimated by the  Bankruptcy  Court pursuant to a Final
Order, or (ii) the estimated amount thereof if the amount of such Claim has been
estimated by the Bankruptcy Court pursuant to a Final Order. "Face Amount" shall
mean, with respect to a particular Interest, the number of shares represented by
such Interest if such Interest were not disputed.

         1.40.  "Filing Date" shall mean July 21, 1997.

         1.41.  "Final Order" shall mean an order or judgment of the  Bankruptcy
Court which is not the subject of a pending appeal, petition for certiorari,  or
other  proceedings  for review,  rehearing,  or  reargument,  which has not been
reversed,  stayed,  modified or amended, and 


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respecting  which the time to appeal from or to petition for certiorari or to
seek review,  rehearing,  or reargument of such order shall have expired, as a
result of which such order shall have become final in accordance  with Rule 8002
of the Bankruptcy Rules and other applicable law.

         1.42.  "Interests"  shall mean the rights of the  holders of the issued
and  outstanding  shares  of  Old  Payless  Common  Stock  determined  as of the
Effective Date.

         1.43.  "Market  Rate"  shall  mean  such rate of  interest  as shall be
determined by the Bankruptcy Court to result in a value for the distributions to
be made  pursuant to  paragraph  3.2 of the Plan equal to the minimum  value set
forth in Section 1129(a)(9)(C) of the Code.

         1.44.  "Net Cash  Proceeds"  shall mean (a) cash  proceeds  (including,
without  limitation,  all  cash  proceeds  by  way of (i)  deferred  payment  of
principal pursuant to a note or installment receivable or otherwise, but only as
and  when  received  and  (ii)   receivables   and  other  assets   retained  as
consideration),  minus (b) reasonable and customary  brokerage  commissions  and
other  reasonable  and customary  fees and expenses  (including  reasonable  and
customary fees and expenses of counsel and investment bankers and reasonable and
customary  inventory  liquidation costs) related to the realization of such cash
proceeds,   minus  (c)  payments  made  to  retire   indebtedness   (other  than
indebtedness  outstanding  under the Existing Credit  Facility)  secured by such
assets being sold or otherwise disposed of where payment of such indebtedness is
required in connection with such sale or disposition.

         1.45. "New Payless Common Stock" shall mean the shares of common stock,
par value $0.01 per Share, authorized by the amended and restated certificate of
incorporation  of the Company,  a copy of which is annexed  hereto as Exhibit A,
which are to be  distributed  by the Company on or after the  Effective  Date to
holders of Allowed  Class 2A Claims,  Class 3A Claims,  Class 4A  Interests  and
Class  5A  Interests  as set  forth  in the  Plan.  As of  the  Effective  Date,
20,000,000 shares of New Payless Common Stock will be available for distribution
under the Plan.

         1.46.  "New  Prudential  Facility"  shall mean that certain Amended and
Restated Loan Agreement among the Company and the Prudential  Insurance  Company
of America,  in form and  substance  satisfactory  to the Debtor,  the  Required
Existing  Lenders and the Required  Exit  Lenders,  to be entered into as of the
Consummation  Date or such other  agreement as may be approved by the Bankruptcy
Court pursuant to Section 1129(b) of the Code after notice and a hearing.

         1.47. "New Prudential  Notes" shall mean the notes issued under the New
Prudential  Facility in the aggregate amount of approximately  $97,400,000 (less
any  principal  payments made during the Chapter 11 Case as a result of any sale
of Prudential  Real Estate)  having an interest rate of 9 1/4%, a final maturity
of December 31, 2003, quarterly amortization,  commencing on the last day of the
first calendar  quarter after the Effective  Date, of $2,500,000,  or such other
terms and conditions as are set forth in the New Prudential Facility.

         1.48.  "New Term Notes"  shall mean the term loan notes to be issued by
the Company  pursuant to the  Post-Consummation  Facility in an aggregate amount
equal to the sum of (i)


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<PAGE>   7
 
$273,000,000  plus (ii) the excess,  if any, of (a) $47,800,000 over (b) the Net
Cash  Proceeds  from the sale or other  liquidation,  after the Filing Date,  of
collateral  (including,  without limitation,  inventory,  income tax refunds,
pledged promissory notes and real estate) securing the Allowed Class 2A Claims,
which Net Cash Proceeds shall have been paid to any of the  holders of Allowed
Class 2A Claims on or prior to the Effective Date in reduction of their Allowed
Class 2A Claims minus (iii) the lesser  of (1)  $8,000,000  and  (2) the
excess,  if  any,  of (a)  the  amount calculated  pursuant to clause (ii)(b)
above over (b) $47,800,000.  The New Term Notes shall be secured by the same
collateral  securing the Exit Facility  (collectively,  the "Collateral"). The
New Term Notes shall bear interest at a rate per annum equal to LIBOR plus 2.5%,
shall mature on December 31, 2002 and  shall  also have the other  terms  and
conditions  as are set forth in the Post-Consummation  Facility. The rights of
the holders of the New Term Notes with respect to the Collateral  shall be
subject and  subordinate to all  obligations owing with respect to the Exit
Facility.

         1.49. "Old Payless Common Stock" shall mean all authorized,  issued and
outstanding  shares of common stock, par value $0.01 per share, of the Debtor as
of the Filing Date.

         1.50. "Old Payless  Preferred Stock" shall mean all authorized,  issued
and outstanding shares of Cumulative Preferred Stock, par value $1.00 per share,
of the Debtor as of the Filing Date.

         1.51.   "Payless  "  shall  mean  Payless   Cashways,   Inc.,  an  Iowa
corporation.

         1.52.  "Plan" shall mean this Plan of  Reorganization  and all exhibits
hereto, which are incorporated herein by reference hereto, and any amendments or
modifications hereof.

         1.53.  "Post-Consummation  Facility"  shall mean a term loan  agreement
dated as of the Effective Date to which the Company,  CIBC, as coordinating  and
collateral agent, and the Existing Lenders will be party,  pursuant to which the
New Term Notes are to be issued,  having the terms  described in Section II.B of
the Term Sheet attached hereto as Exhibit A.

         1.54.  "Prepetition" shall mean arising or accruing prior to the Filing
Date.

         1.55.   "Prepetition  Agent"  shall  mean,  CIBC  in  its  capacity  as
administrative and collateral agent under the Existing Credit Facility.

         1.56.  "Priority Status" shall mean the priority in distribution  which
is afforded to certain unsecured Claims pursuant to Section 507(a) of the Code.

         1.57.  "Priority Tax Claims" shall mean all Claims that are entitled to
priority under Section 507(a)(8) of the Code.

         1.58.  "Pro Rata" shall mean:


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<PAGE>   8

         (a)    with respect to Allowed  Claims,  the same  proportion  that the
                Allowed  Amount of a Claim of a creditor  in any Class of Claims
                bears to the sum of:

                   (i)  the  aggregate  Allowed  Amounts  of all  Claims of that
                        particular Class of Claims; plus

                   (ii) the  aggregate  Face  Amounts  of  all  Claims  of  that
                        particular  Class of Claims which are subject to dispute
                        as of the  Distribution  Date,  as reduced  from time to
                        time as and to the extent that the Disallowed Amounts of
                        such Claims are  determined  not to be allowed or to the
                        extent the amounts  thereof become  Allowed  Amounts and
                        are  thereafter  included in the  immediately  preceding
                        clause (i);

         (b)    with respect to Disputed  Claims,  the same  proportion that the
                Face  Amount of a Disputed  Claim of a creditor  in any Class of
                Claims bears to the aggregate of:

                   (i)  the  aggregate  Allowed  Amounts  of all  Claims of that
                        particular Class of Claims; plus

                   (ii) the aggregate   Face  Amounts  of  all  Claims  of  that
                        particular  Class of Claims which are subject to dispute
                        as of the  Distribution  Date,  as reduced  from time to
                        time as and to the extent that the Disallowed Amounts of
                        such Claims are  determined  not to be allowed or to the
                        extent the amounts  thereof become  Allowed  Amounts and
                        are  thereafter  included in the  immediately  preceding
                        clause (i);

         (c)    with respect to Allowed Interests,  the same proportion that the
                Allowed Interest of an interest holder in any Class of Interests
                bears to the aggregate of:

                   (i)  the aggregate  Allowed  Amounts of all Interests of that
                        particular Class of Interest; plus

                   (ii) the aggregate  Face  Amounts  of all  Interests  of that
                        particular  Class of  Interests  which  are  subject  to
                        dispute as of the  Distribution  Date,  as reduced  from
                        time to time as and to the  extent  that the  Disallowed
                        Amounts  of  such  Interests  are  determined  not to be
                        allowed  or to the  extent the  amounts  thereof  become
                        Allowed  Amounts  and  are  thereafter  included  in the
                        immediately preceding clause (i); and

         (d)    with respect to Disputed Interests, the same proportion that the
                Face Amount of a Disputed  Interest of an interest holder in any
                Class of Interests bears to the aggregate of:

                   (i)  the aggregate  Allowed  Amounts of all Interests of that
                        particular Class of Interest; plus


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<PAGE>   9

                   (ii) the  aggregate  Face  Amounts of all  Interests  of that
                        particular  Class of  Interests  which  are  subject  to
                        dispute as of the  Distribution  Date,  as reduced  from
                        time to time as and to the  extent  that the  Disallowed
                        Amounts  of  such  Interests  are  determined  not to be
                        allowed  or to the  extent the  amounts  thereof  become
                        Allowed  Amounts  and  are  thereafter  included  in the
                        immediately preceding clause (i).

         1.59.  "Prudential Real Estate" shall mean the real property subject to
those  certain  mortgages  granted  by  the  Debtor  pursuant  to  the  Existing
Prudential Facility.

         1.60.  "Required  Existing  Lenders" shall mean financial  institutions
party to the Existing Credit Facility comprising more than one half in number of
all such financial institutions and holding at least two-thirds of the aggregate
amount of the Allowed Class 2A Claims.

         1.61.  "Required Exit Lenders" shall mean Exit Lenders holding at least
two-thirds of the aggregate commitments under the Exit Facility.

         1.62.  "Schedules"  shall mean the schedules of assets and  liabilities
filed  by the  Debtor  with the  Bankruptcy  Court  as they  may be  amended  or
supplemented  from time to time in accordance  with Rule 1009 of the  Bankruptcy
Rules.

         1.63.  "Senior   Subordinated  Notes"  shall  mean  all  9-1/8%  Senior
Subordinated  Notes due April 15,  2003 issued and  outstanding  pursuant to the
Senior Subordinated Note Indenture as of the Filing Date.

         1.64.  "Senior  Subordinated  Note  Indenture"  shall mean that certain
Indenture of Trust dated April 20,  1993,  between the Debtor and the Trustee as
the same may have been subsequently amended, modified or supplemented.

         1.65.  "Subsequent  Allowance  Fraction"  shall mean, when applied to a
distribution  of  property  to be made by the Debtor  pursuant  to the Plan to a
holder  of a  particular  Subsequently  Allowed  Claim or  Subsequently  Allowed
Interest,  that fraction  having a numerator equal to the Allowed Amount of such
Subsequently Allowed Claim or Subsequently Allowed Interest, as the case may be,
and the  denominator  of which is the Face Amount of such  Subsequently  Allowed
Claim or Subsequently Allowed Interest, as the case may be.

         1.66.  "Subsequently  Allowed  Claim" shall mean any Claim for which an
Allowed Amount is fixed after the Effective Date.

         1.67. "Subsequently Allowed Interest" shall mean any Interest for which
an Allowed Amount is fixed after the Effective Date.

         1.68. "Treatment Option" shall mean the alternative methods of treating
a secured Claim in a plan of  reorganization  as provided in Section 1124 of the
Code and set forth in  Section  3.4(c) of the  Plan,  so that such  Claim is not
impaired by the terms of such plan of reorganization.


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<PAGE>   10

         1.69.  "Trustee" shall mean United States Trust Company of New York, as
trustee under the Senior Subordinated Note Indenture.

         1.70.  "Underwriters"  shall  mean CIBC Wood  Gundy  Securities  Corp.,
NationsBank,  N.A., Goldman,  Sachs Credit Partners,  L.P, and Lehman Commercial
Paper Inc.

         1.71.   "Unsecured   Creditors'  Committee"  shall  mean  the  Official
Committee of Unsecured  Creditors appointed in the Chapter 11 Case by the United
States Trustee For The Western  District of Missouri,  as the membership of such
Committee is from time to time constituted and reconstituted.

                                   ARTICLE II.

                     CLASSIFICATION OF CLAIMS AND INTERESTS

         For  purposes  of the Plan,  Claims and  Interests  are  classified  as
follows:

         2.1. "Class 1 Claims" shall consist of all  Prepetition  Claims against
the Debtor  which are  entitled to Priority  Status,  other than  Administrative
Expenses and Priority Tax Claims.

         2.2.  "Class 2A Claims"  shall mean claims  under the  Existing  Credit
Facility.

         2.3. "Class 2B Claims" shall mean claims under the Existing  Prudential
Facility.

         2.4. "Class 2C Claims" shall consist of all secured, Prepetition Claims
against the Debtor,  each determined in accordance with Sections 506(a) and 1111
of the Code, that are not Allowed Class 2A Claims or Class 2B Claims.

         2.5.  "Class 3A Claims"  shall  consist of all  unsecured,  Prepetition
Claims  against the Debtor not  entitled to Priority  Status,  including  Claims
under the Senior Subordinated Notes.

         2.6.  "Class 4A  Interests"  shall consist of all shares of Old Payless
Preferred Stock,  together with any rights of the holders thereof to any accrued
dividends.

         2.7.  "Class 5A  Interests"  shall consist of all shares of Old Payless
Common Stock.

                                  ARTICLE III.

                        TREATMENT OF CLAIMS AND INTERESTS

         3.1.   Treatment  of  Administrative   Expenses.   Each  holder  of  an
Administrative  Expense shall be paid,  in accordance  Articles IV and V hereof,
the Allowed Amount of such holder's Claim in full, in cash, at the option of the
Debtor with the consent of the Required  Existing  Lenders and the Required Exit
Lenders in their respective judgments reasonably exercised, (a) on the Effective
Date, or (b) on such other date as the  Bankruptcy  Court may fix, or (c) in the

                                      -10-
<PAGE>   11

ordinary  course of business as said Claim matures,  or (d) upon such other less
favorable terms as may be agreed upon by such holder and the Debtor.

         3.2.  Treatment of Priority  Tax Claims.  Each holder of a Priority Tax
Claim shall be paid,  consistent with Section  1129(a)(9)(C) of the Code, at the
option of the Debtor with the consent of the Required  Existing  Lenders and the
Required Exit Lenders in their respective judgments reasonably exercised, either
(a) the Allowed Amount of its Claim in full, in cash, on the Effective  Date, or
(b) 10% of its Allowed  Priority  Tax Claim,  together  with  accrued and unpaid
interest on the then  outstanding  amount of such Allowed  Priority Tax Claim at
the Market Rate, on each anniversary of the Effective Date which occurs prior to
the sixth  anniversary  of the date of assessment  of such Allowed  Priority Tax
Claim; and the balance of such Allowed Priority Tax Claim, together with accrued
and unpaid interest thereon at the Market Rate, on the sixth  anniversary of the
date of assessment of such Allowed Priority Tax Claim. The Debtor shall have the
right to prepay any  Allowed  Priority  Tax Claim,  in whole or in part,  at any
time,  without penalty and with interest  accrued and unpaid thereon to the time
of prepayment at the Market Rate.

         3.3. Treatment of Prepetition  Priority Claims.  Class 1 Claims are not
impaired.  Each holder thereof shall be paid, in accordance with Articles IV and
V hereof, the Allowed Amount of its Claim in full, in cash, at the option of the
Debtor with the consent of the Required  Existing  Lenders and the Required Exit
Lenders in their respective judgments reasonably exercised, (a) on the Effective
Date, or (b) on such other date as the  Bankruptcy  Court may fix, or (c) in the
ordinary  course of business as said Claim matures,  or (d) upon such other less
favorable terms as may be agreed upon by such holder and the Debtor.

         3.4.   Allowance and Treatment of Secured Claims

         (a)    Class 2A Claims shall be Allowed Claims,  not subject to offset,
                reduction or credit of any kind whatsoever in an amount equal to
                the sum of (i) the aggregate  principal amount outstanding under
                the  Existing  Credit  Facility of  [$417,952,703.59]  plus (ii)
                accrued and unpaid  interest and letter of credit fees and other
                fees and amounts owing (including, without limitation, cash
                management fees and overdraft repayments),  if any, at the
                non-default  contractual  rate set forth in the Existing Credit
                Facility,  plus  (iii) any  unpaid reasonable  out-of-pocket
                expenses and reasonable fees and disbursements of all  attorneys
                and other advisors  to the  Prepetition  Agent and the  Existing
                Lenders. Allowed  Class 2A Claims are impaired.  Consistent
                with Section 1124 of the Code,  each holder of Allowed  Class 2A
                Claims shall receive  in  full  satisfaction  in  respect
                thereof,   on  the Effective  Date,  in  accordance  with
                Articles IV and V hereof, such holder's allocable portion of:

                  (i) payment in full in cash in immediately  available funds of
                      all interest, fees, expenses and other amounts accrued and
                      owing to the Existing  Lenders and the  Prepetition  Agent
                      through the  Effective  Date  pursuant to or in connection
                      with the Existing Credit Facility or the Plan,  including,
                      without   limitation,   letter  of  credit  fees  and
                      other fees and amounts owing (including, without
                      limitation, cash management fees and overdraft repayments)
                      and  all reasonable  out-of-pocket  expenses  and counsel
                      and other advisory  fees and  expenses  payable  under the
                      Existing Credit Facility; and


                                      -11-
<PAGE>   12

                  (ii)payment in full in cash in immediately available funds, of
                      the Net Cash Proceeds of Designated Collateral received by
                      the Debtor  during the  Chapter 11 Case to the extent such
                      Net Cash  Proceeds  have not  theretofore  been applied to
                      reduce the amount of the Allowed Class 2A Claims; and

                  (iii) the New Term Notes; and

                  (iv)10,800,000  shares of New Payless Common Stock;  provided,
                      however,   that  (1)  the   number  of  shares   otherwise
                      distributable  to  Allowed Class 2A Claims will be
                      decreased  by a number  equal to the  quotient  of (A) the
                      excess, if any, of (I) the Net Cash Proceeds from the sale
                      or other liquidation, after the Filing Date, of collateral
                      (including,  without  limitation,  inventory,  income  tax
                      refunds, pledged promissory notes and real  estate)
                      securing  the Allowed  Class 2A Claims,  which proceeds
                      shall have been paid to any of the holders  of  Allowed
                      Class 2A  Claims  on or prior to the Effective  Date in
                      reduction  of their  Allowed  Class 2A Claims,  over (II)
                      $55,800,000,  divided by (B)  $_______ [assumed per share
                      stock value,  to be specified  prior to the hearing on
                      confirmation  of the Plan];  (2) the number of shares
                      otherwise distributable to Allowed Class 2A  Claims  will
                      be  decreased  by a  number  equal to the quotient  of (A)
                      the excess,  if any, of (I)  $420,000,000 over (II) the
                      aggregate  amount of the  Allowed  Class 2A Claims
                      (including the face amount of any letters of credit
                      outstanding    under   the   Existing   Credit   Facility)
                      outstanding  on the Filing  Date  divided  by (B)  $______
                      [assumed per share stock value,  to be specified  prior to
                      the hearing on confirmation  of the Plan];  (3) 460,000 of
                      such shares shall be  distributed to the Exit Lenders on a
                      pro  rata  basis   determined  in  accordance  with  their
                      respective Exit Facility commitments on the Effective
                      Date, and such  distribution  shall  reduce the number of
                      shares received by each holder of an Allowed Class 2A
                      Claim on an allocable basis; and (4) in the event that
                      Class 3A, Class 4A or Class 5A  rejects  the  Plan  and to
                      the  extent  no Adverse   Determination   is   made  on
                      or   before   the Confirmation  Date,  there shall be
                      added to the number of shares of New Payless Common Stock
                      otherwise distributable to Allowed Class 2A Claims under
                      this clause (ii) the number of shares of such Stock
                      otherwise distributable to Allowed Class 4A Interests
                      and/or Class 5A Interests to the extent provided in
                      Sections 3.6 and 3.7 of the Plan.

         (b)    Class 2B Claims are  impaired.  Consistent  with Section 1124
                of the Code,  each holder of an Allowed Class 2B Claim shall
                receive in full satisfaction in respect thereof, on the
                Effective Date, in accordance with Articles IV and V hereof,
                such holder's Pro Rata share of New Prudential Notes.


                                      -12-
<PAGE>   13

         (c)    Class 2C Claims are not impaired.  Consistent  with Section 1124
                of the Code,  the holder of each  Allowed  Class 2C Claim  shall
                receive  treatment on the Effective  Date,  in  accordance  with
                Article IV and V hereof,  at the  option of the Debtor  with the
                consent of the Required  Existing  Lenders and the Required Exit
                Lenders in their respective judgments reasonably  exercised,  of
                one of the following three types:

                  (i) the Debtor shall execute a written undertaking in favor of
                      the  holder of such  Class 2C Claim,  whereby  the  Debtor
                      assumes  such Claim and  leaves  unaltered  such  holder's
                      legal,  equitable and  contractual  rights with respect to
                      such Claim; or

                  (ii)notwithstanding  any  contractual  provision or applicable
                      law that  entitles  the  holder of such  Class 2C Claim to
                      demand or receive  accelerated payment of such Claim after
                      the occurrence of a default, the Debtor shall (1) cure any
                      such  default  that  occurred  before or after the  Filing
                      Date,  other than a default of a kind specified in Section
                      365(b)(2) of the Code,  (2) reinstate the maturity of such
                      Claim as such maturity  existed  before such default,  (3)
                      compensate  the  holder  of such  Claim  for  any  damages
                      incurred  as a result of any  reasonable  reliance by such
                      holder on such  contractual  provision or such  applicable
                      law,  and (4)  execute a written  undertaking  in favor of
                      such  holder,  whereby the Debtor  assumes such Claim and,
                      except as  permitted  in clauses  (1), (2) and (3) hereof,
                      does  not   otherwise   alter  the  legal,   equitable  or
                      contractual  rights of such  holder  with  respect to such
                      Claim; or

                  (iii) the Debtor  shall pay the holder  thereof  Cash equal to
                      the Allowed Amount of such holder's Class 2C Claim.

         (d)    Notwithstanding the foregoing, the holder of a Class 2B Claim or
                a Class 2C Claim may receive such other less favorable treatment
                as may be agreed upon by such holder and the Debtor.

         3.5.  Treatment  of  general  unsecured  Claims.  Class 3A  Claims  are
impaired.  Each holder of an Allowed Class 3A Claim shall receive, in accordance
with Articles IV and V hereof,  New Payless  Common Stock equal to such holder's
Pro Rata portion of the Class 3A Entitlement.

         3.6.  Treatment of Old Payless Preferred Stock.  Class 4A Interests are
impaired.  Each holder of an Allowed Class 4A Interest shall, in accordance with
Articles IV and V hereof,  receive its Pro Rata share of 3% of all the shares of
New  Payless  Common  Stock to be issued  pursuant  to the Plan  (i.e.,  600,000
shares); provided, however, that the percentage of such New Payless Common Stock
to be distributed  to holders of Class 4A Interests  shall be (i) increased from
2% to 5% in the event of a rejection of the Plan by Class 5A and the  acceptance
of the Plan by Class 4A and  Class  3A and  (ii)  decreased  to no  distribution
whatsoever  in the event of a rejection  of the Plan by Class 4A or Class 3A, in
which  event all of the  shares of New  Payless

                                      -13-
<PAGE>   14

Common Stock otherwise to be distributed to Class 4A Interest  holders and Class
5A Interest holders shall instead be distributed to holders of (1) Allowed Class
2A Claims to the  extent an Adverse  Determination  is not made on or before the
Confirmation  Date,  or (2)  Allowed  Class 3A Claims to the  extent an  Adverse
Determination  is made on or  before  the  Confirmation  Date,  as  provided  in
Sections  3.4(a) and 3.5 of the Plan.  Holders of Class 4A  Interests  shall not
retain or receive any  additional  property  for or on account of their Class 4A
Interests.

         3.7.  Treatment of Old Payless  Common  Stock.  Class 5A Interests  are
impaired.  Each holder of an Allowed Class 5A Interest shall, in accordance with
Articles IV and V hereof,  receive its Pro Rata share of 2% of all the shares of
New  Payless  Common  Stock to be issued  pursuant  to the Plan  (i.e.,  400,000
shares); provided, however, that the percentage of such New Payless Common Stock
to be  distributed  to holders of Class 5A  interests  shall be  decreased to no
distribution  whatsoever  upon  rejection  of the Plan by Class 5A,  Class 4A or
Class 3A, in which event all of the shares of New Payless Common Stock otherwise
to be distributed  to Class 5A Interest  holders shall instead be distributed to
(i)  holders of Allowed  Class 4A  Interests,  if Class 4A and Class 3A votes to
accept the Plan,  as provided in Section 3.6 of the Plan, or (ii) holders of (1)
Allowed Class 2A Claims to the extent an Adverse Determination is not made on or
before the  Confirmation  Date,  or (2) Allowed Class 3A Claims to the extent an
Adverse Determination is made on or before the Confirmation Date, if Class 4A or
Class 3A votes to reject the Plan, as provided in Sections 3.4(a) and 3.5 of the
Plan.  Holders of Class 5A Interests  shall not retain or receive any additional
property for or on account of their Class 5A Interests.

         3.8.  Treatment  of Stock  Options.  Any stock  option  relating to Old
Payless  Preferred  Stock or Old Payless Common Stock which is  outstanding  and
unexercised  on the Filing Date may be  exercised at any time on or prior to the
Consummation  Date, and immediately after the Consummation  Date, all such stock
options  shall be deemed to have been  rejected and shall be of no further force
or effect.

         3.9.  Changes in the Treatment of any Claims or Interests.  Any changes
or other  modifications to the treatment of any claim or interest under the Plan
must be acceptable to the Debtor, the Required Existing Lenders and the Required
Exit Lenders in their respective judgments reasonably exercised.

                                   ARTICLE IV.

                       DISTRIBUTION OF PROPERTY TO HOLDERS
                     OF ALLOWED CLAIMS AND ALLOWED INTERESTS

         4.1.  Distributions to holders of Administrative  Expenses and Priority
Tax Claims.  The Debtor  shall  distribute  to each holder of an  Administrative
Expense or a Priority Tax Claim for which an Allowed Amount has been  determined
as of the  Effective  Date,  an amount,  in cash,  equal to one hundred  percent
(100%) of the Allowed Amount of such holder's Claim,  unless such holder and the
Debtor have otherwise agreed on less favorable treatment of such Claim (in which
case such  holder  shall be paid in  accordance  with such  agreement),  and, in
either case, at such time as the Debtor elects pursuant to Section 3.1 or 3.2 of
the Plan.


                                      -14-
<PAGE>   15

         4.2.  Distributions  to  holders of Class 1 Claims.  The  Debtor  shall
distribute  to each  holder of a Class 1 Claim for which an  Allowed  Amount has
been  determined as of the  Effective  Date,  an amount,  in cash,  equal to one
hundred percent (100%) of the Allowed Amount of such holder's Claim, unless such
holder and the Debtor have otherwise agreed on less favorable  treatment of such
Claim  (in  which  case  such  holder  shall  be paid in  accordance  with  such
agreement),  and, in either case, at such time as the Debtor elects  pursuant to
Section 3.3 of the Plan.

         4.3.   Distributions to holders of Class 2 Claims: Secured Claims.

         (a)    Class 2A. The provisions of this Section 4.3(a) shall apply only
                to Allowed Class 2A Claims.  On the Effective  Date,  the Debtor
                shall distribute to each holder of a Allowed Class 2A Claim such
                holders'  allocable  portion (rounded in accordance with Section
                5.8 of the Plan) of the Class 2A Effective  Date  Payments,  New
                Term Notes and New Payless  Common  Stock to be  distributed  in
                accordance with the provisions of Section 3.4(a) of the Plan.

         (b)    Class 2B. The provisions of this Section 4.3(b) shall apply only
                to Class 2B Claims.  On the  Effective  Date,  the Debtor  shall
                distribute  to each  holder  of a Class  2B Claim  for  which an
                Allowed  Amount has been  determined as of the  Effective  Date,
                such holder's Pro Rata share of the New  Prudential  Notes to be
                distributed in accordance  with the provisions of Section 3.4(b)
                of the Plan.

         (c)    Class 2C. The provisions of each of the following subsections of
                this Section 4.3(c) shall apply only to distributions  made with
                respect to Class 2C Claims:

                  (i) Election of option. On or prior to the Effective Date, the
                      Debtor  shall  notify the holder of each Class 2C Claim in
                      writing as to the  Treatment  Option (each of which is set
                      forth in Section  3.4(c) of the Plan) which the Debtor has
                      elected in  accordance  with the  procedures  set forth in
                      Section 3.4(c) of the Plan.

                  (ii)Determination  of  amounts  due.  A list of all  Class  2C
                      Claims is contained in the Debtor's Schedules. The failure
                      of a holder of a Class 2C Claim to file an objection  with
                      the Bankruptcy  Court,  prior to the Confirmation  Date or
                      such other date as the  Bankruptcy  Court may fix,  to the
                      amounts set forth in the Debtor's  Schedules  with respect
                      to such  holder's  Class 2C Claim,  shall forever bar such
                      holder from  asserting  any  additional  or other  amounts
                      against the Debtor with  respect to such Claim.  In making
                      whatever election they deem appropriate in accordance with
                      Section  3.4(c) of the Plan,  the Debtor shall be entitled
                      to rely solely upon the amounts set forth in the  Debtor's
                      Schedules,  unless a timely  objection has been filed with
                      respect thereto.


                                      -15-
<PAGE>   16

                 (iii)Treatment  of Class 2C Claims  under  Section  3.4(c)(i)
                      election.  In the event the Debtor  elects,  in accordance
                      with  Section  3.4(c)  of the Plan to  treat a  particular
                      Class 2C Claim in accordance with Section 3.4(c)(i) of the
                      Plan, on the Effective  Date,  the Debtor shall execute an
                      undertaking  binding  it to repay  such  Class 2C Claim in
                      full,  in  accordance  with  the  tenor  and  terms of the
                      agreement  underlying  such  Class 2C Claim,  and  without
                      altering the legal,  equitable and  contractual  rights to
                      which such  Class 2C Claim  entitles  the holder  thereof,
                      including,  without  limitation,  the  retention  by  such
                      holder of the property of the Debtor securing such Claim.


                     (iv)Treatment  of  Class  2C Claim  under  Section 
                     3.4(c)(ii) election.  In the event the Debtor  elects,  in
                     accordance with  Section  3.4(c)  of the Plan to  treat a 
                     particular Class 2C Claim in  accordance  with Section 
                     3.4(c)(ii) of the Plan, on the Effective  Date (1) the
                     Debtor shall cure any defaults with respect to such Claim
                     by making  payment to the  holder  of such  Class 2C Claim
                     of an  amount,  in cash,  equal  to the  Allowed  Amount 
                     due in  respect  of defaults,  and (2) the Debtor shall
                     execute an undertaking binding  it to repay  such  Class 
                     2C  Claim  in full,  in accordance  with the  tenor  and 
                     terms  of the  agreement underlying  such  Class  2C 
                     Claim,   without  (except  as permitted by Section 1124(2)
                     of the Code) altering the legal, equitable  and 
                     contractual  rights to which such Class 2C Claim  entitles 
                     the holder  thereof, includin,  without limitation,  the 
                     retention by such holder of the property of the Debtor 
                     securing  such Claim.  The execution by the Debtor of such
                     undertaking shall  automatically  reinstate the  maturity 
                     of such  Class 2C  Claim  as such  maturity existed 
                     immediately before occurrence of defaults subject to cure 
                     with  respect  to such  Class  2C  Claim  and any  
                     acceleration resulting therefrom.                        

                  (v) Treatment  of Class 2C Claims  under  Section  3.4(c)(iii)
                      election.  In the event the Debtor  elects,  in accordance
                      with  Section  3.4(c)  of the Plan to  treat a  particular
                      Class 2C Claim in accordance  with Section  3.4(c)(iii) of
                      the  Plan,  on  the  Effective   Date,  the  Debtor  shall
                      distribute to each holder of a Class 2C Claim for which an
                      Allowed  Amount has been  determined  as of the  Effective
                      Date,  an amount,  in cash,  equal to one hundred  percent
                      (100%) of the  Allowed  Amount of such  holder's  Class 2C
                      Claim,  unless less  favorable  treatment of such Claim is
                      otherwise  agreed upon by such  holder and the Debtor,  in
                      which case such holder  shall be paid in  accordance  with
                      such agreement.

         4.4.  Distributions  to holders of Class 3A Claims;  general  unsecured
Claims. On the Effective Date, the Debtor shall distribute,  to each holder of a
Class 3A Claim  for  which  an  Allowed  Amount  has been  determined  as of the
Effective Date, such holder's Pro Rata share



                                      -16-
<PAGE>   17

(rounded in accordance  with Section 5.8 of the Plan) of the New Payless  Common
Stock to be distributed in accordance  with the provisions of Section 3.5 of the
Plan.

         4.5.  Distributions  to  holders  of Class 4A  Interests;  Old  Payless
Preferred  Stock.  On the Effective  Date,  the Debtor shall  distribute to each
holder of a Class 4A Interest for which an Allowed Amount has been determined as
of the Effective  Date, such holder's Pro Rata share (rounded in accordance with
Section  5.8 of the  Plan)  of the New  Payless  Common  Stock,  if  any,  to be
distributed in accordance with the provisions of Section 3.6 of the Plan.

         4.6. Distributions to holders of Class 5A Interests; Old Payless Common
Stock.  On the Effective  Date, the Debtor shall  distribute to each holder of a
Class 5A  Interest  for which an Allowed  Amount has been  determined  as of the
Effective Date, such holder's Pro Rata share (rounded in accordance with Section
5.8 of the Plan) of the New Payless  Common Stock,  if any, to be distributed in
accordance with the provisions of Section 3.7 of the Plan.

         4.7. Stock Options. Any stock options referred to in Section 3.8 of the
Plan that have not been  exercised on or before the  Consummation  Date shall be
deemed  to have  been  rejected  and  shall be of no  further  force  or  effect
immediately after the Consummation Date.

         4.8.  Record Date.  For the purpose of  establishing  the  ownership of
Claims and  Interests  so as to determine  to whom  distributions  shall be made
under the Plan, the Debtor shall establish a record date therefor,  which record
date  shall  either be  approved  by the  Prepetition  Agent  and the  Unsecured
Creditors' Committee or by a Final Order.

                                   ARTICLE V.

                  DISPUTED CLAIMS, DISPUTED INTERESTS, RESERVES
                    AND MISCELLANEOUS DISTRIBUTION PROVISIONS

         5.1.  Objections.  An objection to the allowance of a Claim or Interest
shall be in writing and may be filed with the Bankruptcy  Court by the Debtor or
by any other  party in  interest at any time on or before the later of (x) sixty
days after the Confirmation  Date, or (y) such other time period as may be fixed
by the Bankruptcy Court.

         5.2. Amendment of Claims. A Claim may be amended prior to the Effective
Date only as  agreed  upon by the  Debtor  and the  holder  of such  Claim or as
otherwise  permitted by the  Bankruptcy  Court and Bankruptcy  Rules.  After the
Effective  Date,  a Claim may be amended to decrease,  but not to increase,  the
Face Amount thereof.

         5.3.  Reserves  for  Disputed  Claims and  Disputed  Interests.  On the
Effective Date, unless the Bankruptcy Court otherwise  agrees,  the Debtor shall
establish a reserve account for the account of the holders of Disputed Claims or
Disputed  Interests,  and shall from time to time on or after the Effective Date
put into such reserve account that property (Cash and/or securities) which would
otherwise be  distributable  to such holders on or after the Effective Date were
such  Disputed  Claims or  Disputed  Interests  to be Allowed  Claims or Allowed
Interests  respectively, 


                                      -17-

<PAGE>   18

on the Effective Date or on such later dates on which such  distributions  would
otherwise  be made,  or such other  property  (Cash  and/or  securities)  as the
holders of such Disputed  Claims or Disputed  Interests and the Debtor may agree
upon.  The Debtor  reserves the right to seek an order of the  Bankruptcy  Court
estimating  the  amount  of any  Disputed  Claim or  Disputed  Interest  for the
purposes of making  distributions into the reserve account established  pursuant
to this Section  5.3.  The property so reserved for the holder of such  Disputed
Claims or Disputed Interests shall be distributed to the relevant holders,  only
to the extent such Disputed Claims or Disputed  Interests are allowed,  and only
after such Disputed Claims become  Subsequently  Allowed Claims or such Disputed
Interests  become  Subsequently  Allowed  Interests.  To the extent  interest is
earned on reserved Cash, such interest shall be held by the Debtor as additional
reserved Cash for the account of the holder for whom such reserved Cash is held;
reserved Cash shall be distributed to the holder of a Subsequently Allowed Claim
in accordance  with Section 5.5 of the Plan. To the extent a permitted  dividend
payment is  received  for or on account of a reserved  security,  such  dividend
payment  shall be held by the Debtor as  additional  reserved  property  for the
account of the  holder for whom such  reserved  security  is held,  and shall be
distributed  to such holder to the extent such  holder  becomes  entitled to the
reserved security with respect to which the dividend payment was received.


         5.4.  Investment of reserves.  Except as otherwise provided in an order
of the Bankruptcy  Court,  the Debtor shall deposit or invest all Cash held from
time to time in reserve consistent  with Section 345 of the Code or as otherwise
permitted by an order of the  Bankruptcy  Court dated as of the Filing Date,  in
each case consistent  with the DIP Facility,  giving due regard for the Debtor's
likely need for such monies to satisfy Subsequently Allowed Claims.

         5.5.  Distributions  to  holders  of  Subsequently  Allowed  Claims  or
Subsequently  Allowed Interests.  Unless another date is agreed on by the Debtor
and the  holder  of a  particular  Subsequently  Allowed  Claim or  Subsequently
Allowed  Interest,  the Debtor shall, on the later of the Effective Date and the
tenth (10th) day after the Allowed Amount of such theretofore  Disputed Claim or
Disputed Interest is determined,  distribute to such holder with respect to such
Subsequently  Allowed Claim or  Subsequently  Allowed  Interest (as the case may
be):

         (a)   Distribution  of cash. To the extent such holder is entitled to a
               distribution of Cash, that amount, in Cash, from the Cash held in
               reserve for such holder with respect to such theretofore Disputed
               Claim and, to the extent such reserve is  insufficient,  from any
               other source of Cash otherwise available to the Debtor,  equal to
               that  amount of Cash which  would have been  distributed  to such
               holder on the  Effective  Date (or on such other date or dates of
               distribution  as  provided  in  Article  III) had  such  holder's
               Subsequently Allowed Claim been an Allowed Claim on the Effective
               Date or on any such later date plus interest  thereon  calculated
               at the  average  rate of interest  actually  earned by the Debtor
               from time to time (net of any  costs of  investment)  on all Cash
               reserved  pursuant to Section 5.4 of the Plan from the  Effective
               Date (or  from  such  other  date or  dates  of  distribution  as
               provided  in  Article  III)  through  the date on or about  which
               distribution is made to such holder; and


                                      -18-

<PAGE>   19

         (b)   Distribution  of New  Payless  Common  Stock.  To the extent such
               holder is entitled to a distribution of New Payless Common Stock,
               from the New Payless Common Stock held in reserve with respect to
               such  theretofore  Disputed  Claims or Disputed  Interests,  that
               number of shares (rounded in accordance with paragraph 5.8 of the
               Plan) of New Payless Common Stock reserved equal to the number of
               shares  allocable  to such holder based on the Face Amount of its
               Claim  or  Interest   multiplied  by  the  Subsequent   Allowance
               Fraction.

Except as hereinabove  provided,  the holder of a Subsequently  Allowed Claim or
Subsequently  Allowed  Interest  shall not be  entitled  to any  interest on the
Allowed Amount of its Claim or Interest, regardless of when distribution thereon
is made to or received by such holder.

         5.6. Fluctuation in value of securities. The market value of securities
held in  reserve  for  distribution  by the Debtor is likely to  fluctuate;  the
Debtor does not represent or warrant that the value of any such  securities will
not decline after the Effective  Date (or after such other date of  distribution
as  provided  in  Article  III) or  otherwise  assume any risk of loss which the
holder of a  Subsequently  Allowed Claim or  Subsequently  Allowed  Interest may
suffer  by  reason  of any  decline  in value  of a  reserved  security  pending
determination  of the Allowed Amount of a Disputed  Claim or Disputed  Interest.
Any  appreciation or depreciation in the value of any reserved  securities shall
be borne by the party to whom such security is ultimately distributed.

         5.7. Excess reserves; Subsequent Distributions.  As each Disputed Claim
becomes a  Subsequently  Allowed  Claim,  the Debtor shall  become  obligated to
distribute on the next Distribution Date to the holders of Allowed Claims of the
Class that would have been  entitled to receive such  property had such Disputed
Claim  never  been  a  Disputed  Claim,  all  property  reserved  for,  but  not
distributed  to,  the  holder  of such  Subsequently  Allowed  Claim  (including
interest,  if any earned thereon) as a consequence of the Allowed Amount of such
Claim having been fixed at less than the Face Amount thereof.

         5.8. Rounding; Fractional Shares. Whenever any payment of a fraction of
a cent in Cash would otherwise be called for, the actual payment shall reflect a
rounding of such  fraction to the nearest whole cent  (rounding  down in case of
fractions of .5 or less).  Whenever  any  delivery of a fractional  share of New
Payless Common Stock shall  otherwise be called for, no such  fractional  shares
shall be so delivered,  but rather the  provisions of paragraph 5.13 of the Plan
shall be applicable.

         5.9.  Unclaimed  Property.  The  Debtor  shall  make  distributions  of
property to holders of Claims and Interests at those times and in the manner set
forth in the Plan.  Subject to the  provision of paragraph  5.16 of the Plan, in
the event that any  distribution of property  remains  unclaimed for a period of
two years (or if said second  anniversary  is not a Business  Day, then the next
Business  Day after said second  anniversary)  after it has been  delivered  (or
after  such  delivery  has  been  attempted)  or  otherwise  made  available  in
accordance with the Plan to the holder entitled thereto, such unclaimed property
shall, on the next Business Day after such second  anniversary,  be forfeited by
such holder,  whereupon all such unclaimed  property shall be distributed on the
next  Distribution Date to the holders of Allowed Claims or Allowed Interests of
the Class


                                      -19-
 
<PAGE>   20

that  would  have  been  entitled  to  receive  such  property  had such  holder
theretofore entitled thereto never been such a holder.

         5.10.  Transmittal of distributed  property and notices.  Except as may
otherwise  be agreed to by the Debtor and the  holder of a  particular  Claim or
Interest,  any  property or notice to which such holder  shall  become  entitled
under the provisions of this Plan,  shall be delivered to such holder by regular
mail,  postage  prepaid,  in an envelope  addressed  to such holder as he or his
authorized agent may direct in a request filed, on or before the Effective Date,
with the Court (or filed, after the Effective Date with the Company),  but if no
such request is filed, to the address shown in the Debtor's Schedules,  or, if a
different address is stated in a proof of claim duly filed, to such address.  In
all cases where  delivery or  distribution  is  effectuated by mail, the date of
delivery or  distribution  shall be the date of mailing.  Property  delivered in
accordance with this paragraph will be deemed delivered to the holder regardless
of whether such  property is actually  received by such holder.  Notwithstanding
any  provision of the Plan to the  contrary,  any payment or other  distribution
which the Debtor is required,  by this Plan, to make to the holder of an Allowed
Claim on the Distribution Date or on any other date, shall be deemed timely made
if made on the  Distribution  Date or on such other date, as the case may be, or
within three (3) Business Days thereafter;  however,  any interest  calculations
required to be made,  shall  continue to be made only  through the  Distribution
Date or such other date,  as the case may be.  Notwithstanding  the foregoing or
any other provision of the Plan,  Class 2A Effective Date Payments shall be made
by wire transfer on the Effective  Date without  offset,  reduction or credit of
any kind whatsoever.

         5.11. Full and final satisfaction. All payments and distributions under
this  Plan  shall be in full and final  satisfaction,  settlement,  release  and
discharge of all Claims and Interests.

         5.12.  Allocation of distribution  with respect to certain Claims.  All
payments  and  distributions  made under this Plan with  respect to a particular
Claim  shall be  allocated  first to the  principal  and then to the accrued and
unpaid  interest  components  of the  Allowed  Amount of such  Claim;  provided,
however,  that this Section 5.12 shall not be  applicable  to Class 1, Class 2A,
Class 2B or Class 2C.

         5.13. Fractional Shares and De Minimis Distributions. Whenever the Plan
would  require  the  distribution  to any  holder  of a Claim or  Interest  of a
fractional share of New Payless Common Stock, the fraction will not be issued to
the holder.  Instead, on the 180th day after the Effective Date, the Debtor will
pay to the  holder  Cash equal to the value of the  fractional  share the holder
would  otherwise  receive.  The  value of each  fraction  shall be  computed  by
multiplying  the  fraction by the  average of the closing  prices of New Payless
Common Stock on the New York Stock Exchange (or, if the New Payless Common Stock
is not listed on the New York Stock Exchange,  such other listing for such Stock
as is otherwise  obtained in  accordance  with Section 12.4 of the Plan) for the
period of twenty  trading  days  ending on or  immediately  before the 170th day
after the Effective  Date.  Notwithstanding  any other provision of the Plan, no
distribution of less than $5 shall be made pursuant to this Section 5.13.



                                      -20-
<PAGE>   21

         5.14. De Minimis  Distributions.  Notwithstanding  any provision of the
Plan otherwise  requiring that a distribution be made of Cash and/or  securities
on any Distribution  Date, if the Company  determines that the amount of Cash or
quantity of securities required to be so distributed does not warrant (given the
anticipated  time and expenses to be incurred to  accomplish  the  distribution)
making such  distribution,  the Cash and/or securities  otherwise  available for
distribution shall be held by the Company and shall be added to the distribution
to be made on the next Distribution Date.

         5.15.  Cramdown.  In the event any Class of Claims  votes  against  the
Plan,  and such Plan is not revoked or withdrawn in accordance with Section 14.7
of  the  Plan,  the  terms of this Plan may be modified or amended by the Debtor
with  the consent of the Required Existing Lenders and the Required Exit Lenders
in  their  respective  judgments reasonably exercised to the extent necessary to
effect  a  "cramdown"  on  such  dissenting  Class.  The  Debtor  may  make such
modifications   or   amendments   to  this  Plan  with  such  consent  and  such
modifications  or  amendments  shall  be  filed  with  the  Court  and served on
all  parties  in  interest  entitled  to  receive  notice  of the hearing on the
confirmation of the Plan at least 10 days prior to such hearing.

         5.16. Surrender of Outstanding Securities.

         (a)   Except  as   otherwise   provided   herein,   each  holder  of  a
               certificated  security  evidencing an Allowed Interest (including
               Class 4A and Class 5A) shall surrender such certificated security
               to the Debtor or the Company  with a duly  executed  letter of
               transmittal.  No distribution  hereunder  shall  be  made to or
               on  behalf  of any holder  of such  Interest  unless  and  until
               such  certificated security is received or the  nonavailability
               of such certificated security is established to the  satisfaction
               of the Debtor or the Company.  The Debtor or the Company may
               reasonably require security and/or indemnity from the purported
               holder  of  such  certificated  security  to  hold  it harmless
               in  respect  of  such  certificated  security  and  any
               distributions made in respect thereof.

         (b)   Each holder of an existing debt security  (including  the holders
               of Class 2B Claims and the  holders of Class 3A Claims in respect
               of the Senior  Subordinated  Notes, but not including the holders
               of  Allowed   Class  2A  Claims)   will   surrender   instruments
               representing such existing debt security held by it to the Debtor
               or the Company,  as applicable in exchange for the  distributions
               to be made to such holders under the Plan. No distribution  shall
               be made to any holder of such an existing  debt security that has
               not so surrendered such instruments held by it, subject,  however
               to section 5.16(c).

         (c)   Any holder of a Claim based on an existing  debt  security  which
               has been lost, stolen,  mutilated, or destroyed shall, in lieu of
               surrendering  such  existing  debt  security  as provided in this
               paragraph,  deliver to the  Debtor or the  Company  (i)  evidence
               satisfactory  to  the  Debtor  or  the Company  of the  loss,
               theft, mutilation or destruction of such existing debt security
               and (ii) such security or indemnity as may be  reasonably
               required by the Debtor or the Company to save it harmless  with
               respect  thereto. Upon  compliance  with this  subparagraph  by a
               holder of a Claim based on an existing 


                                      -21-
<PAGE>   22

               debt  security,  such holder shall,  for all purposes  under this
               Plan, be deemed to have surrendered such existing debt security.

         (d)    Any  holder  of an  existing  debt  security  who shall not have
                surrendered  or  be  deemed  to  have  surrendered   instruments
                representing  its existing debt security  within two years after
                the Effective Date shall receive no  distributions on such claim
                under this Plan and shall be forever  barred from  asserting any
                claim thereon.

         (e)    At any time after the  initial  distribution  to the  holders of
                existing debt  securities  contemplated by the Plan, the Company
                shall  hold the New  Payless  Common  Stock  not so  distributed
                because  the  holder  of  an  existing  debt  security  has  not
                surrendered  to the  Debtor or the  Company  its  instrument  or
                certificate  representing its existing debt security.  Until the
                second year after the  Effective  Date,  any property so held by
                the Company  will be held in trust for the benefit of holders of
                existing debt securities entitled to receive such property.

         5.17. Disputed Payments.  If any dispute arises as to the identity of a
holder  of an  Allowed  Claim  or an  Allowed  Interest  who is to  receive  any
distribution,  the  Company  may, in lieu of making  such  distribution  to such
person,  make such  distribution  into an escrow  account until the  disposition
thereof  shall be  determined by the  Bankruptcy  Court or by written  agreement
among the interested parties to such dispute.

         5.18.  Withholding  Taxes.  Any federal or state  withholding  taxes or
other amounts required to be withheld under any applicable law shall be deducted
and withheld from any distributions hereunder.

         5.19.  Voting of Certain  Securities.  New Payless Common Stock that is
unclaimed or is property held in Disputed  Claims reserves shall be voted at any
meeting of the  stockholders  of the  Company in  proportion  to the vote of the
publicly held shares of New Payless Common Stock voted at any such meeting.

         5.20.  Claims  Incurred After the  Confirmation  Date.  Claims incurred
after the date and time of entry of the Confirmation  Order shall not be subject
to  application or proof of claim and may be paid by the Company in the ordinary
course of business and without further Bankruptcy Court approval.

                                   ARTICLE VI.

                         MEANS OF IMPLEMENTATION OF PLAN

6.1. On the Effective Date, the Company's  certificate of incorporation shall be
amended to  authorize  the  issuance  of shares of New  Payless  Common Stock,
and shall be adopted in form and substance  similar to that to be annexed as
Exhibit B to the Plan on or prior to the  Confirmation  Date, which document
shall be satisfactory in form and substance to the Debtor, the Required Existing
Lenders and the Required Exit Lenders in their respective judgments reasonably
exercised.  The  Company's bylaws shall be adopted in form and substance
similar to those to be annexed as Exhibit C to the Plan on or prior to the
Confirmation Date, which document shall be satisfactory in form and substance to
the Debtor, the Required Existing Lenders and the Required Exit Lenders in their
respective judgments reasonably exercised.


                                      -22-
<PAGE>   23

         6.2. On the Effective Date, the Company's  certificate of incorporation
shall be amended so as to permit the Company to distribute shares of New Payless
Common Stock in sufficient amounts to satisfy the Debtor's obligations under the
Plan.

         6.3. On the Effective  Date,  the Company shall continue to operate its
businesses, except as otherwise contemplated hereby.

         6.4.  On the  Effective  Date,  the  "Closing"  (as defined in the Exit
Facility)  shall take place and the Exit Facility shall become  available to the
Company for its financing requirements.

         6.5.  Payments  to be Made on Account of Allowed  Class 2A Claims.  The
manner of disposition of the inventory at the 29 stores to be closed pursuant to
the Business  Plan shall be  satisfactory  to the Required  Existing  Lenders in
their judgment  reasonably  exercised.  Notwithstanding any term or provision of
this Plan,  between the  Confirmation  Date and the Effective  Date,  the Debtor
shall  continue  to pay all  interest  (on a current  basis),  and the letter of
credit  and  other  fees  and amounts owing (including, without limitation, cash
management  fees, overdraft repayments and all reasonable out-of-pocket expenses
and  reasonable  attorneys'  and  advisors'  fees and disbursements) as adequate
protection to the holders of Allowed Class 2A Claims.

                                  ARTICLE VII.

                    CONDITIONS TO EFFECTIVENESS OF THE PLAN

         7.1. Conditions to Effective Date of Plan. Except as otherwise provided
in Section 7.2 of the Plan,  it shall be a condition  to the  occurrence  of the
Effective Date that:

         (a)    The Debtor and the Exit Lenders  shall have closed (as such term
                is used  therein) the Exit Facility  contemporaneously  with the
                Effective  Date  and all  conditions  thereto  shall  have  been
                satisfied or waived by the requisite Exit Lenders;

         (b)    The DIP Facility  shall have  terminated,  and all amounts owing
                thereunder shall have been paid in full, in cash; and

         (c)    The  Confirmation  Order  shall have been  entered,  in form and
                substance  acceptable  to  the  Debtor,  the  Required  Existing
                Lenders  and the  Required  Exit  Lenders,  in their  respective
                judgments  reasonably  exercised,  and shall have become a Final
                Order.

         7.2. Waiver of Conditions.  The conditions  contained in Section 7.1 of
the Plan may be  waived on or  before  the  Effective  Date by the  Debtor,  the
Required  Existing  Lenders and the  Required  Exit  Lenders  and the  Unsecured
Creditors' Committee in their respective judgments reasonably  exercised.  To be
effective  any such  waiver  must be in writing  and filed  with the  Bankruptcy
Court.


                                      -23-

<PAGE>   24

                                  ARTICLE VIII.

                        TREATMENT OF EXECUTORY CONTRACTS

         8.1.  Assumption.   On  the  Confirmation  Date  (but  subject  to  the
occurrence of the Effective  Date),  the Debtor shall be deemed to have assumed,
in accordance with Section 365 of the Code, any and all executory  contracts and
unexpired leases to which the Debtor is a party,  except those which: (a) prior
to the Confirmation Date shall have been rejected;  (b) at the Confirmation Date
are the  subject of pending  motions to reject or are  included  on a list to be
delivered to the Bankruptcy  Court at or before the hearing on the  confirmation
of the Plan or (c) are stock  options  referred  to in Section 3.8 of the Plan .
The dollar  amount of any  monetary  default of the Debtor  existing  (as of the
Confirmation Date) under a particular unexpired lease or executory contract,  as
may be  agreed  to by  the  parties  thereto  or as  may  be  determined  by the
Bankruptcy Court, shall constitute an Administrative Expense upon the assumption
of such executory contract or unexpired lease.

                                   ARTICLE IX.

                            MANAGEMENT OF THE COMPANY

         9.1.   Officers and Directors.

         (a)  On the Effective Date, by the adoption of the amended certificate 
              of  incorporation  for the Company which is annexed to the Plan as
              Exhibit A, the Company's Board of Directors shall be reconstituted
              to  consist  of  two  individuals   designated  by the  Unsecured
              Creditors' Committee;  five individuals designated by the Required
              Existing Lenders;  and two individuals  designated by the Board of
              Directors of the Debtor, the term of each director to be
              acceptable to the Debtor, the Prepetition Agent and the Required
              Existing Lenders, and the identity of the directors shall be
              disclosed at or prior to the hearing before the Bankruptcy Court
              to consider the  confirmation of the Plan.

         (b)  The persons  who will serve as the Chief  Executive  Officer,  the
              President and the Chief Financial Offer of the Company  commencing
              on the Effective Date will be disclosed at or prior to the hearing
              before the Bankruptcy  Court to consider the  confirmation  of the
              Plan.  The  capability  and  expertise of all  proposed  executive
              officers and directors of the Company must be  satisfactory to the
              Prepetition  Agent, the Required Existing Lenders and the Required
              Exit Lenders.

         9.2.  Management  Stock  Option  Program.   The  Company  may  adopt  a
management  stock option  program on terms  approved by the  Company's  Board of
Directors  providing  for  the  issuance  of  stock  options  to  the  Company's
management from time to time on or after the Effective Date exercisable into New
Payless Common Stock.


                                      -24-

<PAGE>   25

                                   ARTICLE X.

                        WAIVER OF RIGHTS OF SUBORDINATION

         10.1.  Each  holder of a Claim  against the Debtor (a) by virtue of the
acceptance  of the Plan by the  requisite  majority  in number and amount of its
Class,  or (b) by virtue of the  acceptance of the Plan by such holder,  waives,
releases  and  relinquishes  any and all rights  arising  under any  Prepetition
subordination  agreement,  whether  arising out of contract or under  applicable
law, including, without limitation, Section. 510 of the Code (other than Section
510(c)),  to the payment and  distributions of consideration  made or to be made
under the Plan or otherwise  to any other holder of a Claim  against the Debtor.
Notwithstanding  anything  contained  herein  to the  contrary,  all  rights  of
subordination arising under Section 509 of the Code shall be preserved and shall
be unaffected by operation of this Section 10.1 of the Plan.

                                   ARTICLE XI.

                   DISCHARGE, RELEASE OF CLAIMS AND COLLATERAL

         11.1.  Discharge;  Injunction.  Except  as  otherwise  provided  in the
Confirmation Order or in the Plan (e.g., with respect to Allowed Class 2A Claims
and  Allowed  Class 2B  Claims),  upon the  Effective  Date the Debtor  shall be
discharged,  pursuant to Section 1141(d)(1) of the Code, from all Claims and all
debts that arose before the  Confirmation  Date and from any liability of a kind
specified  in Section  502(g),  Section  502(h) or  Section  502(i) of the Code,
whether or not:

         (a)   a proof of the Claim is filed or deemed  filed under  Section 502
               of the Code;

         (b)   such Claim is allowed under Section 502 of the Code; or

         (c)   the holder of such Claim has accepted the Plan.

In  accordance  with  Section 524 of the Code,  the  discharge  provided by this
Section 11.1 and Section  1141 of the Code,  inter alia,  acts as an  injunction
against the commencement or continuation of any action, employment of process or
act to collect, offset or recover the Claims or Interests discharged hereby.

         11.2.  Release  of  collateral  for Class 2C Claims.  Unless  otherwise
agreed  between the Debtor and the holder of a particular  Class 2C Claim,  each
holder of a Class 2C Claim shall on or  immediately  before the  Effective  Date
turn over and  release to the Debtor any and all  property  of the Debtor  which
secures  such  holder's  Class 2C Claim.  Such  holder  shall  execute  whatever
documents or forms the Debtor may reasonably require to evidence, as a matter of
record, such holder's release of the collateral;  provided,  however,  that such
collateral  will be deemed  released for all  purposes,  whether or not any such
documents or forms have been executed. On the Confirmation Date, the property of
the  debtor-in-possession  shall revert to the Company free and clear of any and
all liens or encumbrances, except as otherwise provided in the Plan or as agreed
by the Debtor and the holder of a particular Class 2C Claim.


                                      -25-
<PAGE>   26
    
         11.3. Revesting. Except as otherwise provided in the Confirmation Order
or in the Plan (e.g.,  with respect to Allowed Class 2A Claims and Allowed Class
2B Claims),  on the Effective Date all property comprising the estate created in
the Chapter 11 Case by Section 541 of the Code shall revest in the Company, free
and clear of all Claims, liens, charges, encumbrances and Interests of creditors
and equity security  holders.  As of the Effective Date, the Company may operate
its  businesses  and use,  acquire  and  dispose  of  property  and  settle  and
compromise claims or interests without  supervision of the Bankruptcy Court free
of  any  restrictions  of  the  Code  or  Bankruptcy  Rules,  other  than  those
restrictions  expressly  imposed  by  the  Plan,  the  Confirmation  Order,  the
Post-Consummation   Facility  and  the  Exit  Facility.   Without  limiting  the
foregoing,  the Company may pay the charges it incurs after the  Effective  Date
for reasonable  professional  fees,  disbursements,  expenses or related support
services without any application to the Bankruptcy Court.

         11.4.  Release by the Debtor of certain  potential  claims. On the date
that is 90 days after the  Confirmation  Date,  but subject to the occurrence of
the  Effective  Date,  the Debtor shall be deemed to have  released,  waived and
relinquished  any and all  rights  or  claims  they  may  have or had to  avoid,
pursuant to Sections  544,  547 and 548 of the Code,  any  transfer  made by the
Debtor of an interest in its property prior to the Filing Date, or to offset any
such right or claim  against  any Claim made or  asserted  against  the  Debtor;
provided,  however,  that no such  right or claim  shall be deemed  released  in
connection  with any adversary  proceeding or contested  matter  pending on such
90th day after the Confirmation Date.  Notwithstanding  anything to the contrary
contained  herein or in the Existing Credit  Facility or the Exit Facility,  any
recoveries  received  by or on  behalf  of the  Debtor  in  respect  of any such
adversary  proceeding  or  contested  matter  shall be used to  reduce  the then
outstanding balance of revolving credit loans, if any, under the DIP Facility or
the Exit  Facility (as the case may be) (without any  reduction in the amount of
the commitment  thereunder) and the balance, if any, shall be paid to the Debtor
and used by it for general corporate purposes.

         11.5. Release of directors and officers.  On the Confirmation Date, but
subject to the occurrence of the Effective Date, the Debtor,  on its own behalf,
and on behalf of all the  Debtor's  stockholders  derivatively,  hereby  waives,
releases and  discharges all current  directors,  officers,  employees,  agents,
advisors, professional persons and representatives of the Debtor and all persons
who were directors, officers, employees, agents, advisors,  professional persons
and  representatives  of the Debtor  since the Filing Date,  from all  liability
based upon any act or omission  related to past service with or for or on behalf
of the Debtor or its affiliates.  The immediately  preceding sentence shall not,
however,  apply to (i) any  indebtedness  of any  person to the Debtor for money
borrowed by such person, or (ii) any set-off or counterclaim that the Debtor may
have or assert  against any person,  provided that the aggregate  amount thereof
shall  not  exceed  the   aggregate   amount  of  any  claims   (excluding   any
indemnification  claims  contemplated  by  Section  11.6  of the  Plan)  held or
asserted by such person  against  the  Debtor.  Holders of Claims and  Interests
against the Debtor shall be enjoined from  commencing or continuing  any action,
employment  of process or act to collect,  offset or recover any such claim that
could  be  brought  on  behalf  of or in the  name of the  Debtor,  without  any
independent cause of action belonging to such holder asserting such claim.


                                      -26-
<PAGE>   27
     11.6. Survival of indemnification obligations; Maintenance of Liability
Insurance. The obligations of the Debtor to indemnify those directors, officers,
employees,  agents,  advisors,  professional  persons and representatives of the
Debtor, who have served in such capacity since the Filing Date,  pursuant to the
Debtor's certificate of incorporation, bylaws and applicable statutes in respect
of all present and future  actions,  suits and  proceedings  against any of such
officers,  directors,  employees,  agents,  advisors,  professional  persons and
representatives,  based upon any act or omission  related to service with or for
or on behalf of the Debtor,  shall not be discharged or impaired by confirmation
or consummation of the Plan but shall survive  unaffected by the  reorganization
contemplated  by the Plan,  regardless of such  confirmation,  consummation  and
reorganization.  To the extent  practicable,  the current directors and officers
liability insurance policies  maintained by the Debtor, or replacement  policies
affording  substantially similar coverage and protection,  shall be continued in
effect after the Effective Date.

     11.7. Certain Other releases.  On the Confirmation Date, but subject to the
occurrence of the Effective Date, each holder of a Claim or Interest (i) who has
accepted  the Plan;  (ii) whose  Claim or  Interest  is in a Class that has
accepted the Plan, as determined in accordance with Sections  1126(c) and (d) of
the  Code,  respectively,  or  that  is  deemed  to have  accepted  the  Plan in
accordance with Section 1126(f) of the Code; or (iii) who is entitled to receive
a distribution of property  pursuant to the Plan, shall be deemed,  by virtue of
such holder's  acceptance  of the Plan,  acceptance of the Plan by such holder's
Class,  or such holder's  receipt of a distribution of property or acceptance of
rights granted under the Plan, to have  unconditionally  waived,  discharged and
released all rights, claims, and causes of action which such holder had or might
have had  against  the  Debtor  and every  other  holder of a Claim or  Interest
(including the Debtor's and each such holder's officers,  directors,  employees,
agents,  advisors,  professional  persons  and  representatives  and  whether as
stockholder,  creditor,  director  or  insider of the  Debtor or  otherwise)  in
respect of the Debtor and its  business  affairs  prior to the  Effective  Date;
provided,  however,  that such waiver,  discharge and release shall not apply to
any  debt instruments or securities  of the Debtor  distributed  pursuant to the
Plan or any oral or written  contractual rights against non-Debtor third parties
whether or not such non-Debtor third parties hold Claims against or Interests in
the Debtor.

     11.8. Release of Existing Lenders and Prepetition Agent; Release of DIP
Lenders  and Agent.  On the  Confirmation  Date,  but as of, and  subject to the
occurrence of, the Effective Date, the Debtor, on its own behalf,  and on behalf
of all the  Debtor's  stockholders  derivatively,  hereby  irrevocably waives,
releases and discharges  all  current  and  former  Existing  Lenders  and DIP
Lenders,  the Underwriters, the Prepetition  Agent and the Agent and any
predecessor  Prepetition Agent or Agent, and all persons or entities who were
their respective directors, officers, employees, agents, advisors, professional
persons, representatives, parent corporations, subsidiaries and affiliates, from
any and all causes of action,  claims and other  liabilities based upon any act
or  omission  related  to any extensions  of credit or other  financial services
or involvement. The Confirmation Order shall specifically provide for the
foregoing release and shall enjoin the prosecution of any such released  claim,
causes of action or liability.


                                      -27-

<PAGE>   28

                                  ARTICLE XII.

                   PROVISIONS RELATING TO CORPORATE STRUCTURE
                        OF THE COMPANY UPON CONSUMMATION

         12.1. Certificate of incorporation. The certificate of incorporation of
the Company shall,  as of Effective  Date, be amended in its entirety as
provided in Section 6.1 of the Plan.  The certificate of  incorporation of the
Company shall as of the Effective Date be amended, consistent with Section
1123(a)(6) of the Code, to prohibit the issuance of non-voting equity
securities.

         12.2.  Cancellation of Agreements and Interests. On the Effective Date,
all Old Payless  Preferred  Stock,  Old Payless  Common Stock,  any  unexercised
rights to purchase Old Payless  Preferred  Stock or Old Payless Common Stock and
agreements  relating to the Existing Credit Facility and the Existing Prudential
Facility then outstanding (other than any mortgages, deeds of trust and security
and pledge  agreements  which may be amended and restated or otherwise remain in
effect) shall be deemed  cancelled and of no further force or effect,  except as
evidence of the  entitlement of the holder thereof to receive  distributions  of
property from the Debtor under the Plan.

         12.3.  Cancellation of Senior Subordinated Note Indentures.  The rights
and obligations of Payless under the Senior  Subordinated Note Indenture and the
Senior Subordinated Notes issued thereunder shall be terminated and cancelled as
of the Effective Date.

         12.4. Cancellation of Stock Options. Immediately after the Consummation
Date,  all stock options  referred to in Section 3.8 of the Plan shall be deemed
cancelled and of no further force or effect.

         12.5. Stock Exchange Listing. The Company shall use its best efforts to
obtain a New York Stock Exchange listing for the New Payless Common Stock.

                                  ARTICLE XIII.

                            RETENTION OF JURISDICTION

         13.1.  After the  Effective  Date,  the  Bankruptcy  Court shall retain
jurisdiction  of the  Chapter  11  Cases  pursuant  to and for the  purposes  of
Sections 105(a) and 1127 of the Code and for the following purposes, inter alia:

         (a)   To consider  any  modification  of the Plan under Section 1127 of
               the Code;

         (b)   To determine  any and all  objections  to the allowance of Claims
               and/or Interests;

         (c)   To  determine  any and all fee  requests  of  professionals  made
               pursuant to Sections 330 and 503(b) of the Code:


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<PAGE>   29

         (d)   To determine any and all applications pending on the Confirmation
               Date  for  the  rejection  and  disaffirmance  or  assumption  or
               assignment of executory contracts, or any such items contained in
               the  list  referred  to in  Section  8.1 of  the  Plan,  and  the
               allowance of Claims resulting therefrom;

         (e)   To determine all  controversies and disputes arising under, or in
               connection with the Plan and all agreements or releases  referred
               to in the Plan;

         (f)   To  determine  any and all  applications,  contested  matters  or
               adversary  proceedings  pending on the Confirmation Date or filed
               thereafter  seeking to  adjudicate  the  relative  interests  and
               priorities  in  and  to  property  of  the  Debtor's   estate  or
               otherwise;

         (g)   To effectuate  payments under, and performance of, the provisions
               of the Plan; and

         (h)   To determine  such other  matters and for such other  purposes as
               may be provided for in the Confirmation Order.

                                  ARTICLE XIV.

                            MISCELLANEOUS PROVISIONS

         14.1.  Governing Law. Except to the extent the Code or Bankruptcy Rules
are  applicable,  the rights and  obligations  arising  under this Plan shall be
governed by and construed and enforced in accordance with, the laws of the State
of Missouri.

         14.2. Headings. The headings of the Articles,  Sections and subsections
of this  Plan are  inserted  for  convenience  only and  shall  not  affect  the
interpretation of the Plan.

         14.3.  Successors and assigns.  This Plan and all the provisions hereof
shall be binding  upon and inure to the benefit of the parties  hereto and their
respective successors and assigns.

         14.4. Notices. Any notice,  demand, claim, or other communication under
this Plan  shall be in  writing  and shall be  deemed  to have been  given  upon
personal  delivery  thereof,  or upon the  fifth  (5th)  day  following  mailing
thereof,  if sent by registered mail, return receipt requested,  postage prepaid
to the last known address of the party to whom such notice is given.

         14.5.  Amendment and modification.

         (a)  Preconfirmation  Amendment.  The Debtor may modify the Plan at any
time  prior to the entry of the  Confirmation  Order,  with the  consent  of the
Required  Existing  Lenders and the Required  Exit  Lenders in their  respective
judgments  reasonably  exercised;  provided that the Plan, as modified,  and the
disclosure  statement   pertaining  thereto  meet  applicable   Bankruptcy  Code
requirements.

         (b) Postconfirmation Amendment Not Requiring Resolicitation.  After the
entry of the  Confirmation  Order,  the Debtor may modify the Plan to remedy any
defect or omission or to  reconcile


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<PAGE>   30

any  inconsistencies  in  the  Plan  or in  the  Confirmation  Order,  as may be
necessary to carry out the purposes and effects of the Plan,  provided that: (i)
the Debtor obtains approval of the Bankruptcy Court for such modification, after
notice  and a  hearing;  and (ii) such  modification  shall not  materially  and
adversely affect the interests, rights, treatment, or distributions of any Class
of Allowed Claims or Allowed  Interests under the Plan. Any waiver under Section
7.3 of the Plan shall not be considered to be a modification of this Plan and no
further Court approval need be obtained.

         (c)      Postconfirmation/Preconsummation      Amendment      Requiring
Resolicitation. After the Confirmation Date and before the Effective Date of the
Plan,  the Debtor may modify  the Plan in a way that  materially  and  adversely
affects the interests,  rights, treatment, or distributions of a class of Claims
or  Interests;  provided,  however,  that:  (i) the  Plan,  as  modified,  meets
applicable Bankruptcy Code requirements;  (ii) the Debtor obtains Court approval
for such  modification,  after notice and a hearing;  (iii) such modification is
accepted by at least two-thirds in amount,  and more than one-half in number, of
Allowed Claims and by at least two-thirds in amount of Allowed  Interests voting
in each  Class  adversely  affected  by such  modification;  and (iv) the Debtor
complies with Section 1125 of the Code with respect to the Plan as modified.

         14.6.  Severability.  Should any provision in the Plan be determined to
be  unenforceable,  such  determination  shall  in no way  limit or  affect  the
enforceability  and operative effect of any or all other provisions of the Plan.
In the event that any provision of the Plan would, by its inclusion in the Plan,
prevent or preclude the Bankruptcy  Court from signing the  Confirmation  Order,
the  Bankruptcy  Court,  on its own initiative or upon the request of a party in
interest,  may modify or amend or permit the  modification  or amendment of such
provision,  in whole or in part,  as  necessary to cure any defect or remove any
impediment to the confirmation of the Plan existing by reason of such provision;
provided, however, that any such modification or amendment shall in no way limit
or affect the enforceability and operative effect of any or all other provisions
of this Plan;  and provided  further that in the event of such  modification  or
amendment the Debtor reserves its right to revoke and withdraw the Plan.

         14.7.  Revocation  and  Withdrawal.  The Debtor  reserves  the right to
revoke and  withdraw  this Plan prior to the  Confirmation  Date.  If the Debtor
revokes or withdraws this Plan, then this Plan shall be deemed null and void and
nothing  contained  herein shall be deemed to  constitute a waiver or release of
any claims by or against the Debtor or any other  person or to  prejudice in any
manner  the  rights of the  Debtor  or any  person  in any  further  proceedings
involving the Debtor.

         14.8.  Time. In computing  any period of time  prescribed or allowed by
this Plan, the day of the act or event from which the  designated  period begins
to run shall not be  included.  The last day of the period so computed  shall be
included,  unless it is not a Business Day, in which event the period runs until
the end of the next succeeding Business Day.

         14.9. Rules of Construction.  As used in the Plan, singular terms shall
include the plural,  plural  terms shall  include the  singular,  and  masculine
pronouns shall  include  all  pronouns.


                                      -30-
<PAGE>   31

Unless the Plan expressly provides otherwise, the rules set forth in Section 102
of the Code shall govern interpretation of the provisions of the Plan.

         14.10.  Consent.  Wherever the Plan requires  that a particular  act be
taken (or a  particular  act not be taken)  with the  consent  of any  person or
persons,  such  consent  shall be valid only if such  consent  has been given in
writing and has been signed by the person or persons  whose consent is required,
or by such  person's  or  persons'  duly  authorized  representative;  provided,
however,  that any  consents  given  pursuant  to Section 7.2 of the Plan may be
given orally at any court hearing at which a transcript is taken, in lieu of any
requirement  of a writing.  Consent given by a majority of the voting members of
the  Unsecured  Creditors'  Committee  shall be deemed to be the  consent of the
Unsecured Creditors'  Committee.  Consent given by the holders of Allowed Claims
and Allowed  Interests of a Class meeting the acceptance  standards set forth in
Section 1126 of the Code shall be deemed to be the consent of such Class.

         14.11.  Dissolution  of  Unsecured  Creditors'  Committee.   Except  as
otherwise  provided in any order of the Bankruptcy Court, on the Effective Date,
the duties of the Unsecured  Creditors'  Committee shall terminate,  except with
respect to any appeal of any order in the Chapter 11 Case, fee  applications and
any matters related to any proposed modifications of the Plan.

         14.12.  Corporate  Action.  The  adoption  of any  new or  amended  and
restated  certificates of incorporation  and by-laws of the Debtor and the other
matters  provided for under the Plan  involving the  corporate  structure of the
Debtor,  or corporate  action, as the case may be, to be taken by or required of
the Debtor shall be deemed to have occurred and be effective as provided  herein
and shall be authorized and approved in all respects, without any requirement of
further action by stockholders or directors of the Debtor.  Without limiting the
foregoing,  the Debtor  shall be  authorized,  without any further act or action
required,  to issue all  securities  and any  instruments  required to be issued
hereunder,  including  sufficient  New  Payless  Common  Stock in respect of any
exercise of stock options referenced in Section 9.2 of the Plan.

         14.13.  Effectuating  Documents  and Further  Transactions.  The Debtor
shall  be  authorized  to  execute,  deliver,  file or  record  such  documents,
contracts,  instruments,  releases,  and other  agreements  and take such  other
action as may be  necessary  to  effectuate  and further  evidence the terms and
conditions of the Plan.

         14.14.  Limitation  of  Liability.  Neither the Debtor,  the  Unsecured
Creditors'   Committee   (including  its  members)  the  Existing  Lenders,  the
Prepetition  Agents,  the DIP Lenders,  the Agent,  the  Underwriters or the
Exit Lenders  or  their  agents,  nor any of  their  respective  officers,
directors, employees, agents, advisors, professional persons and representatives
shall have or incur any liability to any entity for any action taken or omitted
to be taken in connection with or related to the  formulation,  preparation,
dissemination, implementation,  confirmation,  or  consummation  of the  Plan,
the  Disclosure Statement,  or any contract,  release, or other agreement or
document created or entered  into,  or any other action taken or omitted to be
taken,  in connection with the Plan; provided,  however, that the provision of
this section shall have no effect on the  liability of any entity that would
otherwise  result from any action or omission to the extent that such action


                                      -31-

<PAGE>   32

or omission is determined in a final order of a court of competent  jurisdiction
to have constituted gross negligence or willful misconduct.

Dated:  Kansas City, Missouri
         July 21, 1997

                                                     Submitted by:

                                                     PAYLESS CASHWAYS, INC.


                                                     By: /s/ David Stanley
                                                         -----------------------
                                                         David Stanley
                                                         Chief Executive Officer


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