Document:

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                                                                  Exhibit 10.19

                            PAYLESS SHOESOURCE, INC.
                               PROFIT SHARING PLAN
                           FOR PUERTO RICO ASSOCIATES

                Amended March 16, 2000 or as otherwise specified.

Exhibit_10_19_  Payless ShoeSource, Inc. Profit Sharing Plan for
                           Puerto Rico Assocites.WPD

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                                             TABLE OF CONTENTS

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SECTION 1

                  DEFINITIONS.............................................................................2
                  1.01     ACCOUNTS.......................................................................2
                  1.02     ADMINISTRATIVE DELEGATE........................................................2
                  1.03     AFTER-TAX CONTRIBUTIONS .......................................................2
                  1.04     ALLOCATION PAY AMOUNT..........................................................2
                  1.05     ASSOCIATE......................................................................2
                  1.06     AUTHORIZED LEAVE OF ABSENCE....................................................3
                  1.07     BEFORE-TAX CONTRIBUTIONS.......................................................3
                  1.08     BENEFICIARY ...................................................................3
                  1.09     BOARD..........................................................................3
                  1.10     COMMITTEE......................................................................3
                  1.11     COMPANY OR PAYLESS.............................................................3
                  1.12     COMPANY ACCOUNTS...............................................................3
                  1.13     COMPANY MATCHING CONTRIBUTIONS.................................................3
                  1.14     COMPANY PROFIT SHARING CONTRIBUTIONS ..........................................3
                  1.15     EFFECTIVE DATE.................................................................4
                  1.16     EMPLOYER OR PAYLESS PR.........................................................4
                  1.17     ERISA..........................................................................4
                  1.18     FIDUCIARY .....................................................................4
                  1.19     FISCAL YEAR....................................................................4
                  1.20     GROUP..........................................................................4
                  1.21     HOUR OF SERVICE................................................................4
                  1.22     INVESTMENT FUND................................................................5
                  1.23     MAY PLAN ......................................................................5
                  1.24     MEMBER.........................................................................5
                  1.25     MEMBER ACCOUNTS................................................................5
                  1.26     MEMBER AFTER-TAX ACCOUNTS......................................................5
                  1.27     MEMBER BEFORE-TAX ACCOUNTS ....................................................5
                  1.28     MEMBER CONTRIBUTIONS ..........................................................5
                  1.29     MEMBER ROLLOVER CONTRIBUTION ACCOUNTS..........................................5
                  1.30     MILITARY SERVICE...............................................................5
                  1.31     NET PROFITS....................................................................5
                  1.32     PAY............................................................................6
                  1.33     PLAN...........................................................................6
                  1.34     PLAN YEAR .....................................................................6
                  1.35     POOLED INVESTMENT ACCOUNT......................................................6
                  1.36     PR CODE........................................................................6
                  1.37     PRIOR PLAN.....................................................................6
                  1.38     QUALIFIED DOMESTIC RELATIONS ORDER.............................................6
                  1.39     RETIREMENT.....................................................................6
                  1.40     ROLLOVER CONTRIBUTIONS.........................................................6
                  1.41     SOCIAL SECURITY WAGE BASE......................................................6
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                  1.42     TOTAL AND PERMANENT DISABILITY.................................................6
                  1.43     TRANSFERRED ACCOUNTS...........................................................7
                  1.44     TRUST AGREEMENT................................................................7
                  1.45     TRUST FUND.....................................................................7
                  1.46     TRUSTEE........................................................................7
                  1.47     UNIT...........................................................................7
                  1.48     UNIT VALUE.....................................................................7
                  1.49     US CODE........................................................................7
                  1.50     VALUATION DATE.................................................................7
                  1.51     YEAR OF SERVICE................................................................7
                  1.52     VESTING SERVICE................................................................8

SECTION 2

                  MEMBERSHIP.............................................................................10
                  2.01     CONDITIONS OF ELIGIBILITY.....................................................10
                  2.02     RE-EMPLOYMENT.................................................................11

SECTION 3

                  COMPANY CONTRIBUTIONS..................................................................12
                  3.01     AMOUNT OF COMPANY PROFIT SHARING CONTRIBUTION.................................12
                  3.02     AMOUNT OF COMPANY MATCHING CONTRIBUTION.......................................12
                  3.03     ALLOCATION OF COMPANY CONTRIBUTIONS...........................................12
                  3.04     PROFIT SHARING ALLOCATION FORMULA.............................................12
                  3.05     INVESTMENT OF THE COMPANY.....................................................12
                  3.06     RETURN OF COMPANY CONTRIBUTIONS...............................................13

SECTION 4

                  MEMBER CONTRIBUTIONS...................................................................14
                  4.01     PROCEDURE FOR MAKING CONTRIBUTIONS............................................14
                  4.02     LIMITATIONS ON BEFORE-TAX CONTRIBUTIONS.......................................16
                  4.03     DISTRIBUTIONS OF EXCESS DEFERRALS.............................................18
                  4.04     LIMITATIONS ON AFTER-TAX CONTRIBUTIONS........................................19
                  4.05     LIMITATIONS ON COMPANY MATCHING CONTRIBUTIONS.................................19
                  4.06     AGGREGATE LIMITATIONS.........................................................19

SECTION 5

                  INVESTMENT PROVISIONS..................................................................20
                  5.01     INVESTMENT FUNDS..............................................................20
                  5.02     INVESTMENT DIRECTION..........................................................20
SECTION 6

                  ACCOUNTS...............................................................................22
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                  6.01     MEMBER ACCOUNTS...............................................................22
                  6.02     COMPANY ACCOUNTS..............................................................22
                  6.03     MAINTENANCE OF ACCOUNTS.......................................................22
                  6.04     VALUATION OF ACCOUNTS.........................................................22
                  6.05     MEMBER STATEMENTS.............................................................22
                  6.06     SHARES OF PAYLESS SHOESOURCE, INC.............................................22
                  6.07     VESTING IN MEMBER AND COMPANY ACCOUNTS .......................................23

SECTION 7

                  EXPENSES...............................................................................27
                  7.01     ADMINISTRATIVE EXPENSES.......................................................27

SECTION 8

                  WITHDRAWALS DURING EMPLOYMENT..........................................................28
                  8.01     WITHDRAWALS PROHIBITED UNLESS SPECIFICALLY AUTHORIZED.........................28
                  8.02     AUTHORIZED WITHDRAWALS........................................................28

SECTION 9

                  BENEFITS UPON RETIREMENT, DEATH, DISABILITY, OR TERMINATION OF
                  EMPLOYMENT.............................................................................30
                  9.01     BENEFITS......................................................................30
                  9.02     BENEFICIARY...................................................................30

SECTION 10

                           PAYMENT OF BENEFITS...........................................................31
                  10.01    TIME OF PAYMENT...............................................................31
                  10.02    FORM OF PAYMENT...............................................................32
                  10.03    INDIRECT PAYMENT OF BENEFITS..................................................32
                  10.04    INABILITY TO FIND MEMBER......................................................32
                  10.05    COMMENCEMENT OF BENEFIT DISTRIBUTION TO MEMBER................................32
                  10.06    COMMENCEMENT OF BENEFIT DISTRIBUTION TO BENEFICIARY...........................32
                  10.07    COMMENCEMENT OF BENEFIT DISTRIBUTION TO ALTERNATE PAYEE. .....................32

SECTION 11

                           PERMITTED ROLLOVER OF PLAN DISTRIBUTIONS......................................34
                  11.01    ROLLOVER AMOUNT TO OTHER PLANS.  .............................................34

                  11.02    ROLLOVER AMOUNT FROM OTHER PLANS..............................................34
                  11.03    DEFINITIONS...................................................................34

SECTION 12

                           LOANS.........................................................................36
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                  12.01    AVAILABILITY OF LOANS.........................................................36
                  12.02    AMOUNTS OF LOANS..............................................................36
                  12.03    TERMS OF LOANS................................................................36

SECTION 13

                           LIMIT ON CONTRIBUTIONS TO THE PLAN............................................38
                  13.01    LIMIT ON CONTRIBUTIONS........................................................38
                  13.02    ADJUSTMENT FOR EXCESSIVE ANNUAL ADDITIONS.....................................39

SECTION 14

                           ADMINISTRATION OF THE PLAN....................................................40
                  14.01    PLAN ADMINISTRATOR............................................................40
                  14.02    DELEGATION OF AUTHORITY.......................................................40
                  14.03    COMMITTEE AND SUBCOMMITTEES...................................................40
                  14.04    ACCOUNTS AND REPORTS..........................................................41
                  14.05    NON-DISCRIMINATION.  .........................................................41

SECTION 15

                           MANAGEMENT OF THE TRUST FUND..................................................43
                  15.01    USE OF THE TRUST FUND.........................................................43
                  15.02    TRUSTEES......................................................................43
                  15.03    INVESTMENTS AND REINVESTMENTS.................................................43

SECTION 16

                           CERTAIN RIGHTS AND OBLIGATIONS OF EMPLOYERS AND MEMBERS.......................45
                  16.01    DISCLAIMER OF EMPLOYER LIABILITY..............................................45
                  16.02    EMPLOYER-ASSOCIATE RELATIONSHIP...............................................45
                  16.03    BINDING EFFECT................................................................45
                  16.04    CORPORATE ACTION..............................................................45
                  16.05    CLAIM AND APPEAL PROCEDURE....................................................45

SECTION 17

                           NON-ALIENATION OF BENEFITS....................................................47
                  17.01    PROVISIONS WITH RESPECT TO ASSIGNMENT AND LEVY................................47
                  17.02    ALTERNATE APPLICATION.........................................................47

SECTION 18

                           AMENDMENTS....................................................................48
                  18.01    COMPANY'S RIGHTS..............................................................48
                  18.02    PROCEDURE TO AMEND............................................................48
                  18.03    PROVISION AGAINST DIVERSION...................................................48
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SECTION 19

                           TERMINATION...................................................................49
                  19.01    RIGHT TO TERMINATE.  .........................................................49
                  19.02    WITHDRAWAL OF AN EMPLOYER.....................................................49
                  19.03    DISTRIBUTION IN EVENT OF TERMINATION OF TRUST.................................49
                  19.04    ADMINISTRATION IN EVENT OF CONTINUANCE OF TRUST.  ............................49
                  19.05    MERGER, CONSOLIDATION OR TRANSFER.............................................49

SECTION 20

                           CONSTRUCTION..................................................................50
                  20.01    APPLICABLE LAW................................................................50
                  20.02    GENDER AND NUMBER.............................................................50
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                            PAYLESS SHOESOURCE, INC.
                 PROFIT SHARING PLAN FOR PUERTO RICO ASSOCIATES

                                  INTRODUCTION

         Effective April 1, 1996, Payless ShoeSource, Inc. ("Payless") withdrew
from and ceased to be a participating Employer in The May Department Stores
Company Profit Sharing Plan (the "May Plan") and established the Payless
ShoeSource, Inc. Profit Sharing Plan (the "Payless Plan"). The Payless Plan, as
adopted, covered eligible Associates employed in Puerto Rico by Payless
ShoeSource of Puerto Rico, Inc. ("Payless PR"). Effective January 1, 1997, a
portion of the Payless Plan covering Associates employed by Payless PR was spun
off and established a new plan, Payless ShoeSource, Inc. Profit Sharing Plan for
Puerto Rico Associates (the "Plan"), which was adopted by Payless PR as an
adopting Employer.

         Now, effective March 20, 2000, or as otherwise specified, Payless is
amending and restating the Plan primarily to include provisions for loans, the
acceptance of rollover contributions from other qualified plans, a change to
daily valuation, other miscellaneous changes and to comply with the tax laws of
Puerto Rico. Such amendment and restatement applies only to Associates or former
Associates who were employed by an Employer on or after the effective date(s) of
the respective amended provisions, and the rights and benefits of persons
thereunder are to be determined solely in accordance with the provisions of the
Plan in effect on the date an Associate's employment was or is terminated.
Notwithstanding the preceding sentence, the change in valuation date shall be
effective for all Associates after the effective date.

         The terms and provisions of this new Plan are as follows:

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                                    SECTION 1

                                   DEFINITIONS

         1.01 ACCOUNTS means the Company Accounts and Member Accounts
established under Section 6.

         1.02 ADMINISTRATIVE DELEGATE means one or more persons or institutions
to which the Committee has delegated certain administrative functions pursuant
to a written agreement.

         1.03 AFTER-TAX CONTRIBUTIONS means Member Contributions which are not
Before-Tax Contributions and which are made by the Member in accordance with
Section 4.01(a).

         1.04 ALLOCATION PAY AMOUNT means with respect to each eligible Member,
(a) one (1) times the amount of Pay as defined in Section 1.33 up to the Social
Security Wage Base ("SSWB") for the Plan Year, plus (b) two (2) times the amount
of such Pay in excess of the SSWB for the Plan Year. Notwithstanding any
provision of this Section 1.04 or of Section 3.03 to the contrary, in no event
shall the percentage of Members' Pay to be allocated for any year below the SSWB
be less than fifty percent (50%) of the percentage of Pay allocated with respect
to Members' Pay in excess of the SSWB, nor may the latter percentage of Pay
(above the SSWB) exceed the former percentage of Pay (below the SSWB) by more
than 5.7% (or such other percentage as may be the maximum permitted differential
under US Code Section 401(1) from time to time).

         In determining each eligible Member's Allocation Pay Amount, only Pay
received during the part of the Plan Year the Member is eligible for the Company
Contribution feature of the Plan, pursuant to Section 2, shall be considered,
and the SSWB to be applied for such Member shall be proportionally prorated if
such eligibility is for less than a full Plan Year.

         Notwithstanding the foregoing, with respect to any Plan Year for which
applying the definition of Allocation Pay Amount set forth above would cause the
allocation made pursuant to Section 3.03 to violate the permitted disparity
limitations of US Treas. Reg. Section 1.401(l)-2, Allocation Pay Amount shall be
adjusted to permit Section 3.03 to operate in compliance with the limitations of
US Treas. Reg. Section 1.401(l)-2.

         1.05 ASSOCIATE means any person employed by Payless PR who receives Pay
from Payless PR. The term Associate also may include, based upon the express
written determination of the Company or the Committee, a person who receives Pay
from sources within Puerto Rico and who is employed, at the request of the
Company or the Employer, by a member of the Group (defined in Section 1.21) to
the extent such employee otherwise qualifies for membership under Section 2, in
which case such Group member shall be deemed to be an "Employer" hereunder, as
to such person or persons only. The term "Associate" shall not include (i) any
person covered under a collective bargaining agreement unless and until the
Employer and the collective bargaining representatives so

                                       2

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agree, (ii) any non-resident alien who received no earned income from the
Employer from sources within Puerto Rico, and (iii) any "leased employee" within
the meaning of US Code Section 414(n)(2). The term "Associate" may include,
where appropriate, Associates of Payless or other related Employers who are
transferred to the Employer or as otherwise may be necessary or appropriate in
construing the Plan under applicable law. In the event that an individual who
was not classified as an employee or a common-law employee is legally
reclassified as an employee or a common-law employee of the Employer, such
employee shall only be considered to be an employee at the time of such
reclassification, or, if later, at the time that such individual is initially
treated as an employee or common-law employee on the payroll records of the
Company.

         1.06 AUTHORIZED LEAVE OF ABSENCE means any leave of absence authorized
by the Employer under rules established by the Employer.

         1.07 BEFORE-TAX CONTRIBUTIONS means contributions which the Member
elects (in accordance with Section 4.01(b)) to have the Employer make directly
to the Plan on behalf of the Member, which election shall constitute an election
under PR Code Section 1165(e)(2)(A). The "Member's Before-Tax Contributions"
shall refer to Before-Tax Contributions made to the Plan by the Employer on
behalf of the Member.

         1.08 BENEFICIARY means the person or persons entitled under Section
9.02 to receive any payments payable under this Plan on account of a Member's
death.

         1.09 BOARD means the Board of Directors of the Company.

         1.10 COMMITTEE means the Profit Sharing Committee comprised of three or
more members as determined and appointed from time to time by the Board. Unless
determined otherwise by the Board, the Committee shall constitute the Profit
Sharing Committee of the Payless ShoeSource, Inc. 401(k) Profit Sharing Plan
from time to time.

         1.11 COMPANY OR PAYLESS means Payless ShoeSource, Inc., a Delaware
corporation, and any other organization which may be a successor to it.

         1.12 COMPANY ACCOUNTS means accounts reflecting the portion of each
Member's interest in the Investment Funds which are attributable to Company
Matching Contributions ("Company Matching Accounts") and to Company Profit
Sharing Contributions ("Company Profit Sharing Accounts") and to any
contributions made by an Employer under Prior Plans, as well as to any income
and/or earnings attributable to such Company Contributions and Prior Plan
contributions.

         1.13 COMPANY MATCHING CONTRIBUTIONS means contributions made by the
Company, based on a Member's Before-Tax and/or After-Tax Contributions, pursuant
to Section 3.02.

         1.14 COMPANY PROFIT SHARING CONTRIBUTIONS means discretionary
contributions made by the Company, based on Net Profits, pursuant to Section
3.01.

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         1.15 EFFECTIVE DATE means March 20, 2000 or as otherwise specified
herein.

         1.16 EMPLOYER OR PAYLESS PR means Payless ShoeSource of Puerto Rico,
Inc. and any other entity affiliated with the Company which elects, with the
consent of the Company, to participate herein.

         1.17 ERISA means the Employee Retirement Income Security Act of 1974,
as amended from time to time, to the extent applicable to the Plan.

         1.18 FIDUCIARY means the Employer, the Trustee, each of the members of
the Committee described in Section 14, and any investment manager designated
pursuant to Section 15.

         1.19 FISCAL YEAR means the Company's Fiscal Year.

         1.20 GROUP means the Company, the Employer, and any other company which
is related to the Company or Employer as a member of a controlled group of
corporations in accordance with ERISA Section 210(c), or as a trade or business
under common control in accordance with ERISA Section 210(d). For the purposes
of the Plan, for determining whether or not a person is an employee of the Group
and the period of employment of such person, each such other company shall be
included in the "Group" only for such period or periods during which such other
company is a member with the Company or Employer of a controlled group or under
common control. In determining Hours of Service, Years of Service and Vesting
Service for all purposes hereunder, employment with any member of the Group
shall be included. Members of an affiliated service group under US Code Section
414(m) will also be part of the Group.

         1.21 HOUR OF SERVICE means any hour for which an Associate (including a
leased employee) is directly or indirectly compensated, or entitled to
compensation, by the Company, the Employer or any other member of the Group,
whether or not such Group member has adopted the Plan, for any of the following:

                  (a) the performance of duties during the applicable
computation period;

                  (b) a period during which no duties are performed
(irrespective of whether the employment relationship has terminated) due to
vacation, holiday, illness, incapacity (including disability), layoff, jury
duty, Military Service, or Authorized Leave of Absence;

                  (c) a period for which back pay is awarded or agreed to,
provided that no Hour of Service has been credited under subsection (a) or (b)
with respect to the same period.

         Hours of Service and applicable computation periods shall be determined
in accordance with the requirements of 29 C.F.R. Section 2530.200b.

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         1.22 INVESTMENT FUND means any fund for investment of contributions as
described in Section 5.01.

         1.23 MAY PLAN means The May Department Stores Company Profit Sharing
Plan.

         1.24 MEMBER means any person included in the membership of this Plan as
provided in Section 2.

         1.25 MEMBER ACCOUNTS means the Member Before-Tax Accounts, the Member
After-Tax Accounts and the Member Rollover Contribution Accounts. To the extent
an Associate makes a Rollover Contribution pursuant to Section 11.02 and the
Associate is otherwise eligible but has not yet completed the participation
requirements of Section 2.01, such contribution shall also be a Member Account.

         1.26 MEMBER AFTER-TAX ACCOUNTS means the Member Accounts with respect
to a Member's After-Tax Contributions.

         1.27 MEMBER BEFORE-TAX ACCOUNTS means the Member Accounts with respect
to a Member's Before-Tax Contributions.

         1.28 MEMBER CONTRIBUTIONS means the Member's Before-Tax Contributions
and After-Tax Contributions.

         1.29 MEMBER ROLLOVER CONTRIBUTION ACCOUNTS means the Member Accounts
with respect to an Associate's or Member's Rollover Contributions.

         1.30 MILITARY SERVICE means effective December 13, 1996, any period of
obligatory military service with the Armed Forces of the United States of
America, or voluntary service in lieu of such obligatory service, provided that
the Associate returns to active employment with the Employer within the period
during which the Employer would be required to re-employ the Associate under
Federal law. Notwithstanding any provision of this Plan to the contrary,
contributions, benefits and service credit with respect to qualified Military
Service will be provided in accordance with the Uniform Services Employment and
Reemployment Rights Act and US Code Section 414(u).

         1.31 NET PROFITS means the consolidated net profits of the Company for
any given Fiscal Year, determined by generally accepted accounting principles
except that (i) no deduction or provision shall be made for any federal, state
or other taxes measured by net income nor for any contributions to the Trust or
to any other pension or profit sharing plan, and (ii) there shall be excluded
any proceeds from life insurance of which the Company or the Employer is
beneficiary (whether paid in a single sum or otherwise) and any gains or losses
on the sale of capital assets. Such term shall also mean any accumulated and
undistributed Net Profits (as defined in the preceding sentence) earned in prior
Fiscal Years to the extent that such accumulated and undistributed Net Profits
constitute surplus of the Company and its subsidiaries available for
contributions hereunder.

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         1.32 PAY means the aggregate of (i) all regular pay, commissions,
overtime pay, cash incentives, and prizes and cash awards, plus (ii) amounts
which the Associate elects to have the Employer contribute directly to the Plan
on the Associate's behalf in accordance with Section 4.01(b). Pay shall include
any amounts not otherwise includable in the Member's taxable income pursuant to
US Code Section 125. Pay shall not include amounts for a pension, a retirement
allowance, a retainer or a fee under contract, deferred compensation (including
amounts deferred under the Deferred Compensation Plan of Payless ShoeSource,
Inc.), severance pay, distributions from this Plan or items of extraordinary
income including but not limited to amounts resulting from the exercise of stock
options, spinoff cash, spinoff stock and restricted stock awards. Pay in excess
of $170,000 shall be disregarded, although such amount shall be adjusted at the
same time and in such manner as permitted under US Code Section 415(d).

         1.33 PLAN means this Payless ShoeSource, Inc. Profit Sharing Plan for
Puerto Rico Associates, as amended from time to time.

         1.34 PLAN YEAR means a calendar year ending each December 31.

         1.35 POOLED INVESTMENT ACCOUNT means an account established pursuant to
an administrative services agreement between the Company and the Trustee.

         1.36 PR CODE means the Puerto Rico Internal Revenue Code of 1994, as
amended from time to time.

         1.37 PRIOR PLAN means The May Department Stores Company Profit Sharing
Plan, the Volume Shoe Corporation Profit Sharing Plan, the Payless ShoeSource,
Inc. Profit Sharing Plan and such other qualified plan as may be so designated
by the Committee.

         1.38 QUALIFIED DOMESTIC RELATIONS ORDER means a "qualified domestic
relations order" as that term is defined in ERISA Section 206(d)(3), provided
that such order was entered on or after January 1, 1985.

         1.39 RETIREMENT means a Member's termination of employment on or after
age 55 and after completing at least five (5) Years of Service or attaining the
fifth anniversary of participation, as of which date the Member's benefit shall
be nonforfeitable.

         1.40 ROLLOVER CONTRIBUTIONS means contributions which the Associate or
Member, as applicable, elects to make in accordance with Section 11.02.

         1.41 SOCIAL SECURITY WAGE BASE means, with respect to each Plan Year,
the maximum amount of wages which are subject to tax in such year under the
Federal Old Age, Survivors and Disability Insurance System.

         1.42 TOTAL AND PERMANENT DISABILITY or DISABILITY means the total
incapacity of a Member for the continued performance of regular active
employment with

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an Employer, which disability is expected to be permanent, as determined by the
Committee, provided that a Member shall not be considered totally and
permanently disabled for purposes of this Plan unless he qualifies for
disability benefits under Title 11 of the Federal Social Security Act.

         1.43 TRANSFERRED ACCOUNTS means Member and Company Accounts transferred
from a Prior Plan.

         1.44 TRUST AGREEMENT means the agreement or agreements provided for in
Section 15, as amended from time to time.

         1.45 TRUST FUND means all the assets of the Investment Funds, including
assets transferred from a Prior Plan, which are held in one or more trusts by
the Trustee or Trustees for the purposes of this Plan.

         1.46 TRUSTEE means the corporation(s), person or persons which may at
any time be acting as Trustee or Trustees under the Trust Agreement.

         1.47 UNIT means one of the units representing an interest in an
Investment Fund as provided in Section 6.03.

         1.48 UNIT VALUE means the value of each Unit in an Investment Fund as
of the Valuation Date as determined pursuant to Section 6.04.

         1.49 US CODE means the U.S. Internal Revenue Code of 1986, as amended
from time to time.

         1.50 VALUATION DATE means any day that the New York Stock Exchange is
open for business or any other date chosen by the Committee. Prior to March 31,
2000, Valuation Date means the last business day of each calendar month and any
other date chosen to perform a valuation.

         1.51 YEAR OF SERVICE for purposes of determining eligibility under
Section 2 means a year of employment during which the Associate has been paid
for not less than 1,000 Hours of Service for an Employer or any other member of
the Group. An Associate shall be credited with a year of employment on each
anniversary date of his commencement of employment with an Employer. Periods of
temporary illness, temporary layoff, Military Service, and Authorized Leaves of
Absence shall not be deemed as breaking continuity of employment and shall be
counted in determining Years of Service. The term "Year of Service" shall also
include an employment year during which, except to the extent otherwise provided
in the US Treasury Regulations, a "leased employee" within the meaning of US
Code Section 414(n) has been paid for not less than 1,000 Hours of Service for
the Employer even though during such period the leased employee was not an
Associate as defined in Section 1.05. The term "Year of Service" shall include
any period required to be included by the Family and Medical Leave Act of 1993.

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The extent to which service with another organization, part or all of whose
business operations are acquired by the Company (or by an Employer), shall be
credited as "Years of Service" hereunder or as "Vesting Service" under Section
1.52 shall be determined by the Company or by the Committee on a case-by-case
basis.

         1.52 Vesting Service for purposes of determining a Member's vested
interest under Section 6.07 is based on "elapsed time" and is to be determined
in accordance with the following definitions:

                  (a) "EMPLOYMENT COMMENCEMENT DATE" means the date upon which
an Associate first performs an Hour of Service.

                  (b) "HOUR OF SERVICE" means an hour for which an Associate is
paid or entitled to payment for the performance of duties for the Employer or
any other member of the Group.

                  (c) "PERIOD OF SERVICE" means a period beginning on the
Associate's Employment Commencement Date (or Reemployment Commencement Date, as
the case may be) and ending on his Severance from Service Date.

                  (d) "SEVERANCE FROM SERVICE DATE" means the earlier to occur
of:

                           (i) the last date upon which an Associate terminates
         employment with the Employer or any other member of the Group (either
         voluntarily or involuntarily), retires or dies; or

                           (ii) the first anniversary of the date upon which the
         Associate was first absent from service with the Employer (with or
         without pay) for any other reason (i.e., vacation, sickness,
         disability, leave of absence or layoff).

Notwithstanding the foregoing, the Severance from Service Date of an Associate
who is absent from service with the Employer beyond the first anniversary of the
first day of such absence on account of maternity or paternity (as described in
ERISA Sections 202(b)(5)(A) or 203(b)(3)(E)) shall be the second anniversary of
the first day of such absence; and the period of time between such first and
second anniversaries shall not be treated as a Period of Service or as a Period
of Severance.

                  (e) "PERIOD OF SEVERANCE" means a period beginning on an
Associate's Severance from Service Date and ending upon the Associate's
Reemployment Commencement Date.

                  (f) "REEMPLOYMENT COMMENCEMENT DATE" means the first date,
following a Severance from Service Date, upon which the Associate performs an
Hour of Service for the Employer or any other member of the Group.

                                       8

<PAGE>   15

                  (g) "SERVICE SPANNING RULES" In determining whether or not an
Associate has completed a twelve month Period of Service for purposes of
vesting, the following Periods of Severance shall be treated as Periods of
Service:

                           (i) If an Associate terminates employment with the
         Employer (either voluntarily or involuntarily) or retires, and then
         performs an Hour of Service within the twelve month period beginning on
         the Severance from Service Date, such Period of Severance shall be
         treated as a Period of Service; and

                           (ii) If an Associate terminates employment with the
         Employer (either voluntarily or involuntarily) or retires during an
         absence from service of twelve months or less for any reason other than
         a termination or retirement, and then performs an Hour of Service
         within a period of twelve months from the date the Employee was first
         absent from service, the Period of Severance shall be treated as a
         Period of Service.

                                       9

<PAGE>   16

                                    SECTION 2

                                   MEMBERSHIP

         2.01     CONDITIONS OF ELIGIBILITY.

                  (a) Each Associate who on March 19, 2000, was a Member of or
is eligible to be a Member of the Plan shall continue to be a Member of the Plan
entitled to make Member Contributions pursuant to Section 4 and eligible to
share in Company Contributions pursuant to Section 3.

                  (b) Each other Associate shall be eligible to become a Member
of the Plan when the Associate has completed one Year of Service and attained
age 21, with membership to commence as of the first day of the month coincident
with or following the date he has met these eligibility requirements. Such
Associate shall be eligible:

                           (i)  to make Member Contributions pursuant to
         Section 4;

                           (ii) to share in Company Matching Contributions
         pursuant to Section 3.02;

                           (iii) to share in Company Profit Sharing
         Contributions, if any, pursuant to Section 3.01.

                  (c) Each Member shall be deemed to have elected to make a
three percent (3%) Before-Tax Contribution pursuant to Section 4.01(b),
commencing with the paycheck issued with respect to the first payroll period
beginning on or after the first day of the month coincident with or following
the date he met the foregoing eligibility requirements. Notwithstanding this
"deemed" election, an Associate or Member may elect pursuant to procedures
established by the Committee to not make, or to suspend making, said three
percent (3%) automatic Before-Tax Contribution, or pursuant to Section 4.01(a)
or (b) to make an After-Tax or a Before-Tax Contribution of an amount other than
three percent (3%).

                  (d) All Years of Service with an Employer including the
Company and Years of Service with The May Department Stores Company ("May")
while the Employer was part of the Group which included May are counted toward
eligibility, provided that, if an Associate has a 1-year break in service before
a Year of Service, service with an Employer or May before such break will not be
taken into account. For the purposes of this Section 2.01, "break in service"
means a 12 consecutive month employment year as used in Section 1.51 during
which the Associate does not complete more than 500 Hours of Service with the
Employer, and/or May while part of the Group.

                  (e) Only Associates employed by the Company's Puerto Rican
subsidiaries are eligible for membership hereunder.  Any other Associate who has
Accounts in this Plan, such Accounts shall continue to be revalued as of each
succeeding Valuation Date pursuant to Section 6.04.

                                       10

<PAGE>   17

         2.02 RE-EMPLOYMENT. A former Member who has retired or has otherwise
terminated employment and is rehired shall become a Member on the first day of
the calendar month coinciding with or next following the date of his rehire.

                                       11

<PAGE>   18

                                    SECTION 3

                              COMPANY CONTRIBUTIONS

         3.01 AMOUNT OF COMPANY PROFIT SHARING CONTRIBUTION. The Company or an
Employer may contribute to the Trust, as of the end of each Plan Year, a
percentage of the Company's Net Profits as a Company Profit Sharing
Contribution. The amount of such contribution, if any, shall be determined by
the Board of Directors in its discretion. Any such contribution shall be made as
soon as practicable after the close of the Company's Fiscal Year. All such
contributions advanced to the Plan by the Company shall be reimbursed to the
Company by the Employer.

         3.02 AMOUNT OF COMPANY MATCHING CONTRIBUTION. The Company, in its
discretion, shall contribute to the Trust, as of the end of each Plan Year, such
that the amount contributed to this Plan and to the Payless ShoeSource, Inc.
Profit Sharing Plan shall be equal to 2 1/2% of Net Profits, until determined
otherwise by the Board of Directors, in the form of a Company Matching
Contribution. The total amount of such contribution shall be allocated in
proportion to the amount that each Member's Contributions under Sections 4.01(a)
and (b), up to a total of 5% of such Member's Pay for a Plan Year, bears to the
total amount of all Member Contributions up to 5% of such Members' Pay for a
Plan Year. Such Company Matching Contribution shall be determined and paid to
the Trustee as soon as practicable after the close of each Fiscal Year and shall
be reimbursed to the Company by the Employer when paid.

         3.03 ALLOCATION OF COMPANY CONTRIBUTIONS. The Company Contributions
shall be allocated only to the Company Accounts of Members who are employed by
the Employer on the last day of the Plan Year and on behalf of Members whose
employment has terminated during the Plan Year by reason of Retirement, death or
Disability. Company Profit Sharing Contributions shall be credited to eligible
Members' Company Profit Sharing Contribution Accounts. Company Profit Sharing
Contributions allocated prior to or as of July 31, 1997 shall be fully vested;
Company Profit Sharing Contributions allocated thereafter shall be subject to
the vesting provisions of Section 6.07. Company Matching Contributions shall be
subject to the vesting provisions of Section 6.07 and to the withdrawal penalty
provisions of Section 8.02(a). No Company Matching Contribution shall be made
with respect to a Member Before-Tax Contribution in excess of the PR Code
Section 1165(e)(7)(A) limit, as referred to in Section 4.01(h) and as revised
from time to time.

         3.04 PROFIT SHARING ALLOCATION FORMULA. The Company Profit Sharing
Contribution, if any, shall be allocated to all Members eligible to share in the
contribution according to the ratio that each Member's Allocation Pay Amount for
the Plan Year bears to the total Allocation Pay Amount for all eligible Members
for the Plan Year. For this purpose the term "eligible Members" includes Members
in both the Payless ShoeSource, Inc. 401(k) Profit Sharing Plan and this Plan.

         3.05 INVESTMENT OF THE COMPANY. The amounts allocated to each Member
pursuant to Section 3.03 shall be credited to his Company Accounts and invested
in one or
                                       12

<PAGE>   19

more of the Investment Funds described in Section 5.01 and in the percentages
designated by the Member in the investment election filed pursuant to
Section 5.02 effective at the time the amount is allocated.

         3.06     RETURN OF COMPANY CONTRIBUTIONS.

                  (a) If, after the Company Contribution has been made and
allocated, it should appear that, through oversight or a mistake of fact or law,
a Member (or an Associate who should have been considered a Member) who should
have been entitled to share in such contribution, receives no allocation or
received an allocation which was less than he should have received, the Company
may, at its election and in lieu of reallocating such contribution, make a
special make-up contribution for the Company Account of such Member in an amount
sufficient to provide for him the same addition to his Company Account as he
should have received. Similarly, if a Member received an allocation which was
more than he should have received (or a Member was inappropriately included in
the Plan), the Company, at its election, may reallocate such contribution,
offset other Company contributions against such allocation, or use such
allocation to pay Plan expenses.

                  (b) To the extent permitted by ERISA, each contribution made
to the Trust shall be made on the condition that it is currently deductible by
the Employer under PR Code Section 1023(n) for the taxable year with respect to
which the contribution is made. If a contribution subsequently is determined,
whether in whole or in part, not to be currently deductible as provided in the
preceding sentence, then, within one year of the date of disallowance of the
deduction of such Company Contribution, an amount equal to the disallowed
deduction shall be returned to the Company and/or Employer, as applicable.

                  (c) Earnings attributable to a contribution that is returned
pursuant to Subsection (a) or (b) above shall not be withdrawn, but losses
attributable thereto shall reduce the amount returned to the Company and/or
Employer.

                                       13
<PAGE>   20

                                    SECTION 4

                              MEMBER CONTRIBUTIONS

         4.01     PROCEDURE FOR MAKING CONTRIBUTIONS.

                  (a) After-Tax Contributions. Subject to any limitations set
forth in the PR Code from time to time, each Member may designate, pursuant to
procedures established by the Company, and contribute to the Plan an amount
equal to not less than 1% nor more than 15% (in whole percentage points) of his
Pay as he shall have designated pursuant to procedures established by the
Company (which may establish lower permissible After-Tax Contributions for
Highly Compensated Employees); provided, however, that a Member shall not
contribute, or elect to have contributed on his behalf, amounts with respect to
Pay received by him after the close of the calendar year during which his
employment terminated and further provided that any Before-Tax Contributions
made on behalf of the Member shall reduce by the percentage which he elects to
have contributed pursuant to Section 4.01(b)(i), the percentage of Pay that the
Member may contribute pursuant to this Section 4.01(a). Notwithstanding any
provision in the Plan to the contrary, in no event may After-Tax Contributions
exceed 10% of the Members accumulated Pay since he or she became a Member in the
Plan without taking into consideration any Member's After-Tax Contribution
subject to Company Matching Contributions.

                  (b)      Before-Tax Contributions.

                           (i) Subject to the limitations set forth below, each
                  Member may elect that his Employer shall contribute directly
                  to the Trust Fund an amount equal to a whole percentage of his
                  Pay, not less than 1% nor greater than such percentage as may
                  be determined from time to time by the Company which amount
                  shall be his Before-Tax Contribution. The maximum Before-Tax
                  Contribution by a Member who is determined to be a Highly
                  Compensated Employee under Section 4.02, for the Plan Year in
                  question, may be further restricted or limited by the Company
                  or the Committee from time to time.

                           (ii) Pursuant to Section 2.01(c), each eligible
         Member shall be deemed to have elected to make a three percent (3%)
         Before-Tax Contribution, unless the Member elects otherwise in
         accordance with procedures established by the Committee.

                  (c) Notwithstanding any election in accordance with Section
4.01 (b), if the Committee at any time determines that all or any portion of the
Member's Before- Tax Contributions should be treated as After-Tax Contributions
in order for the Before- Tax Contribution provisions of the Plan to quality as a
"qualified cash or deferred arrangement" for purposes of Section 1165(e) of
the PR Code, or if the Actual Deferral Percentage standards set forth in the PR
Code are not met at the end of the Plan Year; then

                                       14

<PAGE>   21

the Committee, in its sole and absolute discretion, (i) may, in accordance
with Section 4.02(b) below, limit the amount which shall be contributed by the
Employer as Before-Tax Contributions after the date of such determination on
behalf of all or any portion of the Members and (ii) shall distribute any excess
Before-Tax Contributions made with respect to the Plan Year to the affected
Members as soon as practicable after the end of the Plan Year.

                  (d) The Employer shall (i) deduct a Member's After-Tax
Contributions from the Pay of the Member in such installments as the Employer
may deem appropriate, (ii) contribute a Member's Before-Tax Contributions on
behalf of the Member, and (iii) reduce the Pay that is paid to the Member
directly in cash by an amount equal to the Member's Before-Tax Contributions in
such installments as the Employer shall deem appropriate. The amounts so
deducted and so contributed shall be paid by the Employer to the Trustee not
later than 15 days following the end of the month with respect to which such
amounts are to be so deducted and contributed or within such shorter period of
time as may be designated under the Code, ERISA or related regulations. The
Employer may, from time to time, make estimated contribution payments to the
Trustee during each month.

                  (e) Effective with the paycheck issued with respect to the
first payroll period beginning in any calendar month, or as of such other
effective time as may be determined by the Committee, a Member may elect to
change the rate of his After-Tax Contributions to any other rate permitted by
Subsection (a) of this Section 4.01 and may elect to change the amount to be
contributed by the Employer directly to the Trust Fund as Before-Tax
Contributions to an amount equal to an amount permitted by Subsection (b) of
this Section 4.01 with respect to such contributions to be made after the
effective date of the election, pursuant to procedures established by the
Committee.

                  (f) Not later than 15 days prior to the beginning of a payroll
period of a Member, or not later than such other date as may be determined by
the Committee, such Member may elect, pursuant to procedures established by the
Committee, (i) to suspend making After-Tax Contributions and (ii) that the
Employer should suspend making Before-Tax Contributions on his behalf, all as of
the beginning of such payroll period. Not later than 15 days prior to the
beginning of a payroll period of a Member, or not later than such other date as
may be determined by the Committee, such Member may elect (i) to resume making
After-Tax Contributions and (ii) that the Employer shall resume making
Before-Tax Contributions on his behalf, by indicating any amount of
contributions permitted under Subsection (a) and designating an amount equal to
any amount of Pay as Before-Tax Contributions that is permitted under Subsection
(b) hereof.

                  (g) Contributions pursuant to this Section 4.01 shall be
credited to Member Accounts.

                  (h) Notwithstanding any election in accordance with paragraph
(b) of this Section 4.01, the total amount of a Member's Before-Tax
Contributions for any calendar year shall not exceed $8,000 or 10% of the
Member's annual Pay or such other amount as may be adjusted from time to time
under applicable Puerto Rico law (the

                                       15

<PAGE>   22

"Deferral Limit"). In addition, Before-Tax Contributions by a Member will
be further limited by contributions to an individual retirement account as
described in PR Code Section 1169. If a Member reaches the Deferral Limit, the
Committee can direct that all or any portion of such Member's Contributions
during such year shall be After-Tax Contributions regardless of such Member's
elections pursuant to Sections 4.01(a) and 4.01(b).

                  (i) As of the Effective Date, all then currently existing flat
dollar Member Contributions shall be converted to Member Contributions based on
1% increments calculated by dividing such flat dollar amount by the Member's Pay
for the prior year and rounding the product to the nearest whole percent;
provided, that no flat dollar contribution shall be converted to a percent
contribution of less than 1%.

         4.02     LIMITATIONS ON BEFORE-TAX CONTRIBUTIONS.

                  (a) Notwithstanding the foregoing provisions of this Section
4, the Committee shall limit the amount of Before-Tax Contributions made on
behalf of each "Highly Compensated Employee" (as hereinafter defined) to the
extent necessary to ensure that either of the following tests is satisfied:

                           (i) The "Actual Deferral Percentage" (as hereinafter
         defined) of the group of eligible Highly Compensated Employees for the
         Plan Year is not more than the Actual Deferral Percentage of all other
         eligible Associates ("non-Highly Compensated Employees") multiplied by
         1.25; or

                           (ii) The excess of the Actual Deferral Percentage for
         the group of eligible Highly Compensated Employees over that of all
         other eligible Associates for the Plan Year is not more than two
         percentage points, and the Actual Deferral Percentage for the group of
         eligible Highly Compensated Employees for the Plan Year is not more
         than the Actual Deferral Percentage of all other eligible Associates
         multiplied by 2.0.

                           (iii) To the extent permitted by the PR Code, the
         Actual Deferral Percentage for non-Highly Compensated Employees used in
         satisfying the tests set forth in (i) and/or (ii) above may be, for any
         Plan Year, the Actual Deferral Percentage for non-Highly Compensated
         Employees for the immediately preceding Plan Year, as determined by the
         Company in the manner permitted by law.

         For the purposes of this Section 4.02, Section 4.04 and Section 4.05,
"eligible" means eligible to be a Member of this Plan pursuant to Section
2.01(b)(1).

         For purposes of Sections 4.02, 4.04 and 4.05, the term "Highly
Compensated Employee" shall mean any employee whose Pay is greater than the Pay
of two-thirds of all eligible employees, taking into account only Pay which is
considered for the purpose of Section 4.01. To the extent permitted by the PR
Code and its regulations, the Committee

                                       16

<PAGE>   23

may elect to include all other non-eligible employees for the purposes of
determining compliance by the Plan with the actual deferral percentage test of
PR Code Section 1165.

         For purposes of this Section 4.02, the term "Actual Deferral
Percentage" shall mean, for a specified group of Associates for a Plan Year, the
average of the ratios (calculated separately for each person in such group) of

                           (i) The aggregate of the Before-Tax Contributions
         (and such other contributions which, in accordance with applicable
         rules and regulations promulgated under the PR Code, may be aggregated
         with such Before-Tax Contributions for purposes of demonstrating
         compliance with the requirements of the PR Code) which are actually
         payable to the Trust on behalf of each such Associate, to

                           (ii)     Such Associate's Pay for such Plan Year.

         In the event it is determined prior to any payroll period that the
amount of Before- Tax Contributions elected to be made thereafter would cause
the limitation prescribed in this Section 4.02 to be exceeded, the amount of
Before-Tax Contributions allowed to be made on behalf of Highly Compensated
Employees (and/or such other Members as the Committee may prescribe) shall be
reduced to a rate determined by the Committee, and any elections of future
Before-Tax Contributions which exceed the rate determined by the Committee shall
be deemed to be After-Tax Contributions for the remainder of the Plan Year,
notwithstanding the limitations on contribution rate changes in Section 4.01(e).
Except as is hereinafter provided, the Members to whom such reduction is
applicable and the amount of such reduction shall be determined pursuant to such
uniform and nondiscriminatory rules as the Committee shall prescribe.

                  (b) Notwithstanding the provisions of the foregoing paragraph,
with respect to any Plan Year in which Before-Tax Contributions on behalf of
Highly Compensated Employees exceed the applicable limit set forth in this
Section 4.02, the Committee shall reduce the amount of the excess Before-Tax
Contributions made on behalf of the Highly Compensated Employees (by reducing
such contributions in order of Actual Deferral Percentages beginning with the
highest), and shall distribute such excess Before-Tax Contributions (along with
earnings attributable to such excess Before-Tax Contributions, as determined
pursuant to such rules and regulations as shall be prescribed by the Puerto Rico
Department of the Treasury) to the affected Highly Compensated Employees as soon
as practicable after the end of such Plan Year, and in all events prior to the
end of the next following Plan Year. Any excess Before-Tax Contributions to be
returned to Highly Compensated Employees shall be calculated (i.e., reduced) and
distributed using the methods allowed under the PR Code and its regulation with
preference given to the method using the largest dollar amount deferred by the
Highly Compensated Employees rather than the highest percentage. In lieu of such
distribution of excess Before-Tax Contributions, the Committee may, to the
extent permitted by applicable rules and regulations (and (i) except with
respect to situations in which Section 4.01 (h) applies, and (ii) prior to March
15 of the calendar year following the Plan Year in which such contributions are
made or such later date as may be permitted under the PR

                                       17

<PAGE>   24

Code), recharacterize as After-Tax Contributions for such Plan Year all or
a portion of the Before-Tax Contributions for Members who are Highly Compensated
Employees to the extent necessary to comply with the applicable limit set forth
in this Section 4.02.

         In lieu of either distributing or recharacterizing excess Before-Tax
Contributions, the Company may, to the extent permitted by applicable rules and
regulations, make a qualified nonelective contribution on behalf of non-Highly
Compensated Employees in an amount sufficient to satisfy one of the
non-discrimination tests set forth above, which Company contribution (if any)
shall be reimbursed by the Employer. Allocation of any such qualified
non-elective contribution would be to the Member Before-Tax Accounts of each
non-Highly Compensated Employee in the same proportion that such Member's
Before-Tax Contributions for the year bears to the total Member Before-Tax
Contributions for the year for all non-Highly Compensated Employees of the
Employer. However, the maximum annual addition credited to a Member's Account
shall be limited by Section 4.06.

                  (c) Notwithstanding any provision of Sections 4.02(c) to the
contrary, if Before-Tax Contributions on behalf of Highly Compensated Employees
in excess of the applicable limit set forth in Section 4.02 either are
distributed or are recharacterized, any Company Matching Allocation which would
have been attributable to the amounts distributed or recharacterized shall be
held unallocated in a suspense account and, as of the end of the Plan Year,
forfeited and added to and allocated with Company Contributions in the next
following Plan Year.

         4.03     DISTRIBUTIONS OF EXCESS DEFERRALS

                  (a) Notwithstanding any other provision of the Plan, Excess
Before-Tax Deferrals (as hereinafter defined) and earnings allocable thereto as
determined pursuant to such rules and regulations as are prescribed by the
Puerto Rico Department of the Treasury, may be distributed no later than April
15 (or such later date as may be permitted under the PR Code) to Members who
claim such allocable Excess Before-Tax Amounts (which shall be the "Excess
Before-Tax Deferrals" plus earnings, if any) for the preceding calendar year.

                  (b) For purposes of this Section 4.03, "Excess Before-Tax
Deferral" means the amount of Pay which a Member has elected to have the
Employer contribute to the Trust rather than receive it in cash, which is a
Member Contribution under Section 4.01 for a calendar year that the Member
allocates to this Plan pursuant to the claim procedure set forth in
subsection 4.03(c) hereof.

                  (c) The Member's claim shall be in writing; shall be submitted
to the Committee no later than March 1 (or such other date as the Committee may
specify); shall specify the amount of the Member's Excess Before-Tax Deferral
for the preceding calendar year; and shall be accompanied by the Member's
written statement that if such amounts are not distributed, the Excess
Before-Tax Deferrals, when added to amounts deferred under other plans or
arrangements described in PR Code Section 1165(e) exceeds

                                       18

<PAGE>   25

the limit imposed on the Member in accordance with the applicable provisions of
the PR Code for the year in which the deferral occurred.

                  (d) Notwithstanding any provision of Sections 3 or 4 to the
contrary, any Company Matching Allocation which would have been attributable to
an Excess Before-Tax Deferral distributed to a Member under Section 4.02(a)
shall not be retained or distributed (unless and to the extent permitted under
the PR Code and so determined by the Company in a uniform, nondiscriminatory
manner), but shall be held unallocated in a suspense account and, as of the end
of the Plan Year, forfeited and added to and allocated with Company
Contributions in the next following Plan Year.

         4.04 LIMITATIONS ON AFTER-TAX CONTRIBUTIONS. Notwithstanding the
foregoing provisions of this Section 4, the Company or the Committee, in their
respective discretion, may limit the amount of After-Tax Contributions made by
or on behalf of each eligible Member to the extent determined appropriate.

         4.05 LIMITATIONS ON COMPANY MATCHING CONTRIBUTIONS. Notwithstanding the
foregoing provisions of Sections 3.02 or this Section 4, the Company or the
Committee, in their respective discretion, may limit the amount of Company
Matching Contributions allocated on behalf of each eligible Member to the extent
determined appropriate.

         4.06 AGGREGATE LIMITATIONS. To the extent required under the PR Code or
as so determined by the Company or the Committee, in their respective
discretion, Company Matching Contributions and Member After-Tax Contributions
may be aggregated on a Member by Member basis and limited, as determined
appropriate.

                                       19

<PAGE>   26

                                    SECTION 5

                              INVESTMENT PROVISIONS

         5.01     INVESTMENT FUNDS.

                  (a) There shall be established as part of the Trust Fund a
reasonable range of investment options. The Committee may from time to time, in
its discretion, change, delete or add Investment Funds available within the
Trust Fund; provided that unless and until the Plan is amended accordingly, the
Plan shall provide a Payless Common Stock Fund as an investment option.

                  (b) Income from and proceeds of sales of investments in each
Investment Fund shall be reinvested in the same Investment Fund. Any income or
other taxes payable with respect to a Fund shall be charged to such Fund.

                  (c) A Trustee may, from time to time, make temporary
investments in short term obligations of the United States Government,
commercial paper, or other investments of a short term nature, pending
investment in an Investment Fund.

         5.02     INVESTMENT DIRECTION.

                  (a) A Member may elect that his Member Contributions for each
Payroll period be invested in 1% increments totaling 100% in one or more of the
Investment Funds. Such election must be made pursuant to procedures prescribed
by the Committee. Such election shall be effective until and unless a Member
makes a different election for any period, but only as provided for under
Subsection 5.02(b) and Subsection 5.02(c). If the Member fails to file a timely
initial investment election, he shall be deemed to have elected to have 100% of
his Member Contributions and his Company Profit Sharing Contributions invested
in the stable, fixed income investment as may be determined by the Committee and
100% of his Company Matching Contributions in the Payless Common Stock Fund.
Until such time as the Committee determines otherwise and so notifies Members, a
Member's share of any Company Contributions, when allocated as of Plan Year-end,
shall be invested in the same Investment Funds in the same proportions as the
Member has elected in connection with investment of his Member Contributions at
the time the amount is allocated.

                  (b) A Member may change his election with respect to future
Member and Company Contributions effective pursuant to procedures prescribed by
the Committee, and may not change his election in any other manner except as
provided in Subsection 5.02(c).

                  (c) Effective as of the date determined by the Committee and
pursuant to procedures prescribed by the Committee, a Member may elect to have
any or all of the value in any of the Investment Funds which are credited to
his Member and/or Company Accounts transferred and invested in any one or
more of the Investment Funds.

                                       20

<PAGE>   27

                  (d) Notwithstanding this Section 5.02, effective March 12,
2000, during the black out period as determined by the Committee and the
Trustee, no investment transfers or changes may be made by any Member unless
provided by Section 6.06.

                                       21

<PAGE>   28

                                    SECTION 6

                                    ACCOUNTS

         6.01 MEMBER ACCOUNTS. The Committee shall maintain or cause to be
maintained for each Member under each Investment Fund in which his Member
Contributions are invested separate Member Accounts which shall reflect the
portion of his interest in such Investment Fund which is attributable to his
contributions. The Member's After-Tax Contributions shall be credited to a
separate Member After-Tax Account. The Member's Before-Tax Contributions shall
be credited to a separate Member Before-Tax Account. The Member's or Associate's
Rollover Contribution shall be credited to a separate Member Rollover
Contribution Account.

         6.02 COMPANY ACCOUNTS. The Committee shall maintain or cause to be
maintained for each Member under each Investment Fund in which his Company
Contributions are invested separate Company Accounts which shall reflect the
portion of his interest in such Investment Fund which is attributable to Company
Contributions, as well as to contributions made by an Employer under Prior Plans
and to any income or earnings attributable to such Company Contributions and
Prior Plan contributions. The Member's Company Matching Contributions shall be
credited to a separate Company Matching Contribution Account. The Member's
Company Profit Sharing Contribution, if any, shall be credited to a separate
Company Profit Sharing Contribution Account.

         6.03 MAINTENANCE OF ACCOUNTS. For the purposes of maintaining Accounts
pursuant to this Section 6, each Investment Fund, shall be divided into Units,
and the Interest of each Member in such Investment Fund shall be evidenced by
the number of Units in such Investment Fund credited to his Accounts.

         6.04 VALUATION OF ACCOUNTS. As of each Valuation Date the Committee
shall determine the value of a Unit in each Account by dividing the current
market value of all property in each such Account as of such Valuation Date
(after deducting any expenses or other amounts including withdrawals property
chargeable against such Account) by the number of Units then outstanding to the
credit of all Members in each such Account.

         6.05 MEMBER STATEMENTS. The Committee shall furnish or cause to be
furnished to each Member a statement of his Company and Member Accounts, at
least once each year, or more frequently if required by applicable law.

         6.06 Shares of Payless ShoeSource, Inc. ("Payless Stock") in the
Payless Common Stock Fund.

                  (a) Each Member (or beneficiary of a deceased Member) who has
Accounts invested in the Payless Common Stock Fund shall, as a named fiduciary
within the meaning of Section 403(a)(1) of ERISA, have the right to direct the
Trustee with respect to the vote of the number of shares of Payless Stock
attributable to Units credited to him in the Payless Common Stock Fund as of
the latest practicable Valuation Date prior to or contemporaneous with the
record date set by the Company for each meeting of

                                       22

<PAGE>   29

shareowners of the Company. For such purpose the Trustee shall furnish to
each such Member prior to each such meeting the proxy statement for such
meeting, together with a form to be returned to the Trustee on which may be set
forth the Member's instructions as to the manner of voting such shares of stock.
Upon receipt of such instructions, the Trustee shall vote such shares in
accordance therewith. If Member's instructions are not received by the Trustee
in a timely manner, the Trustee shall vote such Member's shares in the same
proportion as the shares of Common Stock for which instructions were actually
received from Members. The Trustee shall not divulge the instructions of any
Member.

                  (b) Each Member (or beneficiary of a deceased Member) who has
Accounts invested in the Payless Common Stock Fund shall, as a named fiduciary
within the meaning of Section 403(a)(1) of ERISA, have the right with respect to
the number of shares of Payless Stock attributable to Units credited to him in
the Payless Common Stock Fund as of the latest practicable Valuation Date, to
direct the Trustee in writing as to the manner in which to respond to a tender
or exchange offer with respect to Payless Stock, and the Trustee shall respond
in accordance with the instructions so received. The Trustee shall utilize its
best efforts to timely distribute or cause to be distributed to each Member such
information as will be distributed to shareowners of the Company in connection
with any such tender or exchange offer, together with a form requesting
instructions on whether or not such shares will be tendered or exchanged. If the
Trustee shall not receive timely direction from a Member as to the manner in
which to respond to such a tender or exchange offer, the Trustee shall not
tender or exchange any shares of Payless Stock with respect to which such Member
has the right of direction. Tenders as a result of a self-tender offer by the
Company shall continue notwithstanding any investment change blackout. The
Trustee shall not divulge the instructions of any member. The proceeds from the
tender or exchange of shares attributable to Units in Payless Common Stock
Investment Fund accounts of Members shall be transferred to one of the
Investment Funds described in Section 5.01 and pursuant to a procedure
established by the Committee.

         6.07     VESTING IN MEMBER AND COMPANY ACCOUNTS

                  (a) Vesting Schedule. A Member shall have a fully vested
interest at all times (i) in his Member Accounts and (ii) in his Company Profit
Sharing Contribution Account balance determined as of July 31, 1997. A Member
who has completed at least two full Years of Service as of August 1, 1997 also
shall be fully vested at all times (i) in his Company Matching Contributions
Account and (ii) in his Company Profit Sharing Contribution Account determined
at any time after July 31, 1997. The Company Matching Contribution Account of a
Member who is not or was not credited with at least two Years of Service as of
August 1, 1997 and his Company Profit Sharing Contribution Account attributable
to Company Profit Sharing Contributions, if any, based on such Member's
eligibility for such contributions after August 1, 1997, shall vest according to
the following schedule:

<TABLE>
<CAPTION>
                   Vesting Service                          Vested Interest
                 -------------------                        ---------------

                 <S>                                        <C>
                 Fewer than 2 years                                0%
</TABLE>

                                       23

<PAGE>   30

<TABLE>
<CAPTION>
                   Vesting Service                          Vested Interest
                   ---------------                          ---------------

                   <S>                                      <C>
                       2 years                                    25%

                       3 years                                    50%

                       4 years                                    75%

                   5 years or more                                100%
</TABLE>

Notwithstanding the foregoing, a Member's interest in his Company Matching
Contribution Account and his Company Profit Sharing Contribution Account shall
become fully vested upon the Member's Retirement, death or Disability.

                  (b) Cash-Out Distributions to Partially Vested Members and
Restoration of Forfeitures. If, pursuant to Section 10.01, a partially-vested
Member receives a cash-out distribution before he incurs a Forfeiture Break in
Service (as defined in Subsection (e) below), the cash-out distribution will
result in an immediate forfeiture of the nonvested portion(s) of the Member's
Company Matching and Company Profit Sharing Contribution Account(s). See
Subsection (e) below. A partially-vested Member is a Member whose Vested
Interest, determined under Section 6.07(a), in either his Company Matching
Contribution Account or his Company Profit Sharing Contribution Account, or
both, is less than 100%. A cash-out distribution is a distribution of the entire
vested portion of the Member's Account(s).

                           (i) A partially-vested Member who is reemployed by an
         Employer after receiving a cash-out distribution of the vested portion
         of his Account(s) shall have such forfeited amount restored, unless the
         Member no longer has a right to restoration under this subparagraph
         (i). The amount restored by the Plan Administrator shall be the same
         dollar amount as the dollar amount of his Account(s) on the Valuation
         Date immediately preceding the date of the cash- out distribution,
         unadjusted for any gains or losses occurring subsequent to that
         Valuation Date but reduced by the amount of the prior cash-out
         distribution. Restoration of the Member's Account balance(s) includes
         restoration of all US Code Section 411(d)(6) protected benefits with
         respect to the restored Account(s) in accordance with applicable
         Treasury regulations. The Plan Administrator will not restore a
         reemployed Member's Account balance(s) under this subparagraph (i) if
         the Member has incurred a Forfeiture Break in Service (as defined in
         Subsection (d) below).

                           (ii) If restoration of the Member's Account(s) is
         permitted under subparagraph (i) above, the Plan Administrator will
         restore the Member's Account(s) as of the last day of the Plan Year
         during which such Member was reemployed by an Employer. To restore the
         Member's Account(s), the Plan Administrator, to the extent necessary,
         will allocate to the Member's Account(s):

                                    (A)     first, the amount, if any, of
                  Member forfeitures otherwise available for allocation under
                  Subsection (e) below;

                                       24

<PAGE>   31

                                    (B)    second, deductible Employer
                  contributions for the Plan Year to the extent made under a
                  discretionary formula; and

                                    (C)    third, as otherwise permitted by law.

         The Plan Administrator will not take into account any allocation under
         this subsection (b) in applying the limitation on allocations under
         Section 13.

                           (iii) The deemed cash-out rule applies to a 0% vested
         Member. A 0% vested Member is a Member whose Account(s) derived from
         Employer contributions is (are) entirely forfeitable at the time of his
         termination of employment. Under the deemed cash-out rule, the Plan
         Administrator will treat the 0% vested Member as having received a
         cash-out distribution on the date of the Member's termination of
         employment or, if the Member's Account(s) is (are) entitled to an
         allocation of Employer contributions for the Plan Year in which he
         terminates employment, on the last day of that Plan Year.

                  (c) Determination of Vesting Service. For purposes of
determining a Member's Vested Interest in his Company Contributions Account(s)
under subsection (a) above, a Member shall be credited with that number of years
of Vesting Service determined by adding together all of the Associate's Periods
of Service, whether or not consecutive. Notwithstanding the foregoing, Vesting
Service shall not include any Period of Service before the Plan Year in which an
Associate attains age eighteen (18). Only whole years of service shall be taken
into account for purposes of applying the schedule set forth in subsection (a)
above, and, for purposes of determining a Member's number of whole years of
service, non-successive Periods of Service must be aggregated, with 365 days of
service being deemed to constitute one year. For purposes of determining a
Member's Period of Service, the Service Spanning rules described in Section
1.52(g) shall apply.

                  (d) Forfeiture Break in Service. For purposes of this Section
6.07, a "Break in Service" is a Period of Severance of at least 365 consecutive
days. A "Forfeiture Break in Service" occurs when a Member of former Member
incurs 5 consecutive Breaks in Service.

                  (e) Forfeiture Occurs. A Member's forfeiture, if any, of his
Account balance(s) derived from Company contributions occurs under the Plan on
the earlier of:

                           (i)      the last day of the last pay period ending
         within the Plan Year in which the Member first incurs a Forfeiture
         Break in Service; or

                           (ii)     the date the Member receives a cash-out
         distribution.

         The Plan Administrator shall determine the percentage of a Member's
Account(s) forfeiture, if any, under this Subsection (e) solely by reference to
the vesting schedule of Section 6.07(a). As of the last day of each Plan Year,
the total amount of forfeitures which occurred during such Plan Year shall be
calculated and such amount shall be

                                       25

<PAGE>   32

applied (i) to restore under (b) above any amounts previously forfeited
from rehired Members' Accounts and (ii) the balance, if any, shall be added to
and allocated with the Company Matching Contribution for that Plan Year.

                  (f) Former May Plan Members. The provisions of this subsection
(g) apply to a Member who previously was employed by the Employer, when it was
part of the Group which included The May Department Stores Company, and who at
the termination of his employment had Company Accounts in the May Plan which
were forfeited as a result of termination of employment. If such Member has not
incurred five consecutive one-year Breaks in Service as defined in Section
6.07(d), the value of the Member's Company Account forfeited under the May Plan
will be restored under this Plan (in the manner described in Subsection (b)
above) and will be 100% vested.

                                       26
<PAGE>   33
                                    SECTION 7

                                    EXPENSES

         7.01     ADMINISTRATIVE EXPENSES. To the extent permitted by applicable
law, the costs and expenses for administering this Plan, consisting of Trustee
fees and expenses, Investment Manager fees and expenses, fees and expenses of
outside experts, expenses of maintaining records under Section 6 of the Plan,
and all other administrative expenses of the Plan, shall be paid out of the
Trust Fund unless the Company or the Employer elects to pay them with its own
funds. Costs incident to the purchase and sale of securities, such as brokerage
fees, commissions and stock transfer fees, are not regarded as administrative
expenses and shall be borne by the appropriate Investment Fund as determined by
the Trustee or Committee.

                                       27

<PAGE>   34

                                    SECTION 8

                          WITHDRAWALS DURING EMPLOYMENT

         8.01     WITHDRAWALS PROHIBITED UNLESS SPECIFICALLY AUTHORIZED. No
withdrawal from the Plan shall be permitted prior to a Member's termination of
employment, except as provided in Section 8.02.

         8.02     AUTHORIZED WITHDRAWALS.

                  (a) Prior to his termination of employment, a Member may elect
to withdraw, in cash, any or all of the value in his Member After-Tax Accounts.
However, in the event a Member elects to withdraw all or a portion of his
After-Tax Contributions made after August 1, 1997, such Member shall forfeit his
right to fifty percent (50%) of the Company Matching Contribution, if any,
otherwise allocable in connection with his Member Contributions for the Plan
Year in which the withdrawal occurs.

                  (b) Prior to his termination of employment, a Member may elect
to withdraw, in the event of a "hardship", an amount in cash equal to (i) the
total amount of the Before-Tax Contributions made to the Trust on his behalf, or
(ii) the value in his Member Before-Tax Account whichever is less provided,
however, that no withdrawal will be permitted to the extent that loans from the
Plan are available to the Member. In any event the amount withdrawn may not be
greater than the amount determined by the Committee as being required to meet
the immediate financial need created by the "hardship" and not reasonably
available from other resources of the Member, whichever amount is less. The term
"hardship" means a heavy financial hardship in light of immediate and heavy
financial needs as determined by the Committee in accordance with the PR Code
regulations. The amount of an immediate and heavy financial need may include any
amounts necessary to pay any federal, state or local taxes or penalties
reasonably anticipated to result from the distribution. The determination shall
be made in a nondiscriminatory manner. Hardship shall include but not be limited
to the following:

                           (i) Medical expenses described in PR Code Section
         1023(aa)(2)(P), previously incurred by the Member, the Member's spouse,
         or any of the Member's dependents (as defined in PR Code Section 1025);

                           (ii) Purchase (excluding mortgage payments) of a
         principal residence for the Member;

                           (iii) Payment of tuition, related educational fees,
         and room and board expenses for the next 12 months of post-secondary
         education for the Member, his or her spouse, children, or dependents
         (as defined in PR Code Section 1025);

                           (iv) The need to prevent the eviction of the Member
         from his or her principal residence or foreclosure on the mortgage of
         the Member's principal residence.

                                       28

<PAGE>   35

The Committee may adopt written guidelines which identify additional
circumstances constituting hardship and which provide procedures to be followed
in the administration of hardship withdrawal requests, which guidelines are
hereby incorporated herein.

         In addition, such hardship must be one which in the judgment of the
Committee, based on the Member's representations, cannot be relieved (1) through
reimbursement or compensation by insurance or otherwise, (2) by reasonable
liquidation of the Member's assets to the extent such liquidation would not
itself cause an immediate and heavy financial need, (3) by cessation of Member
Contributions under the Plan or (4) by other distributions from employee benefit
plans maintained by the Company or any other employer or by borrowing from
commercial sources on reasonable commercial terms. The Member shall be required
to submit documentation, to be determined by the Committee, with his hardship
withdrawal request to enable the Committee to make a judgment regarding the
validity of such hardship withdrawal request. For any Member who has attained
age 59 1/2, the "hardship" requirement shall be deemed waived.

                  (c) A withdrawal election shall be made pursuant to
application procedures established by the Committee. For any withdrawal under
paragraph (a) or (b), if the amount which may be withdrawn exceeds $100, the
Member may not withdraw less than $100, and if the amount which may be withdrawn
is less than $100, the Member shall be required to withdraw all of such amount.
Contribution totals and Account values shall be determined as of the Valuation
Date coinciding with or next following the filing of the withdrawal election. If
the Member Accounts from which withdrawal is made are in more than one
Investment Fund, the withdrawal shall be pro rata from each such Investment
Fund, except in the case the Member is subject to Section 16 of the Securities
Exchange Act of 1934 or has been designated as a "Designated Insider," in which
case such Member's withdrawal will be taken first from such Member's Investment
Funds other than the Payless Common Stock Fund.

                  (d) Any Member who was a Participant in or eligible to be a
Participant in the Volume Shoe Corporation Profit Sharing Plan (the "Volume
Plan") as of December 31, 1988 and who had an account balance in the Volume Plan
attributable to Employer Contributions made to the Volume Plan before July 31,
1976 and which account became a Company Account under The May Department Stores
Company Profit Sharing Plan and which has been transferred to this Plan from the
Payless Plan, shall be entitled to withdraw the market value of such account
balance determined (and frozen) as of December 31, 1988. If the Member Accounts
from which withdrawal is made are in more than one Investment Fund, the
withdrawal shall be pro rata from each such Investment Fund.

                  (e) Associates with Member Rollover Contribution Accounts may
elect to withdraw their Member Rollover Contribution Accounts prior to
termination of employment.

                                       29

<PAGE>   36

                                    SECTION 9

    BENEFITS UPON RETIREMENT, DEATH, DISABILITY, OR TERMINATION OF EMPLOYMENT

         9.01 BENEFITS. Upon a Member's Retirement, Death, Disability, or other
termination of employment, the value of his Member Accounts and of his vested
Company Accounts shall be determined as of the Valuation Date prior to the date
the distribution is calculated. A temporary Authorized Leave of Absence for
Military Service or for other purposes approved by the Company and/or the
Employer shall not, while any such Authorized Leave of Absence is validly in
effect be regarded as a termination of employment.

         9.02 BENEFICIARY. Any benefits payable on account of a Member's death
shall be paid to such Member's spouse. If such Member has no spouse or if such
Member's spouse shall have consented to the naming of another beneficiary, such
benefits shall be paid to the person or persons (including, without limitation,
estates, trust, or other entities) last named as beneficiary by such Member on
an appropriate form filed with the Committee. A spouse's consent shall designate
a beneficiary, acknowledge the effect of the consent and be in writing,
witnessed by a Plan representative or notary public. A spouse's consent shall be
irrevocable. If no beneficiary has been so named or the named beneficiary does
not survive the Member, any payment to be made under this Plan on account of a
Member's death shall be paid to such Member's spouse, or, if he has no spouse,
to such Member's estate. Whenever permitted by ERISA or regulations thereunder,
the Committee may waive the requirements that a spouse's consent be obtained.
Such waiver may be on a case by case basis or by categories.

                                       30

<PAGE>   37

                                   SECTION 10

                               PAYMENT OF BENEFITS

         10.01    TIME OF PAYMENT.

                  (a) All amounts distributable to a Member or Beneficiary
pursuant to Section 9 shall, unless the Member makes an approved election
pursuant to Section 10.01 (b) or 10.01 (c), be paid in a lump sum payment to be
made as soon as practicable after the request is received, provided however,
that any additional amounts which may be allocated to a Member's Company
Accounts resulting from a Company Contribution in respect of the calendar year
in which employment terminates shall be paid as soon as practicable after such
contribution.

         Notwithstanding any provision of this Section 10 to the contrary, if
the present value of the nonforfeitable accrued benefit of a Member, including
Company and Member Contributions (but excluding accumulated deductible employee
contribution, if any) exceeds (or for distributions prior to March 22, 1999,
ever has exceeded) $5,000, no partial or total distribution shall be made unless
the Member has consented thereto in writing in the manner required by law.

                  (b) Any Member who was a Member of the May Plan as of June 30,
1990 may elect that all Transferred Accounts distributable to him pursuant to
Section 9 shall be paid in annual installments over a period not to exceed ten
years beginning with the Valuation Date as of which the lump sum payment would
otherwise be made. In the event of the death of a Member prior to the expiration
of such period, all amounts which have not been distributed to him shall be paid
in a lump sum to his designated Beneficiary or his estate if there is no
designated Beneficiary. Subject to the foregoing, each such installment shall be
paid as of a Valuation Date and, until all the Accounts of the Member have been
fully distributed, they shall continue to be revalued as of each succeeding
Valuation Date pursuant to Section 6.04.

         Notwithstanding the paragraph above, any Member who as of December 31,
1988 was or was entitled to be a Participant in the Volume Shoe Corporation
Profit Sharing Plan may elect that all Transferred Accounts distributable to him
pursuant to Section 9 be paid in the form of equal monthly installments over a
period not to exceed 120 months. Such payments shall otherwise be made in
accordance with the foregoing portion of this Subsection 10.01 (b).

                  (c) A Member who is entitled to receive a distribution in
excess of $5,000 may elect to defer such distribution to age 65. An election to
defer distribution shall conform to such requirements as to form, content,
manner, and timing as shall be determined by the Committee and which
requirements shall be applied in a manner which does not discriminate in favor
of Members who are highly compensated employees (within the meaning of Code
Section 414(q)). All Accounts of a Member who elects to defer his distribution
shall continue to be revalued as of each succeeding Valuation Date pursuant
to Section 6.04. A deferred distribution shall be paid when such Member attains

                                       31

<PAGE>   38

the age of 65 years or at such earlier or later time as shall be
determined by the Committee as permitted by law. In the event of the death of a
Member prior to distribution of the deferred amounts, all amounts shall be
distributed in a lump sum to his designated Beneficiary or to his estate if
there is no designated Beneficiary. The value for payment shall be determined as
of the Valuation Date coincident with or next following such Member's 65th
birthday or such other payment date determined by the Committee.

         10.02 FORM OF PAYMENT. All distributions shall be made in the form of
cash, except that distributions from the Payless Common Stock Fund shall be made
in the form of full shares of Payless Common Stock, as applicable (with payment
in cash for a fraction of a share) or in cash if elected by the Member or
Beneficiary. The rights extended to a Member hereunder shall also apply to any
Beneficiary or alternate payee of such Member.

         10.03 INDIRECT PAYMENT OF BENEFITS. If any Member or Beneficiary has
been adjudged to be legally, physically or mentally incapable or incompetent,
payment may be made to the legal guardian or other legal representative of such
Member or Beneficiary as determined by the Committee. Such payments shall
constitute a full discharge with respect thereto.

         10.04 INABILITY TO FIND MEMBER. If a Member or Beneficiary or other
person to whom a benefit payment is due cannot be found during the three years
subsequent to the date a distribution was required to be made under this Plan,
the Accounts shall be forfeited at the end of such three-year period. The value
of such Accounts as of the date the distribution was required to be made shall
be restored if such Member or Beneficiary or other person makes a claim.

         10.05 COMMENCEMENT OF BENEFIT DISTRIBUTION TO MEMBER. In accordance
with US Code Section 401 (a)(9) and Treasury Regulations promulgated thereunder,
distributions to a Member must commence not later than the first day of April
following the calendar year in which the Member attains age 70 1/2.
Notwithstanding the foregoing, distribution to a Member who is not a "five
percent owner" as defined in Section 20.10(f)(3) shall commence not later than
April 1 following the calendar year in which the Member attains age 70 1/2 or,
if later, the calendar year in which the Member retires.

         10.06 COMMENCEMENT OF BENEFIT DISTRIBUTION TO BENEFICIARY.
Distributions to the Beneficiary entitled under Section 10.02 to receive any
payments payable under this Plan on account of a Member's death shall be made in
a lump sum payment not later than December 31 of the calendar year following the
calendar year in which the Member died.

         10.07 COMMENCEMENT OF BENEFIT DISTRIBUTION TO ALTERNATE PAYEE.
Distributions to an alternate payee entitled under Section 16.01 to receive any
payments payable under this Plan pursuant to the terms of a Qualified Domestic
Relations Order shall be made in accordance with the terms of such Qualified
Domestic Relations Order and this Plan on or after the date on which the Member
has attained his "earliest retirement age" (as defined under ERISA Section
206(d)(3)) under the Plan. Notwithstanding the foregoing, distribution to an
alternate payee may be made prior to the Member's attainment of his earliest
retirement age if, but only if: (1) the Qualified Domestic

                                       32

<PAGE>   39

Relations Order specifies distribution at that time or permits an agreement
between the Plan and the alternate payee to authorize an earlier distribution;
(2) the distribution is a single sum distribution of the alternate payee's
entire benefit entitlement under the Plan; and (3) in the event the present
value of the alternate payee's benefits under the Plan exceeds $5,000, the
alternate payee consents to any distribution occurring prior to the Member's
attainment of earliest retirement age.

         Nothing in this Section 10.07 shall be construed to permit a Member to
(1) receive a distribution at a time not otherwise permitted under the Plan, (2)
permit the alternate payee to receive a form of payment not otherwise permitted
under the Plan, or (3) cause his Plan accounts to be valued or otherwise
determined in a manner not otherwise permitted under the Plan.

                                       33

<PAGE>   40

                                   SECTION 11

                    PERMITTED ROLLOVER OF PLAN DISTRIBUTIONS

         11.01 ROLLOVER AMOUNT TO OTHER PLANS. Notwithstanding any provision of
the Plan to the contrary that would otherwise limit a distributee's election
under this Section, a distributee may elect, at the time and pursuant to
procedures prescribed by the Committee, to have his entire Plan distribution
paid directly to a qualified retirement plan described in the PR Code Section
1165(a) or to an individual retirement account as described in PR Code Section
1165(b)(2) specified by him.

         11.02 ROLLOVER AMOUNT FROM OTHER PLANS. An Associate eligible to
participate in the Plan, regardless of whether he has satisfied the
participation requirements of Section 2.01, may transfer to the Plan an Eligible
Rollover Distribution provided that such distribution is from an Eligible
Retirement Plan. If such transfer is not a direct transfer, such a transfer may
be made only if the following conditions are met:

                  (a) the transfer occurs on or before the 60th day following
the Associate's receipt of the distribution from the Eligible Retirement Plan;
and

                  (b) the amount transferred is equal to any portion of the
distribution the Associate received from the Eligible Retirement Plan, not in
excess of the fair market value of all property received in such a distribution
reduced by employee contributions, as defined in US Code Section 402 (a)(5)(E).

The Committee shall develop such procedures, and may require such information,
from a Member desiring to make such a transfer, as it deems necessary or
desirable to determine that the proposed transfer will meet the requirements of
the Section. Upon approval by the Committee or its Administrative Delegate, the
amount transferred shall be deposited in the Trust Fund and shall be credited to
the Member's account. Such rollover amount shall be one hundred percent (100%)
vested in the Member, shall share in the income allocations in accordance with
Section 5, but shall not share in the Company Profit Sharing Contributions, the
Company Matching Contributions or the forfeiture allocations. Upon termination
of employment, the total amount of the rollover contribution shall be
distributed in accordance with the terms of the Plan.

Upon such a transfer by an Associate who is otherwise eligible to participate in
the Plan but who has not yet completed the participation requirements of Section
2.01, his rollover amount shall represent his sole interest in the Plan until he
becomes a Member.

         11.03    DEFINITIONS.  The following definitions shall apply for the
purposes of this Section 11:

         (a)      ELIGIBLE ROLLOVER DISTRIBUTION.  An eligible rollover
         distribution is any distribution of all or any portion of the balance
         of the credit of the distributee from a qualified trust as described
         in PR Code Section 1165(b)(2).

                                       34

<PAGE>   41

         (b) ELIGIBLE RETIREMENT PLAN. An eligible retirement plan is an
         individual retirement account described in PR Code Section 1169(a), an
         individual retirement annuity described in PR Code Section 1169(b), or
         a qualified trust described in PR Code Section 1165(a), which accepts
         or will make, as applicable, an Eligible Rollover Distribution.
         However, in the case of an Eligible Rollover Distribution to a Member's
         surviving spouse, an eligible retirement plan is an individual
         retirement account or individual retirement annuity, as described
         above.

         (c) DISTRIBUTEE. A distributee includes a Member or former Member. In
         addition, the Member or former Member's surviving spouse and the
         Member's or former Member's spouse or former spouse who is the
         alternate payee under a qualified domestic relations order, as defined
         in ERISA Section 206(d)(3), are distributees with regard to the
         interest of the spouse or former spouse.

         (d) DIRECT TRANSFER.  A direct rollover is a payment by the Plan to
         the eligible retirement plan specified by the distributee as described
         in Article 1165-6(5) of the regulations issued under the PR Code.

                                       35

<PAGE>   42

                                   SECTION 12

                                      LOANS

         12.01 AVAILABILITY OF LOANS. Loans shall be permitted under this Plan
as established by the policy of the Committee. Any such loan shall be subject to
such conditions and limitations as the Committee deems necessary for
administrative convenience and to preserve the tax-qualified status of the Plan.

         12.02 AMOUNTS OF LOANS. No loan to any Member or Beneficiary may be
made to the extent that such loan, when added to the outstanding balance of all
other loans to the Member or Beneficiary, would exceed the lesser of (a) $50,000
reduced by the excess (if any) of the highest outstanding balance of loans
during the one-year period ending on the day before the loan is made, over the
outstanding balance of loans from the Plan on the date the loan is made, or (b)
one-half the present value of the nonforfeitable accrued benefit of the Member.
For the purpose of the above limitation, all loans from all plans of the
Employer and other member of a group of employers described in US Code Sections
414(b), 414(c), 414(m), and 414(o) are aggregated. Furthermore, any loan shall
by its terms require that repayment (principal and interest) be amortized in
level payments, not less frequently than quarterly, over a period not extending
beyond five years from the date of the loan. If such loan is used to acquire a
dwelling unit which within a reasonable time (determined at the time the loan is
made) will be used as the principal residence of the Member, the repayment
period shall not extend beyond twenty nine and one-half years from the date of
the loan. An assignment or pledge of any portion of the Member's interest in the
Plan and a loan, pledge, or assignment with respect to any insurance contract
purchased under the Plan, will be treated as a loan under this paragraph.

         12.03    TERMS OF LOANS.

                  (a) Loans shall be made available to all Members and
Beneficiaries on a reasonably equivalent basis.

                  (b) Loans shall not be made available to Highly Compensated
Employees (as defined in US Code Section 414(q)) in an amount greater than the
amount made available to other Employees.

                  (c) Loans must be adequately secured using not more than fifty
percent (50%) of the Member's Vested Account balance, and bear a reasonable
interest rate as determined from time to time by the Committee.

                  (d) A Member loan for less than $1,000 is not permitted;
provided, however, that if such Member also receives a loan from the Payless
ShoeSource, Inc. 401(k) Profit Sharing Plan, such minimum amount limitation
shall not apply.

                  (e) In the event of default, foreclosure on the note and
attachment of security will not occur until a distributable event occurs in the
Plan.

                                       36

<PAGE>   43

                  (f) No loans will be made to any Member who on any day during
the Company's applicable fiscal year is a beneficial owner of more than five
percent (5%) of the outstanding stock of the Company.

                  (g) All loans shall be made pursuant to a written Member loan
program incorporated herein by reference.

                  (h) Loans are available from the following accounts, and
will be withdrawn from the Member's accounts in the following hierarchy:

                      (1) Member Accounts
                      (2) Vested Company Accounts
                      (3) Member Rollover Contribution

                  (i) Loans will be taken and repaid from and to the Investment
Funds on a pro rata basis, except in the case the Member is subject to Section
16 of the Securities Exchange Act of 1934 or has been designated as a
"Designated Insider," in which case such Member's loan will be taken first from
such Member's Investment Funds other than the Payless Common Stock Fund.

                                       37
<PAGE>   44
                                   SECTION 13

                       LIMIT ON CONTRIBUTIONS TO THE PLAN

         This Section 13 is intended to conform the Plan to the requirements of
US Code Section 415 and limits the contributions that can be made by and for an
individual under the Plan.

         13.01 LIMIT ON  CONTRIBUTIONS.  Notwithstanding  any  provision of the
Plan to the contrary:

         (a) The amounts allocated to a Participant during the Limitation Year
         under the Plan and allocated to the Participant under any other defined
         contribution plan to which the Employer or any other member of the
         Group has contributed shall be proportionately reduced, to the extent
         necessary, so that the Annual Addition does not exceed the least of:

                  (1)      $30,000; or

                  (2)      25% of the  Participant's  remuneration  from the
         Employer or any member of the Group during the Limitation Year; or

                  (3)      such other limits set forth in US Code Section 415.

         The amount set forth in subparagraph (1) above shall automatically be
         adjusted to reflect adjustments made by applicable law. Remuneration
         for purposes of this Section means remuneration as defined in US
         Treasury Regulation Section 1.415- 2(d) and shall also include the
         deferrals described in US Code Section 415(c)(3)(D).

                  (b) For purposes of this Section, Limitation Year means the 12
         month period commencing on January 1 and ending on December 31.

                  (c) For purposes of this Section, Annual Additions means the
         sum for the Limitation Year of Employer contributions, Employee
         contributions (determined without regard to any rollover contributions
         as defined in US Code Sections 402(a)(5), 403(a)(4), 403(b)(8) and
         408(d)(3) and without regard to Employee contributions to a simplified
         employee pension plan which are excludible from gross income under US
         Code Section 408(k)(6)) and forfeitures.

                                       38

<PAGE>   45

         13.02    Adjustment for Excessive Annual Additions

                  (a) If, as a result of the allocation of forfeitures, a
reasonable error in estimating a Member's Pay or other facts and circumstances
to which US Treasury Regulation Section 1.415-6(b)(6) shall be applicable, the
"annual additions" under this Plan would cause the maximum "annual additions" to
be exceeded for any Member, the Committee shall (1) return any Member
Contributions credited for the "limitation year" to the extent that the return
would reduce the "excess amount" in the Member's Accounts, (2) hold any "excess
amount" remaining after the return of any Member Contributions in a "Section 415
suspense account", (3) use the "Section 415 suspense account" in the next
"limitation year" (and succeeding "limitation years" if necessary) to reduce
either Company Contributions for that Member if that Member is covered by the
Plan as of the end of the "limitation year" or if such Member is not covered by
the Plan at the end of the "limitation year" to reduce Company Contributions for
all Members in the Plan, before any Company Contributions or Member
Contributions which would constitute "annual additions" are made to the Plan for
such "limitation year," (4) reduce Company Contributions for such "limitation
year" by the amount of the "Section 415 suspense account" allocated and
reallocated during such "limitation year." For purposes of (3) above, the Plan
may not distribute "excess amounts" to Members or former Members.

                  (b) For purposes of this Section, "excess amount" for any
Member for a "limitation year" shall mean the excess, if any, of (1) the "annual
additions" which would be credited to his account under the terms of the Plan
without regard to the limitations of US Code Section 415 over (2) the maximum
"annual additions" determined pursuant to Section 13.01(a).

                  (c) For purposes of this Section, "Section 415 suspense
account" shall mean an unallocated account equal to the sum of "excess amount"
for all Members in the Plan during the "limitation year." The "Section 415
suspense account" shall not share in any earnings or losses of the Trust Fund.

                                       39

<PAGE>   46

                                   SECTION 14

                           ADMINISTRATION OF THE PLAN

         14.01    PLAN  ADMINISTRATOR.  The Company shall be the Plan
Administrator of the Plan for purposes of ERISA and shall be a "named fiduciary"
as determined in ERISA Section 402(a)(2).

         14.02    DELEGATION OF AUTHORITY.

                  (a) Authority to administer the Plan has been delegated to the
Committee and the Administrative Subcommittee, if any, in accordance with
Sections 1.43 (Total and Permanent Disability), 4.01 (Member Contributions),
6.01 (Member Accounts), 6.02 (Company Accounts), 6.05 (Member Statements), 8.02
(Authorized Withdrawals), 13.02 (Adjustment for Excessive Annual Additions),
20.02 (Withdrawal of an Employer) and this Section 14.

                  (b) Authority with respect to the Investment Funds of the Plan
has been delegated to the Trustee in accordance with Sections 5.01(c)
(Investment Funds), 6.06 (shares of Payless ShoeSource, Inc. ("Payless Stock")
in the Payless Common Stock Fund), 7.01 (Administrative Expenses) and 15
(Management of the Trust Fund).

                  (c) Authority to direct the investment of the Plan's funds has
been delegated to the Investment Subcommittee, if any, in accordance with
Section 15.03(b), (c) and (d) (Investments and Reinvestments).

                  (d) The Committee shall also have the authority and discretion
to engage on Administrative Delegate who shall perform, without discretionary
authority or control, administrative functions within the frame work of
policies, interpretations, rules practices and procedures made by the Committee
or other Plan Fiduciary. Any action made or taken by the Administrative Delegate
may be appealed by an affected Member to the Committee in accordance with the
claims review procedure in Section 16.05. Any decisions which call for
interpretations of the Plan provisions not previously made by the Committee
shall be made only by the Committee. The Administrative Delegate shall not be
considered a fiduciary with respect to the services it provides.

         14.03    COMMITTEE AND SUBCOMMITTEES.

                  (a) The Committee may appoint two subcommittees (an
Administrative Subcommittee" and an "Investment Subcommittee"), each
Subcommittee to consist of at least three persons, who need not be members of
the Board. The Committee and each Subcommittee, if appointed, shall elect from
its members a Chairman and a Secretary, and may appoint one or more Assistant
Secretaries who may, but need not be, members of the Committee or such
Subcommittee, and may employ such agents, such legal counsel and such clerical,
medical, accounting, actuarial and other services as it may from time to time
deem advisable to assist in the administration of the Plan. The Committee and
each Subcommittee may, from time to time, appoint agents and delegate to such
agents such
                                       40

<PAGE>   47
duties as it considers appropriate and to the extent that such
duties have been so delegated, the agent shall be exclusively responsible for
the proper discharge of such duties.

                  (b) The Administrative Subcommittee shall have the general
responsibility for the administration of the Plan and the carrying out of its
provisions, and shall have general powers with respect to Plan administration,
including, but not limited to, the powers listed in this Section 14.03. The
Administrative Subcommittee shall have the power to interpret and construe the
Plan, the power to establish rules for the administration of the Plan and the
transaction of its business, the power to remedy and resolve inconsistencies and
omissions, and the power to determine all questions which arise in the
administration, interpretation, or application of the Plan, including but not
limited to questions regarding the eligibility, status, Account value and any
rights of any Member, Beneficiary, and any other person hereunder.

                  (c) The Investment Subcommittee shall have the powers provided
for in Section 15.03(b).

                  (d) The Committee and each Subcommittee shall act by a
majority of its members and the action of such majority expressed by a vote at a
meeting, or in writing without a meeting, shall constitute the action of the
Committee or such Subcommittee. All decisions, determinations, actions or
interpretations with respect to the Plan by the Committee or either Subcommittee
and the individual committee or subcommittee members shall be in the
Committee's, Subcommittee's or individual member's sole discretion. The
decision, determination, action or interpretation of the Committee or either
Subcommittee and the respective individual members of the Committee or
Subcommittee in respect to all matters within the scope of its authority shall
be conclusive and binding on all persons. No member of the Committee or either
Subcommittee shall have any liability to any person for any action or omission
except each for his own individual willful misconduct. If a Subcommittee is not
appointed, the Committee shall exercise such Subcommittee's authority and
perform its duties as described herein.

                  (e) Nothing in this Section 14 or in any other provision of
the Plan shall be deemed to relieve any person who is a fiduciary under the Plan
for purposes of ERISA from any responsibility or liability for any
responsibility, obligation or duty which Part 4 of Title I of ERISA shall impose
upon such person with respect to this Plan.

         14.04 ACCOUNTS AND REPORTS. The Committee shall maintain or cause to be
maintained accounts reflecting the fiscal transactions of the Plan and shall
keep in convenient form such data as may be necessary for the administration of
the Plan. The Committee shall prepare annually a report showing in reasonable
detail the assets and liabilities of the Plan and setting forth a brief account
of the operation of the Plan for the preceding year.

         14.05 NON-DISCRIMINATION. Neither the Committee nor either Subcommittee
shall exercise its discretion in such a way as to result in discrimination in
favor of officers, shareholders or highly compensated employees (within the
meaning of US Code Section 414(q)).

                                       41
<PAGE>   48

                                   SECTION 15

                          MANAGEMENT OF THE TRUST FUND

         15.01 USE OF THE TRUST FUND. All assets of the Plan shall be held as a
Trust Fund in one or more trusts and shall be used to provide the benefits of
this Plan. No part of the corpus or income shall be used for, or diverted to,
purposes other than for the exclusive benefit of Members and their Beneficiaries
under this Plan and administrative expenses of this Plan.

         15.02 TRUSTEES. The Trust Fund may, at the direction of the Company, be
divided into one or more separate trusts, each of which may have a separate
Trustee appointed from time to time by the Company and subject to removal by the
Company. The Trustee or Trustees of each trust shall have complete authority and
discretion with respect to the investment and reinvestment of the assets of each
trust, subject, however, to (i) the provisions in the Trust Agreements between
the Trustee or Trustees and the Company, and (ii) the provisions of this Plan.
Any or all of such separate trusts shall be referred to collectively from time
to time as the Trust Fund. Any division of the Trust Fund into one or more
separate trusts shall be at the direction of the Company.

         15.03 INVESTMENTS AND REINVESTMENTS. The investment and reinvestment of
the assets of the Trust Fund shall be in accordance with the following:

                  (a) The Company shall have the authority to instruct the
Trustee or Trustees to accept and follow the instructions of any designated
investment manager (within the meaning of ERISA Section 3(38)) with respect to
the investment and reinvestment of the assets in any Investment Funds the
Company may designate.

                  (b) The Investment Subcommittee shall have the powers, with
respect to investment and reinvestment of the assets constituting the Investment
Funds, to promulgate limitations, restrictions, rules or guidelines with respect
to the investment policies and classes of investments in which the assets of the
Funds may be invested or reinvested by the Trustee or Trustees, including any
such investments made pursuant to the instructions of any investment manager. In
the event an investment manager designated pursuant to Section 15.03(a) resigns
or otherwise is unable to act, the Investment Subcommittee shall have such power
and authority as otherwise would be exercisable by such Investment Manager.

                  (c) In the event that the assets of the Trust Fund shall be
divided into one or more separate trusts pursuant to the authority provided for
in Section 15.02, then the powers of the Investment Subcommittee as provided for
in Section 15.03(b) may be exercised with respect to one or more of such trusts
within the discretion of the Investment Subcommittee.

                  (d) The powers of the Investment Subcommittee as provided in
Section 14.03(b), may be exercised at any time or from time to time by the
Investment Subcommittee within the discretion of the Investment Subcommittee and
shall be pursuant

                                       43
<PAGE>   49

to a written agreement between the Investment Subcommittee and the Trustee or
Trustees or, if an investment manager has been appointed, between the Investment
Subcommittee and the investment manager.

                  (e) The Trust Agreement between the Company (and/or the
Employer) and the Trustee or Trustees implementing the Plan shall contain
provisions effectuating the provisions of this Section 15 of the Plan.

                                       44

<PAGE>   50

                                   SECTION 16

             CERTAIN RIGHTS AND OBLIGATIONS OF EMPLOYERS AND MEMBERS

         16.01    DISCLAIMER OF EMPLOYER LIABILITY.

                  (a) No liability shall attach to the Company or any Employer
with respect to a benefit or claim hereunder and Members and their
Beneficiaries, and all persons claiming under or through them, shall have
recourse only to the Trust Fund for payment of any benefit hereunder.

                  (b) The rights of the Members, their Beneficiaries and other
persons are hereby expressly limited and shall be only in accordance with the
provisions of the Plan. Nothing contained herein shall be deemed to give a
Member any interest in any specific property of the Trust or any interest other
than a right to receive payments pursuant to the provisions of the Plan.

         16.02 EMPLOYER-ASSOCIATE RELATIONSHIP. Neither the establishment of
this Plan nor its communication through a Summary Plan Description (or
otherwise) shall be construed as conferring any legal or other rights upon any
Associate or any other person to continue in employment or as interfering with
or affecting in any manner the right of the Company or the Employer to discharge
any Associate or otherwise act with relation to him. The Company and the
Employer may take any action (including discharge) with respect to any Associate
or other person and may treat him without regard to the effect which such action
or treatment might have upon him as a Member of this Plan.

         16.03 BINDING EFFECT. Each Member, by executing an enrollment form,
beneficiary designation and otherwise agreeing to participate in the Plan agrees
for himself, his beneficiary(ies), heirs, successors and assigns to be bound by
all of the provisions of the Plan.

         16.04 CORPORATE ACTION. With respect to any action permitted or
required by the Plan, the Company and/or the Employer may act through its
appropriate officers:

         16.05 CLAIM AND APPEAL PROCEDURE. A Member or beneficiary may file with
the Committee or its designee at any time a written claim in connection either
with a benefit payable hereunder or otherwise. The Committee or its designee,
normally within 90 days after receipt of a written claim, shall render a written
decision on the claim, unless an additional 90 days is required by special
circumstances which shall be explained to the claimant. If the claim is denied,
either in whole or in part, the decision shall include the reason or reasons for
the denial; a specific reference to the Plan provision or provisions which are
the basis for the denial; a description of any additional material or
information necessary for the claimant to perfect the claim; an explanation as
to why the information or material is necessary; and an explanation of the
Plan's entire claim procedure. The claimant may file with the Committee, within
60 days after receiving the written decision from the Committee, a written
notice of request for review of the Committee's decision. The review shall be
made by a committee of up to three individuals (which may include

                                       45
<PAGE>   51

members of the Committee) appointed by the Company or by the Committee. Said
committee shall render a written decision on the claim containing the specific
reasons for their decision, including a reference to the Plan's provisions,
normally within 60 days after receipt of the request for review, unless an
additional 60 days is required by special circumstances which shall be explained
to the claimant. If a Member or beneficiary does not file written notice of a
claim with the Committee or its designee at the times set forth above, he shall
have waived any right to a benefit other than as originally proposed by the
Company or the Committee.

                                       46
<PAGE>   52

                                   SECTION 17

                           NON-ALIENATION OF BENEFITS

         17.01 PROVISIONS WITH RESPECT TO ASSIGNMENT AND LEVY. No benefit
payable under this Plan shall be subject in any manner to anticipation,
alienation, sale, transfer, assignment, pledge, encumbrance, levy or charge, and
any attempt so to anticipate, alienate, sell, transfer, assign, encumber, levy
upon or charge the same shall be void; nor shall any such benefit be in any
manner liable for or subject to the debts, contracts, liabilities, engagements
or torts of the person entitled to such benefit, except as specifically provided
herein. Notwithstanding the foregoing, the creation, assignment, or recognition
of a right to any benefit payable to an alternate payee with respect to a
Qualified Domestic Relations Order shall not be treated as an assignment or
alienation prohibited by this Section. Any other provision of the Plan to the
contrary notwithstanding, if a Qualified Domestic Relations order requires the
distribution of all or part of a Member's benefits under the Plan, the
establishment or acknowledgment of the alternate payee's right to benefits under
the Plan in accordance with the terms of such Qualified Domestic Relations Order
shall in all events be deemed to be consistent with the terms of the Plan.

                  Notwithstanding the above a Member's benefit will be offset
against any amount he or she is ordered or required to pay to the Plan pursuant
to an order or requirement which arises under a judgment of conviction for a
crime involving the Plan, under a civil judgment entered by a court in an action
involving a fiduciary breach, or pursuant to a settlement agreement between the
Participant and the Department of Labor or the Pension Benefit Guaranty
Corporation. Any such offset shall be made pursuant to Section 206(d) of ERISA.

         17.02 ALTERNATE APPLICATION. If a Member or Beneficiary under this Plan
becomes bankrupt or attempts to anticipate, alienate, sell, transfer, assign,
pledge, encumber or charge any benefit under this Plan, except as specifically
provided herein, or if any benefit shall, in the discretion of the Committee,
cease, and in that event the Committee may hold or apply the same or any part
thereof to or for the benefit of such Member or Beneficiary, his spouse,
children or other dependents, or any of them, or in such other manner and in
such proportion as the Committee may deem proper.

                                       47
<PAGE>   53

                                   SECTION 18

                                   AMENDMENTS

         18.01 COMPANY'S RIGHTS. The Company reserves the right at any time and
from time to time in its sole discretion to alter, amend, or modify, in whole or
in part, any or all of the provisions of this Plan, provided, however, no such
alteration, amendment or modification shall be made which shall decrease the
accrued benefit of any Member. Anything in this Plan to the contrary
notwithstanding, the Company in its sole discretion may make any modifications
or amendments, additions or deletions in or to this Plan as to benefits or
otherwise and retroactively if necessary, and regardless of the effect thereof
on the rights of any particular Member or Beneficiary, which it deems
appropriate and/or necessary in order to comply with or satisfy any conditions
of any law or regulation relating to the qualification of this Plan and the
trust or trusts created pursuant hereto and to keep this Plan and said trusts
qualified under US Code Section 401(a) and the applicable PR Code section(s) and
to have the trust or trusts declared exempt from taxation under US Code Section
501(a) and the applicable PR Code section(s).

         18.02 PROCEDURE TO AMEND. This Plan may be amended by action of the
Company's Board of Directors and evidenced by a written amendment signed by the
Company's Secretary or by any other person so authorized by or pursuant to
authority of the Board of Directors.

         18.03 PROVISION AGAINST DIVERSION. No part of the assets of the Trust
Fund shall, by reason of any modification or amendment or otherwise, be used
for, or diverted to, purposes other than for the exclusive benefit of Members
and their Beneficiaries under this Plan and administrative expenses of this
Plan.

                                       48
<PAGE>   54
                                   SECTION 19

                                   TERMINATION

         19.01 RIGHT TO TERMINATE. The Company reserves the right to terminate
this Plan, in whole or in part, at any time and, if this Plan shall be
terminated, the provisions of Section 19.03 shall apply and the Accounts of
affected Members shall become (or remain) fully vested and nonforfeitable.

         19.02 WITHDRAWAL OF AN EMPLOYER. If an Employer shall cease to be a
participating Employer in this Plan, the Trust Fund and the Accounts of the
Members of the withdrawing Employer and their Beneficiaries shall be revalued as
if such withdrawal date were a Valuation Date. The Committee shall then direct
the Trustee either to distribute the Accounts of the Members of the withdrawing
Employer as of the date of such withdrawal on the same basis as if the Plan had
been terminated pursuant to Section 19.03 or to deposit in a trust established
by the withdrawing Employer pursuant to a plan substantially similar to this
Plan assets equal in value to the assets of the Trust Fund allocable to the
Accounts of the Members of the withdrawing Employer.

         19.03 DISTRIBUTION IN EVENT OF TERMINATION OF TRUST. If this Plan is
terminated at any time including a partial termination as defined in US Code
Section 411(d)(3), or if contributions are completely discontinued and the
Company determines that the trust shall be terminated, in whole or in part, the
Trust Fund and all Accounts shall be revalued as if the termination date were a
Valuation Date and the affected Members' Accounts shall be distributed in
accordance with Section 10.

         19.04 ADMINISTRATION IN EVENT OF CONTINUANCE OF TRUST. If this Plan
shall be terminated in whole or in part or contributions completely discontinued
but the Company determines that the trust shall be continued pursuant to the
terms of the Trust Agreement, the trust shall continue to be administered as
though the Plan were otherwise in effect. Upon the subsequent termination of the
trust, in whole or in part, the provisions of Section 19.03 shall apply.

         19.05 MERGER, CONSOLIDATION OR TRANSFER. In the case of any merger or
consolidation with, or transfer of Plan assets or liabilities to, any other plan
each Member shall be entitled to receive a benefit immediately after the merger,
consolidation or transfer (if the transferee plan then terminated) which is
equal to or greater than the benefit he would have been entitled to receive
immediately before the merger, consolidation or transfer (if the Plan had then
terminated).

                                       49

<PAGE>   55

                                   SECTION 20

                                  CONSTRUCTION

         20.01 APPLICABLE LAW. The provisions of this Plan except as otherwise
governed by ERISA shall be construed, regulated, administered and enforced
according to the laws of Puerto Rico and, whenever possible, to be in conformity
with the applicable requirements of ERISA, of the US Code to the extent
applicable and of the PR Code of 1994.

         20.02 GENDER AND NUMBER. Wherever applicable, the masculine pronoun as
used herein shall include the feminine pronoun and the singular pronoun shall
include the plural.

          IN WITNESS WHEREOF, the Company has caused this Plan to be executed by
a duly authorized officer this ______ day of _____________, 2000.

                                               PAYLESS SHOESOURCE, INC.

                                               By: ___________________________

EXHIBIT 10 19 Payless ShoeSource, Inc. Profit Sharing Plan for Puerto Rico
Assocites. WPD

                                       50<PAGE>

                                   AGREEMENT
                                   ---------

     THIS AGREEMENT, made and entered into this 7th day of February, 2000, by
and between THE CHICAGO MERCANTILE EXCHANGE ("Employer"), an Illinois not for
profit corporation, having its principal place of business at 30 South Wacker
Drive, Chicago, Illinois, and James J. McNulty ("Employee").

                               R E C I T A L S:
                               ---------------

     WHEREAS, Employer wishes to retain the services of Employee in the capacity
of president and chief executive officer upon the terms and conditions
hereinafter set forth and Employee wishes to accept such employment;

     NOW, THEREFORE, in consideration of the mutual promises contained herein,
the parties mutually agree as follows:

     1.   Employment.  Subject to the terms of the Agreement, Employer hereby
agrees to employ Employee during the Agreement Term as president and chief
executive officer and Employee hereby accepts such employment. Employee shall
report to the Employer's Board of Directors, or any successor to the Board of
Directors (hereinafter, "Board" shall mean the Board of Directors of Employer
and/or any successor thereto). The duties of Employee as president and chief
executive officer shall include, but not be limited to, the performance of all
duties associated with the management and operation of Employer, including the
execution of all policies formulated by the Board, the selection and hiring of
personnel for the various divisions and departments, the training and
establishing of duties and responsibilities of supervisory personnel, and
improvements in organization, accounting procedures and financial policy for
Employer. Further, and without limiting the generality of the foregoing,
Employee, pursuant to the direction
<PAGE>

of the Board, shall be expected to successfully oversee and implement the
"demutualization" of Employer, defined herein as the change of Employer from a
member-owned not for profit corporation to a stockholder-owned for-profit
corporation. Employee shall devote his full time, ability and attention to the
business of Employer during the Agreement Term, subject to the direction of the
Board.

     Notwithstanding anything to the contrary contained herein, nothing in the
Agreement shall preclude Employee from participating in the affairs of any
governmental, educational or other charitable institution, engaging in
professional speaking and writing activities, and serving as a member of the
board of directors of a publicly held corporation (except for a competitor of
Employer), as long as the Board does not determine that such activities
interfere with or diminish Employee's obligations under the Agreement. Employee
shall be entitled to retain all fees, royalties and other compensation derived
from such activities, in addition to the compensation and other benefits payable
to him under the Agreement, but shall disclose such fees to Employer.

     2.   Agreement Term.  Employee shall be employed hereunder for a term
commencing on February 7, 2000 and expiring on December 31, 2003, unless sooner
terminated as herein provided ("Agreement Term"). The Agreement Term may be
extended or renewed by the mutual written agreement of the parties.

     3.   Compensation.

          (a) Sign-on Bonus. Within thirty (30) days of Employee's commencement
of employment with Employer, Employer shall pay to Employee, in a single lump
sum, a sign-on bonus of two million dollars ($2,000,000), less applicable
deductions and withholdings, to compensate Employee for the loss of benefits
from Employee's previous employment.

                                       2
<PAGE>

          (b)  Annual Base Salary. During the Agreement Term, Employee shall
receive an Annual Base Salary of one million dollars ($1,000,000) payable semi-
monthly. Employer shall annually review the Annual Base Salary and, at its sole
discretion, may increase it from the level then in effect; in no event shall the
Annual Base Salary be reduced during the Agreement Term from the level specified
herein.

          (c)  Annual Incentive Bonus. Employee shall have the opportunity for
an Annual Incentive Bonus for each calendar year during the Agreement Term based
on Employee's attainment of pre-established goals, as follows:

               (i)  The goals for the first calendar year of the Agreement Term
have been mutually agreed-upon by the parties, and are attached hereto as
Exhibit A and are incorporated herein by reference. During the remainder of the
Agreement Term, the goals for each coming calendar year shall be determined
solely by the Board, and shall be communicated, in writing, to Employee at least
thirty (30) days prior to the start of each calendar year.

               (ii)  The Annual Incentive Bonus shall not exceed the lesser of
one and one-half million dollars ($1,500,000) or, following demutualization, ten
percent (10%) of the Employer's Net Income, determined in accordance with
generally accepted accounting practices by the Employer's regular outside
certified public accountants.

               (iii)  The amount of the Annual Incentive Bonus for each calendar
year shall be as determined by the Board, in its sole discretion, based on the
Board's evaluation of Employee's attainment of the pre-established goals. Prior
to payment of an Annual Incentive Bonus to Employee, the Board shall certify in
writing that the pre-established goals, and any other terms deemed material by
the Board, have been attained.

                                       3
<PAGE>

               (iv) Payment to Employee of any Annual Incentive Bonus determined
by the Board, shall be made in a single lump sum during the first calendar
quarter following the end of the calendar year.

          (d) Non-Qualified Stock Option and Long Term Incentive Award. As of
the date of Employee's commencement of employment with Employer, Employer shall
grant to Employee a Non-Qualified Stock Option and Long-Term Incentive Award
("collectively referred to herein as the "Non-Qualified Stock Option") in
accordance with Supplement A attached hereto and incorporated herein by
reference.

          (e) Benefits and Benefit Programs. Employee shall be eligible to, and
shall, participate in all benefits and benefit programs offered from time to
time to the senior executives of Employer. This shall include, without
limitation, all insurance programs (e.g., medical, dental, vision, life,
accidental death and dismemberment and disability), paid holidays and 5 weeks
annual vacation, and pension, savings, cash balance, 401(k) and other retirement
plan or plans, all as may be in effect from time to time. In addition, at
Employer's expense, Employee shall be entitled to: (1) an annual physical
examination; (2) parking space at the principal location of Employer, and (3)
the amount of legal fees expended by Employee in connection with the negotiation
and execution of this Agreement, not to exceed thirty-five thousand dollars
($35,000).

          (f) CEO Perquisites. Employee shall be eligible for such other
perquisites, paid for or reimbursed by Employer, that are customary for the
chief executive officer of a major financial institution, such as club
memberships, automobile allowance and reimbursement for professional services.
All such perquisites are subject to the approval of the Board's Compensation
Committee, or its designate or successor, which approval shall not be
unreasonably

                                       4
<PAGE>

withheld, and shall not exceed fifty thousand dollars ($50,000) for each
calendar year of the Agreement Term.

          (g) Business Expenses. Employer agrees to pay or promptly reimburse
Employee for all reasonable expenses incurred by Employee in furtherance of, or
in connection with, the transaction of the business of Employer hereunder,
subject to proper accounting by Employee and approval by Employer.

     4.   Disability.

          (a) In the event Employee is permanently disabled, as hereinafter
defined, for a continuous period of 6 months, Employer, in its sole discretion,
may terminate Employee's employment under the Agreement upon written notice to
Employee. In such event, Employee's Annual Base Salary shall continue as
provided in subparagraph (a) of paragraph 5.

          (b) Employee, for the purposes hereof, shall be deemed to be
"permanently disabled" when a mutually selected physician determines that as a
result of bodily injury or disease or mental disorder, he is so disabled that he
is prevented from performing the principal duties of his employment with or
without reasonable accommodation.

     5.   Termination.

     Employer may terminate the employment of Employee under the Agreement in
the event that Employee shall die, or become permanently disabled, or for
"Cause" or "without Cause" as hereinafter defined, or upon expiration of the
Agreement Term, as set forth in subparagraphs (b) and (c) of this paragraph, and
Employee may terminate employment under the Agreement with or without Good
Reason, as hereinafter defined, as set forth in subparagraph (d) of this
paragraph. Except as set forth in the last sentence of this Section, Employee's
and his dependents' health,

                                       5
<PAGE>

dental and vision insurance shall be continued on the terms then in effect (or
as thereafter changed generally for the senior management of Employer) until the
earlier of (a) the end of the period of continuation of Employee's Annual Base
Salary, or (b) the date Employee obtains other employment and becomes eligible
for coverage under such employer's health insurance program. To the extent
applicable, continuation of group health insurance coverage for Employee and his
dependents pursuant to the provisions of Section 4980B of the Internal Revenue
Code of 1986, as amended, and Sections 6.02 through 6.07 of the Employee
Retirement Income Security Act of 1974, as amended ("COBRA") shall commence
after expiration of the health insurance coverage provided above. In the event
of termination of Employee for Cause, or termination by Employee other than for
Good Reason, or termination upon expiration of the Agreement, Employee's and his
dependents' sole right to continued health insurance coverage shall be pursuant
to COBRA.

     (a) Death or Disability. In the event of termination of Employee's
employment hereunder due to death or Employee becoming permanently disabled,
Employer shall, for a period of six (6) months following such termination,
continue to pay Employee's Annual Base Salary, as then in effect. Payments
pursuant to this subparagraph (a) shall be made to Employee, or to his estate or
designated beneficiary in the event of his death.

     Any portion of the Non-Qualified Stock Option that is not vested prior to
termination on account of Employee's death or permanent disability shall
immediately vest on such termination. In the event of permanent disability,
during the remainder of the ten year period following the Grant Date (defined in
Supplement A), Employee shall be permitted to exercise any unexercised portion
of the Non-Qualified Stock Option. Any portion of the Non-Qualified Stock Option
that has not been exercised on the ten year anniversary of the Grant Date shall
be forfeited. As soon

                                       6
<PAGE>

as practicable following death, Employer shall pay to Employee's estate or
designated beneficiary cash equal to the excess of the fair market value of the
Covered Shares (referred to in Supplement A) subject to such exercise over the
aggregate exercise price for such Shares.

     (b) Cause or Expiration of Agreement Term. If Employee's employment
hereunder is terminated by Employer for Cause, or upon expiration of the
Agreement Term, Employer shall pay to Employee in a single lump sum, as soon as
practicable after such termination or expiration, any and all accrued but unused
vacation pay and, accrued but unpaid Annual Base Salary, and other amounts that
have been earned but not paid to Employee as of the date of such termination or
expiration. If Employee is terminated for Cause, the entire Non-Qualified Stock
Option that has not been exercised by the date of notice of termination for
Cause shall be forfeited unless the Board, in its sole discretion, determines
otherwise. Upon expiration of the Agreement Term, Employee shall be permitted to
exercise any unexercised portion of the Non-Qualified Stock Option during the
ten year period following the Grant Date. Any portion of the Non-Qualified Stock
Option that has not been exercised by the ten year anniversary of the Grant Date
shall be forfeited.

     For purposes of this Agreement, "Cause" shall be deemed to exist if, and
only if:

          (i) Employee shall engage, during the performance of his duties
hereunder, in acts or omissions constituting dishonesty, intentional breach of
fiduciary obligation or intentional wrongdoing or malfeasance;

          (ii) Employee shall intentionally disobey or disregard a lawful and
proper direction of the Board or Employer; or

                                       7
<PAGE>

          (iii) Employee shall materially breach the Agreement and such breach
by its nature is either incapable of being cured, or if capable of being cured,
remains uncured for more than thirty (30) days following receipt by Employee of
written notice from Employer specifying the nature of the breach and demanding
the cure thereof. For purposes of this clause (iii), a material breach of the
Agreement that involves inattention by Employee to his duties shall be deemed a
breach capable of cure.

     Without limiting the generality of the foregoing, the following shall not
constitute Cause for termination of Employee or the modification or diminution
of any of his authority hereunder: (a) any personal or policy disagreement
between Employee and Employer or any member of Employer or its Board, or (b) any
action taken by Employee in connection with his duties hereunder or any failure
to act, if Employee acted, or failed to act, in good faith and in a manner
Employee reasonably believed to be in and not opposed to the best interest of
Employer and Employee has no reasonable cause to believe his conduct was
unlawful.

     In the event of termination for Cause, Employer shall give Employee at
least thirty (30) days prior written notice, specifying in reasonable detail the
reason or reasons for Employee's termination.

     (c) Without Cause. Employee's employment may be terminated by Employer at
any time during the Agreement Term, at Employer's discretion and without Cause,
upon ninety (90) days advance written notice of same to Employee. In this event,
Employee shall continue to receive (1) his Annual Base Salary for the remainder
of the Agreement Term, and (2) one-third (1/3) of the maximum Annual Incentive
Bonus, payable semi-monthly, for the remainder of the Agreement Term. Any
portion of the Non-Qualified Stock Option that is not vested prior to such

                                       8
<PAGE>

termination shall immediately vest on termination. During the ten year period
following the Grant Date, Employee shall be permitted to exercise any
unexercised portion of the Non-Qualified Stock Option. Any portion of the Non-
Qualified Stock Option that has not been exercised by the ten year anniversary
of the Grant Date shall be forfeited.

     (d) By Employee. Employee's employment with Employer may be terminated by
Employee at any time, after the first anniversary of this Agreement, by the
giving of ninety (90) days advance written notice of same to Employer. In the
event Employee terminates after the first anniversary of this Agreement,
Employer shall pay to Employee, as soon as practicable after such termination,
in a single lump sum, any and all Annual Base Salary, and accrued but unused
vacation pay, that have been earned but not paid to Employee as of the date of
termination. Employee shall forfeit the Annual Incentive Bonus for the year
during which he resigns, and he shall forfeit any portion of the Non-Qualified
Stock Option that is not vested prior to termination. During the one hundred
eighty (180) day period following such termination, Employee shall be permitted
to exercise any portion of the Non-Qualified Stock Option that was vested prior
to termination. Any portion of the Non-Qualified Stock Option that has not been
exercised by the one hundred eighty first (181st) day following termination
shall be forfeited. In the event Employee attempts to terminate his employment
prior to the first anniversary of the Agreement, such act shall be treated as a
material breach of the Agreement by Employee under paragraph 5(b)(iii).

     In the event Employee terminates the Agreement pursuant to the above after
its first anniversary date with less than ninety (90) days advance written
notice of same to Employer, the parties acknowledge that Employer will be
damaged thereby, but that such damages will be

                                       9
<PAGE>

difficult to calculate. Accordingly, Employee will promptly pay to Employer, or
allow Employer to set off against any monies it may then owe to Employee, as
liquidated damages a sum equal to Employee's Annual Base Salary, on the date of
termination divided by 260 for each day Employee's notice of termination
hereunder is less than ninety (90) days.

     A termination by Employee for Good Reason shall entitle Employee to those
payments applicable to a termination without Cause, as set forth in subparagraph
(c) of this paragraph. For purposes of this paragraph, "Good Reason" shall be
deemed to exist if, and only if:

          (i)    The Employee's principal place of business is relocated outside
                 of the Chicago metropolitan area;

          (ii)   Employer fails to pay to Employee the agreed-upon compensation
                 or benefits;

          (iii)  There is a demotion or significant diminution in Employee's
                 responsibilities or authorities under the Agreement sufficient
                 to constitute a constructive termination as presently defined
                 by Illinois law.

     The conditions set forth in (ii) and (iii) above shall constitute Good
Reason if such conditions remain uncured for more than thirty (30) days
following Employer's receipt of written notice from Employee advising of such
condition and demanding the cure thereof.

     6.   "Walkaway" Option.

     In the event Employer has not demutualized by December 31, 2000, the
Agreement may, within thirty (30) days thereafter, be terminated by either
Employee, if such failure is not the result of an intentional act by Employee,
or by Employer, by written notice of same to the other; provided, however, that
if Employer certifies in writing to Employee on or before January 31,

                                       10
<PAGE>

2001, that demutualization has been delayed solely because a necessary
government action or ruling has not been received, and that Employer believes in
good faith that it will be received within ninety (90) days of the date of
Employer's certification hereunder, Employee shall not terminate hereunder
unless demutualization is not completed within such ninety (90) day period. For
purposes of the Agreement, the "Walkaway Period" shall mean the foregoing period
of time prior to demutualization, including the specified extensions thereof,
during which either party may, pursuant to this paragraph 6, terminate the
Agreement.

     In the event of termination of the Agreement under this paragraph, Employee
shall be paid the Annual Base Salary in effect prior to such termination plus
one-third (1/3) of the maximum Annual Incentive Bonus, payable semi-monthly, for
the remainder of the Agreement Term. Such payments shall cease if and when
Employee becomes employed by or becomes a consultant to any organization engaged
in trade execution and/or trade clearing. Notwithstanding the preceding
sentence, such payments shall not cease if Employee becomes a member of the
board of directors of any organization that is not in direct competition with
Employer. For purposes of this provision, all stock exchanges shall be deemed to
be in direct competition with Employer.

     During the Walkaway Period, Employee shall not exercise any portion of the
Non-Qualified Stock Option that has vested. In the event of termination of the
Agreement under this paragraph by either Employer or Employee, the entirety of
the Non-Qualified Stock Option, regardless of whether otherwise vested or
unvested, shall be forfeited.

     7. Change in Control. For purposes of the Agreement, the term "Change in
Control" means the occurrence, of the events described in any of subsections
(i), (ii), or (iii) below:

                                      11
<PAGE>

(i) The acquisition by any individual, entity or group (within the meaning of
Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended
(the "Exchange Act")) (a "Person") of beneficial ownership (within the meaning
of Rule 13d-3 promulgated under the Exchange Act) of any voting securities of
the Employer entitled to vote generally in the election of directors ("Voting
Securities") if, immediately after such acquisition, such Person beneficially
owns fifty percent (50%) or more of the combined voting power of the outstanding
Voting Securities (the "Outstanding Employer Voting Securities"). The foregoing
provisions of this subsection (i) shall be subject to the following:

(A)  The following shall not constitute a "Change in Control": (I) any
     acquisition by an employee benefit plan (or related trust) sponsored or
     maintained by Employer or any entity controlled by Employer (an "Employer
     Plan"); (II) any acquisition by an underwriter temporarily holding
     securities pursuant to an offering of such securities; or (III) any
     acquisition by any Person pursuant to a transaction which complies with
     subsections (ii)(A) and (ii)(B) of this definition.

(B)  For purposes of the foregoing provisions of this subsection (i), the
     following shall not be deemed to constitute an "acquisition" by any Person:
     (I) any acquisition directly from Employer (excluding any acquisition
     resulting from the exercise of an exercise, conversion, or exchange
     privilege unless the security being so exercised, converted, or exchanged
     was acquired directly from Employer); and (II) any acquisition by Employer
     of Voting Securities.

(ii)  Consummation of (I) a reorganization, merger, consolidation, or other
business combination involving Employer or (II) the sale or other disposition of
more than fifty percent (50%) of the

                                      12
<PAGE>

operating assets of Employer (determined on a consolidated basis), other than in
connection with a sale-leaseback or other arrangement resulting in the continued
utilization of such assets (or the operating products of such assets) by
Employer (any transaction described in part (I) or (II) being referred to as a
"Corporate Transaction"); excluding, however, a Corporate Transaction pursuant
to which each of subsections (A) and (B) below are applicable:

(A)  All or substantially all of the individuals and entities who are the
     beneficial owners, respectively, of the Outstanding Employer Voting
     Securities immediately prior to such Corporate Transaction beneficially
     own, directly or indirectly, more than fifty percent (50%) of the combined
     voting power of the then Outstanding Employer Voting Securities entitled to
     vote generally in the election of directors of the ultimate parent entity
     resulting from such Corporate Transaction (including, without limitation,
     an entity which, as a result of such transaction, owns Employer or all or
     substantially all of the assets of Employer either directly or through one
     or more subsidiaries) in substantially the same proportions as their
     ownership, immediately prior to such Corporate Transaction, of the
     Outstanding Employer Voting Securities, as the case may be.

(B)  No Person (other than Employer, any Employer Plan or related trust, the
     corporation resulting from such Corporate Transaction, and any Person which
     beneficially owned, immediately prior to such Corporate Transaction,
     directly or indirectly, fifty percent (50%) or more of the Outstanding
     Employer Voting Securities) will beneficially own, directly or indirectly,
     fifty percent (50%) or more of the then combined voting power of the then
     outstanding voting securities of such entity.

                                      13
<PAGE>

(iii) Approval by the shareholders of Employer of a plan of complete liquidation
or dissolution of the Employer.

     If during the Agreement Term there is both a Change in Control, and
Employee's employment is terminated by Employer, or by Employee for Good Reason,
during the two (2) years following such Change in Control, Employee shall be
entitled to the following:

     (a) A single lump sum severance payment to be paid by Employer equal to the
aggregate of (1) two (2) times the Annual Base Salary in effect prior to such
termination that would have been due Employee but for his termination pursuant
to this paragraph 7, plus (2) one and one-third (1 1/3) times the maximum Annual
Incentive Bonus that Employee would have been eligible to receive but for his
termination pursuant to this paragraph 7, for the remainder of the Agreement
Term; provided, however, that such severance payment shall not exceed eight
million dollars ($8,000,000), and may be reduced to a lesser amount to the
extent provided in subparagraph (b) next below. This severance payment shall be
made within ninety (90) days of the date of such termination pursuant to this
paragraph.

     (b)  If:

     (i) any payment or benefit to which the Employee is entitled from Employer,
     any affiliate, or trusts established by Employer or by any affiliate (the
     "Payments," which shall include, without limitation, the vesting of an
     option or other non-cash benefit or property) are more likely than not to
     be subject to the tax imposed by Section 4999 of the Internal Revenue Code
     of 1986, as amended ("Code") or any successor provision to that section;
     and

                                      14
<PAGE>

     (ii) reduction of the Payments to the amount necessary to avoid the
     application of such tax would result in Employee retaining an amount that
     is greater than the amount he would retain if the Payments were made
     without such reduction but after the application of such tax;

the Payments shall be reduced to the extent required to avoid application of
such tax. The Employee shall be entitled to select the order in which Payments
are to be reduced in accordance with the preceding sentence. Determination of
whether Payments would result in the application of the tax under Code Section
4999, and the amount of reduction that is necessary so that no such tax is
applied, shall be made by the mutual agreement of the parties or, in the absence
of such agreement, by a mutually selected independent certified public
accounting firm, retained at Employer's expense.

     (c) Any portion of the Non-Qualified Stock Option that is not then vested
shall immediately vest. If the securities that Employee would receive upon the
exercise of the Non-Qualified Stock Option are of a class that is not registered
under Section 12 of the Securities Exchange Act of 1934, then the Non-Qualified
Stock Option shall be exercisable by Employee until the three-year anniversary
of Employee's termination of employment with Employer; provided that in no event
shall the Non-Qualified Stock Option be exercisable later than the ten-year
anniversary of the Grant Date. If the securities that Employee would receive
upon the exercise of the Non-Qualified Stock Option are of a class that is
registered under Section 12 of the Securities Exchange Act of 1934, then
Employer shall file a Securities Exchange Commission Form S-8 with respect to
the sale of all of the securities that would be deliverable to Employee upon the
exercise of the Non-Qualified Stock Option (in whole or in part) (the "Required
Form S-

                                      15
<PAGE>

8") before, or as soon as practicable after the termination of Employee's
employment with Employer, and the Non-Qualified Stock Option shall be
exercisable by Employee until the latest to occur of:

(i)    the one-year anniversary of Employee's termination of employment with
       Employer;

(ii)   the one-year anniversary of the date on which the Required Form S-8
       becomes effective with respect to the exercise of the Non-Qualified Stock
       Option; or

(iii)  the one-year anniversary of the date on which counsel to Employer renders
       an opinion to Employer and Employee that Employee is not an "affiliate"
       (as that term is defined in Rule 144 under the Securities Act of 1933)
       with respect to Employer or, if later, the date specified in such opinion
       as the date on which Employee will cease to be an "affiliate";

provided that in no event shall the Non-Qualified Stock Option be exercisable
later than the ten-year anniversary of the Grant Date. Any portion of the
Non-Qualified Stock Option that has not been exercised prior to the end of the
period of exercisability set forth in this paragraph (c) shall be forfeited.

     8.   Nondisclosure of Confidential Information.

     (a)  Employee acknowledges that Employer may disclose certain confidential
information to Employee during the Agreement Term to enable him to perform his
duties hereunder, and Employee hereby covenants and agrees that, subject to
subparagraph (b) of this Section, he will not, without the prior written consent
of Employer, during the Agreement Term (except in connection with the proper
performance of his duties hereunder) or at any time thereafter, disclose or
permit to be disclosed to any third party by any method whatsoever any of the
confidential information of Employer. For purposes of the Agreement,
"confidential

                                       16
<PAGE>

information" shall include, but not be limited to, any and all records, notes,
memoranda, data, writings, research, personnel information, customer
information, clearing members' information, Employer's financial information and
plans in the possession or control of Employer that have not been published or
disclosed to the general public or the commodities futures industry. If Employee
fails to comply with any provisions of this paragraph, which failure (i) is
inadvertent or unintentional, or (ii) occurs notwithstanding Employee's good
faith effort to comply with paragraph, or (iii) does not, and is not likely to,
result in material loss to Employer, then such failure shall not constitute a
violation of any provision, covenant or agreement of this paragraph, for any
purposes of this Agreement.

     (b) Clause (a), above, shall not be applicable if and to the extent
Employee is required to testify in a legislative, judicial or regulatory
proceeding pursuant to an order of Congress, any state or local legislature, a
judge, or an administrative law judge issued after Employee and his legal
counsel have, by all legal means, resisted such order. Employee will promptly
notify Employer, so that Employer will have sufficient time to intervene or
otherwise protect its interests, of the commencement of a proceeding or action
which might result in an order requiring the disclosure of confidential
information by Employee.

     9.   Indemnity.  Except as precluded by law or regulation, Employer shall
indemnify, protect, defend and save Employee harmless from and against any
threatened, pending or completed action, suit or proceeding whether civil,
criminal, administrative or investigative, in which Employee is made a party by
reason of the fact that Employee is an officer, employee or agent of Employer,
or any judgment, amount paid in settlement (with the consent of Employer), fine,
loss, expense, cost, damage and reasonable attorney's fees incurred by reason of
the fact that

                                      17
<PAGE>

Employee is an officer, employee or agent of Employer, provided, however, that
Employee acted in good faith and in a manner he reasonably believed to be in the
best interests of Employer, and had no reasonable cause to believe his conduct
was unlawful. Employer, at its expense, shall have the right to purchase and
maintain insurance or fidelity bonds on behalf of Employee against any liability
asserted against him and incurred by him in his capacity as an officer, employee
or agent of Employer.

     10.  Arbitration; Equitable Remedies.  Any controversy or claim arising out
of or relating to the Agreement or the validity, interpretation, enforceability
or breach thereof, which is not settled by agreement of the parties, shall be
settled by arbitration conducted in the City of Chicago, in accordance with the
Labor Rules and Procedures of the American Arbitration Association
("Association"), and judgment upon the award rendered in such arbitration may be
entered in any court having jurisdiction. The arbitration shall be conducted
before a single arbitrator selected by the parties. In the event the parties
cannot agree on any arbitrator, then the Association will supply both parties
with a list of seven (7) names. The parties will alternatively strike one name
until only one remains. First choice will be determined by a coin toss, the
winning party having the option of striking first or second. All expenses of
arbitration shall be borne equally by the parties, except that each party shall
bear its own attorney's fees. The arbitrator shall have no power to amend,
alter, add to or delete from the Agreement.

     Employee acknowledges that Employer would be irreparably injured by a
violation of paragraph 8 and Employee agrees that Employer, in addition to any
other remedies available to it for such breach or threatened breach, shall be
entitled to a preliminary injunction, temporary restraining order, or other
equivalent relief, restraining Employee from any actual or threatened

                                      18
<PAGE>

breach of paragraph 8 pending, and in aid of, arbitration of the dispute. If a
bond is required to be posted in order for Employer to secure an injunction or
other equitable remedy, the parties agree that such bond need not be more than a
nominal sum.

     11.  Return of Property.  Upon Employee's last day of active work, Employee
hereby agrees to immediately turn over to Employer any keys, credit cards,
passes, and all notes, memoranda, records, documents, computer disks, and all
other information, no matter how produced or reproduced, kept by Employee or in
his possession or control, used in or pertaining to the business of Employer, it
being hereby acknowledged that all of said items are the sole and exclusive
property of Employer.

     12.  Defense of Claims.  During the period of his employment by Employer,
and continuing after the termination of his employment for a period of three (3)
years, Employee shall reasonably cooperate with Employer at its request in the
defense or prosecution of any claim that may be made by or against Employer.
Such cooperation shall include, without limitation, serving as a witness at
trial or hearing, being deposed, and preparation for same or otherwise
cooperating with Employer as determined to be necessary by Employer at its sole
discretion, for the defense or prosecution of a claim. For the period after
Employee terminates his employment with Employer, Employer shall reimburse
Employee for all reasonable expenses in connection therewith, including travel
expenses, and shall compensate him at a daily rate equal to his Annual Base
Salary on the date his employment with Employer terminated, divided by 260, with
days used for preparation, travel and other related matters being included for
purposes of determining the compensation due to Employee. Less than full days
shall be paid for by the hour, determined by dividing the daily

                                      19
<PAGE>

rate by eight. To the extent reasonably practicable, Employer shall provide
Employee with notice at least ten (10) days prior to the date on which any such
travel is required.

     13.  Waiver of Breach.  No waiver of either party hereto of a breach of any
provision of the Agreement by the other party, or of compliance with any
condition or provision of the Agreement to be performed by such other party,
will operate or be construed as a waiver of any subsequent breach by such other
party or any similar or dissimilar provisions and conditions at the same or any
prior or subsequent time. The failure of either party to take any action by
reason of such breach will not deprive such party of the right to take action at
any time while such breach continues.

     14.  Entire Agreement.  The Agreement constitutes the entire agreement
between the parties concerning the subject matter hereof and supersedes all
prior and contemporaneous agreements, if any, between the parties relating to
the subject matter hereof.

     15.  Counterparts.  The Agreement may be signed in multiple counterparts,
each of which shall be deemed to be an original for all purposes.

     16.  Acknowledgment by Employee.  Employee represents that he is
knowledgeable and sophisticated as to business matters, including the subject
matter of the Agreement, that he has read the Agreement and that he understands
its terms. Employee acknowledges that, prior to assenting to the terms of the
Agreement, he has been given reasonable time to review it, to consult with
counsel of his choice, and to negotiate at arm's length with Employer as to the
contents. Employee and Employer agree that the language used in the Agreement is
the language chosen by the parties to express their mutual intent, and that no
rule of strict construction is to be applied against either party hereto.

                                      20
<PAGE>

     17.  Assignment, Survival of Agreement
          ---------------------------------

          (a)  This Agreement is personal to Employee and shall not be assigned.

          (b)  Employer may assign the Agreement without the consent of Employee
to any other entity who in connection with such assignment acquires all or
substantially all of the assets of Employer, or acquires a majority of the
voting rights of Employer, or into or with which Employer is merged or
consolidated. In the event of a merger, sale, reorganization or other Change in
Control (as defined in paragraph 7) of Employer, the Agreement shall be binding
upon, and inure to the benefit of, any successor to Employer.

          (c)  Except as otherwise expressly provided in this Agreement, the
rights and obligations of the parties to the Agreement shall survive the
termination of Employee's employment with Employer.

     18.  Notice. All notices and communications required hereunder shall be in
writing and shall be deemed to have been given on the day of delivery if
personally delivered or sent by facsimile, or two (2) days after mailing if
mailed, postage prepaid, certified or registered, return receipt requested, to
the following addresses:

If to Employee:          James J. McNulty
                         6 Kent Road
                         Winnetka, Illinois 60093

With a copy to:          John Adams
                         Schiff Hardin & Waite
                         233 S. Wacker Drive
                         Chicago, Illinois 60606

If to Employer:          Chicago Mercantile Exchange
                         30 South Wacker Drive
                         Chicago, Illinois  60606
                         Attention: Craig Donohue
                         ---------

                                       21
<PAGE>

with a copy to                Jerrold E. Salzman
                                    Freeman, Freeman & Salzman
                                    401 N. Michigan Avenue, Suite 3200
                                    Chicago, Illinois 60611

or to such other addresses as the respective parties may hereafter designate.

     19.  Severability. If any clause, phrase, provision or portion of this
Agreement or the application thereof to any person or circumstance shall be
invalid or unenforceable under any applicable law, such event shall not affect
or render invalid or unenforceable the remainder of this Agreement, and shall
not affect the application to any clause, provision or portion hereof to other
persons or circumstances.

     20.  Benefit. The provisions of this Agreement shall be binding upon and
inure to the benefit of Employer, its successors and assigns and upon and to
Employee, his heirs, personal representatives and successors, including without
limitation, the estate of Employee and the executors, administrators or trustees
of such estate.

     21.  Relevant Law: This Agreement shall be construed and enforced in
accordance with the laws of the State of Illinois without regard to that State's
conflict of laws.

                                       22
<PAGE>

     IN WITNESS WHEREOF, the parties hereto have set their hands and seals the
day and date first above written.

EMPLOYER:                              EMPLOYEE:

CHICAGO MERCANTILE EXCHANGE,
an Illinois not for profit
corporation                            ____________________________________
                                       [Name]

By:_______________________________

Its:______________________________

                                       23
<PAGE>

                                 SUPPLEMENT A
                                 ------------

     As of the date of employment (the "Grant Date"), Employer grants to
Employee this Non-Qualified Stock Option ("Option") upon the terms and
conditions set forth in this Supplement A. The Option may only be exercised if
Employer converts from an Illinois not-for-profit corporation to a for-profit
corporation.  If Employer does not convert, Employee shall be entitled to
appreciation rights in lieu of the Option.  The Option rewards Employee for
helping to increase the Value of Employer.  The Option allows Employee to
acquire a basket of up to 2.5% of all classes of the Employer's common stock, as
of the date that Employer converts, for an exercise price equal to 2.5% of the
Value of the Employer on the Grant Date and to acquire a basket of up to 2.5% of
all classes of the Employer's common stock, as of the date that Employer
converts, for an exercise price equal to 3.75% of the Value of the Employer on
the Grant Date.  The number of shares of each class will be computed when the
conversion becomes final and a Rider showing the results of such computation
will be attached to and become a part of this Agreement.  The number of shares
and exercise price of a class of common stock subject to the Option shall be
adjusted as a result of an equity restructuring to maintain the economic value
of the Option.  For purposes of this Supplement A, an equity restructuring is
a nonreciprocal transaction between the Company and its shareholders, such as a
stock dividend, spin-off, stock split, reverse stock split, rights offering, or
recapitalization through a special, large nonrecurring dividend that causes the
market value per share of the stock underlying the Option to decrease or
increase.

     The Option shall be a non-qualified stock option, not granted in accordance
with Section 422 of the Internal Revenue Code of 1986, as amended, to purchase
an indivisible package including each class of shares issued by the Employer
(the "Covered Shares").
<PAGE>

1.   The Option provides that, upon exercise with respect to the Covered Shares
     elected by Employee, Employee shall receive shares of Class A common stock,
     Class B common stock, cash, or a combination thereof, as determined by
     Employer in its sole discretion (except Employer shall not distribute more
     class B common stock than the amount included in the indivisible package
     comprising the Covered Shares elected by Employee), with an aggregate Fair
     Market Value equal to the Fair Market Value of the Covered Shares to which
     he would otherwise have been entitled upon exercise.

2.   The Options will be divided into two tranches, referred to as Tranche A and
     Tranche B. Each of Tranche A and Tranche B will include an equal number of
     the Covered Shares granted hereunder, that is, each tranche shall include a
     basket equal to 2.5% of each class of Employer's common stock.

3.   The exercise price with respect to all of the Covered Shares under Tranche
     A shall be 2.5% of the Value of Employer on the Grant Date.  The exercise
     price with respect to all of the Covered Shares under Tranche B shall be
     3.75% of the Value of Employer on the Grant Date.  If fewer than all the
     Covered Shares in a Tranche are exercised, the exercise price will be
     proportionately reduced.

4.   The "Value of Employer on the Grant Date" shall be equal to the sum of the
     prices for all memberships, with the price for any category of membership
     to be determined based on the average price of all actual transactions for
     that category of membership which took place during the six months prior to
     the Grant Date.

5.   Each Installment of Covered Shares of Tranche A and each installment of
     Covered Shares of Tranche B shall be exercisable on and after the Vesting
     Date for such Installment as

                                       2
<PAGE>

     described in the following schedule (but only if Employee's date of
     termination with Employer has not occurred before the Vesting Date):

<TABLE>
<CAPTION>
-----------------------------------------------------------------
INSTALLMENT              VESTING DATE APPLICABLE TO
                         INSTALLMENT
-----------------------------------------------------------------
<S>                      <C>
40% of Covered Shares    One year anniversary of the Grant Date
-----------------------------------------------------------------

20% of Covered Shares    Two year anniversary of the Grant Date

-----------------------------------------------------------------

20% of Covered Shares    Three year anniversary of the Grant Date
-----------------------------------------------------------------

20% of Covered Shares    Four year anniversary of the Grant Date

-----------------------------------------------------------------
</TABLE>

6.   Notwithstanding the foregoing provisions of paragraph 5, the Option shall
     become fully vested and exercisable under the following circumstances: (i)
     the termination of Employee's employment with Employer by reason of the
     Employee's death or permanent disability pursuant to subparagraph 5(a) of
     the Agreement, (ii) termination by Employer without Cause pursuant to
     subparagraph 5(c) of the Agreement, (iii) termination by Employee for Good
     Reason pursuant to subparagraph 5(d) of the Agreement, and (iv) a Change in
     Control and termination as defined in paragraph 7(a) of the Agreement.

                                       3
<PAGE>

7.   At any time that a portion of the Option is exercisable, Employee may
     exercise such portion in whole or in part by filing a written notice with
     Employer accompanied by payment of the exercise price in accordance with
     Paragraph 13 of this Supplement A.

8.   The Option may be exercised on or after Employee's date of termination with
     Employer only as to those Covered Shares for which it was exercisable
     immediately prior to Employee's date of termination with Employer, or
     becomes exercisable on Employee's date of termination with Employer.

9.   Upon exercise of the Option, Employer shall distribute to Employee the
     Covered Shares subject to the exercise, or in lieu of the Covered Shares,
     shares of Class A common stock, Class B common stock, cash, or a
     combination thereof, as determined by Employer in its sole discretion
     (except Employer shall not distribute more class B common stock than the
     amount included in the indivisible package comprising the Covered Shares
     elected by Employee).  Such payment of cash and/or shares of common stock
     shall be equal to the aggregate Fair Market Value of the Covered Shares
     subject to the exercise notice on the date of exercise.  The Fair Market
     Value for the Class A and Class B Stock included in the Covered Shares, as
     of any date, shall be determined in the following manner:

               (i) If traded on an established exchange, Fair Market Value shall
          be the closing prices of such Stock on such exchange as of such date;

               (ii) If such Stock is not traded on an established exchange as of
          such date, Fair Market Value shall be the average of the bid and ask
          prices for such Stock, where quoted for such Stock, as of the
          applicable date;

                                       4
<PAGE>

               (iii) If no applicable price is available pursuant to clauses (i)
          or (ii) above, or if, in the mutual opinion of Employer and Employee,
          either or both of Class A and Class B Stock are thinly traded, an
          outside expert, mutually selected by Employer and Employee, shall
          establish the Fair Market Value of either or both.

10.  The Option shall not be exercisable after Employer's close of business on
     the last business day that occurs prior to the Expiration Date.  The
     "Expiration Date" shall be the earlier to occur of: (i) the ten-year
     anniversary of the Grant Date or (ii) the date on which Employee is
     notified by Employer of Employee's termination for Cause; or (iii) the
     applicable date following Employee's death, permanent disability or other
     termination pursuant to paragraphs 5 or 7 of the Agreement.

11.  The Options and all rights thereunder will be non-transferable except with
     the written consent of the Compensation Committee of the Board.

12.  Shares of Class A Stock of Employer distributed pursuant to the exercise of
     the Option shall be transferable by Employee, subject to Employee being
     required to hold shares of such Stock, with a Fair Market Value equal to
     not less than three times Employee's Annual Base Salary, while employed by
     Employer as its Chief Executive Officer, subject to any applicable legal
     requirements, and subject to any lockup restrictions specified by
     Employer's banker.

13.  The Option may be exercised by Employee, by a legatee or legatees of the
     Option under Employee's last will, or by his executors, personal
     representatives or distributees, by delivering to the Secretary of Employer
     written notice of the percentage of Covered Shares with respect to which
     the Option is being exercised, accompanied by full payment

                                       5
<PAGE>

     to Employer of the exercise price of the Covered Shares being purchased
     under the Option. The exercise price of the Covered Shares purchased shall
     be paid in full by any of the following methods, or any combination
     thereof, selected by Employee, or his legatee or legatees, executors,
     personal representatives or distributees: (i) in cash, (ii) in Class A
     Stock valued at its Fair Market Value on the date of exercise, (iii) in
     Class B Stock valued at its Fair Market Value on the date of exercise, (iv)
     in cash by a broker-dealer to whom the holder of the Option has submitted
     an exercise notice consisting of a fully-endorsed Option (in such case,
     Employer shall pay all brokerage fees in connection with the exercise), (v)
     by agreeing to surrender a portion of the Option then exercisable, valued
     at the Fair Market Value of the Covered Shares minus the exercise price for
     such Covered Shares, or (vi) by directing Employer to withhold such number
     of shares of Covered Shares otherwise issuable upon exercise of the Option
     having an aggregate Fair Market Value on the date of exercise equal to the
     exercise price of the Option. The election by Employee pursuant to the
     preceding sentence must be made on or prior to the date of exercise of the
     Option and shall be irrevocable.

14.  As soon as reasonably practicable after exercise of the Option, and payment
     of the exercise price as provided above, Employer shall issue, in the name
     of Employee (or if applicable his legatees, executors, personal
     representatives or distributees) stock certificates representing the total
     number of Covered Shares or shares of common stock issuable pursuant to the
     exercise of the Option, provided that any Stock purchased by Employee
     through a broker-dealer shall be delivered to such broker-dealer in
     accordance with applicable government regulations.

                                       6
<PAGE>

15.  If Employer has not demutualized at the date that Employee gives notice of
     exercise, Employee shall receive appreciation rights in lieu of the Covered
     Shares to which he would have been entitled.  In such case, no payment of
     the exercise price shall be due from Employee under paragraphs 7 and 13 of
     this Supplement A, and no distribution shall be made to Employee in
     accordance with paragraphs 1, 9 and 14 of this Supplement A or otherwise.
     Instead, Employee shall be entitled to a cash payment equal to the excess
     of (i) the Fair Market Value (determined in accordance with paragraph 4 as
     of the date of exercise) of the percentage of Employer that would have been
     represented by Covered Shares subject to the exercise over (ii) the
     exercise price applicable to the Covered Shares that would have been
     subject to the exercise notice.  The amount of such cash distribution
     (together with interest at the rate of LIBOR plus one) shall be made in
     three substantially equal installments on each of the one-year anniversary,
     the two-year anniversary, and the three-year anniversary of the exercise
     date.

                                       7

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