Document:

exv10w7

 

EXHIBIT 10.7

PAYLESS SHOESOURCE, INC. 401(k)

PROFIT SHARING PLAN

As Amended Effective January 1, 2007, or as otherwise specified

 

 

TABLE OF CONTENTS

	 	 	 	 	 
	 	 	PAGE
	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 Code
	 	 	3	 
	1.11 Committee
	 	 	3	 
	1.12 Company
	 	 	3	 
	1.13 Company Accounts
	 	 	3	 
	1.14 Company Matching Contributions
	 	 	3	 
	1.15 Company Profit Sharing Contributions
	 	 	3	 
	1.16 Effective Date
	 	 	3	 
	1.17 Employer
	 	 	3	 
	1.18 ERISA
	 	 	4	 
	1.19 Fiduciary
	 	 	4	 
	1.20 Fiscal Year
	 	 	4	 
	1.21 Group
	 	 	4	 
	1.22 Hour of Service
	 	 	4	 
	1.23 Investment Fund
	 	 	4	 
	1.24 May Plan
	 	 	4	 
	1.25 Member
	 	 	4	 
	1.26 Member Accounts
	 	 	4	 
	1.27 Member After-Tax Accounts
	 	 	5	 
	1.28 Member Before-Tax Accounts
	 	 	5	 
	1.29 Member Contributions
	 	 	5	 
	1.30 Member Rollover Contribution Accounts
	 	 	5	 
	1.31 Military Service
	 	 	5	 
	1.32 Net Profits
	 	 	5	 
	1.33 Pay
	 	 	5	 
	1.34 Pooled Investment Account
	 	 	6	 
	1.35 Plan
	 	 	6	 
	1.36 Plan Year
	 	 	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	 
	1.42 Total and Permanent Disability or Disability
	 	 	6	 
	1.43 Transferred Accounts
	 	 	6	 
	1.44 Trust Agreement
	 	 	6	 
	1.45 Trust Fund
	 	 	6	 
	1.46 Trustee
	 	 	6	 
	1.47 Unit
	 	 	7	 
	1.48 Unit Value
	 	 	7	 
	1.49 Valuation Date
	 	 	7	 
	1.50 Year of Service
	 	 	7	 

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	 	 	PAGE
	1.51 Vesting Service
	 	 	7	 
	SECTION 2 - Membership
	 	 	9	 
	2.01 Conditions of Eligibility
	 	 	9	 
	 
	 	 	 	 
	SECTION 3 - Company Contributions
	 	 	11	 
	3.01 Amount of Company Profit Sharing Contribution
	 	 	11	 
	3.02 Amount of Company Matching Contribution
	 	 	11	 
	3.03 Allocation of Company Contributions
	 	 	11	 
	3.04 Profit Sharing Allocation Formula
	 	 	11	 
	3.05 Investment of the Company Contribution
	 	 	12	 
	3.06 Return of Company Contributions
	 	 	12	 
	 
	 	 	 	 
	SECTION 4 - Member Contributions
	 	 	13	 
	4.01 Procedure for Making Contributions
	 	 	13	 
	4.02 Limitations On And Distributions On Before-Tax Contributions For Highly Compensated Employees
	 	 	15	 
	4.03 Distributions of Excess Deferrals
	 	 	17	 
	4.04 Limitations On And Distributions Of After-Tax Employee Contributions And Matching
Contributions For Highly Compensated Employees
	 	 	17	 
	4.05 Definitions and Special Rules
	 	 	19	 
	 
	 	 	 	 
	SECTION 5 - Investment Provisions
	 	 	20	 
	5.01 Investment Funds
	 	 	20	 
	5.02 Investment Direction
	 	 	20	 
	 
	 	 	 	 
	SECTION 6 - Accounts
	 	 	22	 
	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. in the Payless Common Stock Fund
	 	 	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 Members
	 	 	33	 
	10.06 Commencement of Benefit Distribution to Beneficiary
	 	 	36	 
	10.07 Commencement of Benefit Distribution to Alternate Payee
	 	 	36	 

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	 	 	PAGE
	SECTION 11 - Permitted Rollover of Plan Distributions
	 	 	37	 
	11.01 Rollover to Other Plans
	 	 	37	 
	11.02      Rollover from Other Plans
	 	 	37	 
	11.03      Definitions
	 	 	38	 
	 
	 	 	 	 
	SECTION 12 - Loans
	 	 	39	 
	12.01      Availability of Loans
	 	 	39	 
	12.02      Amount of Loans
	 	 	39	 
	12.03      Terms of Loans
	 	 	39	 
	 
	 	 	 	 
	SECTION 13 - Limit on Contributions to the Plan
	 	 	41	 
	13.01      Limit on Contributions
	 	 	41	 
	13.02      Adjustment for Excessive Annual Additions
	 	 	41	 
	 
	 	 	 	 
	SECTION 14 - Administration of the Plan
	 	 	43	 
	14.01      Plan Administrator
	 	 	43	 
	14.02      Delegation of Authority
	 	 	43	 
	14.03      Committee and Subcommittees
	 	 	43	 
	14.04      Accounts and Reports
	 	 	44	 
	14.05      Non-Discrimination
	 	 	44	 
	 
	 	 	 	 
	SECTION 15 - Management of the Trust Fund
	 	 	46	 
	15.01      Use of the Trust Fund
	 	 	46	 
	15.02      Trustees
	 	 	46	 
	15.03      Investments and Reinvestments
	 	 	46	 
	 
	 	 	 	 
	SECTION 16 - Certain Rights and Obligations of Employers and Members
	 	 	48	 
	16.01      Disclaimer of Employer Liability
	 	 	48	 
	16.02      Employer-Associate Relationship
	 	 	48	 
	16.03      Binding Effect
	 	 	48	 
	16.04      Corporate Action
	 	 	48	 
	16.05      Claim and Appeal Procedure
	 	 	48	 
	 
	 	 	 	 
	SECTION 17 - Non-Alienation of Benefits
	 	 	50	 
	17.01      Provisions with Respect to Assignment and Levy
	 	 	50	 
	17.02      Alternate Application
	 	 	50	 
	 
	 	 	 	 
	SECTION 18 - Amendments
	 	 	51	 
	18.01      Company’s Rights
	 	 	51	 
	18.02      Procedure to Amend
	 	 	51	 
	18.03      Provision Against Diversion
	 	 	51	 
	 
	 	 	 	 
	SECTION 19 - Termination
	 	 	52	 
	19.01      Right to Terminate
	 	 	52	 
	19.02      Withdrawal of an Employer
	 	 	52	 
	19.03      Distribution in Event of Termination of Trust
	 	 	52	 
	19.04      Administration in Event of Continuance of Trust
	 	 	52	 
	19.05      Merger, Consolidation or Transfer
	 	 	52	 
	 
	 	 	 	 
	SECTION 20 - Construction
	 	 	53	 
	20.01      Applicable Law
	 	 	53	 
	20.02      Gender and Number
	 	 	53	 

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	 	 	PAGE
	SECTION 21 - Top-Heavy Requirements
	 	 	54	 
	21.01      Generally
	 	 	54	 
	21.02      Minimum Allocations
	 	 	54	 
	21.03      Participants Under Defined Benefit Plans
	 	 	54	 
	21.04      Determination of Top Heaviness
	 	 	54	 
	21.05      Calculation of Top-Heavy Ratios
	 	 	55	 
	21.06      Cumulative Accounts and Cumulative Accrued Benefits
	 	 	55	 
	21.07      Other Definitions
	 	 	56	 

iv

 

PAYLESS SHOESOURCE, INC.

401(k) PROFIT SHARING PLAN

INTRODUCTION

     Effective April 1, 1996, Payless ShoeSource, Inc. 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 “Plan”). Effective January
1, 1997, a portion of the Plan covering Associates of Payless ShoeSource of Puerto Rico, Inc. was
spun off. As of August 1, 1997, Payless amended and restated the Plan, primarily to establish a
company matching contribution based on Members’ contributions effective January 1, 1998, to
institute automatic enrollment in before-tax contributions by Members, and to comply with certain
changes in the law. On June 1, 1998, Payless restructured its corporate organization into a
holding company structure with Payless ShoeSource, Inc., a Delaware corporation, as the parent
corporation and the named Company for this Plan. Effective March 20, 2000, the Company amended and
restated the Plan, primarily to include provisions for loans and the acceptance of rollover
contributions from other qualified plans, a change to daily valuation and other miscellaneous
changes.

     Effective January 1, 2002, the Company amended and restated the Plan to effect the adoption of
mandatory and certain permissive provisions of the Economic Growth and Tax Relief Reconciliation
Act of 2001 (“EGTRRA”). The EGTRRA amendments to the Plan are intended to be made in good faith
compliance with the requirements of EGTRRA and are to be construed in accordance with EGTRRA and
guidance issued thereunder. While the EGTRRA amendments are generally effective January 1, 2002,
some of the amendments are effective May 1, 2002, as indicated below. In addition, effective May
1, 2002, the Plan was amended to permit Full Time Associates to participate in the Plan upon the
completion of 90 days of employment service with a participating Employer or other member of the
Group. Effective January 1, 2003 the Company again amended and restated the Plan to reflect the
terms of the final Treasury Regulations governing required minimum distributions. Effective March
28, 2005, the Company amended the Plan to reduce the limit for certain mandatory distributions as
described in IRS notice 2005-5. Other amendments made herein are effective on the dates as
specified. The Plan was further amended as specified to provide for a guaranteed minimum Company
Matching Contribution. Additional amendments were made effective January 1, 2006 to permit
Full-Time Associates to make elective contributions to the Plan after completing 60 days of
employment and to be eligible to receive the Company Matching Contribution after completing 180
days of employment. The hardship provisions of the Plan were also amended to expand the definition
of a “hardship”, consistent with Treasury regulations. The Plan was further amended effective
January 1, 2007 to provide for Part-Time Associates to be eligible to participate in the Plan upon
turning age 21 and completing a full year of employment and to remove the re-employment provision
specified under Section 2.02.

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

1

 

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 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 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
Treas. Reg. Section 1.401(l)-2.

     1.05 Associate means any person who is classified as an employee by an Employer and who
receives Pay from an Employer. The term Associate also may include, based upon the express written
determination of the Company or the Committee, a U.S. citizen employed, at the request of the
Company, 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 agree, (ii) any non-resident alien, and (iii) any “leased employee” within the meaning of
Code Section 414(n)(2).

2

 

     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 Code Section 401(k)(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 Code means the Internal Revenue Code of 1986, as amended from time to time.

     1.11 Committee means the Profit Sharing Committee comprised of three or more members as
determined and appointed from time to time by the Board.

     1.12 Company means Payless ShoeSource, Inc., a Delaware corporation, and any other
organization which may be a successor to it.

     1.13 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.

     1.14 Company Matching Contributions means contributions made by the Company or an Employer,
based on a Member’s Before-Tax and/or After-Tax Contributions, pursuant to Section 3.02.

     1.15 Company Profit Sharing Contributions means discretionary contributions made by the
Company or an Employer, based on Net Profits, pursuant to Section 3.03.

     1.16 Effective Date originally meant April 1, 1996. However, the effective date of this
amendment and restatement of the Plan shall be March 20, 2000, unless otherwise specified herein.

     1.17 Employer means the Company and, if authorized by the Company to participate herein, any
subsidiary of the Company or any affiliated corporation, partnership or sole proprietorship which
elects to participate herein.

3

 

     1.18 ERISA means the Employee Retirement Income Security Act of 1974, as amended from time to
time.

     1.19 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.

     1.20 Fiscal Year means the Company’s Fiscal Year.

     1.21 Group means the Company and any other company which is related to the Company as a member
of a controlled group of corporations in accordance with Code Section 414(b), as a trade or
business under common control in accordance with Code Section 414(c) or as an affiliated service
group in accordance with Code Section 414(m) or the regulations under Code Section 414(o). 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 of a
controlled group or under common control.

     1.22 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 Employer or by any 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.

     1.23 Investment Fund means any fund for investment of contributions as described in Section
5.01.

     1.24 May Plan means The May Department Stores Company Profit Sharing Plan.

     1.25 Member means any person included in the membership of this Plan as provided in Section
2.

     1.26 Member Accounts means the Member Before-Tax Accounts, the Member After-Tax Accounts and
the Member Rollover Contribution Accounts. To the extent an Associate

4

 

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.

     1.27 Member After-Tax Accounts means the Member Accounts with respect to a Member’s After-Tax
Contributions.

     1.28 Member Before-Tax Accounts means the Member Accounts with respect to a Member’s
Before-Tax Contributions.

     1.29 Member Contributions means the Member’s Before-Tax Contributions and After-Tax
Contributions.

     1.30 Member Rollover Contribution Accounts means the Member Accounts with respect to an
Associate’s or Member’s Rollover Contributions.

     1.31 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,
loan repayment and service credit with respect to qualified Military Service will be provided in
accordance with Code Section 414(u).

     1.32 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 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.

     1.33 Pay means the aggregate of (i) all regular pay, commissions, overtime pay, cash
incentives, 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 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 The May Department Stores Company and the Deferred
Compensation Plan of Payless ShoeSource, Inc.), severance pay, distributions from this Plan,
amounts earned before an individual becomes a Member, 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 $200,000 shall be disregarded,

5

 

although such
amount shall be adjusted at the same time and in such manner as permitted under Code Section
415(d).

     1.34 Pooled Investment Account means an account established pursuant to an administrative
services agreement between the Company and the Trustee.

     1.35 Plan means this Payless ShoeSource Inc. 401(k) Profit Sharing Plan.

     1.36 Plan Year means a calendar year ending each December 31.

     1.37 Prior Plan means either The May Department Stores Company Profit Sharing Plan, the Volume
Shoe Corporation Profit Sharing Plan, or 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 Code Section 414(p), 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 qualification for disability under
Title 11 of the Federal Social Security Act.

     1.43 Transferred Accounts means Member and Company Accounts transferred from the May Plan.

     1.44 Trust Agreement means the agreement or agreements provided for in Section 14, as amended
from time to time.

     1.45 Trust Fund means all the assets of the Investment Funds and any other assets 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.

6

 

     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 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.

     1.50 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 during which
he earns not less than 1,000 Hours of Service for an Employer or any other member of the Group.
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 Treasury Regulations, a “leased employee” within the meaning of
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.

     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 1.51 shall be determined by the Company or by the
Committee on a case-by-case basis.

     1.51 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.

7

 

(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 Code Sections 410(a)(5)(E) or 411(a)(6)(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.

(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.

8

 

SECTION 2

Membership

2.01 Conditions of Eligibility.

(a) Each Associate who on April 30, 2002 was a Member of or is eligible to be a Member of
the Plan shall continue to be a Member of this 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
attains age 21 and meets such other eligibility criteria for Part-Time and Full-Time
Associates as set forth below. Once determined eligible, membership commences as of the
first day of the month coincident with or following the date the Associate has met the
applicable 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.

     Effective January 1 2006, a Full Time Associate shall be eligible to make Member
Contributions pursuant to Section 4 as of the first day of the month coincident with or
following the date he has completed 60 days of employment with the Employer and attained age
21. Further, a Full-Time Associate shall be eligible to receive a Company Matching
Contribution coincident with or following the date he has completed 180 days of service with
the Company and satisfied the requirements of Section 3.03. For the purposes of the
preceding sentence, a “Full Time Associate” is an Associate classified on the Employer’s
records as a Full Time Associate. In many locations, this means the Associate is normally
scheduled to work 32 or more hours per week. However, the Associate’s classification on the
Employer’s records, and not the actual number of hours worked in any period, determines Full
Time status. Effective January 1, 2007, a Part Time Associate shall be eligible to make
Member Contributions pursuant to Section 4 as of the first day of the month coincident with
or following the date he has completed one full year of employment. Prior to the effective
date of January 1, 2007, Part Time Associates must have completed one full Year of Service
to be eligible to make Member Contributions.

(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 first 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 the Employer determines he met the foregoing
eligibility requirements. Notwithstanding this “deemed” election, an Associate

9

 

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)	 	Associates employed by the Company’s Puerto Rican Subsidiaries are not eligible
for membership hereunder. If any such Associate has Accounts in this Plan, such
Accounts shall continue to be revalued as of each succeeding Valuation Date pursuant to
Section 6.04.

10

 

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 shall, in its discretion,
contribute to the Trust, as of the end of each Plan Year, a total combined amount as to this Plan
and the Payless ShoeSource, Inc. Profit Sharing Plan for Puerto Rico Associates (“Puerto Rico
Plan”) equal to 2 1/2% of its Net Profits, until determined otherwise by the Board of Directors, in
the form of a Company Matching Contribution. Effective beginning with the 2006 Plan Year, the
Board has determined that a minimum guaranteed Company Matching Contribution of $.25 per $1.00 of
Member Contributions up to 5% of Pay will be contributed each Plan Year by the Company. Such
Company Matching Contributions may be made by an Employer, rather than by the Company, as to that
Employer’s participating Associates. 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) for such
Plan Year, up to a total of 5% of such Member’s Pay, bears to the total amount of all Member
Contributions up to 5% of such Members’ Pay. Such Company Matching Contribution shall be
determined and paid to the Trustee as soon as practicable after the close of each Fiscal Year.

     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 Code Section 402(g)
and 414(v) limit, 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 Puerto
Rico Plan and this Plan.

11

 

     3.05 Investment of the Company Contribution. The amounts allocated to each Member pursuant to
Section 3.03 shall be credited to his Company Accounts and invested in one or 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 receives 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 an Associate 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) Each contribution made to the Trust shall be made on the condition that it is currently
deductible by the Company or Employer under Code Section 404 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
or Employer.

(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.

12

 

SECTION 4

Member Contributions

4.01 Procedure for Making Contributions.

(a) After-Tax Contributions. Subject to the limitations set forth in Sections 4.02, 4.03
and 4.04, each Member may contribute to the Plan an amount (in whole percentage points)
equal to not less than 1% nor more than 15% (effective May 1, 2002, 75%) 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 terminates 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).

(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 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 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 qualify as a “qualified cash or deferred arrangement” for purposes of Code
Section 401(k), or if the Actual Deferral Percentage standards set forth in Code Section
401(k)(3) are not met at the end of the Plan Year, then the Committee, in its sole and
absolute discretion,

(i) may, in accordance with Section 4.02 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,

13

 

(ii) may, except with respect to situations in which Section 4.01(h) applies, (and
prior to March 15 of the calendar year following the Plan Year in which such
contributions are made) declare all or such portion of the Before-Tax Contributions
theretofore or thereafter made on behalf of all or a portion of the Members to be
After-Tax Contributions. Effective January 1, 1997, if Before-Tax Contributions are
made to another plan or plans, this Plan and such other plans must be aggregated for
purposes of Section 410(b) of the Code (other than the average benefit percentage
test).

(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 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 Subsection (b), the total amount of a
Member’s Before-Tax Contributions and other contributions made by the Member

14

 

under Code
Section 401(k) to another plan qualified under Code Section 401(a) for any calendar year
shall not exceed $11,000 (as adjusted from time to time by the Secretary of the Treasury or
his delegate, pursuant to Code Section 415(d)). If any Member may reach the $11,000 limit
(as adjusted) 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). Effective May 1, 2002, all employees
who are eligible to make elective deferrals under this Plan and who have attained age 50
before the close of the Plan Year shall be eligible to make catch-up contributions in
accordance with, and subject to the limitations of, section 414(v) of the Code. Such
catch-up contributions shall not be taken into account for purposes of the provisions of the
Plan implementing the required limitations of sections 402(g) and 415 of the Code. The Plan
shall not be treated as failing to satisfy the provisions of the Plan implementing the
requirements of sections 401(k)(3), 401(k)(11), 401(k)(12), 410(b), or 416 of the Code, as
applicable, by reason of the making of such catch-up contributions.

(i) The Committee shall provide each new Member a notice that explains the procedure for
making Before-Tax Contributions under Sections 4.01(b) and 2.01(c), including the Member’s
right to elect to make no Before-Tax Contribution from his or her Pay and the manner in
which the amount of such contributions may be changed. In addition, the Committee shall
provide an annual notice to each Member indicating his or her Before-Tax Contributions as a
percentage of Pay, describing the right to alter and the procedure for changing such
percentage, and explaining the timing for implementation of any such change.

     4.02 Limitations On And Distributions Of Before-Tax Contributions For Highly Compensated
Employees.

The Committee is authorized to reduce to the extent necessary the maximum contributions
under Section 4.01(b) for Highly Compensated Employees prior to the close of the Plan Year
if the Committee reasonably believes that such reduction is necessary to prevent the Plan
from failing both tests in Code Section 401(k)(3). Such adjustments shall be made in
accordance with rules prescribed by the Committee. The Committee may implement rules
limiting contributions under Section 4.01(b) which may be made on behalf of some or all
Highly Compensated Employees so that the limits of Section 401(k)(3) or 401(m)(2) of the
Code are satisfied. If for any Plan Year the Plan satisfies neither of the tests set forth
in Code Section 401(k)(3), the Trustee shall be directed by the Committee to return to each
Highly Compensated Employee his or her portion of the excess contributions (plus the income
or less the loss allocable to such excess contributions) for such Plan Year within 12 months
after the last day of such Plan Year. A Highly Compensated Employee shall forfeit any
Matching Contributions which were contributed on account of any portion of the excess
contributions even if such Matching Contributions are vested. Each Highly Compensated
Employee’s portion of the excess contributions for a Plan Year shall be
determined under a two step process. First, the aggregate amount of excess contributions
shall be calculated. This shall be done by reducing the actual deferral percentages of
those Highly Compensated Employees with the highest actual deferral

15

 

percentages to the
extent necessary but not below the next highest level of actual deferral percentages. This
process shall be repeated, to the extent necessary, until the actual deferral percentage for
the group of Highly Compensated Employees satisfies one of the tests set forth in Code
Section 401(k)(3). The aggregate amount of excess contributions shall be equal to the sum
of all such reductions. Second, the aggregate amount of excess contributions to be returned
shall be allocated by reducing the Before-Tax Contributions of those Highly Compensated
Employees with the highest amount of Before-Tax Contributions to the extent necessary but
not below the next highest amount of Before-Tax Contributions. This process shall be
repeated, to the extent necessary, until all excess contributions to be returned shall be
allocated among the Highly Compensated Employees. The income or loss allocable to a Highly
Compensated Employee’s portion of the excess contribution will be determined under such
reasonable method as the Committee shall establish, provided the method does not
discriminate in favor of Highly Compensated Employees, is used consistently for all Members
and for all corrective distributions under the Plan for the Plan Year, and is used by the
Plan for allocating income to Members’ accounts.

(a) Coordination With Distributions Of Elective Deferrals. If the Plan is required
to distribute both elective deferrals and excess contributions for a Plan Year, the
Plan shall:

(i) calculate and distribute the elective deferrals before determining the
excess contributions to be distributed to Highly Compensated Employees;

(ii) calculate the actual deferral percentage including the amount of excess
elective deferrals distributed pursuant to (i) above; and

(iii) distribute excess contributions to Members by reducing the excess
contributions distributed to a Member by the amount of excess elective
deferrals distributed to such Member.

(b) Election To Make Additional Contributions. Notwithstanding the above, in
accordance with Treasury Regulation Section 1.401(k)-2(a)(6), the Company may elect,
in lieu of all or a portion of the corrective distribution described above in this
Section, to make additional qualified nonelective contributions or qualified
matching contributions which are treated as elective deferrals under the Plan and
that, in combination with the elective deferrals, satisfy the actual deferral
percentage test. Any such additional qualified nonelective contributions will be
credited to a Member Before-Tax Account and shall be allocated to each Member who is
not a Highly Compensated Employee in an amount as determined by the Company and will
be contributed as a percentage of such Member’s Pay for the Plan Year. Any such
additional qualified matching contributions will be credited to a Member Before-Tax
Account and shall be allocated to each Member who is not a Highly Compensated
Employee and will be
contributed as a percentage of the amount contributed by such Member under Section
4.01(b).

16

 

(c) Testing Year. The actual deferral percentage of Non-Highly Compensated
Employees shall be determined as of the Plan Year preceding the Plan Year for which
the Plan must satisfy one of the tests in Code Section 401(k)(3).

4.03 Distributions of Excess Deferrals.

     If a Member’s elective deferrals for any calendar year exceed $10,500 (or such higher
amount prescribed under Section 402(g) of the Code), then the Member may file an election
form prescribed by the Committee with the Employer/Company designating in writing the amount
of the Member’s Excess Before-Tax Deferrals to be distributed from this Plan. Any such
election form must be filed with the Committee no later than the first March 1 following the
close of such calendar year in order for the Committee to act on it. If such an election
form is timely filed, the Trustee shall distribute to the Member the amount of such Excess
Before-Tax Deferrals which the Member has allocated to this Plan together with any income or
less any loss allocable to such amount on or before the first April 15 following the close
of such calendar year. In the case of a Highly Compensated Employee, any matching
contributions which were contributed on account of the Excess Before-Tax Deferrals being
distributed will be forfeited, even if such matching contributions are vested. For purposes
of this Section 4.03, the income or loss allocable to such Excess Before-Tax Deferrals will
be determined under such reasonable method as the Committee shall establish, provided the
method does not discriminate in favor of Highly Compensated Employees, is used consistently
for all Members and for all corrective distributions under the Plan for the Plan Year, and
is used by the Plan for allocating income to Members’ accounts.

     4.04 Limitations On And Distributions Of After-Tax Employee Contributions And Matching
Contributions For Highly Compensated Employees.

The Committee is authorized to reduce to the extent necessary the maximum amount of Employer
Matching Contributions under Section 3.02 and Employee After-Tax Contributions contributed
on behalf of any Highly Compensated Employee prior to the close of the Plan Year if the
Committee reasonably believes that such adjustment is necessary to prevent the Plan from
failing both tests in Code Section 401(m)(2). Such reduction shall be made in accordance
with rules prescribed by the Committee. Notwithstanding anything herein to the contrary,
the tests in Code Section 401(m)(2) shall be treated as satisfied with respect to such
Matching Contributions and After-Tax Contributions to the Plan, or a portion of the Plan, if
the Plan or such portion is a collectively bargained plan that automatically satisfies Code
Section 410(b), in accordance
with Treasury Regulation Sections 1.401(m)-1(b)(2) and 1.410(b)-2(b)(7). If for any Plan
Year the Plan fails to satisfy either of the tests set forth in Code Section 401(m)(2), the
Trustee shall be directed by the Committee to distribute to each Highly Compensated Employee
his or her vested portion (and forfeit the nonvested portion) of the excess aggregate
contributions (plus the income or less the losses allocable to such excess

17

 

aggregate
contributions) for such Plan Year, within 12 months after the last day of such Plan Year.
Each Highly Compensated Employee’s portion of the excess aggregate contributions for a Plan
Year shall be determined under a two step process. First, the aggregate amount of excess
aggregate contributions shall be calculated. This shall be done by reducing the actual
contribution percentages of those Highly Compensated Employees with the highest actual
contribution percentages to the extent necessary but not below the next highest level of
actual contribution percentages. This process shall be repeated, to the extent necessary,
until the actual contribution percentage for the group of Highly Compensated Employees
satisfies one of the tests set forth in Code Section 401(m)(2). The aggregate amount of
excess aggregate contributions shall be equal to the sum of all such reductions. Second,
the aggregate amount of excess aggregate contributions to be distributed or forfeited shall
be allocated by first reducing any After-Tax Contributions and then any Matching
Contributions made by or on behalf of Highly Compensated Employees with the highest total
amount of After-Tax Contributions and Matching Contributions to the extent necessary but not
below the next highest total amount of After-Tax Contributions and Matching Contributions.
This process shall be repeated, to the extent necessary, until all excess aggregate
contributions to be distributed or forfeited shall be allocated among the Highly Compensated
Employees. A Highly Compensated Employee whose After-Tax Contributions are determined to be
excess aggregate contributions shall forfeit any Matching Contributions which were
contributed on account of such After-Tax Contributions, even if such Matching Contributions
are vested. The income or loss allocable to a Highly Compensated Employee’s portion of the
excess aggregate contributions will be determined under such reasonable method as the
Committee shall establish, provided the method does not discriminate in favor of Highly
Compensated Employees, is used consistently for all Members and for all corrective
distributions under the Plan for the Plan Year, and is used by the Plan for allocating
income to Members’ accounts.

(a) Election To Make Additional Contributions. Notwithstanding the above, in
accordance with Treasury Regulation Section 1.401(m)-2(a)(6), the Company may elect,
in lieu of all or a portion of the distribution described above, to either (i) make
an additional qualified nonelective contribution that, in combination with Matching
Contributions and After-Tax Contributions for the Plan Year, satisfies the actual
contribution percentage test or (ii) recharacterize elective contributions as
Matching Contributions. Any such additional qualified nonelective contributions
will be credited to a Member Before-Tax Account and shall be allocated to each
Member who is not a Highly Compensated Employee in an amount as determined by the
Company and will be contributed as a percentage of such Member’s Pay for the Plan
Year.

(b) The actual contribution percentage of Non-Highly Compensated Employees shall be
determined as of the Plan Year preceding the Plan Year for which the Plan must
satisfy one of the tests in Code Section 401(m)(2).

18

 

     4.05 Definitions and Special Rules.

(a) Repeal of Multiple Use Test.

     The Multiple use test described in Treasury Regulation section
1.401(m)-2 shall not apply for Plan Years beginning after December 31, 2001.

(b) Special Definitions.

     All terms used in this Section 4 shall have the meaning given such terms
in Code Sections 401(k) and 401(m) and the regulations thereunder.

(c) Special Rule For Early Participation. If the Company applies Code Section
410(b)(4)(B) in determining whether the Plan satisfies Code Section 410(b) by
excluding from consideration eligible Associates who have not met minimum age and
service requirements, the Company may exclude from consideration all Non-Highly
Compensated Employees who have not met the minimum age and service requirements of
Code Section 410(a)(1)(A) for purposes of satisfying the tests in Code Sections
401(k)(3) and 401(m)(2).

(d) Highly Compensated Employee In Two Or More Qualified Plans. The actual
contribution percentage and the actual deferral percentage of a Highly Compensated
Employee who is eligible to participate in two or more qualified plans which have
(i) cash or deferred arrangements or (ii) Matching Contributions or After-Tax
Contributions features maintained by the Employer or a member of the Group, shall be
calculated by treating all such cash or deferred arrangements in which the Highly
Compensated Employee is eligible to participate as one cash or deferred arrangement
for purposes of calculating the actual deferral percentage for such Highly
Compensated Employee and all such features in which the Highly Compensated Employee
is eligible to participate as one feature for purposes of calculating the actual
contribution percentage for such Highly Compensated Employee with respect to years
ending within the same calendar year.

(e) Plan Restructuring. The Plan may be aggregated with another plan or other plans
or disaggregated under Section 1.401(k)-1(b)(4) and Section 1.401(m)-
1(b)(4) of the Treasury Regulations for any Plan Year in order to pass the actual
contribution percentage and actual deferral percentage tests set forth in this
Section.”

19

 

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 continue to 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 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
invested in the stable, fixed income investment as may be determined by the Committee.
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 Company Contribution is
contributed to the Trust.

(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

 

(d) Notwithstanding this Section 5.02, effective March 20, 2000, during the black out period
as determined by the Committee and the Trustee established to change to daily valuation or a
change in recordkeepers, no investment transfers or changes may be made by a Member unless
provided in Section 6.06. Notwithstanding anything to the contrary, no loans, withdrawals
or distributions shall be made during any such blackout period except as provided by the
Committee.

21

 

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
properly 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

22

 

contemporaneous
with the record date set by the Company for each meeting of 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 a 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 timely 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 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 Contribution 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:

23

 

	 	 	 
	Vesting Service	 	Vested Interest
	Fewer than 2 years

	 	0%
	2 years
	 	25%
	3 years
	 	50%
	4 years
	 	75%
	5 years or more
	 	100%

     Notwithstanding the foregoing, a Member’s interest in his Company Matching Contribution
Account and his Company Profit Sharing Contribution Account shall become fully vested if the
Member terminates employment on account of 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 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) on the same
day as the date of allocation of the Company Contribution for the Plan Year during
which such Member was reemployed by an Employer. To restore

24

 

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 (f) below;

(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 1.51(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 or 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

25

 

(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 applied
(i) to restore under (b) above any amounts previously forfeited from rehired Members’
Accounts, (ii) to pay Administrative Expenses under Section 7.01 and (iii) 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 (f) 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 Breaks in Service as defined in Section
6.07(b), 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

 

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 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

 

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 up 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. 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 Internal Revenue Service 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 Code Section 213(d) previously incurred by the
Member, the Member’s spouse, or any of the Member’s dependents (as defined in Code
Section 125) or necessary for these persons to obtain medical care described in
Section 213(d);

(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 Code Section 152);

(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

 

(v) (Effective January 1, 2006). Payments for burial or funeral
expenses for a Member’s deceased parent, spouse, children or dependents (as
defined in Section 152 of the Code and effective January 1, 2006), without
regard to Section 152(d)(1)(B).

(vi) (Effective January 1, 2006). Expenses for the repair of damage
to Member’s principal residence that would qualify for the casualty deduction
under Section 165 of the Code (determined without regard to whether the loss
exceeds 10% of adjusted gross income).

          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, (4) by other distributions or loans from employee benefit plans,
including this Plan, maintained by the Company or any other employer or (5) 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 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, shall be entitled to withdraw the
market value of such account balance determined (and frozen) as of December 31, 1988.

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

     (e) A withdrawal election shall be made pursuant to application procedures established by the
Committee. 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.

29

 

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 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 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 the Code 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

 

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 Valuation Date as of which the
Account values are determined pursuant to Section 9.01; 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 Contributions, Member
Contributions, Rollover Contributions and earnings thereon (but excluding accumulated
deductible employee contributions, if any) exceeds $1,000, no partial or total distribution
shall be made unless the Member has consented thereto in writing in the manner required by
law.

(b) A 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, a 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 $1,000 may elect to
defer such distribution to the required minimum distribution age, as determined by law from
time to time. 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

31

 

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 the required minimum distribution age 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 birthday coincident with the Member’s
required minimum distribution age 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 Required Minimum Distributions.

          Notwithstanding anything to the contrary contained in the Plan, the entire interest of a
Member will be distributed in accordance with Code Section 401(a)(9) and the regulations thereunder
beginning no later than the Member’s Required Beginning Date. The provisions of this Section will
apply for purposes of determining required minimum distributions for calendar years beginning with
the 2003 calendar year. Notwithstanding the other provisions of this Section, distributions may be
made under a designation made before January 1, 1984, in accordance with section 242(b)(2) of the
Tax Equity and Fiscal Responsibility Act (TEFRA) and the provisions of the Plan that relate to
section 242(b)(2) of TEFRA.

     (a) If the Member dies before distributions begin, the Member’s entire interest will be
distributed, or begin to be distributed, no later than as follows:

     (1) If the Member’s surviving spouse is the Member’s sole designated
beneficiary, then distributions to the surviving spouse will begin by December 31 of
the calendar year immediately following the calendar year in which the Member

32

 

died,
or by December 31 of the calendar year in which the Member would have attained age
701/2, if later.

     (2) If the Member’s surviving spouse is not the Member’s sole designated
beneficiary, then distributions to the designated beneficiary will begin by December
31 of the calendar year immediately following the calendar year in which the Member
died.

     (3) If there is no designated beneficiary as of September 30 of the year
following the year of the Member’s death, the Member’s entire interest will be
distributed by December 31 of the calendar year containing the fifth anniversary of
the Member’s death.

     (4) If the Member’s surviving spouse is the Member’s sole designated
beneficiary and the surviving spouse dies after the Member but before distributions
to the surviving spouse begin, this subsection, other than subsection (a)(1), will
apply as if the surviving spouse were the Member.

For purposes of this subsection, unless subsection (a)(4) applies, distributions are
considered to begin on the Member’s Required Beginning Date. If subsection (a)(4) applies,
distributions are considered to begin on the date distributions are required to begin to the
surviving spouse under subsection (a)(1). To the extent the Plan provides for distributions
in the form of annuities, if distributions under an annuity purchased from an insurance
company irrevocably commence to the Member before the Member’s Required Beginning Date (or
to the Member’s surviving spouse before the date distributions are required to begin to the
surviving spouse under subsection (a)(1)), the date distributions are considered to begin is
the date distributions actually commence.

     (b) Unless the Member’s interest is distributed in the form of an annuity purchased
from an insurance company or in a single sum on or before the Required Beginning Date, as of
the first distribution calendar year distributions will be made in accordance with
subsections (c) and (d). To the extent the Plan provides for distributions in the form of
annuities, if the Member’s interest is distributed in the form of an annuity purchased from
an insurance company, distributions thereunder will be made in accordance with the
requirements of Code Section 401(a)(9) and the Treasury regulations.

     (c) During the Member’s lifetime, the minimum amount that will be distributed for each
distribution calendar year is the lesser of:

     (1) the quotient obtained by dividing the Member’s account balance by the
distribution period in the Uniform Lifetime Table set forth in
section 1.401(a)(9)-9 of the Treasury regulations, using the Member’s age as of the
Member’s birthday in the distribution calendar year; or

33

 

     (2) if the Member’s sole designated beneficiary for the distribution calendar
year is the Member’s spouse, the quotient obtained by dividing the Member’s account
balance by the number in the Joint and Last Survivor Table set forth in section
1.401(a)(9)-9 of the Treasury regulations, using the Member’s and spouse’s attained
ages as of the Member’s and spouse’s birthdays in the distribution calendar year.

Required minimum distributions will be determined beginning with the first distribution
calendar year and up to and including the distribution calendar year that includes the
Member’s date of death.

     (d) If the Member dies on or after the date distributions begin and there is a
designated beneficiary, the minimum amount that will be distributed for each distribution
calendar year after the year of the Member’s death is the quotient obtained by dividing the
Member’s account balance by the longer of the remaining life expectancy of the Member or the
remaining life expectancy of the Member’s designated Beneficiary, determined as follows:

     (1) The Member’s remaining life expectancy is calculated using the age of the
Member in the year of death, reduced by one for each subsequent year.

     (2) If the Member’s surviving spouse is the Member’s sole designated
beneficiary, the remaining life expectancy of the surviving spouse is calculated for
each distribution calendar year after the year of the Member’s death using the
surviving spouse’s age as of the spouse’s birthday in that year. For distribution
calendar years after the year of the surviving spouse’s death, the remaining life
expectancy of the surviving spouse is calculated using the age of the surviving
spouse as of the spouse’s birthday in the calendar year of the spouse’s death,
reduced by one for each subsequent calendar year.

     (3) If the Member’s surviving spouse is not the Member’s sole designated
beneficiary, the designated beneficiary’s remaining life expectancy is calculated
using the age of the beneficiary in the year following the year of the Member’s
death, reduced by one for each subsequent year.

If the Member dies on or after the date distributions begin and there is no designated
beneficiary as of September 30 of the year after the year of the Member’s death, the minimum
amount that will be distributed for each distribution calendar year after the year of the
Member’s death is the quotient obtained by dividing the Member’s account balance by the
Member’s remaining life expectancy calculated using the age of the Member in the year of
death, reduced by one for each subsequent year.

     (e) If the Member dies before the date distributions begin and there is a designated
beneficiary, the minimum amount that will be distributed for each distribution calendar year
after the year of the Member’s death is the quotient obtained by dividing the

34

 

Member’s
account balance by the remaining life expectancy of the Member’s designated beneficiary,
determined as provided in subsection (d). If the Member dies before the date distributions
begin and there is no designated beneficiary as of September 30 of the year following the
year of the Member’s death, distribution of the Member’s entire interest will be completed
by December 31 of the calendar year containing the fifth anniversary of the Member’s death.
If the Member dies before the date distributions begin, the Member’s surviving spouse is the
Member’s sole designated beneficiary, and the surviving spouse dies before distributions are
required to begin to the surviving spouse under subsection (a)(1), this Section will apply
as if the surviving spouse were the Member.

     (f) The following definitions shall apply for purposes of this Section:

     (1) Designated beneficiary shall mean the individual who is designated as the
beneficiary under the terms of the Plan and is the designated beneficiary under Code
Section 401(a)(9) and section 1.401(a)(9)-1, Q&A-4 of the Treasury regulations.

     (2) A distribution calendar year is a calendar year for which a minimum
distribution is required. For distributions beginning before the Member’s death,
the first distribution calendar year is the calendar year immediately preceding the
calendar year which contains the Member’s Required Beginning Date. For
distributions beginning after the Member’s death, the first distribution calendar
year is the calendar year in which distributions are required to begin under
subsection (a). The required minimum distribution for the Member’s first
distribution calendar year will be made on or before the Member’s Required Beginning
Date. The required minimum distribution for other distribution calendar years,
including the required minimum distribution for the distribution calendar year in
which the Member’s Required Beginning Date occurs, will be made on or before
December 31 of that distribution calendar year.

     (3) Life expectancy means an individual’s life expectancy as computed by use of
the Single Life Table in section 1.401(a)(9)-9 of the Treasury regulations.

     (4) The Member’s account balance is the account balance as of the last
valuation date in the calendar year immediately preceding the distribution calendar
year (valuation calendar year) increased by the amount of any contributions made and
allocated or forfeitures allocated to the account balance as of dates in the
valuation calendar year after the valuation date and decreased by distributions made
in the valuation calendar year after the valuation date. The account balance for
the valuation calendar year includes any amounts rolled over or transferred to the
Plan either in the valuation calendar year or in the distribution calendar year if
distributed or transferred in the valuation calendar year.

35

 

     (5) Required Beginning Date means the first day of April following the calendar
year in which the Member attains age 701/2 or, if later, the calendar year in which
the Member retires. In the case of a Member who is a “five percent owner” as
defined in Section 21.07(f)(3), Required Beginning Date means the first day of April
following the calendar year in which the Member attains age 701/2.

     10.06 Commencement of Benefit Distribution to Beneficiary. Distributions to the Beneficiary
entitled under Section 9.02 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 Code Section 414(p)) 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 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 $1,000, 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.

36

 

SECTION 11

Permitted Rollover of Plan Distributions

     11.01 Rollover 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 any portion of an eligible
rollover distribution paid directly to an eligible retirement plan specified by the distributee in
a direct rollover. Such distribution may commence no less than thirty (30) days nor more than
ninety (90) after any notice required under Treas. Reg. Section 1.411(a)-11(c) (or its successor)
and explanation of his right to rollover his distribution and tax explanation in accordance with
Internal Revenue Rules are given to a Member or other distributee, provided that the Member has
been clearly informed that he has a right to a period of at least thirty (30) days after receiving
said notice to consider the decision as to whether to elect a distribution or, if applicable, a
distribution option, and the Member nevertheless affirmatively elects distribution preceding the
expiration of thirty (30) days. A portion of the distribution shall not fail to be an eligible
rollover distribution merely because the portion consists of after-tax Member contributions which
are not includible in gross income. However, such portion may be transferred only to an individual
retirement account or annuity described in Sections 408(a) or (b) of the Code, or a qualified
defined contribution plan described in Sections 401(a) or 403(a) of the Code that agrees to
separately account for amounts so transferred, including separately accounting for the portion of
such distribution which is includible in gross income and the portion of such distribution which is
not so includible.

     11.02 Rollover 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 other than an individual retirement account described in Code Section 408(a) or an
individual retirement annuity described in Code Section 408(b); and, provided further, that this
Plan shall not accept the portion of any eligible rollover distribution that is not includible in
gross income. 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 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

37

 

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 requirement 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 to the credit of the distributee, except that an
eligible rollover distribution does not include: any distribution that is one of a series of
substantially equal periodic payments (not less frequently than annually) made for the life
(or life expectancy) of the distributee or the joint lives (or joint life expectancies) of
the distributee and the distributee’s beneficiary or for a specified period of ten years or
more; any distribution to the extent such distribution is required under Code Section
401(a)(9) and any hardship distribution.

(b) Eligible Retirement Plan. An eligible retirement plan is an individual retirement
account described in Code Section 408(a), an individual retirement annuity described in Code
Section 408(b), an annuity plan described in Code Section 403(a), an annuity contract
described in Code Section 403(b), an eligible plan described in Code Section 457(b)
maintained by a state, a political subdivision of a state, or any instrumentality of a state
or political subdivision of a state, or a qualified trust described in Code Section 401(a),
which accepts or will make, as applicable, an Eligible Rollover Distribution. This
definition shall also apply to an Eligible Rollover Distribution to a Member’s surviving
spouse, or a former spouse who is an alternate payee under a Qualified Domestic Relations
Order.

(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
Code Section 414(p), are distributees with regard to the interest of the spouse or former
spouse.

(d) Direct Transfer. A direct transfer is a payment by the Plan to the eligible retirement
plan specified by the distributee as described in Code Section 401(a)(31).

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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. Loans are available to Associates who have a Member Rollover Contribution Account.

     12.02 Amount of Loans. No loan to any Associate, Member or Beneficiary may be made to the
extent that such loan, when added to the outstanding balance of all other loans to the Associate,
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 Participant. For the
purpose of the above limitation, all loans from all plans of the Employer and other members of a
group of employers described in 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
four and one-half 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 Participant, 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
Participant’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 Associates, Members and Beneficiaries on a
reasonably equivalent basis.

(b) Loans shall not be made available to Highly Compensated Employees (as defined in 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) An Associate or Member loan for less than $1,000 is not permitted; provided, however,
that if such Associate or Member also receives a loan from the Puerto Rico Plan, such
minimum amount limitation shall not apply.

39

 

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

(f) No loans will be made to any Associate or 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 Members
accounts in the following hierarchy:

(a) Member Accounts

(b) Vested Company Accounts

(c) Member Rollover Contribution Accounts

(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.

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SECTION 13

Limit on Contributions to the Plan

     This Section 13 is intended to conform the Plan to the requirements of 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)	 	$40,000; or
	 
	 	(2)	 	100% 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 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 Treasury Regulation Section 1.415-2(d)(10) and, effective January 1, 1998, shall also
include the deferrals described in Code Section 415(c)(3)(D)(including effective January 1, 2001,
elective amounts not included in gross income by reason of Code Section 132(f)(4)).

(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 Code Sections 402(a)(5), 403(a)(4), 403(b)(8) and 408(d)(3),
without regard to catch-up contributions under Code Section 414(v) and without regard to
Employee contributions to a simplified employee pension plan which are excludible from gross
income under 408(k)(6) of the Code) and forfeitures.

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 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)

41

 

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 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.

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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 1.42 (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 7.01 (Administrative Expenses), 5.01(c) (Investment Funds), 15
(Management of the Trust Fund) and 6.06 (shares of Payless ShoeSource, Inc. (Payless Stock) in the
Payless Common Stock 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 an 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

43

 

administration of the Plan. The Committee and each Subcommittee may, from time to time,
appoint agents and delegate to such agents such 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 discretionary authority 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 Code
Section 414(q)).

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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 constituting a money market or
stable value fund, a fixed income fund, a common stock fund, or any other 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 Investment 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 15.03(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 to a written agreement between

45

 

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 the Trustee or Trustees implementing the Plan
shall contain provisions effectuating the provisions of this Section 15 of the Plan.

46

 

SECTION 16

Certain Rights and Obligations of Employers and Members

     16.01 Disclaimer of Employer Liability.

     (a) No liability shall attach to 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 an Employer to discharge any Associate or
otherwise act with relation to him. Each 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 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 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

47

 

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.

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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.

49

 

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 Code Section
401(a) and to have the trust or trusts declared exempt from taxation under Code Section 501(a).

     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.

50

 

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 either in its entirety or with respect
to any Employer included hereunder, 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 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).

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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 the State of Kansas
and, whenever possible, to be in conformity with the applicable requirements of ERISA and the
Internal Revenue Code.

     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.

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SECTION 21

Top-Heavy Requirements

     21.01 Generally. For any Plan Year in which the Plan is a Top-Heavy Plan, the provisions of
Sections 21.02 and 21.03 shall automatically take effect in accordance with Code Section 416.

     21.02 Minimum Allocations.

(a) Minimum Employer Allocations and allocations of Plan forfeitures for a Member who is not
a Key Employee shall be required under the Plan for the Plan Year as set forth in Section
21.02 (b) and(c).

(b) The amount of the minimum allocation shall be the lesser of the following, percentages of
Pay: (i) four percent (4%) or, (ii) the highest percentage at which such allocations are made
under the Plan for the Plan Year on behalf of a Key Employee. For purposes of this paragraph
(b), all defined contribution plans required to be included in an Aggregation Group shall be
treated as one plan. This paragraph (b) shall not apply if the Plan is required to be
included in an Aggregation Group and the Plan enables a defined benefit plan required to be
included in the Aggregation Group to meet the requirement of Code Sections 401(a)(4) or 410.
For purposes of this paragraph (b), the calculation of the percentage at which allocations
are made for a Key Employee shall be based only on his Pay not in excess of $200,000, such
amount to be adjusted periodically for increases in the cost of living in accordance with
Code Section 401(a)(17). The minimum allocation described in this paragraph (b) shall be in
addition to (and shall not be reduced by) any Member Contributions under Section 4 (whether
Before-Tax or After-Tax) and any allocation of forfeitures, if any, to which a Member may be
entitled.

(c) For purposes of this Section 21.02, the term “Member” shall be deemed to refer to all
Members who have not separated from service at the end of the Plan Year including, without
limitation, individuals who declined to make contributions to the Plan.

     21.03 Participants Under Defined Benefit Plans. If any Member other than a Key Employee is
also a participant under a defined benefit plan of an Employer which is a Top-Heavy Plan, then
Section 21.03(a) shall not apply and the required minimum annual contribution for such Member under
this Plan shall be 7 percent (7 %) of such Member’s Pay. Such contribution shall be made without
regard to the amount of contribution, if any, made to the Plan on behalf of Employees.

     21.04 Determination of Top Heaviness.

(a) The determination of whether a plan is Top-Heavy shall be made in accordance with
paragraphs (b) through (d) of this Section 21.04.

53

 

(b) If the Plan is not required to be included in an Aggregated Group with other plans, then
it shall be Top-Heavy only if when considered by itself, it is a Top-Heavy Plan and it is not
included in a permissive Aggregation Group that is not a Top-Heavy Group.

(c) If the Plan is required to be included in an Aggregation Group with other plans, it shall
be Top-Heavy only if the Aggregation Group, including any permissively aggregated plans, is
Top-Heavy.

(d) If a plan is not a Top-Heavy Plan and is not required to be included in an Aggregation
Group, then it shall not be Top-Heavy even if it is permissively aggregated in an Aggregation
Group which is a Top-Heavy Group.

     21.05 Calculation of Top-Heavy Ratios. A plan shall be Top-Heavy and an Aggregation Group
shall be a Top-Heavy Group with respect to any Plan Year as of the Determination Date if the sum as
of the Determination Date of the Cumulative Accrued Benefits and the Cumulative Accounts of
Employees who are Key Employees for the Plan Year exceeds 60 percent (60%) of a similar sum
determined for all Employees, excluding former Key Employees.

     21.06 Cumulative Accounts and Cumulative Accrued Benefits.

(a) The Cumulative Accounts and Cumulative Accrued Benefits for any Employee shall be
determined in accordance with paragraphs (b) through (e) of this Section 21.06.

(b) Cumulative Account shall mean the sum of the amount of an Employee’s accounts under a
defined contribution plan (for an unaggregated plan) or under all defined contribution plans
included in an Aggregation Group (for aggregated plans) determined as of the most recent
plan Valuation Date within a 12-month period ending on the Determination Date, increased by
any allocations due after such Valuation Date and before the Determination Date.

(c) Cumulative Accrued Benefit means the sum of the present value of an Employee’s accrued
benefits under a defined benefit plan (for an unaggregated plan) or under all defined
benefit plans included in an Aggregation Group (for aggregated plans), determined under the
actuarial assumptions set forth in such plan or plans, as of the most recent plan Valuation
Date within a 12-month period ending on the Determination Date as if the Employee
voluntarily terminated service as of such Valuation Date.

(d) Accounts and benefits shall be calculated to include all amounts attributable to both
Matching Allocations and Employee contributions but excluding amounts attributable to
voluntary deductible Employee contributions.

(e) Accounts and benefits shall be increased by the aggregate distributions during the
one-year period ending on the Determination Date made with respect to an Employee under the
plan or plans as the case may be or under a terminated plan which, if it had not been
terminated, would have been required to be included in the Aggregation Group. In

54

 

the case
of a distribution made for a reason other than separation from service, death, or
disability, this provision shall be applied by substituting “five-year period” for “one-year
period.”

(f) Rollovers and direct plan-to-plan transfers shall be handled as follows:

(i) If the transfer is initiated by the Employee and made from a plan maintained by
one Employer to a plan maintained by another Employer, the transferring plan
continues to count the amount transferred under the rules for counting
distributions. The receiving plan does not count the amount if accepted after
December 31, 1983, but does count it if accepted prior to December 31, 1983.

(ii) If the transfer is not initiated by the Employee or is made between plans
maintained by the Employers, the transferring plan shall no longer count the amount
transferred and the receiving plan shall count the amount transferred.

(iii) For purposes of this subsection (f), all Employers aggregated under the rules
of Code Sections 414(b), (c) and (m) shall be considered a single employer.

(g) The accrued benefits and accounts of any individual who has not performed services for
the Employer during the one-year period ending on the Determination Date shall not be taken
into account.

21.07 Other Definitions.

(a) Solely for purposes of this Section 21, the definitions in paragraphs (b) through (i) of
this Section 21.07 shall apply, to be interpreted in accordance with the provisions of Code
Section 416 and the regulations thereunder.

(b) Aggregation Group means a plan or group of plans which included all plans maintained by
the Employer in which a Key Employee is a participant or which enables any plan in which a
Key Employee is a participant to meet the requirements of Code Section 401(a)(4) or Code
Section 410, as well as all other plans selected by the Company for permissive aggregation,
the inclusion of which would not prevent the group of plans from continuing to meet the
requirements of such Code sections.

(c) Determination Date means, with respect to any Plan Year, the last day of the preceding
Plan Year.

(d) Employee means any person employed by an Employer and shall also include any Beneficiary
of such persons, provided that the requirements of Sections 21.02 and 21.03
shall not apply to any person included in a unit of Employees covered by an agreement which
the Secretary of Labor finds to be a collective bargaining agreement between Employee
representatives and one or more Employers if there is evidence that retirement

55

 

benefits were
the subject of good faith bargaining between such Employee representatives and such Employer
or Employers.

(e) Employer means any corporation which is a member of a controlled group of corporations
(as defined in Code Section 414(b)) which includes the Company or any trades or businesses
(whether or not incorporated) which are under common control (as defined in Code Section
414(c)) with the Company, or a member of an affiliated service group (as defined in Code
Section 414(m)) which includes the Company,

(f) Key Employee means any Employee or former Employee (including any deceased Employee) who
is, at any time during the Plan Year which includes the Determination Date, any one or more
of the following: (1) an officer of an Employer who has annual Pay of more $130,000 (as
adjusted under Code Section 416(i)(1))(2) any person owning (or considered as owning within
the meaning of the Code Section 318) more than five percent of the outstanding stock of an
Employer or stock possessing more than five percent of the total combined voting power of
such stock; (3) a person who would be described in subsection (2) above if “one percent”
were substituted for “five percent” each place it appears in subsection (2) above, and who
has annual Pay of more than $150,000 (for purposes of determining ownership under this
subsection, Code Section 318(a)(2)(C) shall be applied by substituting “five percent” for
“50 percent” and the rules of subsections (b), (c) and (m) of Code Section 414 shall not
apply).

     IN WITNESS WHEREOF, the Company has caused this amended Plan to be executed by a duly
authorized officer effective November 10, 2005.

	 	 	 	 	 	 	 
	 

	 	 	 	 	 	 
	 	 	PAYLESS SHOESOURCE, INC.	 	 
	 
	 	 	 	 	 	 
	 

	 	By:	 	 	 	 
	 

	 	 	 	 	 	 

56exv10w13

 

EXHIBIT
- 10.13

PAYLESS SHOESOURCE, INC.

STOCK OWNERSHIP PLAN

(as amended January 1, 2007)

1. PURPOSE AND EFFECT OF PLAN

     The purpose of the Plan is to provide associates, including executive officers, an opportunity
to purchase Common Stock of Payless ShoeSource, Inc. (the “Company”) through payroll deductions at
a discount on a tax deferred basis. It is believed that this will help attract, motivate and retain
highly qualified and talented associates who are important to the Company’s success. The Plan is
also intended to offer equity ownership in the Company to associates to encourage them to enhance
the value of the Company and therefore the price of the Company’s Common Stock and the shareowners’
return.

     The Plan is intended to comply with Code section 423 and to be a “tax conditioned plan” within
the meaning of SEC Rule 16b-3(c).

2. SHARES RESERVED FOR THE PLAN

     There shall be reserved for issuance and purchase by Eligible Associates under the Plan an
aggregate of 2,000,000 shares of Common Stock, subject to adjustment as provided in Section 16.
Shares purchased for the Plan shall be purchased in the open market or in private transactions, or
a combination thereof.

3. DEFINITIONS

     Where indicated by initial capital letters, the following terms shall have the following
meanings:

     ACT: The Securities Exchange Act of 1934.

     BASE COMPENSATION: The regular earnings of an Eligible Associate (before withholding or other
deductions), including overtime, after any salary reduction contributions pursuant to elections
under a plan subject to Code sections 125 or 401(k) and excluding bonuses and any other special
payments; provided, that the Committee may expand or narrow the definition of Base Compensation
from time to time so long as such definition is consistent with the requirements of Section 423 of
the Code.

     BOARD: The Board of Directors of the Company.

 

 

     BUSINESS DAY: Each day on which shares of Common Stock are or could be traded on the New York
Stock Exchange, or such other definition as the Committee may from time to time specify.

     CODE: The Internal Revenue Code of 1986, as amended, or any subsequently enacted federal
revenue law. A reference to a particular section of the Code shall include a reference to any
regulations issued under the section and to the corresponding section of any subsequently enacted
federal revenue law.

     COMMITTEE: The committee established pursuant to Section 13 to be responsible for the general
administration of the Plan.

     COMMON STOCK: The Company’s common stock, $.01 par value.

     COMPANY: Payless ShoeSource, Inc., a Missouri corporation, provided, that immediately after
the effective time of the Merger such term shall mean Payless ShoeSource, Inc. (formerly Payless
ShoeSource Holdings, Inc.), a Delaware corporation, and any successor by merger, consolidation or
otherwise.

     ELIGIBLE ASSOCIATE: Each employee, including each executive officer, of the Company and its
domestic Subsidiaries who meet the eligibility requirements of Section 4.

     EMPLOYER: A Participating Company that is the employer of a Participant.

     ENROLLMENT PROCEDURE: The procedure specified from time to time by the Committee to enable an
Eligible Associate to participate in the Plan and to authorize payroll deductions pursuant to
Section 5.

     FAIR MARKET VALUE: The weighted average price per share paid for all shares purchased on the
date in question with respect to a determination of the Purchase Price of Common Stock purchased
other than from the Company by an independent trustee or purchasing agent in arms-length
transactions. For all other purposes, Fair Market Value shall mean the average of the reported
lowest and highest sales prices per share for the Common Stock on the New York Stock Exchange on
the date in question, or, if there are no such sales on that date, the reported lowest and highest
sales prices per share for the Common Stock on the New York Stock Exchange for the last Business
Day prior to the date in question for which sales of the Common Stock were reported.

 

 

     INVESTMENT ACCOUNT: The account established for each Participating Associate to hold Common
Stock purchased under the Plan pursuant to Section 5.

     INVESTMENT DATE: The date on which the shares of Common Stock are purchased for the Plan.

     “MERGER” means the merger of Payless Merger Corp., a Missouri corporation and
wholly-owned subsidiary of Payless ShoeSource, Inc. (formerly Payless ShoeSource Holdings, Inc.), a
Delaware corporation, with the Company, pursuant to an Agreement and Plan of Merger among the
Company, Payless Merger Corp. and Payless ShoeSource, Inc. (formerly Payless ShoeSource Holdings,
Inc.).

     MONTH: A calendar month.

     PARENT: Any corporation (other than the Company) in an unbroken chain of corporations ending
with the Company if, as of an Investment Date, each of the corporations other than the Company owns
stock possessing 50% or more of the total combined voting power of all classes of stock in one of
the other corporations in such chain.

     PARTICIPATING COMPANIES: The Company and its domestic Subsidiaries.

     PARTICIPANT OR PARTICIPATING ASSOCIATE: Eligible Associates who elect to participate in the
Plan pursuant to Section 5.

     PAYROLL DEDUCTION ACCOUNT: The account established for a Participating Associate to hold
payroll deductions pursuant to Section 5.

     PLAN: The “Payless ShoeSource, Inc. Stock Ownership Plan,” as set forth herein and as amended
from time to time.

     PURCHASE PRICE: The price for each whole and fractional share of Common Stock, including those
purchased by dividend reinvestment, which shall be 95% of the Fair Market Value of such whole or
fractional share on the Investment Date; provided, however, the Committee may change such purchase
price so long as the purchase price is not lower than the lesser of (i) 85% of the Fair Market
Value of the Common Stock on the first day of the applicable purchase period, and (ii) 85% of the
Fair Market Value of the Common Stock on the Investment Date.

     PURCHASE PERIOD: That period specified by the Committee during which payroll deductions shall
be accumulated for the purchase of Common

3

 

Stock under the Plan; provided, that such period shall
not have a duration that exceeds the limitations provided in Section 423(b)(7) of the Code.

     RULE 16B-3: Rule 16b-3 of the Securities and Exchange Commission promulgated under the Act, as
now and hereafter amended.

     SUBSIDIARY OR SUBSIDIARIES: Any corporation (other than the Company) in an unbroken chain of
corporations beginning with the Company if, as of an Investment Date, each of the corporations
other than the last corporation in the unbroken chain owns stock possessing 50% or more of the
total combined voting power of all classes of stock in one of the other corporations in such chain.

     TRUSTEE: The trustee of the Plan designated by the Committee as provided in Section 13.

4. ELIGIBLE ASSOCIATES

     Participation in the Plan shall be open to each associate of a Participating Company
(including each executive officer of the Company) who has been continuously employed by one or more
Participating Companies for at least six months; provided, that the Committee may establish such
other or different employment requirements as it may deem appropriate so long as such other or
different requirements are consistent with the provisions of Section 423 of the Code. For purposes
of this section any break in service of less than thirty-one days shall not be deemed to constitute
a discontinuance of employment, unless the Committee shall otherwise provide.

     No director of the Company or of any its Subsidiaries who is not an associate shall be
eligible to participate in the Plan.

5. ELECTION TO PARTICIPATE; METHOD OF PURCHASE; INVESTMENT ACCOUNTS; DIVIDENDS

     5.1 ELECTION TO PARTICIPATE. Each Eligible Associate may become a Participant effective on
the first day of any Month coincident with or following the date the Participant becomes an
Eligible Associate by complying with the Enrollment Procedure authorizing specified regular payroll
deductions from the Participant’s Base Compensation. Such regular payroll deductions shall be
subject to a minimum deduction of $5.00 per weekly pay period and $10.00 per bi-weekly pay period
and a maximum deduction of $480.00 per weekly pay period and $960.00 per bi-weekly pay period;
provided, that the Committee may increase or decrease such minimum and maximum deductions from time
to time. All regular payroll deductions shall be credited to the Payroll Deduction Account that the
Company has established in the name of the Participant.

4

 

     5.2 PURCHASE OF COMMON STOCK. Each Participating Associate having eligible funds in the
Participant’s Payroll Deduction Account on an Investment Date
shall be deemed, without any further action, to have purchased the number of shares which the
eligible funds in the Participant’s Payroll Deduction Account could purchase at the Purchase Price
on that Investment Date. All shares purchased shall be maintained by the Trustee in separate
Investment Accounts for
Participating Associates. Fractional shares will be allocated to accounts under the Plan unless the
Committee otherwise provides; provided that share certificates shall only be issued for whole
shares. If fractional shares are not allocated to accounts under the Plan, amounts that otherwise
would have been applied to the purchase of fractional shares will continue to be held for the
Participant and be applied towards the purchase of shares on the last day of the next Purchase
Period.

     5.3 TIMING AND MANNER OF PURCHASE. The Committee shall designate Purchase Periods during which
funds shall be accumulated in Payroll Deduction Accounts for the purchase of Common Stock. Until
otherwise specified the Purchase Periods shall consist of each Month in a year. The Investment Date
shall occur during an interval immediately following the end of each Purchase Period having such
duration as the Committee shall from time to time specify, provided that until the Committee
otherwise specifies, such interval shall be the ten Business Days immediately following the end of
the Purchase Period. However, nothing contained in this Plan shall authorize the Committee, the
Company or any affiliate of the Company to exercise any direct or indirect control or influence
over the times when, or the prices at which, the Trustee or its independent agent may purchase the
Common Stock for the Plan, the amounts of the Common Stock to be purchased, the manner in which the
Common Stock is to be purchased, or the selection of a broker or dealer (other than the Trustee)
through which purchases may be executed; provided, that the Company, the Committee and affiliates
of the Company, shall not be deemed to have such control or influence solely because the Committee
revises not more than once in any three month period the basis for determining the amount of the
Company’s contributions to the Plan, the basis for determining the frequency of the Company’s
allocations to the Plan, or any formula in the Plan that determines the amount or timing of shares
to be purchased by the Trustee.

     5.4 DIVIDENDS AND OTHER DISTRIBUTIONS. All cash dividends paid with respect to the whole and
fractional shares of the Common Stock and shares so purchased shall be reinvested in Common Stock
on the immediately following Investment Date and added to the shares held for a Participating
Associate in the Participant’s Investment Account. Stock dividends and stock splits received by the
Plan will be credited to Participants having Common Stock allocated to their Investment Account to
the extent that they are attributable to such allocated Common Stock. Property, other than shares
of Common Stock or

5

 

cash, received by the Trustee as a distribution with respect to Common Stock
allocated to Participant Common Stock accounts will be distributed in kind to Participants in
proportion to the number of shares of Common Stock contained in their Investment Account.

     5.5 STOCK PURCHASES. The Trustee shall effect purchases of Common Stock on the open market or
in private transactions. Purchases shall be made using total amounts contained in all Payroll
Deduction Accounts
immediately preceding the purchase. The Company will pay the difference between the Purchase
Price and the price at which such shares are purchased for the Plan on or prior to the required
closing date for the purchase. Expenses incurred in the purchase of shares shall also be paid by
the Company.

     5.6 PAYMENT OF DEDUCTIONS TO THE TRUSTEE. Participating Companies shall pay to the
Trustee or to the order of the Trustee payroll deductions made during a Month prior to the time
required for the closing of purchases of Common Stock for the Plan, as directed by the Committee.
Interest shall not accrue on any amount paid to the Trustee or otherwise allocated to an Investment
Account pending investment in Common Stock or other distribution.

6. CHANGE IN PARTICIPATION, WITHDRAWALS AND DISTRIBUTIONS

     6.1 PERIOD OF PARTICIPATION. After an Eligible Associate has become a Participant in the Plan,
such participation will continue thereafter, so long as the Plan continues in effect, until the
employment of the Participant with all Participating Companies terminates, the Participant ceases
to make contributions to the Plan and makes a complete withdrawal from the Plan, or the Participant
ceases to be an Eligible Associate.

     6.2 CHANGE IN PARTICIPATION. A Participant may change the amount of the Participant’s payroll
deductions in accordance with rules established by the Committee.

     6.3 PARTIAL WITHDRAWALS. The Trustee shall deliver whole shares allocated to a Participant’s
Investment Account upon written request for a partial withdrawal received in accordance with rules
established by the Committee so long as the Participant’s Investment Account following such
delivery contains at least one share or such other amount as the Committee may from time to time
require. Deliveries shall be made as soon as practicable after the request is received.

     6.4 COMPLETE WITHDRAWAL, TERMINATION OF EMPLOYMENT, DEATH. A Participant may effect a
complete withdrawal from the Plan by giving notice in accordance with rules established by the
Committee. A withdrawal from the Plan shall also be deemed to occur at such time as the Participant
ceases to

6

 

be an Eligible Associate for any reason, including death, or upon the occurrence of such
other event as may herein be specified as one which triggers a withdrawal. The Employer shall give
prompt notice to the Trustee of such withdrawal. Upon any such withdrawal the Participant, or the
Participant’s beneficiary or estate in the case of death, shall be entitled to receive from the
Trustee, as soon as practicable after the Trustee shall have completed its purchases of Common
Stock hereunder with all funds attributable to amounts received by the Trustee with respect to the
part of the Purchase Period that precedes the effective date of such withdrawal: (a) the number of
whole shares of
Common Stock credited to the account of such Participant, (b) cash in the amount of any
fractional share credited to the Participant’s Investment Account and (c) any cash balance credited
to such Participant’s Accounts which has not been invested by the Trustee. In the case of the death
of the Participant the deliveries shall be made to the beneficiary designated by the Participating
Associate in a writing filed with the Company. If no beneficiary has been designated, or if the
designated beneficiary does not survive the Participating Associate, such amount and all shares
shall be delivered to the Participant’s estate.

     6.5 PLAN RE-ENTRY; SUSPENSION DURING APPROVED LEAVE. A Participant who withdraws from the Plan
and continues to otherwise be an Eligible Associate may re-enter the Plan in accordance with such
rules as the Committee may establish; provided that until the Committee otherwise specifies,
re-entry may be effected at any time in accordance with the Enrollment Procedure. A Participant
whose contributions under the Plan shall have been temporarily discontinued shall not be considered
to have withdrawn from the Plan.

7. REGISTRATION OF SHARES

     The shares to be delivered to a Participant will be issued in such registration as shall have
been specified by the Participant in accordance with procedures established by the Committee. The
Committee may, in its discretion, restrict the use of any form of registration other than
registration solely in the name of the Participant and may permit such other registrations as may
be permitted under Section 423 of the Code and related Code sections and rules. The shares of a
Participant who is a minor may, with the consent of the Committee, and upon written instructions by
such associate, be registered in the name of an adult as custodian for such minor associate.

8. REQUIRED NOTICE OF SUBSEQUENT SALE

     As a condition of participation in the Plan, each Participating Associate agrees to notify the
Company if the Participant sells or otherwise disposes of any

7

 

of the Participant’s shares of Common
Stock within two years of the Investment Date on which such shares were purchased.

9. STATEMENT OF ACCOUNT

     As soon as practicable after the end of each calendar quarter each Participant will receive
from the Trustee or the Company a statement of the Participant’s account with respect to such
period, subject to the right of the Committee to prescribe the form and content of such statement
and to otherwise change the frequency, coverage and delivery of such statement.

10. EXERCISE OF VOTING AND OTHER RIGHTS

     Prior to the time when the Trustee makes delivery to the Participating Associate of the shares
of Common Stock held in the Participant’s Investment Account, the Trustee will exercise all voting
rights pertaining to the shares of Common Stock allocated to the Investment Account of each
Participant only in accordance with written directions, if any, given to the Trustee by such
Participant prior to the date fixed for the exercise of such voting rights. In the absence of such
direction, the Trustee shall not vote allocated shares but may vote any unallocated Common Stock in
its discretion. All stock rights or offers received by the Trustee with respect to any Common Stock
held by it hereunder shall be exercised by the Trustee to the extent appropriately specified in
writing by Participants with respect to Common Stock allocated to the Investment Accounts of such
Participants. Rights or offers relating to any unallocated Common Stock shall be exercised or
otherwise disposed of by the Trustee in its discretion.

11. DESIGNATION OF BENEFICIARY

     A Participant may file with the Company a written designation of a beneficiary with respect to
the assets in the accounts of the Participant in the event of the Participant’s death, provided
that no such designation shall be effective unless so filed prior to the death of the Participant.
The written designation of a beneficiary filed with the Company may be changed or revoked by the
sole action of the Participant unless such action is precluded by statute. If upon the death of a
Participant there is doubt as to the right of any beneficiary to receive any amount, the Committee
may direct the Trustee to retain such amount, without liability for any interest thereon, until the
rights thereto are determined, or the Committee may direct the Trustee to distribute such amount
into any court of appropriate jurisdiction, in either of which events neither the Trustee nor the
Committee nor any Employer shall be under any further liability to anyone with respect to such
amount.

12. SALE OF SHARES

8

 

     A Participating Associate shall have the right to direct the Trustee to sell shares in the
Participant’s Investment Account in lieu of a withdrawal or distribution of the shares in kind;
provided that the Committee may adopt rules regulating such elections, the timing of such sales,
and requirements that sales be aggregated with other sales. The Committee may also choose to
completely or temporarily suspend or terminate such rights. Upon any permitted direction to sell,
the Trustee will sell all shares allocated to the Investment Account that are covered by the
direction together with any fractional interest that may be aggregated with other fractional
interests into a whole share, and remit the proceeds of such sale, less brokerage commissions and
other selling expenses to the Participant or other permitted distributee. The Trustee may,
consistent with applicable securities laws, sell the shares in private transactions, in the open
market, or to the Company. If so directed the Trustee shall sell the shares to the
Company. Any sale of shares to the Company shall be effected at Fair Market Value on the date
of purchase.

13. ADMINISTRATION OF THE PLAN

     13.1 THE COMMITTEE. The Plan shall be administered by the Committee, which shall
consist of not less than two members appointed by the Board. Committee members shall be directors,
officers or salaried employees of the Company. The Board from time to time may appoint members
previously appointed and may fill vacancies, however caused, in the Committee.

     13.2 THE TRUSTEE. The Committee will designate one or more individuals, a bank, trust company
or investment firm having trust powers to act as trustee under the Plan (the “Trustee”), with the
right in the Committee to change such designation in its discretion. The Trustee will hold all
funds received by it under the Plan and, until delivery thereof to the Participants hereunder, all
shares of Common Stock acquired by the Trustee under the Plan. The Trustee may rely on all orders,
requests, and instructions with respect to the Plan given in writing and signed by any person
authorized by the Committee or the Company’s Board of Directors, and the Trustee shall not be
liable to any person for any action taken in accordance therewith. The Trustee or such other agent
as the Trustee may appoint to effect purchases under the Plan shall be an “agent independent of the
issuer” within the meaning of Regulation M of the Securities and Exchange Commission, as amended.

     13.3 AUTHORITY OF THE COMMITTEE. Subject to the express provisions of the Plan, the Committee
shall have the authority to take any and all actions (including directing the Trustee as to the
acquisition of shares) necessary to implement the Plan, to interpret the Plan, to prescribe, amend
and rescind rules and regulations relating to it, and to make all other determinations necessary or
advisable in administering the Plan. All of such determinations shall

9

 

be final and binding upon all
persons. A quorum of the Committee shall consist of a majority of its members and the Committee may
act by vote of a majority of its members at a meeting at which a quorum is present, or without a
meeting by a written consent to the action taken signed by all members of the Committee. The
Committee may request advice or assistance or employ such other persons as are necessary for proper
administration of the Plan. To the extent that the Committee exercises discretionary authority with
respect to the establishment and modification of rules, regulations and guidelines for the
administration of the Plan, such rules and rule changes shall be made to apply uniformly to all
Participants, consistent with the requirements of Section 423 of the Code.

14. LIMITATION ON PURCHASES

     No Participating Associate may purchase during any one calendar year under the Plan (or under
any other plan of the Company, a Parent or Subsidiary qualified under Code section 423) shares of Common Stock having an aggregate Fair Market Value
(determined by reference to the Fair Market Value on each Investment Date) in excess of the
limitations of Code section 423(b)(8).

     A Participating Associate’s Payroll Deduction Account may not be used to purchase
Common Stock on any Investment Date to the extent that after such purchase the Participating
Associate would own (or be considered as owning within the meaning of Code section 424(d)) stock
possessing 5 percent or more of the total combined voting power of the Company or its Parent or
Subsidiary. For this purpose, Common Stock which the Participating Associate may purchase under any
outstanding rights to purchase shall be treated as owned by such Participating Associate. As of the
first Investment Date on which this paragraph limits a Participating Associate’s ability to
purchase Common Stock, the associate shall cease to be an Eligible Associate.

15 RIGHTS NOT TRANSFERABLE

     Rights under the Plan are not transferable by a Participating Associate otherwise than by will
or the laws of descent and distribution, and are exercisable, during the Associate’s lifetime, only
by the Associate.

16. CHANGE IN CAPITAL STRUCTURE

     In the event of a stock dividend, stock split or combination of shares, recapitalization or
merger in which the Company is the surviving corporation or other change in the Company’s capital
stock (including, but not limited to, the creation or issuance to shareholders generally of rights,
options or warrants for the purchase of Common Stock or preferred stock of the Company), the
number and kind of shares of stock or securities of the Company to be subject to the Plan, the
maximum number of shares or securities which may be delivered under

10

 

the Plan, the selling price and
other relevant provisions shall be appropriately adjusted by the Committee, whose determination
shall be binding on all persons.

     If the Company is a party to a consolidation or a merger in which the Company is not the
surviving corporation, a transaction that results in the acquisition of substantially all of the
Company’s outstanding stock by a single person or entity, or a sale or transfer of substantially
all of the Company’s assets, the Committee may take such actions with respect to the Plan as the
Committee deems appropriate.

     Notwithstanding anything in the Plan to the contrary, the Committee may take the foregoing
actions without the consent of any Participant, and the Committee’s determination shall be
conclusive and binding on all persons for all purposes.

17. AMENDMENT OF THE PLAN

     The Board of Directors may at any time, or from time to time, amend the Plan in any respect;
provided, however, that the shareholders of the Company must approve any amendment that would (i)
increase the number of securities that may be issued under the Plan, or (ii) modify the
requirements as to eligibility for participation in the Plan.

18. TERMINATION OF THE PLAN

     The Plan and all rights of associates hereunder shall terminate:

          a.
on the Investment Date that Participating Associates become entitled to purchase a
number of shares greater than the number of reserved shares remaining available for purchase; or

          b. at any date at the discretion of the Board of Directors.

     In the event that the Plan terminates under circumstances described in (a) above, reserved
shares remaining as of the termination date shall be issued to Participating Associates on a pro
rata basis. Upon termination of the Plan, all amounts in an associate’s Payroll Deduction Account
that are not used to purchase Common Stock will be refunded.

19. EFFECTIVE DATE OF PLAN

     The Plan was approved by the Board of Directors on March 20, 1997, and shall become effective
on August 1, 1997, subject to receiving shareholder approval.

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20. GOVERNMENT AND OTHER REGULATIONS

     The Plan, and the grant and exercise of the rights to purchase shares hereunder, and the
Company’s obligation to sell and deliver shares upon the exercise of rights to purchase shares,
shall be subject to all applicable federal, state and foreign laws, rules and regulations, and to
such approvals by any regulatory or government agency as may, in the opinion of counsel for the
Company, be required.

21. INDEMNIFICATION AND LIABILITY OF COMMITTEE AND TRUSTEE

     The Committee and all persons employed by each Participating Company who are engaged in
administering the Plan shall be entitled to rely upon all valuations, certificates and reports
furnished by the Trustee or by any accountant or actuary selected by the Committee and upon all
opinions given by any legal counsel selected by the Committee. The members of the Committee, the
Trustee, each Participating Company, and all persons employed by each Participating
Company and the Trustee who are engaged in administering the Plan (a) shall be fully protected
with respect to any action taken by them in good faith and all actions so taken shall be conclusive
and binding upon all persons having or claiming to have any interest under the Plan; and (b) shall
not be personally liable by reason of any instrument made or executed by them or on their behalf or
in the course of administering the Plan or for any mistake of judgment made by them or any other
person, or for any neglect, omission or wrongdoing of any other person or for any loss to the Plan
unless resulting from their own willful misconduct. No member of the Committee shall have any
liability to any person for any action or omission except each for his own individual willful
misconduct.

     Service on the Committee shall constitute service as a director of the Company so that
members of the Committee shall be entitled to indemnification and reimbursement as directors of the
Company pursuant to its Articles of Incorporation and Bylaws.

     In addition to the foregoing, each member of the Committee, the Trustee, and each director and
officer of each Participating Company shall be indemnified by the Company against all expenses
(including costs and attorneys fees) actually and necessarily incurred or paid by such person in
connection with the defense of any action, suit or proceeding in any way relating to or arising
from the Plan to which the Participant may be made a party by reason of the party being or having
been such member of the Committee, Trustee, director or officer or by reason of any action or
omission or alleged action or omission by him in such capacity, and against any amount or amounts
which may be paid by him (other than to the Employer) in reasonable settlement of any such action,
suit or proceeding, where the Company has consented to such settlement. In cases

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where such action,
suit or proceeding shall proceed to final adjudication, such indemnification shall not extend to
matters as to which it shall be adjudged that such member of the Committee, Trustee, director or
officer is liable for willful misconduct in the performance of the duties of such person as such.
The right of indemnification herein provided shall not be exclusive of other rights to which any
member of the Committee, Trustee, director or officer may now or hereafter be entitled, shall
continue as to a person who has ceased to be such member of the Committee, Trustee, director or
officer and shall inure to the benefit of the heirs, executors, administrators, successor or
assigns of such members of the Committee, director or officer.

22. APPLICABLE LAW

     The place of administration of the Plan shall conclusively be deemed to be within the State of
Kansas and the validity, construction, interpretation and administration of the Plan and of any
rules or regulations or determinations or decisions made thereunder, and the rights of any and all
persons having or
claiming to have any interest therein or thereunder, shall be governed by and be determined
exclusively and solely in accordance with, the laws of the State of Kansas. Without limiting the
generality of the foregoing, the period within which any action arising under or in connection with
the Plan, or any payment or award made or purportedly made under or in connection therewith, must
be commenced shall be governed by the laws of the State of Kansas, irrespective of the place where
the act or omission complained of took place and of the residence of any party to such action and
irrespective of the place where the action may be brought.

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