Payless ShoeSource, Inc. has signed a definitive agreement to acquire The Stride Rite Corporation, which owns or licenses such key upscale brands as Stride Rite, Keds, Sperry Top-Sider, Tommy Hilfiger Footwear, Saucony and Robeez, for approximately $800 million plus the assumption of Stride Rite debt. The all-cash offer of $20.50 per share represents a 32% premium over Stride Rite's average stock price over the past 90 days and was approved unanimously by the boards of directors of both companies.

Concurrent with the closing of the transaction, Payless ShoeSource intends to rename the company Collective Brands, Inc. and, as a holding company, will operate three standalone business units.

Collective Brands is expected to have stronger growth potential than either Payless or Stride Rite alone as a result of a strong portfolio of well-known footwear, lifestyle and athletic brands and competitive advantages stemming from increased scope and scale.

The new Collective Brands holding company will operate a powerful business model with leading retail, wholesale, licensing and e-commerce channels. The three highly complementary and separate business units have distinct missions in terms of their product offering, distribution channels, and target customer base:


    -- Payless stores, focusing on democratizing fashion and design in
       footwear and accessories through its nearly 4,600 store retail chain;
    -- Stride Rite, centering on lifestyle and athletic branded footwear and
       high-quality children's footwear sold primarily through wholesaling
       arrangements and more than 300 Stride Rite store locations; and,
    -- Collective Licensing International, specializing in brand management
       and global licensing of its expanding portfolio of youth, lifestyle and
       high-quality fashion athletic brands.


Terms of the Transaction

Under the terms of the transaction, Payless ShoeSource would acquire all of the outstanding shares of Stride Rite for approximately $800 million plus assumed debt. The acquisition will be financed through existing cash resources and committed new financings.

Collective Brands will be built on the foundation of each company's individual core competencies and outstanding heritage. It will enjoy several competitive advantages:


    -- The ability to target specific customer segments with branded products
       offered at a range of price points through the highly respected Payless
       and Stride Rite retail store chains and a vibrant wholesale
       distribution channel.
    -- The preeminent position in children's footwear both at the premium and
       moderate level.
    -- A stronger, more efficient organization with the scope and scale to
       manage all aspects of getting to market -- from interpretations of
       emerging trends through design, development, sourcing, logistics and
       distribution.

Following completion of the transaction, Matt Rubel, Payless' CEO and president, will serve as CEO of Collective Brands, Inc. overseeing the business units. Collective Brands, Inc. will remain listed on The New York Stock Exchange and, along with Payless ShoeSource, have its headquarters in Topeka, Kan.; Stride Rite's headquarters will remain in Lexington, Mass.; and Collective Licensing will continue to be headquartered in Denver, Colo. Each of the individual operating units will retain their own names, identities and discrete operations.

“This transaction is squarely on strategy and driven by its strong growth potential,” said Mr. Rubel. “Through this acquisition and as indicated by the change in our name, we are creating a leading, innovative global footwear, accessory and lifestyle brand company that is well positioned to grow in both our key domestic and international markets. Together we can provide the customers, employees and business partners of all three business units with greater opportunities, and investors with enhanced value.”

“We believe this is the right strategic decision for Stride Rite's shareholders, customers, and employees,” said David Chamberlain, chairman and CEO of The Stride Rite Corporation. “This transaction will create substantial value for Stride Rite shareholders, provide significant supply chain efficiencies and greater resources to grow our business as a separate unit within the holding company structure, and open up new opportunities for our talented employees as part of a larger and more diversified organization.”

The Stride Rite and Payless teams operate in distinct markets which will enable Collective Brands to quickly capitalize on the most promising growth opportunities in the footwear and accessories industry:


    -- Over the past five years, the branded footwear category has experienced
       higher growth than private label or designer categories.  Collective
       Brands will offer more brands to more customers.
    -- Children's footwear is among the fastest growing footwear sectors.
       Through its distinct and complementary operating units -- Payless and
       Stride Rite -- Collective Brands will have a strong leadership position
       with about 19% unit share in this growth segment.  The support of
       Collective Brands and its ability to invest and provide back-end
       efficiencies will enable Stride Rite to develop innovative new products
       and accelerate growth of well-located stores.
    -- Casual footwear is one of the faster growing categories.  Collective
       Brands will be in a strong position to capitalize in both men's and
       women's as Keds, Sperry Top-Sider and Tommy Hilfiger are all brands
       with cachet, authenticity and substantial growth potential.
    -- Collective Brands can accelerate the growth of the Saucony business on
       a global basis by providing greater support for this leading technical
       running brand in the premium performance footwear market.
    -- Off-mall retail locations such as in lifestyle and outlet centers are
       increasingly preferred by consumers.  Stride Rite stores are currently
       under-penetrated in these shopping venues and present a strong
       opportunity for growth by leveraging Collective Brands' strong real
       estate expertise and scale advantages.
    -- Finally, the new company will be better positioned to compete in the
       global marketplace through expansion across all of its business
       channels -- retailing, wholesaling, licensing and e-commerce.

The combined company is expected to have strong pro-forma financials:

    -- The transaction is expected to be earnings per share accretive in
       fiscal year 2008.
    -- The 2006 - 2009 compound annual growth rate in operating profit is
       expected to be in excess of 20%.
    -- The debt leverage ratio for the new company is expected to return to
       Payless' pre-transaction level within two to three years of the
       acquisition's consummation.

The core Payless business unit should continue to achieve low single-digit positive same-store sales on a consistent basis through successful execution of its merchandising strategies. Over time, the Payless unit is expected to contribute operating profit percentage growth in the mid-teens.

The transaction is subject to customary closing conditions and regulatory approvals, as well as approval by Stride Rite shareholders. The transaction is expected to close in the third fiscal quarter of 2007. The intention to rename the company to Collective Brands, Inc. is also subject to approval by Payless ShoeSource shareholders.

Citi and Financo, Inc. are the financial advisors to Payless, and Sullivan & Cromwell is the company's legal advisor. Goldman Sachs is the financial advisor to Stride Rite and Goodwin, Procter is its legal advisor.