BWS 10-Q 2nd Qtr

BROWN SHOE COMPANY, INC. (Exact name of registrant as specified in its charter)

New York (State or other jurisdiction of incorporation or organization)	43-0197190 (IRS Employer Identification Number)

8300 Maryland Avenue St. Louis, Missouri (Address of principal executive offices)	63105 (Zip Code)

(314) 854-4000 (Registrant's telephone number, including area code)

	(Unaudited)
				AS RESTATED (See Note 2)
($ thousands)	July 30, 2005			July 31, 2004			January 29, 2005
Assets
Current Assets
Cash and cash equivalents	$	37,037		$	71,478		$	79,448
Receivables		124,650			83,938			97,503
Inventories		493,745			453,016			421,450
Prepaid expenses and other current assets		22,260			19,491			24,438
Total current assets		677,692			627,923			622,839

Other assets		87,923			88,652			87,427
Goodwill and intangible assets, net		188,998			20,382			21,474

Property and equipment		351,154			323,840			339,138
Allowances for depreciation and amortization		(235,237	)		(216,624	)		(224,744	)
Total property and equipment		115,917			107,216			114,394
Total assets	$	1,070,530		$	844,173		$	846,134

Liabilities and Shareholders' Equity
Current Liabilities
Current maturities of long-term debt	$	79,000		$	27,500		$	92,000
Trade accounts payable		195,974			192,243			143,982
Accrued expenses		119,776			95,313			98,096
Income taxes		7,038			7,377			7,437
Total current liabilities		401,788			322,433			341,515

Other Liabilities
Long-term debt		200,000			100,000			50,000
Other liabilities		70,021			55,102			63,316
Total other liabilities		270,021			155,102			113,316

Shareholders' Equity
Common stock		69,006			68,209			68,406
Additional paid-in capital		64,069			65,155			62,639
Unamortized value of restricted stock		(2,228	)		(3,188	)		(2,661	)
Accumulated other comprehensive loss		(233	)		(3,974	)		(983	)
Retained earnings		268,107			240,436			263,902
Total shareholders’ equity		398,721			366,638			391,303
Total liabilities and shareholders’ equity	$	1,070,530		$	844,173		$	846,134

	(Unaudited)						(Unaudited)
	Thirteen Weeks Ended						Twenty-six Weeks Ended
				AS RESTATED (See Note 2)						AS RESTATED (See Note 2)
($ thousands, except per share amounts)	July 30, 2005			July 31, 2004			July 30, 2005			July 31, 2004
Net sales	$	551,480		$	458,657		$	1,074,763		$	950,489
Cost of goods sold		335,834			269,411			648,511			561,879
Gross profit		215,646			189,246			426,252			388,610
Selling and administrative expenses		204,872			176,208			392,410			360,722
Operating earnings		10,774			13,038			33,842			27,888
Interest expense		(5,157	)		(2,141	)		(8,556	)		(4,620	)
Interest income		184			170			633			296
Earnings before income taxes		5,801			11,067			25,919			23,564
Income tax provision		(1,718	)		(3,399	)		(18,057	)		(7,370	)
Net earnings	$	4,083		$	7,668		$	7,862		$	16,194

Basic net earnings per common share	$	0.23		$	0.43		$	0.43		$	0.91

Diluted net earnings per common share	$	0.22		$	0.40		$	0.42		$	0.85

Dividends per common share	$	0.10		$	0.10		$	0.20		$	0.20

	(Unaudited)
	Twenty-six Weeks Ended
				AS RESTATED (See Note 2)
($ thousands)	July 30, 2005			July 31, 2004
Operating Activities:
Net earnings	$	7,862		$	16,194
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization		18,343			14,507
Share-based compensation expense		1,155			711
Loss on disposal of facilities and equipment		632			403
Impairment charges for facilities and equipment		565			600
Provision for (recoveries from) doubtful accounts		105			(344	)
Changes in operating assets and liabilities:
Receivables		(6,571	)		(1,664	)
Inventories		(42,878	)		(76,806	)
Prepaid expenses and other current assets		(4,726	)		(5,137	)
Trade accounts payable and accrued expenses		64,831			74,935
Income taxes		(399	)		4,417
Deferred rent		(136	)		2,822
Deferred income taxes		6,582			(196	)
Collection of non-current insurance receivable		3,093			950
Other, net		726			(2,220	)
Net cash provided by operating activities		49,184			29,172

Investing Activities:
Acquisition cost, net of cash received		(206,633	)		-
Capital expenditures		(16,449	)		(19,118	)
Other		531			153
Net cash used for investing activities		(222,551	)		(18,965	)

Financing Activities:
(Decrease) increase in current maturities of long-term debt		(13,000	)		8,000
Proceeds from issuance of senior notes		150,000			-
Debt issuance costs		(4,733	)		(1,071	)
Proceeds from stock options exercised		1,900			1,605
Tax benefit related to share-based plans		455			709
Dividends paid		(3,666	)		(3,629	)
Net cash provided by financing activities		130,956			5,614
(Decrease) increase in cash and cash equivalents		(42,411	)		15,821
Cash and cash equivalents at beginning of period		79,448			55,657
Cash and cash equivalents at end of period	$	37,037		$	71,478

The accompanying condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and reflect all adjustments which management believes necessary (which include only normal recurring accruals) to present fairly the financial position, results of operations, and cash flows of Brown Shoe Company, Inc. (the “Company”). These statements, however, do not include all information and footnotes necessary for a complete presentation of the Company's consolidated financial position, results of operations and cash flows in conformity with accounting principles generally accepted in the United States. The condensed consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany balances and transactions have been eliminated.

In conjunction with the issuance of the Company’s consolidated financial statements for the year ended January 29, 2005 (fiscal 2004), the Company restated its results for the first three quarters of fiscal 2004 and prior years to correct its method of accounting for certain lease issues. Accordingly, the consolidated financial statements for the second quarter and first half of 2004, included herein, have been restated.

Consistent with many other companies having retail operations, the Company historically accounted for construction allowances received from landlords as a reduction of property and equipment and amortized the allowances over the useful lives of the assets to which they were assigned. The Company determined that, in some cases, the lives assigned to amortize the construction allowances were shorter than the lease term, thereby understating rent expense. In its restated consolidated financial statements, the Company has treated these construction allowances as a lease incentive, as defined by FASB Technical Bulletin 88-1. The allowances are recorded as a deferred rent obligation upon receipt, rather than a reduction of property and equipment, and amortized to income over the lease term as a reduction of rent expense.

The Company also determined that its calculation of straight-line rent expense should be modified. The Company had previously recognized straight-line rent expense for leases beginning on the commencement date of the lease, which had the effect of excluding the store build-out periods from the calculation of the period over which it expensed rent. In its restated consolidated financial statements, the Company has recognized straight-line rent expense over the lease term, including any rent-free build-out periods.

The adjustment to net earnings is a noncash item. As a result of the restatement, the Company’s earnings before income taxes were reduced by $240,000 and $307,000, and the Company’s net earnings were reduced by $146,000 and $187,000, respectively, for the thirteen weeks and twenty-six weeks ended July 31, 2004. The restatement had the effect of reducing basic and diluted net earnings per common share by $0.01 for both the thirteen weeks and twenty-six weeks ended July 31, 2004.

On April 22, 2005, the Company completed the acquisition of Bennett Footwear Holdings, LLC and its subsidiaries (“Bennett”) for $205 million in cash, including indebtedness of Bennett repaid by the Company at closing of $35.7 million. The purchase price is subject to a post-closing adjustment based on net equity as defined. This post-closing adjustment, if any, has not yet been finalized. In addition, the sellers may receive up to $42.5 million in contingent payments to be earned upon the achievement of certain future performance targets over the three years following the acquisition. The operating results of Bennett have been included in the Company’s financial statements since April 22, 2005. The Company expects the acquisition of Bennett to complement the Company’s portfolio of wholesale footwear brands, which are primarily sold in the moderately priced range, by adding owned and licensed brands that sell primarily in the better and bridge footwear price zones at department stores, including Via Spiga, Franco Sarto, Etienne Aigner and Nickels Soft.

The total consideration paid by the Company in connection with the acquisition of Bennett was $207.0 million, including associated fees and expenses. The cost to acquire Bennett has been allocated to the assets acquired and liabilities assumed according to estimated fair values and is subject to adjustment when additional information concerning asset and liability valuations are finalized. The allocation has resulted in acquired goodwill of $70.8 million and intangible assets related to trademarks, licenses and customer relationships of $98.5 million.

The Company has determined that certain redundant employment positions at Bennett will be eliminated and has recorded a severance liability of $0.7 million in the preliminary allocation of purchase price. The Company funded approximately $0.1 million of this liability in the second quarter. The Company anticipates that the remaining severance liability will be funded during 2005.

The unaudited pro forma results shown above reflect the assumption that, on January 29, 2005 and February 1, 2004, the Company would have financed the Bennett acquisition under identical terms and conditions as the actual financing, including the repatriation of $60.5 million of foreign earnings to fund a portion of the acquisition and related expenses, and the associated $9.6 million tax expense. The unaudited pro forma results of operations have been prepared for comparative purposes only and do not purport to be indicative of the results of operations which actually would have resulted had the Bennett acquisition occurred as of January 30, 2005, and February 1, 2004, respectively.

Prior to and in connection with the acquisition, the Company entered into a commitment with a lender to provide $100.0 million of short-term financing (the “Bridge Commitment”) on a senior unsecured basis. The Bridge Commitment was not funded as a result of the issuance of the senior notes described below simultaneously with the closing of the Bennett acquisition. The Company expensed all fees and costs associated with the Bridge Commitment, totaling $1.0 million, during the quarter ended April 2005 as a component of interest expense.


	Thirteen Weeks Ended				Twenty-six Weeks Ended
(in thousands, except per share data)	July 30, 2005		July 31, 2004		July 30, 2005		July 31, 2004

NUMERATOR
Net earnings	$	4,083	$	7,668	$	7,862	$	16,194

DENOMINATOR
Denominator for basic earnings per common share		18,146		17,921		18,110		17,881
Dilutive effect of unvested restricted stock and stock options		788		1,066		741		1,072
Denominator for diluted earnings per common share		18,934		18,987		18,851		18,953

Basic earnings per common share	$	0.23	$	0.43	$	0.43	$	0.91


Diluted earnings per common share	$	0.22	$	0.40	$	0.42	$	0.85


	Thirteen Weeks Ended						Twenty-six Weeks Ended
($ Thousands)	July 30, 2005			July 31, 2004			July 30, 2005			July 31, 2004
Net earnings	$	4,083		$	7,668		$	7,862		$	16,194

Other comprehensive income (loss), net of tax:
Foreign currency translation adjustment		1,172			1,218			604			(92	)
Unrealized losses on derivative instruments		(727	)		(214	)		(720	)		(112	)
Net loss from derivatives reclassified into earnings		296			673			866			1,164
		741			1,677			750			960
Comprehensive income	$	4,824		$	9,345		$	8,612		$	17,154

In June 2005, the Company announced a series of initiatives to strengthen its Naturalizer brand, including plans to close approximately 80 underperforming Naturalizer stores, consolidate all buying, merchandise planning and allocation functions for its U.S. and Canadian stores into its St. Louis headquarters, consolidate all retail accounting and information systems support within its Madison, Wisconsin, offices, and streamline certain Naturalizer Wholesale operations, including the sales, marketing and product development areas. In connection with the restructuring, the Company expects to incur total pre-tax costs in the range of $14 million to $17 million through the first quarter of 2006. The Company recorded a pre-tax charge of $2.9 million in the second quarter of 2005, the components of which are as follows:


($ thousands)	Famous Footwear		Wholesale Operations		Specialty Retail			Other			Totals
Thirteen Weeks Ended July 30, 2005

External sales	$	286,245	$	207,379	$	57,856		$	-		$	551,480
Intersegment sales		414		32,105		-			-			32,519
Operating earnings (loss)		9,296		16,260		(5,470	)		(9,312	)		10,774
Operating segment assets		441,319		452,402		76,233			100,576			1,070,530

Thirteen Weeks Ended July 31, 2004

External sales	$	269,812	$	136,885	$	51,960		$	-		$	458,657
Intersegment sales		317		36,553		-			-			36,870
Operating earnings (loss)		12,391		8,963		(2,427	)		(5,889	)		13,038
Operating segment assets		422,971		219,564		69,573			132,065			844,173


($ thousands)	Famous Footwear		Wholesale Operations		Specialty Retail			Other			Totals
Twenty-six Weeks Ended July 30, 2005

External sales	$	574,980	$	388,668	$	111,115		$	-		$	1,074,763
Intersegment sales		854		79,050		-			-			79,904
Operating earnings (loss)		25,810		33,765		(8,979	)		(16,754	)		33,842

Twenty-six Weeks Ended July 31, 2004

External sales	$	541,936	$	308,430	$	100,123		$	-		$	950,489
Intersegment sales		639		74,932		-			-			75,571
Operating earnings (loss)		24,709		21,769		(4,897	)		(13,693	)		27,888

In fiscal 2005, the Company began reporting its majority-owned subsidiary, Shoes.com, Inc., a footwear e-commerce company, within the Specialty Retail segment. Shoes.com had previously been reported within the Other segment. Prior year amounts have been reclassified to conform to current year presentation. This reclassification resulted in a transfer of sales of $6.7 million and $3.7 million in the thirteen weeks ended July 30, 2005 and July 31, 2004, respectively, and resulted in an immaterial transfer of operating earnings (loss) in both the thirteen weeks ended July 30, 2005 and July 31, 2004 to the Specialty Retail segment. For the twenty-six weeks ended July 30, 2005 and July 31, 2004, this reclassification resulted in a transfer of sales of $13.3 million and $6.5 million, respectively, and an immaterial transfer of operating earnings (loss) in both periods to the Specialty Retail segment. This reclassification also resulted in a transfer of operating segment assets of $9.1 million and $5.7 million at July 30, 2005 and July 31, 2004, respectively.

The change between periods in the Wholesale Operations segment reflects the Company’s preliminary purchase price allocation for the acquisition of Bennett on April 22, 2005. The Company’s purchase price allocation has resulted in acquired goodwill of $70.8 million and identifiable intangible assets of $98.5 million. The intangible assets will be amortized on a straight-line basis over their estimated useful lives, ranging from 5 to 14 years, except for the Via Spiga trademark, for which an indefinite life has been assigned. The change between periods for the Specialty Retail segment reflects changes in the Canadian dollar exchange rate. The change in the Other segment from July 31, 2004 to July 30, 2005, of $0.7 million reflects the adjustment to the Company’s minimum pension liability recorded in the fourth quarter of 2004.

As of July 30, 2005, the Company had four share-based compensation plans, which are described more fully in Note 16 to the consolidated financial statements contained in the Company's Annual Report on Form 10-K for the year ended January 29, 2005. The Company accounts for those plans under the recognition and measurement principles of APB Opinion No. 25, "Accounting for Stock Issued to Employees" and related interpretations. Compensation expense is recognized in net earnings for stock appreciation units, stock performance plans and restricted stock grants. No share-based employee compensation cost is reflected in net earnings for stock options, as all option grants had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net earnings and net earnings per common share as if the Company had applied the fair value recognition provisions of SFAS No. 123, Accounting for Stock-Based Compensation, to stock options outstanding:


	Thirteen Weeks Ended						Twenty-six Weeks Ended
($ thousands, except per share amounts)	July 30, 2005			July 31, 2004			July 30, 2005			July 31, 2004
Net earnings, as reported	$	4,083		$	7,668		$	7,862		$	16,194
Add: Total share-based employee compensation expense (income) included in reported net earnings, net of related tax effect		591			(451	)		728			462
Deduct: Total share-based employee compensation expense determined under the fair value based method for all awards, net of related tax effect		(1,689	)		(359	)		(2,824	)		(2,013	)
Pro forma net earnings	$	2,985		$	6,858		$	5,766		$	14,643
Earnings per share:
Basic - as reported	$	0.23		$	0.43		$	0.43		$	0.91
Basic - pro forma		0.16			0.38			0.32			0.82
Diluted - as reported		0.22			0.40			0.42			0.85
Diluted - pro forma		0.16			0.36			0.31			0.77

During December 2004, the Financial Accounting Standards Board issued SFAS No. 123(R), Share-Based Payment, which is a revision of SFAS No. 123. SFAS No. 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values. The Company has historically provided pro forma disclosures of stock option expense in the notes to the Company’s financial statements as previously allowed by SFAS No. 123, rather than recognizing the impact of such expense in the financial statements. As a result of the Securities and Exchange Commission’s April 15, 2005 release delaying the required date of adoption, the Company plans to adopt the provisions of SFAS No. 123(R) at the beginning of fiscal year 2006.


	Pension Benefits						Other Postretirement Benefits
	Thirteen Weeks Ended						Thirteen Weeks Ended
($ thousands)	July 30, 2005			July 31, 2004			July 30, 2005			July 31, 2004
Service cost	$	1,580		$	1,699		$	-		$	-
Interest cost		2,283			2,228			65			67
Expected return on assets		(3,935	)		(4,042	)		-			-
Amortization of:
Actuarial loss (gain)		130			81			(15	)		(20	)
Prior service costs		100			81			-			-
Net transition assets		(46	)		(42	)		-			-
Total net periodic benefit cost	$	112		$	5		$	50		$	47


	Pension Benefits						Other Postretirement Benefits
	Twenty-six Weeks Ended						Twenty-six Weeks Ended
($ thousands)	July 30, 2005			July 31, 2004			July 30, 2005			July 31, 2004
Service cost	$	3,188		$	3,082		$	-		$	-
Interest cost		4,567			4,331			130			130
Expected return on assets		(7,870	)		(7,650	)		-			-
Amortization of:
Actuarial loss (gain)		260			159			(30	)		(70	)
Prior service costs		200			156			-			-
Net transition assets		(92	)		(85	)		-			-
Total net periodic benefit cost (income)	$	253		$	(7	)	$	100		$	60

In connection with the acquisition of Bennett, the Company repatriated $60.5 million of earnings from its foreign subsidiaries under the provisions of the American Jobs Creation Act of 2004. The Company recognized $9.6 million of tax expense associated with the repatriation. Although the Company recorded its best estimate of tax due related to the repatriation based on information currently available, certain regulations are still pending. Any adjustment to taxes due will be recorded when known.

The Company anticipates that it will repatriate approximately $20 million in additional foreign earnings during 2005. The Company is providing tax expense at the expected 5.25% effective rate in accordance with the American Jobs Creation Act of 2004 as these current period earnings are generated. With regard to any other accumulated unremitted foreign earnings, the Company’s intention is to reinvest these earnings indefinitely or to repatriate the earnings only when it is tax-effective to do so.

Brown Shoe Company, Inc. has a Revolving Credit Agreement (the “Agreement”) that provides for a maximum line of credit of $350 million, subject to a calculated borrowing base, and is guaranteed by certain of its subsidiaries. Borrowing availability under the Agreement is based upon the sum of eligible accounts receivable and inventory, less outstanding borrowings, letters of credit and applicable reserves. The Agreement matures on July 21, 2009, and the Company’s obligations are secured by its accounts receivable and inventory. Borrowings under the Agreement bear interest at a variable rate determined based upon the level of availability under the Agreement. If availability falls below specified levels, the Company would then be subject to certain financial covenants. In addition, if availability falls below $25 million and the fixed charge coverage ratio is less than 1.0 to 1, the Company would be in default. The Agreement also contains certain other covenants and restrictions. On March 14, 2005, the Company entered into the First Amendment to the Agreement to permit the acquisition of Bennett and the issuance of its 8.75% Senior Notes due 2012.

To fund a portion of the Bennett acquisition, Brown Shoe Company, Inc. issued $150 million aggregate principal amount of 8.75% senior notes due 2012 (“Senior Notes”). The Senior Notes are guaranteed on a senior unsecured basis by each of the subsidiaries of Brown Shoe Company, Inc. that is an obligor under its secured Revolving Credit Agreement. Interest on the Senior Notes is payable on May 1 and November 1 of each year, beginning on November 1, 2005. The Senior Notes mature on May 1, 2012, but are callable any time on or after May 1, 2009, at specified redemption prices plus accrued and unpaid interest. The Senior Notes also contain certain restrictive covenants.

The Company is involved in environmental remediation and ongoing compliance activities at several of its former manufacturing sites. The Company is remediating, under the oversight of Colorado authorities, the groundwater and indoor air at its owned facility in Colorado (also known as the Redfield site) and residential neighborhoods adjacent to and near the property that have been affected by solvents previously used at the facility. During the first half of 2005, the Company recorded $0.5 million of expense related to this remediation. The anticipated future cost of remediation activities at July 30, 2005 is $5.6 million and is included within accrued expenses and other noncurrent liabilities, but the ultimate cost may vary. The cumulative costs incurred through July 30, 2005 are $16.0 million.

The Company assesses future recoveries from insurance companies related to remediation costs by estimating a range of probable recoveries and recording the low end of the range. Recoveries from other responsible parties are recorded when a contractual agreement is reached. As of July 30, 2005, recorded recoveries totaled $0.2 million and are recorded in other noncurrent assets on the consolidated balance sheet, substantially all of which represents recoveries expected from certain insurance companies as indemnification for amounts spent for remediation associated with the Redfield site. The insurance companies are contesting their indemnity obligations, and the Company has sued its insurers seeking recovery of defense costs, indemnity and other damages related to the former operations and the remediation at the site. The Company believes insurance coverage in place entitles it to reimbursement for more than the recovery recorded. The Company believes the recorded recovery is supported by the fact that the limits of the insurance policies at issue exceed the amount of the recorded recovery and certain insurers have already settled these claims. The Company is unable to estimate the ultimate recovery from the insurance carriers, but is pursuing resolution of its claims.

The Company has completed its remediation efforts at its closed New York tannery and two landfill sites related to that operation. In 1995, state environmental authorities reclassified the status of these sites as being properly closed and requiring only continued maintenance and monitoring over the next 19 years. The Company has an accrued liability of $2.2 million at July 30, 2005, related to these sites, which has been discounted at 6.4%. On an undiscounted basis, this liability would be $3.7 million. The Company expects to spend approximately $0.2 million in each of the next five succeeding years and $2.7 million thereafter related to these sites. In addition, various federal and state authorities have identified the Company as a potentially responsible party for remediation at certain other landfills.

Based on information currently available, the Company had an accrued liability of $8.1 million as of July 30, 2005, for the cleanup, maintenance and monitoring at all sites. Of the $8.1 million liability, $1.7 million is included in accrued expenses, and $6.4 million is included in other noncurrent liabilities in the consolidated balance sheet. The ultimate costs may vary, and it is possible costs may exceed the recorded amounts.

In March 2000, a class action lawsuit was filed in Colorado State Court (District Court for the City and County of Denver) related to the Redfield site described above. Plaintiffs alleged claims for trespass, nuisance, strict liability, unjust enrichment, negligence and exemplary damages arising from the alleged release of solvents contaminating the groundwater and indoor air in the areas adjacent to and near the site. In December 2003, the jury hearing the claims returned a verdict finding the Company’s subsidiary negligent and awarded the class plaintiffs $1.0 million in damages. The Company recorded this award along with estimated pretrial interest on the award and estimated costs related to sanctions imposed by the court related to a pretrial discovery dispute between the parties. In the first quarter of 2005, the federal court hearing a cost recovery suit against other responsible parties approved a settlement agreement between the Company, its co-defendant in the class action lawsuit and an insurer which resolved all remaining sanctions issues related to the class action. Accordingly, the Company reversed into income $0.7 million related to accrued sanctions. The total pretax charges recorded for these matters in 2004 and prior were $3.7 million. The plaintiffs have filed an appeal of the December 2003 jury verdict, and the ultimate outcome and cost to the Company may vary.

The Company also is involved in legal proceedings and litigation arising in the ordinary course of business. In the opinion of management, the outcome of such ordinary course of business proceedings and litigation currently pending will not have a material adverse effect on the Company’s results of operations or financial position. All legal costs associated with litigation are expensed as incurred.

During the fourth quarter of 2004, the Company recorded a charge of $3.5 million related to its guarantee of an Industrial Development Bond financing for a manufacturing and warehouse facility in Bedford County, Pennsylvania. These facilities and the business that operated them were sold to another party in 1985, which assumed the bond obligation. The current owner of the manufacturing and warehouse facility has filed for bankruptcy protection and is liquidating its assets. Although the Company will pursue recovery of these costs, the ultimate outcome is uncertain. Accordingly, the Company recorded its estimate of the maximum exposure, $3.5 million, as a charge in the fourth quarter of 2004. The Company made a payment under this guarantee of $0.7 million during the first quarter of 2005 and has an accrued liability of $2.8 million at July 30, 2005, related to this matter.

During 2004 and 2003, the Company recorded charges totaling $2.7 million relating to the insolvency of an insurance company that insured the Company for workers’ compensation and casualty losses from 1973 to 1989. That insurance company is now in liquidation. Certain claims from that time period are still outstanding. While management has recorded its best estimate of loss, the ultimate outcome and cost to the Company may vary.

The Company is contingently liable for lease commitments of approximately $7.4 million in the aggregate, which relate to the Cloth World and Meis specialty retailing chains and a manufacturing facility, which were sold in prior years. In order for the Company to incur any liability related to these lease commitments, the current owners would have to default. At this time, the Company does not believe this is reasonably likely to occur.

On April 22, 2005, Brown Shoe Company, Inc. issued senior notes to finance a portion of the purchase price of Bennett. The notes are fully and unconditionally and jointly and severally guaranteed by all existing and future subsidiaries of Brown Shoe Company, Inc. which are guarantors under its existing Revolving Credit Agreement. The following table presents the condensed consolidating financial information for each of Brown Shoe Company, Inc. (Parent), the Guarantors and subsidiaries of the Issuer that are not Guarantors (the Non-Guarantors), together with consolidating eliminations, as of and for the periods indicated.

The condensed consolidating financial statements have been prepared using the equity method of accounting in accordance with the requirements for presentation of such information. Management believes that the information, presented in lieu of complete financial statements for each of the Guarantors, provides meaningful information to allow investors to determine the nature of the assets held by, and operation and cash flow of, each of the consolidating groups.

($ thousands)	Parent			Guarantors		Non-Guarantors			Eliminations			Total
ASSETS
Current Assets
Cash and cash equivalents	$	803		$	10,532	$	25,702		$	-		$	37,037
Receivables		55,619			31,423		38,433			(825	)		124,650
Inventories		75,830			415,361		7,155			(4,601	)		493,745
Other current assets		5,550			14,142		970			1,598			22,260
Total current assets		137,802			471,458		72,260			(3,828	)		677,692
Other assets		75,295			199,628		1,998			-			276,921
Property and equipment, net		14,508			97,915		3,494			-			115,917
Investment in subsidiaries		431,551			41,020		-			(472,571	)		-
Total assets	$	659,156		$	810,021	$	77,752		$	(476,399	)	$	1,070,530

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities
Current maturities of long-term debt	$	79,000		$	-	$	825		$	(825	)	$	79,000
Trade accounts payable		14,712			146,676		34,586			-			195,974
Accrued expenses		53,055			60,577		4,198			1,946			119,776
Income taxes		2,799			1,869		2,369			1			7,038
Total current liabilities		149,566			209,122		41,978			1,122			401,788
Other Liabilities
Long-term debt		200,000			-		-			-			200,000
Other liabilities		35,415			34,715		(109	)		--			70,021
Intercompany (receivable) payable		(124,546	)		130,893		(1,397	)		(4,950	)		-
Total other liabilities		110,869			165,608		(1,506	)		(4,950	)		270,021
Shareholders’ equity		398,721			435,291		37,280			(472,571	)		398,721
Total liabilities and shareholders’ equity	$	659,156		$	810,021	$	77,752		$	(476,399	)	$	1,070,530

($ thousands)	Parent			Guarantors			Non-Guarantors			Eliminations			Total
Net Sales	$	265,684		$	737,073		$	158,726		$	(86,720	)	$	1,074,763
Cost of goods sold		193,984			410,303			129,826			(85,602	)		648,511
Gross profit		71,700			326,770			28,900			(1,118	)		426,252
Selling and administrative expenses		67,894			311,365			14,269			(1,118	)		392,410
Equity in (earnings) of subsidiaries		(19,575	)		(13,372	)		-			32,947			-
Operating earnings		23,381			28,777			14,631			(32,947	)		33,842
Interest expense		(8,526	)		-			(30	)		-			(8,556	)
Interest income		11			86			536			-			633
Intercompany interest income (expense)		2,725			(3,291	)		566			-			-
Earnings before income taxes		17,591			25,572			15,703			(32,947	)		25,919
Income tax provision		(9,729	)		(5,923	)		(2,405	)		-			(18,057	)
Net earnings (loss)	$	7,862		$	19,649		$	13,298		$	(32,947	)	$	7,862

($ thousands)	Parent			Guarantors			Non-Guarantors			Eliminations			Total
Net cash provided by operating activities	$	12,540		$	28,071		$	7,153		$	1,420		$	49,184

Investing activities
Payments on acquisition, net of cash received		-			(206,633	)		-			-			(206,633	)
Capital expenditures		(665	)		(15,513	)		(271	)		-			(16,449	)
Other		531						-			-			531
Net cash used by investing activities		(134	)		(222,146	)		(271	)		-			(222,551	)

Financing activities
(Decrease) increase in current maturities of long-term debt		(13,000	)		-			50			(50	)		(13,000	)
Proceeds from the issuance of Senior Notes		150,000			-			-			-			150,000
Debt issuance costs		(4,733	)		-			-			-			(4,733	)
Proceeds from stock options exercised		1,900			-			-			-			1,900
Tax benefit related to share-based plans		455			-			-			-			455
Dividends (paid) received		(3,666	)		60,464			(60,464	)		-			(3,666	)
Intercompany financing		(138,901	)		134,238			6,033			(1,370	)		-
Net cash (used) provided by financing activities		(7,945	)		194,702			(54,381	)		(1,420	)		130,956

Increase (decrease) in cash and cash equivalents		4,461			627			(47,499	)		-			(42,411	)
Cash and cash equivalents at beginning of period		(3,657	)		9,905			73,200			-			79,448
Cash and cash equivalents at end of period	$	804		$	10,532		$	25,701		$	-		$	37,037

($ thousands)	Parent			Guarantors			Non-Guarantors			Eliminations			Total
ASSETS
Current Assets
Cash and cash equivalents	$	(2,790	)	$	10,482		$	63,786		$	-		$	71,478
Receivables		55,336			5,045			24,557			(1,000	)		83,938
Inventories		83,265			371,343			3,841			(5,433	)		453,016
Other current assets		2,920			13,555			1,084			1,932			19,491
Total current assets		138,731			400,425			93,268			(4,501	)		627,923
Other assets		71,399			35,445			2,190			-			109,034
Property and equipment, net		14,888			88,659			3,669			-			107,216
Investment in subsidiaries		381,433			78,031			-			(459,464	)		-
Total assets	$	606,451		$	602,560		$	99,127		$	(463,965	)	$	844,173

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities
Current maturities of long-term debt	$	27,500		$	-		$	1,000		$	(1,000	)	$	27,500
Trade accounts payable		18,898			145,593			27,752			-			192,243
Accrued expenses		43,235			48,262			5,217			(1,401	)		95,313
Income taxes		5,000			(724	)		1,394			1,707			7,377
Total current liabilities		94,633			193,131			35,363			(694	)		322,433
Other Liabilities
Long-term debt		100,000			-			-			-			100,000
Other liabilities		27,531			27,543			28			-			55,102
Intercompany payable (receivable)		17,649			(3,584	)		(10,258	)		(3,807	)		-
Total other liabilities		145,180			23,959			(10,230	)		(3,807	)		155,102
Shareholders’ equity		366,638			385,470			73,994			(459,464	)		366,638
Total liabilities and shareholders’ equity	$	606,451		$	602,560		$	99,127		$	(463,965	)	$	844,173

($ thousands)	Parent			Guarantors			Non-Guarantors			Eliminations			Total
Net Sales	$	261,762		$	650,696		$	134,149		$	(96,118	)	$	950,489
Cost of goods sold		190,959			351,779			114,127			(94,986	)		561,879
Gross profit		70,803			298,917			20,022			(1,132	)		388,610
Selling and administrative expenses		69,349			282,458			10,047			(1,132	)		360,722
Equity in (earnings) of subsidiaries		(17,614	)		(9,963	)		--			27,577			-
Operating earnings		19,068			26,422			9,975			(27,577	)		27,888
Interest expense		(4,589	)		(2	)		(29	)		--			(4,620	)
Interest income		6			45			245			-			296
Intercompany interest income (expense)		3,526			(3,869	)		343			-			-
Earnings before income taxes		18,011			22,596			10,534			(27,577	)		23,564
Income tax provision		(1,817	)		(5,208	)		(345	)		-			(7,370	)
Net earnings (loss)	$	16,194		$	17,388			10,189		$	(27,577	)	$	16,194

($ thousands)	Parent			Guarantors			Non-Guarantors			Eliminations			Total
Net cash (used) provided by operating activities	$	(29,287	)	$	44,061		$	13,033		$	1,365		$	29,172

Investing activities
Capital expenditures		(1,763	)		(15,923	)		(1,432	)		--			(19,118	)
Other		153			-			-			-			153
Net cash used by investing activities		(1,610	)		(15,923	)		(1,432	)		-			(18,965	)

Financing activities
Increase in current maturities of long-term debt		8,000			-			-			-			8,000
Debt issuance costs		(1,071	)		-			-			-			(1,071	)
Proceeds from stock options exercised		1,605			-			-			-			1,605
Tax benefit related to share based plans		709			-			-			-			709
Dividends paid		(3,629	)		-			-			-			(3,629	)
Intercompany financing		26,031			(24,021	)		(645	)		(1,365	)
Net cash provided (used) by financing activities		31,645			(24,021	)		(645	)		(1,365	)		5,614

Increase in cash and cash equivalents		748			4,117			10,956			-			15,821
Cash and cash equivalents at beginning of period		(3,538	)		6,365			52,830			-			55,657
Cash and cash equivalents at end of period	$	(2,790	)	$	10,482		$	63,786		$	-		$	71,478

Overall, we believe we made solid progress in our second quarter as we moved forward with the transition and integration of the Bennett business, acquired in April 2005, announced and began the implementation of our initiative to strengthen our Naturalizer brand by, among other things, closing approximately 80 underperforming stores, and registered solid sales gains in our Wholesale and Famous Footwear segments. Nevertheless, net earnings for the quarter were below last year’s levels as the impact of the store closing program, acquisition accounting and lower gross profit rates at Famous Footwear negatively affected our results.

Consolidated net sales rose 20.2% to $551.5 million for the second quarter of fiscal 2005, as compared to $458.7 million for the second quarter of the prior year. Of the sales increase, $45.5 million was attributable to the recently acquired Bennett business. Operating earnings declined 17.4% to $10.8 million in the second quarter of 2005 compared to $13.0 million in the second quarter of 2004. Net earnings were $4.1 million, or $0.22 per diluted share, for the second quarter compared to $7.7 million, or $0.40 per diluted share, for the second quarter of last year.

Famous Footwear’s net sales increased 6.1% to $286.2 million in the second quarter compared to $269.8 million last year. Same-store sales increased 2.2%. Operating earnings decreased to $9.3 million in the second quarter compared to $12.4 million in the second quarter of the prior year. While the return of warm weather helped spur our sandal business, it also served to dampen demand for closed-toe footwear and athletics. As a result, Famous Footwear took markdowns to ensure our inventory would be well positioned for the back-to-school season. These markdowns resulted in lower gross profit rates in the quarter and a decline in our operating earnings.

Our Wholesale Operations segment’s sales increased 51.5% to $207.4 million in the second quarter reflecting increased sales in most of the division’s brands and the additional sales from the acquired Bennett business of $44.1 million. As a result, operating earnings increased in the second quarter to $16.3 million compared to $9.0 million in the second quarter last year. This year’s operating earnings reflect the lower margin impact of approximately $2.0 million related to the write-up of inventory to fair value from the Bennett purchase price allocation. Lower margins were recognized on this inventory as it was sold in the second quarter.

Our Specialty Retail segment experienced an 11.3% increase in net sales to $57.9 million in the second quarter, compared to $52.0 million in the second quarter of the prior year, primarily due to significant growth in our Shoes.com business and the addition of Via Spiga stores that were part of the Bennett acquisition. Same-store sales were up 0.1% for the quarter. We incurred an operating loss of $5.5 million in the second quarter compared to an operating loss of $2.4 million in the second quarter of the prior year. The higher loss was driven by charges of $2.3 million related to our initiative to strengthen our Naturalizer brand. The division also experienced lower margins to clear spring inventory.

Inventories at quarter-end are $493.7 million, up from $453.0 million last year. The current year increase reflects Bennett inventory of $31.8 million and additional stores and square footage at Famous Footwear. Our current ratio, the relationship of current assets to current liabilities, decreased to 1.7 to 1 compared to 1.8 to 1 at January 29, 2005, and from the July 30, 2004 ratio of 1.9 to 1. Our debt-to-capital ratio, the ratio of our debt obligations to the sum of our debt obligations and shareholders’ equity, at the end of the quarter increased to 41.2% from 25.8% at the end of the year-ago quarter, driven by the issuance of $150 million senior notes due 2012 in conjunction with the acquisition of Bennett.

On June 6, 2005, we announced that we would be closing approximately 80 underperforming Naturalizer retail stores, of which approximately 60 are in the United States and 20 are in Canada. We expect that these closures will be complete by April 2006. In addition, we will consolidate our Canadian retail division buying, merchandising, accounting and information services functions into the United States. We anticipate that the cost to implement this restructuring will result in expense in the range of $14 million to $17 million on a pre-tax basis (or $0.45 to $0.55 on a diluted per share basis) for lease buyouts, severance, asset write-offs and inventory markdowns. We expect that this expense will be recognized primarily over the remainder of fiscal 2005. We also anticipate that the restructuring will have an immaterial impact on cash as the costs to exit the stores and eliminate positions will be substantially offset by the cash generated from liquidating inventories carried in the stores. We believe this is a significant strategic step in improving our profitability in the Specialty Retail segment. As of July 30, 2005, approximately $2.9 million has been recorded to expense related to this restructuring.

On April 22, 2005, we completed the acquisition of Bennett for $205 million in cash, including indebtedness of Bennett repaid by us at closing of $35.7 million. The purchase price is subject to a post-closing adjustment based on net equity as defined. In addition, the sellers may receive up to $42.5 million in contingent payments to be earned upon the achievement of certain performance targets over the next three years. The operating results of Bennett have been included in our financial statements since April 22, 2005. The acquisition of Bennett is expected to complement our portfolio of wholesale brands, which are primarily sold in the moderately priced range, by adding owned and licensed brands that sell primarily in the better and bridge footwear zones at department stores, including Via Spiga, Franco Sarto, Etienne Aigner and Nickels Soft.

To fund a portion of the acquisition, we issued $150 million aggregate principal amount of 8.75% senior notes due 2012. The Senior Notes are guaranteed on a senior unsecured basis by each of our subsidiaries that is an obligor under our secured Revolving Credit Agreement. Interest is payable on May 1 and November 1 of each year, beginning on November 1, 2005. The Senior Notes will mature on May 1, 2012, but are callable any time on or after May 1, 2009, at specified redemption prices plus accrued and unpaid interest. The Senior Notes also contain certain restrictive covenants.

	Thirteen Weeks Ended								Twenty-six Weeks Ended
					AS RESTATED								AS RESTATED
	July 30, 2005				July 31, 2004				July 30, 2005				July 31, 2004
($ millions)				% of Net Sales				% of Net Sales				% of Net Sales				% of Net Sales
Net sales	$	551.5		100.0%	$	458.7		100.0%	$	1,074.8		100.0%	$	950.5		100.0%
Cost of goods sold		335.9		60.9%		269.5		58.7%		648.5		60.3%		561.9		59.1%
Gross profit		215.6		39.1%		189.2		41.3%		426.3		39.7%		388.6		40.9%
Selling and administrative expenses		204.8		37.1%		176.2		38.5%		392.5		36.6%		360.7		38.0%
Operating earnings		10.8		2.0%		13.0		2.8%		33.8		3.1%		27.9		2.9%
Interest expense		(5.2	)	(0.9)%		(2.1	)	(0.4)%		(8.5	)	(0.8)%		(4.6	)	(0.4)%
Interest income		0.2		0.0%		0.2		0.0%		0.6		0.1%		0.3		0.0%
Earnings before income taxes		5.8		1.1%		11.1		2.4%		25.9		2.4%		23.6		2.5%
Income tax provision		(1.7	)	(0.4)%		(3.4	)	(0.7)%		(18.0	)	(1.7)%		(7.4	)	(0.8)%
Net earnings	$	4.1		0.7%	$	7.7		1.7%	$	7.9		0.7%	$	16.2		1.7%

Net sales increased $92.8 million, or 20.2%, to $551.5 million in the second quarter of 2005 as compared to $458.7 million in the second quarter of the prior year. The acquisition of Bennett contributed $45.5 million in sales during the quarter, accounting for approximately half of the increase. Our Wholesale Operations, excluding Bennett, have improved $26.4 million, led by strong sales of women’s private label and Dr. Scholl’s product. In addition, Famous Footwear improved its sales by $16.4 million over the year ago quarter, reflecting a same-store sales gain of 2.2% and additional stores in the current period.

Net sales increased $124.3 million, or 13.1%, to $1,074.8 million in the first half of 2005 as compared to $950.5 million in the first half of the prior year. This increase is attributable to an increase of $33.1 million at Famous Footwear, reflecting a same store sales gain of 1.8% and additional stores, sales from the recently acquired Bennett business, which contributed $51.6 million in sales in 2005, and a sales improvement of $30.4 million in our Wholesale Operations, excluding Bennett, reflecting higher sales in most divisions.

Gross profit increased $26.4 million, or 14.0%, to $215.6 million for the second quarter of 2005 as compared to $189.2 million in the second quarter of the prior year. The increase in gross profit is the result of higher net sales. However, as a percent of net sales, our gross profit rate decreased to 39.1% in the second quarter from 41.3% in the second quarter of the prior year partially due to a heavier mix of Wholesale sales, which carry a lower margin than our Retail operations. In addition, our Famous Footwear division experienced lower margins as we aggressively marked down our closed-up footwear and athletic footwear and our Specialty Retail division experienced lower margins to clear spring inventory. Our Wholesale Operations segment experienced lower margins as a result of continued allowance pressures, a higher mix of first cost sales which carry lower margins, and the impact of selling through the inventory acquired in the Bennett acquisition, which carried a lower margin because of the fair value purchase price allocation.

Gross profit increased $37.7 million, or 9.7%, to $426.3 million for the first half of 2005 as compared to $388.6 million in the first half of the prior year, as a result of the higher sales base. However, as a percent of net sales, our gross profit rate decreased to 39.7% in the first half from 40.9% in the first half of the prior year. The reduction of gross profit as a percent of net sales was due to the same factors described in the preceding paragraph.

Selling and administrative expenses increased $28.6 million, or 16.3%, to $204.8 million for the second quarter as compared to $176.2 million in the second quarter of the prior year. The increase is due, in part, to the inclusion of Bennett selling and administrative expenses, which accounted for over one-half of the consolidated increase. In addition, Famous Footwear has experienced higher selling and administrative expenses to support the higher sales base. Further, during the second quarter of 2005, we recognized restructuring charges of $2.9 million related to our initiative to strengthen our flagship Naturalizer brand by closing underperforming retail stores and consolidating and streamlining certain retail and wholesale functions. These factors were partially offset by the non-recurrence of transition and assimilation costs related to the Bass business, which were incurred in 2004. As a percentage of sales, selling and administrative expenses have decreased to 37.1% from 38.5%, as we have better leveraged our expense base.

Selling and administrative expenses increased $31.8 million, or 8.8%, to $392.5 million for the first half of 2005 as compared to $360.7 million in the first half of the prior year. This increase in selling and administrative expenses was due to the factors described in the preceding paragraph. As a percentage of sales, selling and administrative expenses have decreased to 36.6% from 38.0%, reflecting a better leveraged expense base.

Interest expense increased $3.1 million, or 140.9%, to $5.2 million in the second quarter as compared to $2.1 million in the second quarter of the prior year. The increase in interest expense is a result of the additional interest expense for the $150 million aggregate principal amount of 8.75% senior notes due 2012 that we issued in April to fund a portion of the Bennett acquisition.

Interest expense increased $3.9 million, or 85.2%, to $8.5 million in the first half of 2005 as compared to $4.6 million in the first half of the prior year. The increase in interest expense is a result of the additional interest expense on the Senior Notes described above and a charge of $1.0 million for bank commitment fees incurred in the first quarter in connection with funding the acquisition of Bennett.

For the first half of 2005, our consolidated effective income tax rate was 69.7% as compared to 31.3% for the first half of the prior year, reflecting the $9.6 million of incremental tax expense recorded in the first quarter related to our repatriation of $60.5 million of earnings from our foreign subsidiaries to fund a portion of the Bennett acquisition. Excluding the $9.6 million incremental charge, our effective tax rate for the first half of 2005 was 32.8% compared to 31.3% in the first half of last year. This increase reflects an additional provision on foreign earnings recorded for the expected repatriation of current year earnings in 2005.

Net earnings decreased $3.6 million, or 46.8%, to $4.1 million in the second quarter as compared to $7.7 million in the second quarter of the prior year. The decrease in net earnings reflects the charges of $2.9 million, ($1.8 million on an after-tax basis) related to our initiative to strengthen our flagship Naturalizer brand by closing underperforming retail stores and consolidating and streamlining certain retail and wholesale functions. In addition, during the second quarter, after consideration of the additional interest costs related to the acquisition and other acquisition related charges, the net effect of the Bennett business was a net loss of $1.3 million.

Net earnings decreased $8.3 million, or 51.5%, to $7.9 million in the first half of 2005 as compared to $16.2 million in the first half of the prior year, as a result of the Naturalizer restructuring charges and acquisition related charges described in the preceding paragraph. In addition, in the first quarter, we recorded $9.6 million of tax expense related to the repatriation of foreign earnings and $1.0 million ($0.6 million on an after-tax basis) for bank commitment fees associated with the Bennett acquisition. These expenses were partially offset by improved operating earnings at our Famous Footwear and Wholesale Operations segments.

	Thirteen Weeks Ended						Twenty-six Weeks Ended
				AS RESTATED						AS RESTATED
	July 30, 2005			July 31, 2004			July 30, 2005			July 31, 2004
($ millions, except sales per square foot)			% of Net Sales			% of Net Sales			% of Net Sales			% of Net Sales
Operating Results
Net sales	$	286.2	100.0%	$	269.8	100.0%	$	575.0	100.0%	$	541.9	100.0%
Cost of goods sold		160.5	56.1%		148.0	54.9%		320.1	55.7%		299.1	55.2%
Gross profit		125.7	43.9%		121.8	45.1%		254.9	44.3%		242.8	44.8%
Selling and administrative expenses		116.4	40.7%		109.4	40.5%		229.1	39.8%		218.1	40.2%
Operating earnings	$	9.3	3.2%	$	12.4	4.6%	$	25.8	4.5%	$	24.7	4.6%

Key Metrics
Same-store sales % change		2.2%			(2.5)%			1.8%			0.0%
Same-store sales $ change	$	5.5		$	(6.5)		$	9.6		$	-
Sales change from new and closed stores, net	$	10.9		$	7.4		$	23.5		$	11.9

Sales per square foot	$	44		$	43		$	88		$	86
Square footage (thousand sq. ft.)		6,540			6,384			6,540			6,384

Stores opened		15			26			35			38
Stores closed		9			8			21			16
Ending stores		933			915			933			915

Net sales increased $16.4 million, or 6.1%, to $286.2 million in the second quarter of 2005 as compared to $269.8 million in the second quarter of the prior year. This increase is attributable to higher sales from new stores and the same-store sales increase of 2.2%. All major categories of footwear, except athletic, achieved higher sales in the quarter. During the second quarter of 2005, we opened 15 new stores and closed 9, resulting in 933 stores at the end of the second quarter as compared to 915 at the end of the second quarter of the prior year. Sales per square foot were $44, as compared to $43 a year ago.

Net sales increased $33.1 million, or 6.1%, to $575.0 million in the first half of 2005 as compared to $541.9 million in the first half of the prior year. This increase is attributable to higher sales from new stores and the same-store sales increase of 1.8%. During the first half of 2005, we opened 35 new stores and closed 21, resulting in 933 stores at the end of the first half as compared to 915 at the end of the first half of the prior year. Sales per square foot were $88, compared to $86 a year ago.

Same-store sales changes are calculated by comparing the sales in stores that have been open at least 13 months. This method avoids the distorting effect that grand opening sales have in the first month of operation. Relocated stores are treated as new stores. Closed stores are excluded from the calculation. Sales change from new and closed stores, net reflects the change in net sales due to stores that have been opened or closed during the period and are thereby excluded from the same-store sales calculation.

Gross profit increased $3.9 million, or 3.2%, to $125.7 million in the second quarter of 2005 as compared to $121.8 million in the second quarter of the prior year. The increase in the gross profit is due to the higher sales base. However, as a percentage of net sales, there was a decrease in the gross profit rate to 43.9% in the second quarter of 2005 from 45.1% in the second quarter of the prior year. These lower margins are almost entirely due to aggressively marking down our closed-up footwear and athletic footwear to ensure our inventory is well positioned for the back-to-school season.

Gross profit increased $12.1 million, or 5.0%, to $254.9 million in the first half of 2005 as compared to $242.8 million in the first half of the prior year. The increase in the gross profit is due to the higher sales base. However, as a percentage of net sales, there was a decrease in the gross profit rate to 44.3% in the first half of 2005 from 44.8% in the first half of the prior year. These lower margins are the result of higher markdowns and slight increases in shrinkage and inbound freight costs.

Selling and administrative expenses increased $7.0 million, or 6.4%, to $116.4 million for the second quarter of 2005 as compared to $109.4 million in the second quarter of the prior year. This increase is primarily attributable to increased retail facilities costs, driven by store growth, and higher marketing costs. As a percentage of net sales, selling and administrative costs increased to 40.7% from 40.5% last year.

Selling and administrative expenses increased $11.0 million, or 5.1%, to $229.1 million for the first half of 2005 as compared to $218.1 million in the first half of the prior year. This increase is primarily attributable to increased retail facilities costs driven by store growth. As a percentage of net sales, selling and administrative costs decreased to 39.8% from 40.2% last year, as the division effectively leveraged its expense base.

	Thirteen Weeks Ended								Twenty-six Weeks Ended
					AS RESTATED								AS RESTATED
	July 30, 2005				July 31, 2004				July 30, 2005				July 31, 2004
($ millions, except for sales per square foot)				% of Net Sales				% of Net Sales				% of Net Sales				% of Net Sales
Operating Results
Net sales	$	57.9		100.0%	$	52.0		100.0%	$	111.1		100.0%	$	100.1		100.0%
Cost of goods sold		32.9		56.8%		29.0		55.8%		61.2		55.1%		53.1		53.1%
Gross profit		25.0		43.2%		23.0		44.2%		49.9		44.9%		47.0		46.9%
Selling and administrative expenses		30.5		52.7%		25.4		48.9%		58.9		53.0%		51.9		51.8%
Operating loss	$	(5.5	)	(9.5)%	$	(2.4	)	(4.7)%	$	(9.0	)	(8.1)%	$	(4.9	)	(4.9)%

Key Metrics
Same-store sales % change		0.1%				(3.9)%				0.1%				(1.0)%
Same-store sales $ change	$	0.1			$	(1.8)			$	0.2			$	(0.8)
Sales change from new and closed stores, net	$	1.2			$	0.2			$	1.2			$	0.3
Impact of changes in Canadian exchange rate on sales	$	1.6			$	0.2			$	2.8			$	1.6
Increase in sales of e-commerce subsidiary	$	3.0			$	1.8			$	6.8			$	3.0

Sales per square foot, excluding e-commerce subsidiary	$	84			$	80			$	161			$	154
Square footage (thousand sq. ft.)		565				588				565				588

Stores acquired upon Bennett acquisition		--				-				12				-
Stores opened		4				4				5				9
Stores transferred, net		-				-				-				4
Stores closed		13				3				23				11
Ending stores		369				380				369				380

Net sales increased $5.9 million, or 11.3%, to $57.9 million in the second quarter of 2005 as compared to $52.0 million in the second quarter of the prior year. For our domestic stores, same-store sales increased 1.2%, while Canadian stores experienced a same-store decline of 1.2%. The favorable impact of the Canadian exchange rate improved net sales by $1.6 million. Sales of our e-commerce subsidiary, Shoes.com, Inc., increased $3.0 million, or 81.2% to $6.7 million from $3.7 million. The recently acquired Via Spiga stores contributed $1.4 million in net sales. We opened 4 new stores and closed 13 resulting in 369 stores at the end of the second quarter of 2005 as compared to 380 at the end of the second quarter of the prior year. Sales per square foot increased to $84 from $80 in the year ago period.

Net sales increased $11.0 million, or 11.0%, to $111.1 million in the first half of 2005 as compared to $100.1 million in the first half of the prior year. For our domestic stores, same-store sales increased 1.1%, while Canadian stores experienced a same-store decline of 1.3%. The favorable impact of the Canadian exchange rate improved net sales by $2.8 million. Sales of our e-commerce subsidiary, Shoes.com, Inc., increased $6.8 million, or 104.3% to $13.3 million from $6.5 million. Sales per square foot increased to $161 from $154 in the year ago period.

Gross profit increased $2.0 million, or 8.9%, to $25.0 million in the second quarter of 2005 as compared to $23.0 million in the second quarter of the prior year. The increase in gross profit is due to the higher sales base. However, as a percentage of net sales, our gross profit rate declined to 43.2% in the second quarter from 44.2% in the year ago quarter. This decline was driven by higher markdowns recorded to clear spring inventory in our stores and a relative increase in the portion of e-commerce sales, which carry a lower gross profit rate.

Gross profit increased $2.9 million, or 6.1%, to $49.9 million in the first half of 2005 as compared to $47.0 million in the first half of the prior year. The increase in gross profit is due to the higher sales base. However, as a percentage of net sales, our gross profit rate declined to 44.9% in the first half from 46.9% in the first half of the prior year. This margin decline was driven by higher markdowns recorded to clear seasonal inventory in our stores and a relative increase in the portion of e-commerce sales, which carry a lower gross profit rate.

Selling and administrative expenses increased $5.1 million, or 20.0%, to $30.5 million for the second quarter of 2005 as compared to $25.4 million in the second quarter of the prior year. In connection with our initiative to strengthen our Naturalizer brand, we recorded charges of $2.3 million related to closing underperforming stores in the second quarter. Our recently acquired Via Spiga stores contributed $1.3 million of selling and administrative expenses during the second quarter. Approximately $0.8 million of the increase is due to changes in the Canadian exchange rate. The remaining portion of the increase relates to higher costs at our e-commerce subsidiary to support the sales growth.

Selling and administrative expenses increased $7.0 million, or 13.4%, to $58.9 million for the first half of 2005 as compared to $51.9 million in the first half of the prior year. We recorded charges of $2.3 million in the second quarter to close underperforming Naturalizer stores. Our recently acquired Via Spiga stores contributed $1.4 million of selling and administrative expenses during the first half of 2005. Approximately $1.5 million of the increase is due to changes in the Canadian exchange rate. The remaining portion of the increase relates to higher costs at our e-commerce subsidiary to support the sales growth.

	Thirteen Weeks Ended						Twenty-six Weeks Ended
	July 30, 2005			July 31, 2004			July 30, 2005			July 31, 2004
($ millions)			% of Net Sales			% of Net Sales			% of Net Sales			% of Net Sales
Operating Results
Net sales	$	207.4	100.0%	$	136.9	100.0%	$	388.7	100.0%	$	308.4	100.0%
Cost of goods sold		142.4	68.7%		92.3	67.4%		267.2	68.7%		209.5	67.9%
Gross profit		65.0	31.3%		44.6	32.6%		121.5	31.3%		98.9	32.1%
Selling and administrative expenses		48.7	23.5%		35.6	26.1%		87.7	22.6%		77.1	25.0%
Operating earnings	$	16.3	7.8%	$	9.0	6.5%	$	33.8	8.7%	$	21.8	7.1%

Key Metrics
Unfilled order position at end of period, including $81.8 million at July 30, 2005 from the recently acquired Bennett business	$	261.5 .5		$	172.7

Net sales increased $70.5 million, or 51.5%, to $207.4 million in the second quarter of 2005 as compared to $136.9 million in the second quarter of the prior year. The increase in sales was driven by the recent acquisition of Bennett, which contributed $44.1 million in sales for the period. The segment also experienced sales gains in its Dr. Scholl’s, LifeStride, Women’s private label, Children’s, Bass and Carlos by Carlos Santana divisions, which were partially offset by a decline in the Naturalizer division.

Net sales increased $80.3 million, or 26.0%, to $388.7 million in the first half of 2005 as compared to $308.4 million in the first half of the prior year. The increase in sales was driven by the acquisition of Bennett, which contributed $49.9 million in sales for the period. The division also experienced sales improvements in all major divisions with the exception of the Naturalizer and Bass divisions.

Gross profit increased $20.4 million, or 45.6%, to $65.0 million in the second quarter of 2005 as compared to $44.6 million in the second quarter of the prior year, driven by the increase in net sales. However, as a percentage of net sales, our gross profit rate declined to 31.3% in the second quarter from 32.6% in the second quarter of the prior year. This decline is principally due to higher allowances granted to our department store customers, primarily within our Naturalizer, LifeStride, and Carlos by Carlos Santana wholesale divisions, a greater mix of women’s private label footwear, primarily sold to mass merchants on a first cost basis, which carries a lower gross profit rate, and the negative impact of selling through the inventory acquired in the Bennett acquisition, which carried a lower gross profit rate with the write-up of inventory to fair value as required by acquisition accounting.

Gross profit increased $22.6 million, or 22.8%, to $121.5 million in the first half of 2005 as compared to $98.9 million in the first half of the prior year, driven by the increase in net sales. However, as a percentage of net sales, our gross profit rate declined to 31.3% in the first half from 32.1% in the first half of the prior year. This decline is principally due to the same factors affecting the second quarter as described in the previous paragraph.

Selling and administrative expenses increased $10.6 million, or 13.7%, to $87.7 million for the first half of 2005 as compared to $77.1 million in the first half of the prior year. A portion of the increase is due to the higher sales base. In addition, the increase is due in part to the inclusion of selling and administrative costs associated with the Bennett operations, which contributed approximately $14.8 million of expense. Partially offsetting these increases is the non-recurrence of $4.8 million of transition and assimilation costs associated with the Bass footwear line, which were incurred in the first half of 2004.

Operating earnings increased $7.3 million, or 81.4%, to $16.3 million for the second quarter of 2005 as compared to $9.0 million in the second quarter of the prior year. This improvement is due to the increase in net sales, partially offset by the higher selling and administrative expenses, as described above, and the non-recurrence of $1.5 million of transition and assimilation costs associated with the Bass footwear line, which were incurred in the second quarter of 2004.

Operating earnings increased $12.0 million, or 55.1%, to $33.8 million for the first half of 2005 as compared to $21.8 million in the first half of the prior year. This improvement is due to the increase in net sales, partially offset by the higher selling and administrative expenses, as described above, and the non-recurrence of $4.8 million of transition and assimilation costs associated with the Bass footwear line, which were incurred in the first half of 2004.

Total debt obligations have increased by $151.5 million, or 119%, to $279.0 million at July 31, 2005, as compared to $127.5 million at July 30, 2004. The increase in total debt obligations is due to the issuance of $150 million of Senior Notes to fund a portion of the Bennett acquisition, which is described in more detail below. Interest expense increased $3.1 million, or 141%, to $5.2 million in the second quarter of 2005 from $2.1 million in the second quarter of the prior year, due to the new $150 million Senior Notes.

To fund a portion of the Bennett acquisition, we issued $150 million aggregate principal amount 8.75% senior notes due 2012. The Senior Notes are guaranteed on a senior unsecured basis by each of our subsidiaries that is an obligor under our senior secured credit facility. Interest is payable on May 1 and November 1 of each year, beginning on November 1, 2005. The Senior Notes mature on May 1, 2012, but are callable any time on or after May 1, 2009, at specified redemption prices plus accrued and unpaid interest. The Senior Notes also contain certain restrictive covenants, including, among other things, restrictions on the payment of dividends, the incurrence of additional indebtedness, the guarantee or pledge of our assets, certain investments, and our ability to merge or consolidate with another entity or sell substantially all of our assets.

We have a Revolving Credit Agreement that provides for a maximum line of credit of $350 million, subject to a calculated borrowing base. Borrowing availability under the Credit Agreement is based upon the sum of eligible accounts receivable and inventory, less outstanding borrowings, letters of credit and applicable reserves. The Credit Agreement matures on July 21, 2009, and our obligations are secured by our accounts receivable and inventory. Borrowings under the Credit Agreement bear interest at a variable rate determined based upon the level of availability under the Credit Agreement. If availability falls below specified levels, we would then be subject to certain financial covenants. In addition, if availability falls below $25 million and the fixed charge coverage ratio is less than 1.0 to 1, we would be in default. The Credit Agreement also contains certain other covenants and restrictions. On March 14, 2005, we entered into the First Amendment to the Credit Agreement to permit the acquisition of Bennett and the issuance of 8.75% Senior Notes due 2012.


	Twenty-six Weeks Ended
($ millions)	July 30, 2005			July 31, 2004			Increase/ (Decrease)
Net cash provided (used) by operating activities	$	49.2		$	29.2		$	20.0
Net cash provided (used) by investing activities		(222.6	)		(19.0	)		(203.6	)
Net cash provided (used) by financing activities		131.0			5.6			125.4
Increase (decrease) in cash and cash equivalents	$	(42.4	)	$	15.8		$	(58.2	)

Working capital at July 30, 2005 was $275.9 million, which was $5.4 million lower than at January 29, 2005, and $29.6 million lower than at July 30, 2004. The decline in our working capital is attributable to a reduction in cash and cash equivalents. In connection with our acquisition of Bennett, we repatriated $60.5 million of earnings from our foreign subsidiaries and used this cash to partially fund the acquisition. Our current ratio, the relationship of current assets to current liabilities, decreased to 1.7 to 1 at July 30, 2005 from the ratio at January 29, 2005 and the July 31, 2004 ratio as a result of the Bennett acquisition.

At July 30, 2005, we had $37.0 million of cash and cash equivalents, substantially all of which represents cash and cash equivalents of our Canadian and other foreign subsidiaries. On October 22, 2004, the American Jobs Creation Act of 2004 was signed into law. The Act provides for a special tax rate for certain foreign earnings that are repatriated to the United States if certain conditions are met. In connection with the acquisition of Bennett, we repatriated $60.5 million of earnings from our foreign subsidiaries under the provisions of the Act. We anticipate that we will repatriate approximately $20 million in additional foreign earnings during 2005. We are providing tax expense at the expected 5.25% effective rate under the Act as these current period earnings are being generated. With regard to any other accumulated unremitted foreign earnings, our intention is to reinvest these earnings indefinitely or to repatriate the earnings only when it is tax-effective to do so.

This Form 10-Q contains forward-looking statements. Such statements are subject to various risks and uncertainties that could cause actual results to differ materially. These include (i) general economic conditions and the consumer's preferences and purchasing patterns, which may be influenced by consumers' disposable income; (ii) the uncertainties of currently pending litigation; (iii) intense competition within the footwear industry; (iv) political and economic conditions or other threats to continued and uninterrupted flow of inventory from Brazil and China, where the Company relies heavily on third-party manufacturing facilities for a significant amount of its inventory; (v) the integration of the Bennett business; and (vi) the Company’s ability to successfully implement its plan to strengthen the Naturalizer brand. In Item 1 of the Company's Annual Report on Form 10-K for the year ended January 29, 2005, detailed risk factors that could cause variations in results to occur are listed and further described. Such description is incorporated herein by reference.

It is the Chief Executive Officer's and Chief Financial Officer's ultimate responsibility to ensure we maintain disclosure controls and procedures designed to provide reasonable assurance that material information, both financial and non-financial, and other information required under the securities laws to be disclosed is identified and communicated to senior management on a timely basis. Our disclosure controls and procedures include mandatory communication of material events, automated accounting processing and reporting, management review of monthly, quarterly and annual results, an established system of internal controls and internal control reviews by our internal auditors.

As of July 30, 2005, management of the Company, including the Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures with respect to the information generated for use in this Quarterly Report. Based upon and as of the date of that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded our disclosure controls were effective to provide reasonable assurance that information required to be disclosed in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Commission's rules and forms.

As of July 30, 2005, we have substantially completed the transition of certain of our business and financial systems supporting our Wholesale Operations segment to new platforms. Implementation of the new systems involved changes to our procedures for control over financial reporting. The new systems have been subjected to testing and, based on that testing, appropriate controls are functioning to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. We have not experienced any significant difficulties in connection with the implementation or operation of the new systems.

On April 22, 2005, we completed the acquisition of Bennett Footwear Group, LLC. The operating results of Bennett are included in our results from April 22, 2005, to July 30, 2005. We have applied our disclosure controls and procedures to the operating results of Bennett for that period. We will continue to closely monitor and refine our internal controls over financial reporting for this division during the transition and integration period. No deficiencies have been identified at this time.

It should be noted that while our management, including the Chief Executive Officer and Chief Financial Officer, believes our disclosure controls and procedures provide a reasonable level of assurance, they do not expect that our disclosure controls and procedures or internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well conceived or operated, can provide only reasonable, not absolute, assurance the objectives of the control system are met. Further, the design of a control system must reflect the fact there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to errors or fraud may occur and not be detected.

We are involved in legal proceedings and litigation arising in the ordinary course of business. In the opinion of management, the outcome of such ordinary course of business proceedings and litigation currently pending will not have a material adverse effect on our results of operations or financial position. All legal costs associated with litigation are expensed as incurred.

Fiscal Period	Total Number of Shares Purchased		Average Price Paid per Share			Total Number of Shares Purchased as Part of Publicly Announced Program		Maximum Number of Shares that May Yet Be Purchased Under the Program (1)
May 1, 2005 - May 28, 2005	20,489	(2)	$	31.567	(2)	-	(2)		1,071,100

May 29, 2005 - July 2, 2005	7,694	(2)		38.006	(2)	-	(2)		1,071,100

July 3, 2005 - July 30, 2005	-			-		-			1,071,100

Total	28,183		$	33.325		-			1,071,100

In May 2000, the Board of Directors authorized a stock repurchase program authorizing the repurchase of up to 2 million shares of our outstanding common stock. The Company can utilize the repurchase program to repurchase shares on the open market or in private transactions from time to time, depending on market conditions. The repurchase program does not have an expiration date. Under this plan, 928,900 shares have been repurchased and the remaining availability is 1,071,100 shares as of the end of the quarter.

Represents shares that were tendered by employees related to certain share-based awards. These shares were tendered in satisfaction of the exercise price of stock options and/or to satisfy minimum tax withholding amounts for non-qualified stock options, restricted stock and stock performance awards. Accordingly, these share purchases are not considered a part of our publicly announced stock repurchase program.

(3)	(i)	Certificate of Incorporation of the Company incorporated herein by reference from Exhibit 3 (a) to the Company's Quarterly Report on Form 10-Q for the quarter ended May 4, 2002.
	(ii)	Bylaws of the Company as amended through February 5, 2004, incorporated herein by reference from Exhibit 3 (b) to the Company’s Annual Report on Form 10-K for the year ended January 31, 2004.
(31.1)		Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
(31.2)		Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
(32.1)		Certification of the Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

[X]	Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended July 30, 2005

[ ]	Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from _____________ to _____________


	Employee Severance			Lease Buyouts			Store Asset Write-off			Inventory Markdowns			Total
Original charge and reserve balance	$	1.1		$	1.0		$	0.6		$	0.2		$	2.9
Amounts settled in quarter ending July 30, 2005		(0.2	)		(0.4	)		(0.6	)		(0.2	)		(1.4	)
Reserve balance July 30, 2005	$	0.9		$	0.6		$	-		$	-		$	1.5


	July 30, 2005	July 31, 2004	January 29, 2005
Working capital ($ millions)	$275.9	$305.5	$281.3

Current ratio	1.7:1	1.9:1	1.8:1

Total debt as a percentage of total capitalization	41.2%	25.8%	26.6%

		BROWN SHOE COMPANY, INC.

Date: September 6, 2005		/s/ Andrew M. Rosen
		Senior Vice President and Chief Financial Officer on Behalf of the Registrant and as the Principal Financial Officer

($ millions)	July 30, 2005		July 31, 2004		Increase/ (Decrease)
Current maturities of long-term debt	$	79.0	$	27.5	$	51.5
Long-term debt		200.0		100.0		100.0
Total short- and long-term debt	$	279.0	$	127.5	$	151.5