BWS Form 10-Q for Three Quarter

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)	October 29, 2005			October 30, 2004			January 29, 2005
Assets
Current Assets
Cash and cash equivalents	$	48,107		$	74,793		$	79,448
Receivables		120,765			74,850			97,503
Inventories		429,147			409,961			421,450
Prepaid expenses and other current assets		24,704			15,737			24,438
Total current assets		622,723			575,341			622,839

Other assets		87,431			90,059			87,427
Goodwill and intangible assets, net		186,817			20,860			21,474

Property and equipment		355,978			332,300			339,138
Allowances for depreciation and amortization		(239,911	)		(222,196	)		(224,744	)
Total property and equipment		116,067			110,104			114,394
Total assets	$	1,013,038		$	796,364		$	846,134

Liabilities and Shareholders' Equity
Current Liabilities
Current maturities of long-term debt	$	67,500		$	43,500		$	92,000
Trade accounts payable		125,542			108,755			143,982
Accrued expenses		126,236			90,934			98,096
Income taxes		4,088			11,811			7,437
Total current liabilities		323,366			255,000			341,515

Other Liabilities
Long-term debt		200,000			100,000			50,000
Other liabilities		70,991			56,520			63,316
Total other liabilities		270,991			156,520			113,316

Shareholders' Equity
Common stock		69,112			68,229			68,406
Additional paid-in capital		64,215			62,977			62,639
Unamortized value of restricted stock		(1,964	)		(2,935	)		(2,661	)
Accumulated other comprehensive income (loss)		1,288			(607	)		(983	)
Retained earnings		286,030			257,180			263,902
Total shareholders’ equity		418,681			384,844			391,303
Total liabilities and shareholders’ equity	$	1,013,038		$	796,364		$	846,134

	(Unaudited)						(Unaudited)
	Thirteen Weeks Ended						Thirty-nine Weeks Ended
				AS RESTATED (See Note 2)						AS RESTATED (See Note 2)
($ thousands, except per share amounts)	October 29, 2005			October 30, 2004			October 29, 2005			October 30, 2004
Net sales	$	617,676		$	514,825		$	1,692,439		$	1,465,314
Cost of goods sold		378,223			306,782			1,026,734			868,661
Gross profit		239,453			208,043			665,705			596,653
Selling and administrative expenses		208,058			180,178			600,468			540,900
Operating earnings		31,395			27,865			65,237			55,753
Interest expense		(5,289	)		(1,980	)		(13,845	)		(6,600	)
Interest income		266			221			899			517
Earnings before income taxes		26,372			26,106			52,291			49,670
Income tax provision		(6,600	)		(7,540	)		(24,657	)		(14,910	)
Net earnings	$	19,772		$	18,566		$	27,634		$	34,760

Basic net earnings per common share	$	1.09		$	1.03		$	1.52		$	1.94

Diluted net earnings per common share	$	1.04		$	1.00		$	1.46		$	1.84

Dividends per common share	$	0.10		$	0.10		$	0.30		$	0.30

	(Unaudited)
	Thirty-nine Weeks Ended
				AS RESTATED (See Note 2)
($ thousands)	October 29, 2005			October 30, 2004

Operating Activities:
Net earnings	$	27,634		$	34,760
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization		29,329			22,426
Share-based compensation expense (income)		1,499			(1,480	)
Loss on disposal of facilities and equipment		755			739
Impairment charges for facilities and equipment		1,496			1,481
Provision for (recoveries from) doubtful accounts		28			(342	)
Changes in operating assets and liabilities:
Receivables		(2,609	)		7,422
Inventories		21,720			(33,751	)
Prepaid expenses and other current assets		(3,117	)		(2,410	)
Trade accounts payable and accrued expenses		959			(12,932	)
Income taxes		(3,349	)		8,851
Deferred rent		1,357			3,470
Deferred income taxes		2,363			2,088
Collection of non-current insurance receivable		3,004			950
Other, net		1,414			(1,824	)
Net cash provided by operating activities		82,483			29,448

Investing Activities:
Acquisition cost, net of cash received		(206,026	)		-
Capital expenditures		(26,514	)		(30,343	)
Other		531			153
Net cash used for investing activities		(232,009	)		(30,190	)

Financing Activities:
(Decrease) increase in current maturities of long-term debt		(24,500	)		24,000
Proceeds from issuance of senior notes		150,000			-
Debt issuance costs		(4,733	)		(1,274	)
Proceeds from stock options exercised		2,061			1,687
Tax benefit related to share-based plans		864			913
Dividends paid		(5,507	)		(5,448	)
Net cash provided by financing activities		118,185			19,878
(Decrease) increase in cash and cash equivalents		(31,341	)		19,136
Cash and cash equivalents at beginning of period		79,448			55,657
Cash and cash equivalents at end of period	$	48,107		$	74,793

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 third quarter and the first nine months 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 $416,000 and $723,000, and the Company’s net earnings were reduced by $254,000 and $441,000, respectively, for the thirteen weeks and thirty-nine weeks ended October 30, 2004. The restatement had the effect of reducing basic and diluted net earnings per common share by $0.02 and $0.01 for the thirteen weeks ended October 30, 2004, respectively, and $0.03 for the thirty-nine weeks ended October 30, 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 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 $206.4 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 $70.1 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 recorded a severance liability of $0.6 million in the preliminary allocation of purchase price. The Company funded approximately $0.1 million of this liability through October 29, 2005. The Company anticipates that the remaining severance liability will be funded during the fourth quarter of 2005.

The unaudited pro forma results shown above reflect the assumption that, on January 30, 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				Thirty-nine Weeks Ended
(in thousands, except per share data)	October 29, 2005		October 30, 2004		October 29, 2005		October 30, 2004

NUMERATOR
Net earnings	$	19,772	$	18,566	$	27,634	$	34,760

DENOMINATOR
Denominator for basic earnings per common share		18,214		17,943		18,145		17,902
Dilutive effect of unvested restricted stock and stock options		740		706		783		950
Denominator for diluted earnings per common share		18,954		18,649		18,928		18,852

Basic earnings per common share	$	1.09	$	1.03	$	1.52	$	1.94


Diluted earnings per common share	$	1.04	$	1.00	$	1.46	$	1.84


	Thirteen Weeks Ended						Thirty-nine Weeks Ended
($ Thousands)	October 29, 2005			October 30, 2004			October 29, 2005			October 30, 2004
Net earnings	$	19,772		$	18,566		$	27,634		$	34,760

Other comprehensive income (loss), net of tax:
Foreign currency translation adjustment		1,682			3,580			2,286			3,488
Unrealized losses on derivative instruments		(498	)		(631	)		(1,218	)		(743	)
Net loss from derivatives reclassified into earnings		337			418			1,203			1,582
		1,521			3,367			2,271			4,327
Comprehensive income	$	21,293		$	21,933		$	29,905		$	39,087

During the second quarter of 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, consolidate all retail accounting and information systems support and streamline certain Naturalizer Wholesale operations, including the sales, marketing and product development areas. During the third quarter, the Company increased the number of expected store closings under this initiative to 97, 73 in the United States and 24 in Canada. In connection with the restructuring, the Company expects to incur total pre-tax costs in the range of $14 million to $16 million, substantially all of which is expected to be incurred in fiscal 2005. The Company recorded a pre-tax charge of $2.9 million in the second quarter of 2005 and a pre-tax charge of $5.2 in the third quarter of 2005, the components of which are as follows:

Of the $2.9 million charge recorded in the second quarter, $2.3 million was reflected in the Specialty Retail segment and $0.6 million was reflected in the Wholesale Operations segment. Of this charge, $0.2 million was reflected in cost of goods sold and $2.7 million was reflected in selling and administrative expenses. A tax benefit of $1.1 million was associated with this charge.


	Employee Severance			Lease Buyouts			Fixed 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	)
Additional charge in quarter ending October 29, 2005		0.4			2.6			1.3			0.9			5.2
Amounts settled in quarter ending October 29, 2005		(0.7	)		(2.5	)		(1.3	)		(0.9	)		(5.4	)
Reserve balance October 29, 2005	$	0.6		$	0.7		$	-		$	-		$	1.3


($ thousands)	Famous Footwear		Wholesale Operations		Specialty Retail			Other			Totals

Thirteen Weeks Ended October 29, 2005

External sales	$	328,059	$	226,480	$	63,137		$	-		$	617,676
Intersegment sales		582		42,199		-			-			42,781
Operating earnings (loss)		26,178		19,201		(6,993	)		(6,991	)		31,395
Operating segment assets		398,975		424,291		80,399			109,373			1,013,038

Thirteen Weeks Ended October 30, 2004

External sales	$	311,685	$	148,696	$	54,444		$	-		$	514,825
Intersegment sales		414		46,673		-			-			47,087
Operating earnings (loss)		24,386		10,375		(1,644	)		(5,252	)		27,865
Operating segment assets		379,303		188,372		86,999			141,690			796,364


Thirty-nine Weeks Ended October 29, 2005

External sales	$	903,040	$	615,147	$	174,252		$	-		$	1,692,439
Intersegment sales		1,436		121,250		-			-			122,686
Operating earnings (loss)		51,988		52,967		(15,973	)		(23,745	)		65,237

Thirty-nine Weeks Ended October 30, 2004

External sales	$	853,620	$	457,125	$	154,569		$	-		$	1,465,314
Intersegment sales		1,054		121,606		-			-			122,660
Operating earnings (loss)		49,096		32,144		(6,541	)		(18,946	)		55,753

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 $8.7 million and $4.5 million in the thirteen weeks ended October 29, 2005 and October 30, 2004, respectively, and resulted in a transfer of operating earnings of $0.5 million and an operating loss of $0.2 million in the thirteen weeks ended October 29, 2005 and October 30, 2004, respectively, to the Specialty Retail segment. This reclassification resulted in a transfer of sales of $22.0 million and $11.1 million and a transfer of operating earnings of $0.2 million and an operating loss of $0.3 million in the thirty-nine weeks ended October 29, 2005 and October 30, 2004, respectively, to the Specialty Retail segment. This reclassification also resulted in a transfer of operating segment assets of $11.5 million and $7.2 million at October 29, 2005 and October 30, 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 $70.1 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 October 30, 2004 to October 29, 2005, of $0.7 million reflects the adjustment to the Company’s minimum pension liability recorded in the fourth quarter of 2004.

As of October 29, 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						Thirty-nine Weeks Ended
($ thousands, except per share amounts)	October 29, 2005			October 30, 2004			October 29, 2005			October 30, 2004
Net earnings, as reported	$	19,772		$	18,566		$	27,634		$	34,760
Add: Total share-based employee compensation expense (income) included in reported net earnings, net of related tax effect		218			(1,425	)		944			(962	)
Deduct: Total share-based employee compensation expense determined under the fair value based method for all awards, net of related tax effect		(934	)		618			(3,756	)		(1,396	)
Pro forma net earnings	$	19,056		$	17,759		$	24,822		$	32,402
Earnings per share:
Basic - as reported	$	1.09		$	1.03		$	1.52		$	1.94
Basic - pro forma		1.05			0.99			1.37			1.81
Diluted - as reported		1.04			1.00			1.46			1.84
Diluted - pro forma		1.01			0.95			1.31			1.72

In 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. The Company anticipates that the adoption of SFAS No. 123(R) will result in additional expense of $5.7 million ($5.0 million on an after-tax basis, or $0.26 per diluted share) to expense stock options during fiscal 2006.


	Pension Benefits						Other Postretirement Benefits
	Thirteen Weeks Ended						Thirteen Weeks Ended
($ thousands)	October 29, 2005			October 30, 2004			October 29, 2005			October 30, 2004
Service cost	$	1,656		$	1,543		$	-		$	-
Interest cost		2,277			2,169			65			65
Expected return on assets		(3,947	)		(3,831	)		-			-
Curtailment loss		18			-			-			-
Settlement loss		71			-			-			-
Amortization of:
Actuarial loss (gain)		111			104			(15	)		(35	)
Prior service costs		100			78			-			-
Net transition assets		(48	)		-			-			-
Total net periodic benefit cost	$	238		$	63		$	50		$	30


	Pension Benefits						Other Postretirement Benefits
	Thirty-nine Weeks Ended						Thirty-nine Weeks Ended
($ thousands)	October 29, 2005			October 30, 2004			October 29, 2005			October 30, 2004

Service cost	$	4,844		$	4,625		$	-		$	-
Interest cost		6,844			6,500			195			195
Expected return on assets		(11,817	)		(11,481	)		-			-
Curtailment loss		18			-			-			-
Settlement loss		71			-			-			-
Amortization of:
Actuarial loss (gain)		371			263			(45	)		(105	)
Prior service costs		300			234			-			-
Net transition assets		(140	)		(85	)		-			-
Total net periodic benefit cost	$	491		$	56		$	150		$	90

The Company anticipates that it will repatriate additional foreign earnings of approximately $30 - $32 million during the fourth quarter of 2005 to be utilized under the provisions of the American Jobs Creation Act of 2004 (Act). The Company is providing tax expense at the expected 5.25% effective rate in accordance with the Act as the current period earnings are generated. Depending upon the ultimate amount repatriated in the fourth quarter, the Company may recognize additional tax expense of up to $0.8 million during the fourth quarter of 2005, related to such repatriation.

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 in 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 nine months of 2005, the Company recorded $0.5 million of expense related to this remediation. The anticipated future cost of remediation activities at October 29, 2005 is $5.3 million and is included within accrued expenses and other noncurrent liabilities, but the ultimate cost may vary. The cumulative costs incurred through October 29, 2005 are $16.3 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 October 29, 2005, recorded recoveries totaled $0.3 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 October 29, 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 in aggregate 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 $7.9 million as of October 29, 2005, for the cleanup, maintenance and monitoring at all sites. Of the $7.9 million liability, $1.7 million is included in accrued expenses, and $6.2 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 has made payments under this guarantee of $0.8 million during the first three quarters of 2005 and has an accrued liability of $2.7 million at October 29, 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 $6.8 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 Parent 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	$	(1,014	)	$	13,125	$	35,996		$	-		$	48,107
Receivables		55,348			37,315		28,577			(475	)		120,765
Inventories		55,656			367,461		10,160			(4,130	)		429,147
Other current assets		5,002			17,518		882			1,302			24,704
Total current assets		114,992			435,419		75,615			(3,303	)		622,723
Other assets		75,177			197,108		1,963			-			274,248
Property and equipment, net		14,655			97,952		3,460			-			116,067
Investment in subsidiaries		453,223			47,891		-			(501,114	)		-
Total assets	$	658,047		$	778,370	$	81,038		$	(504,417	)	$	1,013,038

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities
Current maturities of long-term debt	$	67,500		$	-	$	475		$	(475	)	$	67,500
Trade accounts payable		11,148			86,724		27,670			-			125,542
Accrued expenses		59,296			58,494		5,775			2,671			126,236
Income taxes		(2,777	)		5,271		2,985			(1,391	)		4,088
Total current liabilities		135,167			150,489		36,905			805			323,366
Other Liabilities
Long-term debt		200,000			-		-			-			200,000
Other liabilities		35,070			35,952		(31	)		-			70,991
Intercompany (receivable) payable		(130,871	)		135,628		(649	)		(4,108	)		-
Total other liabilities		104,199			171,580		(680	)		(4,108	)		270,991
Shareholders’ equity		418,681			456,301		44,813			(501,114	)		418,681
Total liabilities and shareholders’ equity	$	658,047		$	778,370	$	81,038		$	(504,417	)	$	1,013,038

($ thousands)	Parent			Guarantors			Non-Guarantors			Eliminations			Total
Net Sales	$	400,665		$	1,182,862		$	238,126		$	(129,214	)	$	1,692,439
Cost of goods sold		295,060			669,250			191,638			(129,214	)		1,026,734
Gross profit		105,605			513,612			46,488			-			665,705
Selling and administrative expenses		98,857			476,383			25,228			-			600,468
Equity in (earnings) of subsidiaries		(39,160	)		(19,428	)		-			58,588			-
Operating earnings		45,908			56,657			21,260			(58,588	)		65,237
Interest expense		(13,809	)		-			(36	)		-			(13,845	)
Interest income		15			89			795			-			899
Intercompany interest income (expense)		4,041			(4,945	)		904			-			-
Earnings before income taxes		36,155			51,801			22,923			(58,588	)		52,291
Income tax provision		(8,521	)		(13,233	)		(2,903	)		-			(24,657	)
Net earnings (loss)	$	27,634		$	38,568		$	20,020		$	(58,588	)	$	27,634

($ thousands)	Parent			Guarantors			Non-Guarantors			Eliminations			Total
Net cash provided by operating activities	$	30,597		$	34,499		$	17,159		$	228		$	82,483

Investing activities
Acquisition cost, net of cash received		-			(206,026	)		-			-			(206,026	)
Capital expenditures		(1,444	)		(24,690	)		(380	)		-			(26,514	)
Other		531			-			-			-			531
Net cash used by investing activities		(913	)		(230,716	)		(380	)		-			(232,009	)

Financing activities
(Decrease) increase in current maturities of long-term debt		(24,500	)		-			(300	)		300			(24,500	)
Proceeds from issuance of Senior Notes		150,000			-			-			-			150,000
Debt issuance costs		(4,733	)		-			-			-			(4,733	)
Proceeds from stock options exercised		2,061			-			-			-			2,061
Tax benefit related to share-based plans		864			-			-			-			864
Dividends (paid) received		(5,507	)		60,464			(60,464	)		-			(5,507	)
Intercompany financing		(145,226	)		138,973			6,781			(528	)		-
Net cash (used) provided by financing activities		(27,041	)		199,437			(53,983	)		(228	)		118,185

Increase (decrease) in cash and cash equivalents		2,643			3,220			(37,204	)		-			(31,341	)
Cash and cash equivalents at beginning of period		(3,657	)		9,905			73,200			-			79,448
Cash and cash equivalents at end of period	$	(1,014	)	$	13,125		$	35,996		$	-		$	48,107

($ thousands)	Parent			Guarantors		Non-Guarantors			Eliminations			Total
ASSETS
Current Assets
Cash and cash equivalents	$	226		$	5,190	$	69,377		$	-		$	74,793
Receivables		56,085			6,332		13,183			(750	)		74,850
Inventories		71,946			339,855		5,128			(6,968	)		409,961
Other current assets		1,864			10,455		1,070			2,348			15,737
Total current assets		130,121			361,832		88,758			(5,370	)		575,341
Other assets		72,972			35,813		2,134			-			110,919
Property and equipment, net		15,017			91,358		3,729			-			110,104
Investment in subsidiaries		401,439			83,019		-			(484,458	)		-
Total assets	$	619,549		$	572,022	$	94,621		$	(489,828	)	$	796,364

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities
Current maturities of long-term debt	$	43,500		$	-	$	750		$	(750	)	$	43,500
Trade accounts payable		13,385			80,902		14,468			-			108,755
Accrued expenses		45,197			43,655		4,494			(2,412	)		90,934
Income taxes		7,446			532		2,033			1,800			11,811
Total current liabilities		109,528			125,089		21,745			(1,362	)		255,000
Other Liabilities
Long-term debt		100,000			-		-			-			100,000
Other liabilities		28,786			27,675		59			-			56,520
Intercompany payable (receivable)		(3,609	)		14,056		(6,436	)		(4,011	)		-
Total other liabilities		125,177			41,731		(6,377	)		(4,011	)		156,520
Shareholders’ equity		384,844			405,202		79,253			(484,455	)		384,844
Total liabilities and shareholders’ equity	$	619,549		$	572,022	$	94,621		$	(489,828	)	$	796,364

($ thousands)	Parent			Guarantors			Non-Guarantors			Eliminations			Total
Net Sales	$	396,647		$	1,021,233		$	195,070		$	(147,636	)	$	1,465,314
Cost of goods sold		294,827			554,885			164,781			(145,832	)		868,661
Gross profit		101,820			466,348			30,289			(1,804	)		596,653
Selling and administrative expenses		98,699			429,168			14,837			(1,804	)		540,900
Equity in (earnings) of subsidiaries		(34,735	)		(15,096	)		-			49,831			-
Operating earnings		37,856			52,276			15,452			(49,831	)		55,753
Interest expense		(6,562	)		(2	)		(36	)		-			(6,600	)
Interest income		7			54			456			-			517
Intercompany interest income (expense)		4,806			(5,348	)		542			-			-
Earnings before income taxes		36,107			46,980			16,414			(49,831	)		49,670
Income tax provision		(1,347	)		(12,430	)		(1,133	)		-			(14,910	)
Net earnings (loss)	$	34,760		$	34,550			15,281		$	(49,831	)	$	34,760

($ thousands)	Parent			Guarantors			Non-Guarantors			Eliminations			Total
Net cash (used) provided by operating activities	$	(18,534	)	$	31,359		$	15,304		$	1,319		$	29,448

Investing activities
Capital expenditures		(2,505	)		(26,154	)		(1,684	)		-			(30,343	)
Other		153			-			-			-			153
Net cash used by investing activities		(2,352	)		(26,154	)		(1,684	)		-			(30,190	)

Financing activities
Increase in current maturities of long-term debt		24,000			-			(250	)		250			24,000
Debt issuance costs		(1,274	)		-			-			-			(1,274	)
Proceeds from stock options exercised		1,687			-			-			-			1,687
Tax benefit related to share based plans		913			-			-			-			913
Dividends paid		(5,448	)		-			-			-			(5,448	)
Intercompany financing		4,772			(6,380	)		3,177			(1,569	)		-
Net cash provided (used) by financing activities		24,650			(6,380	)		2,927			(1,319	)		19,878

Increase (decrease) in cash and cash equivalents		3,764			(1,175	)		16,547			-			19,136
Cash and cash equivalents at beginning of period		(3,538	)		6,365			52,830			-			55,657
Cash and cash equivalents at end of period	$	226		$	5,190		$	69,377		$	-		$	74,793

Overall, we are pleased with the results of our third quarter as we moved forward with the transition and integration of the Bennett business, acquired in April 2005. We also made solid progress on our initiatives to strengthen our Naturalizer brand by, among other things, closing underperforming stores, and registered solid sales gains in our Famous Footwear and Wholesale businesses. Net earnings for the quarter were ahead of last year’s levels despite the impact of the store closing program.

Consolidated net sales rose 20.0% to $617.7 million for the third quarter of fiscal 2005, as compared to $514.8 million for the third quarter of the prior year. Of the sales increase, $66.8 million was attributable to the recently acquired Bennett business. Operating earnings increased 12.7% to $31.4 million in the third quarter of 2005 compared to $27.9 million in the third quarter of 2004. Net earnings were $19.8 million, or $1.04 per diluted share, for the third quarter compared to $18.6 million, or $1.00 per diluted share, for the third quarter of last year. Our net earnings for the third quarter were negatively impacted by charges of $5.2 million ($3.2 million on an after-tax basis, or $0.17 per diluted share) related to our initiative to strengthen our flagship Naturalizer brand by closing underperforming retail stores and consolidating and streamlining certain retail and wholesale functions.

Famous Footwear’s net sales increased 5.3% to $328.1 million in the third quarter compared to $311.7 million last year. Same-store sales increased 2.1%. Famous Footwear benefited from improvement in sales of women’s fashion footwear and men’s and children’s footwear during the quarter. Sales of athletic footwear improved from trends experienced earlier in the year. Operating earnings increased to $26.2 million in the third quarter compared to $24.4 million in the third quarter of the prior year. The improvement in operating earnings was due to the leveraging of higher sales across the expense base.

Our Wholesale Operations segment’s sales increased 52.3% to $226.5 million in the third quarter reflecting the additional sales from the acquired Bennett business of $65.1 million and increased sales in most of the division’s brands. As a result, operating earnings increased in the third quarter to $19.2 million compared to $10.4 million in the third quarter last year. The Bennett division contributed $5.8 million in operating earnings during the quarter.

Our Specialty Retail segment experienced a 16.0% increase in net sales to $63.1 million in the third quarter, compared to $54.4 million in the third quarter of the prior year, primarily due to significant growth in our Shoes.com business and a same-store sales increase of 2.5% for the quarter. We incurred an operating loss of $7.0 million in the third quarter compared to an operating loss of $1.6 million in the third quarter of the prior year. The higher loss was driven by charges of $5.2 million related to our initiative to close underperforming stores.

Inventories at quarter-end were $429.1 million, up from $410.0 million last year. The current year increase reflects Bennett inventory of $25.5 million and additional stores and square footage at Famous Footwear, partially offset by lower inventory levels within our Wholesale Operations segment. Our current ratio, the relationship of current assets to current liabilities, increased slightly to 1.9 to 1 compared to 1.8 to 1 at January 29, 2005, and declined from the October 30, 2004 ratio of 2.3 to 1. Our debt-to-capital ratio, the ratio of our debt obligations to the sum of our debt obligations and shareholders’ equity increased to 39.0% at the end of the quarter from 27.2% 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. However, our debt-to-capital ratio has decreased from 41.2% at the end of the second quarter of fiscal 2005 as a result of our financial results and cash flows during the third quarter.

	Thirteen Weeks Ended								Thirty-nine Weeks Ended
					AS RESTATED								AS RESTATED
	October 29, 2005				October 30, 2004				October 29, 2005				October 30, 2004
($ millions)				% of Net Sales				% of Net Sales				% of Net Sales				% of Net Sales
Net sales	$	617.7		100.0%	$	514.8		100.0%	$	1,692.4		100.0%	$	1,465.3		100.0%
Cost of goods sold		378.2		61.2%		306.8		59.6%		1,026.7		60.7%		868.6		59.3%
Gross profit		239.5		38.8%		208.0		40.4%		665.7		39.3%		596.7		40.7%
Selling and administrative expenses		208.1		33.7%		180.1		35.0%		600.5		35.4%		540.9		36.9%
Operating earnings		31.4		5.1%		27.9		5.4%		65.2		3.9%		55.8		3.8%
Interest expense		(5.3	)	(0.9)%		(2.0	)	(0.3)%		(13.8	)	(0.9)%		(6.6	)	(0.4)%
Interest income		0.3		0.1%		0.2		0.0%		0.9		0.1%		0.5		0.0%
Earnings before income taxes		26.4		4.3%		26.1		5.1%		52.3		3.1%		49.7		3.4%
Income tax provision		(6.6	)	(1.1)%		(7.5	)	(1.5)%		(24.7	)	(1.5)%		(14.9	)	(1.0)%
Net earnings	$	19.8		3.2%	$	18.6		3.6%	$	27.6		1.6%	$	34.8		2.4%

Net sales increased $102.9 million, or 20.0%, to $617.7 million in the third quarter of 2005 as compared to $514.8 million in the third quarter of the prior year. The acquisition of Bennett contributed $66.8 million in sales during the quarter, accounting for approximately two thirds of the increase. Famous Footwear improved its sales by $16.4 million over the year-ago quarter, reflecting a same-store sales gain of 2.1% and additional stores in the current period. In addition, our Wholesale Operations, excluding Bennett, increased $12.6 million, led by improved sales of women’s private label, Carlos by Carlos Santana, Children’s and Dr. Scholl’s product.

Net sales increased $227.1 million, or 15.5%, to $1,692.4 million in the first nine months of 2005 as compared to $1,465.3 million in the first nine months of the prior year. This increase is attributable to an increase of $49.4 million at Famous Footwear, reflecting a same-store sales gain of 1.9% and additional stores, sales from the recently acquired Bennett business, which contributed $118.3 million in sales in 2005, and a sales improvement of $42.9 million in our Wholesale Operations, excluding Bennett, reflecting higher sales in most divisions.

Gross profit increased $31.5 million, or 15.1%, to $239.5 million for the third quarter of 2005 as compared to $208.0 million in the third 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 38.8% in the third quarter from 40.4% in the third quarter of the prior year primarily due to a heavier mix of Wholesale sales, which carry a lower margin than our Retail operations. Markdowns incurred related to the closing of Naturalizer stores also contributed to the decline in the gross profit rate.

Gross profit increased $69.0 million, or 11.6%, to $665.7 million for the first nine months of 2005 as compared to $596.7 million in the first nine months of the prior year, as a result of the higher sales base and the addition of the Bennett business. As a percent of net sales, our gross profit rate decreased to 39.3% in the first nine months from 40.7% in the first nine months of the prior year. This reduction was due to the same factors described in the preceding paragraph. In addition, the Company experienced lower margins on inventory acquired in the Bennett acquisition as a result of the fair value purchase price allocation.

Selling and administrative expenses increased $28.0 million, or 15.5%, to $208.1 million for the third quarter as compared to $180.1 million in the third quarter of the prior year. The increase is due, in part, to the inclusion of Bennett selling and administrative expenses, which accounted for nearly 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 third quarter of 2005, we recognized restructuring charges of $4.3 million related to our initiative to close underperforming Naturalizer retail stores and consolidate and streamline certain retail and wholesale functions. As a percentage of sales, selling and administrative expenses have decreased to 33.7% from 35.0%, as we have better leveraged our expense base.

Selling and administrative expenses increased $59.6 million, or 11.0%, to $600.5 million for the first nine months of 2005 as compared to $540.9 million in the first nine months of the prior year. This increase in selling and administrative expenses was due to the factors described in the preceding paragraph. In addition, the increase was 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 35.4% from 36.9%, reflecting a better leveraged expense base.

Interest expense increased $7.2 million to $13.8 million in the first nine months of 2005 as compared to $6.6 million in the first nine months of the prior year. The increase in interest expense is a result of the additional interest expense from the senior notes described above and a charge of $1.0 million for bank commitment fees incurred in the first quarter of 2005 in connection with funding the acquisition of Bennett.

For the first nine months of 2005, our consolidated effective income tax rate was 47.2% as compared to 30.0% for the first nine months of the prior year, reflecting the $9.6 million of incremental tax expense recorded in the first quarter of 2005 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 nine months of 2005 was 28.9% compared to 30.0% in the first nine months of last year. This decrease reflects the higher mix of foreign income, which is taxed at lower rates.

Net earnings increased $1.2 million, or 6.5%, to $19.8 million in the third quarter as compared to $18.6 million in the third quarter of the prior year. The increase in net earnings reflects the accretion from the Bennett business and sales gains within our Famous Footwear and Wholesale Operations. After consideration of the additional interest costs related to the acquisition and other acquisition related charges, the Bennett business contributed $3.0 million, or $0.16 per diluted share, to net earnings. Net earnings includes aftertax charges of $3.2 million, or $0.17 per diluted share, related to our initiative to strengthen our flagship Naturalizer brand by closing underperforming retail stores and consolidating and streamlining certain retail and wholesale functions.

Net earnings decreased $7.2 million, or 20.5%, to $27.6 million in the first nine months of 2005 as compared to $34.8 million in the first nine months of the prior year, as a result of the Naturalizer restructuring charges of $5.0 million, or $0.26 per diluted share, and acquisition related charges. The Company recognized lower margins on inventory acquired in the Bennett acquisition as a result of the fair value purchase price allocation. 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						Thirty-nine Weeks Ended
				AS RESTATED						AS RESTATED
	October 29, 2005			October 30, 2004			October 29, 2005			October 30, 2004
($ millions, except sales per square foot)			% of Net Sales			% of Net Sales			% of Net Sales			% of Net Sales
Operating Results
Net sales	$	328.1	100.0%	$	311.7	100.0%	$	903.0	100.0%	$	853.6	100.0%
Cost of goods sold		183.6	56.0%		174.6	56.0%		503.6	55.8%		473.7	55.5%
Gross profit		144.5	44.0%		137.1	44.0%		399.4	44.2%		379.9	44.5%
Selling and administrative expenses		118.3	36.1%		112.7	36.2%		347.4	38.5%		330.8	38.7%
Operating earnings	$	26.2	7.9%	$	24.4	7.8%	$	52.0	5.7%	$	49.1	5.8%

Key Metrics
Same-store sales % change		2.1%			(0.4)%			1.9%			(0.2)%
Same-store sales $ change	$	6.1		$	(1.2)		$	15.7		$	(1.3)
Sales change from new and closed stores, net	$	10.3		$	11.3		$	33.7		$	23.3

Sales per square foot	$	50		$	49		$	138		$	135
Square footage (thousand sq. ft.)		6,603			6,394			6,603			6,394

Stores opened		23			16			58			54
Stores closed		13			17			34			33
Ending stores		943			914			943			914

Net sales increased $16.4 million, or 5.3%, to $328.1 million in the third quarter of 2005 as compared to $311.7 million in the third quarter of the prior year. This increase is attributable to higher sales from new stores and the same-store sales increase of 2.1%. The division experienced improvements in sales of women’s fashion footwear as well as men’s and children’s. Athletic sales have also improved compared to trends experienced earlier in the year. During the third quarter of 2005, we opened 23 new stores and closed 13, resulting in 943 stores at the end of the third quarter as compared to 914 at the end of the third quarter of the prior year. Sales per square foot were $50, as compared to $49 a year ago.

Net sales increased $49.4 million, or 5.8%, to $903.0 million in the first nine months of 2005 as compared to $853.6 million in the first nine months of the prior year. This increase is attributable to higher sales from new stores and the same-store sales increase of 1.9%. During the first nine months of 2005, we opened 58 new stores and closed 34. Sales per square foot were $138, compared to $135 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 $19.5 million, or 5.1%, to $399.4 million in the first nine months of 2005 as compared to $379.9 million in the first nine months 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 44.2% in the first nine months of 2005 from 44.5% in the first nine months 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 $5.6 million, or 5.0%, to $118.3 million for the third quarter of 2005 as compared to $112.7 million in the third 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 have dropped to 36.1% from 36.2% last year, as the division leveraged its expense base over higher net sales.

Selling and administrative expenses increased $16.6 million, or 5.0%, to $347.4 million for the first nine months of 2005 as compared to $330.8 million in the first nine months 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 38.5% from 38.7% last year, as the division leveraged its expense base over higher net sales.

	Thirteen Weeks Ended						Thirty-nine Weeks Ended
	October 29, 2005			October 30, 2004			October 29, 2005			October 30, 2004
($ millions)			% of Net Sales			% of Net Sales			% of Net Sales			% of Net Sales
Operating Results
Net sales	$	226.5	100.0%	$	148.7	100.0%	$	615.1	100.0%	$	457.1	100.0%
Cost of goods sold		159.3	70.3%		103.9	69.9%		426.4	69.3%		313.4	68.6%
Gross profit		67.2	29.7%		44.8	30.1%		188.7	30.7%		143.7	31.4%
Selling and administrative expenses		48.0	21.2%		34.4	23.1%		135.7	22.1%		111.6	24.4%
Operating earnings	$	19.2	8.5%	$	10.4	7.0%	$	53.0	8.6%	$	32.1	7.0%

Key Metrics
Unfilled order position at end of period, including $78.0 million at October 29, 2005 from the recently acquired Bennett business	$	298.5		$	197.8

Net sales increased $158.0 million, or 34.6%, to $615.1 million in the first nine months of 2005 as compared to $457.1 million in the first nine months of the prior year. The increase in sales was driven by the acquisition of Bennett, which contributed $115.1 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 $45.0 million, or 31.3%, to $188.7 million in the first nine months of 2005 as compared to $143.7 million in the first nine months of the prior year, driven by the increase in net sales. As a percentage of net sales, our gross profit rate declined to 30.7% in the first nine months from 31.4% in the first nine months of the prior year. This decline is principally due to 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.

Selling and administrative expenses increased $24.1 million, or 21.6%, to $135.7 million for the first nine months of 2005 as compared to $111.6 million in the first nine months 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 $26.9 million of selling and administrative costs and intangible amortization associated with the Bennett operations. Partially offsetting these increases is the non-recurrence of $5.1 million of transition and assimilation costs associated with the Bass footwear line, which were incurred in the first three quarters of 2004.

Operating earnings increased $20.9 million, or 64.8%, to $53.0 million for the first nine months of 2005 as compared to $32.1 million in the first nine months of the prior year. This improvement is due to the increase in net sales and the addition of the Bennett business, partially offset by the higher selling and administrative expenses, as described above, and the non-recurrence of $5.1 million of transition and assimilation costs associated with the Bass footwear line, which were incurred in the first half of 2004.

	Thirteen Weeks Ended								Thirty-nine Weeks Ended
					AS RESTATED							AS RESTATED
	October 29, 2005				October 30, 2004				October 29, 2005			October 30, 2004
($ millions, except for sales per square foot)				% of Net Sales				% of Net Sales			% of Net Sales				% of Net Sales
Operating Results
Net sales	$	63.1		100.0%	$	54.4		100.0%	$	174.3	100.0%	$	154.6		100.0%
Cost of goods sold		35.3		55.9%		28.3		52.0%		96.6	55.4%		81.5		52.7%
Gross profit		27.8		44.1%		26.1		48.0%		77.7	44.6%		73.1		47.3%
Selling and administrative expenses		34.8		55.2%		27.7		51.0%		93.7	53.8%		79.6		51.5%
Operating loss	$	(7.0	)	(11.1)%	$	(1.6	)	(3.0)%	$	(16.0)	(9.2)%	$	(6.5	)	(4.2)%

Key Metrics
Same-store sales % change		2.5%				(2.8)%				1.0%			(1.6)%
Same-store sales $ change	$	1.2			$	(1.4	)		$	1.3		$	(2.3	)
Sales change from new and closed stores, net	$	2.0			$	0.5			$	3.3		$	0.8
Impact of changes in Canadian exchange rate on sales	$	1.3			$	1.0			$	4.2		$	2.7
Increase in sales of e-commerce subsidiary	$	4.2			$	2.5			$	10.9		$	5.7

Sales per square foot, excluding e-commerce subsidiary	$	83			$	81			$	244		$	236
Square footage (thousand sq. ft.)		636				586				636			586

Stores acquired upon Bennett acquisition		-				-				12			-
Stores opened		32				4				37			13
Stores transferred, net		-				-				-			4
Stores closed		20				3				43			14
Ending stores		381				381				381			381

Net sales increased $8.7 million, or 16.0%, to $63.1 million in the third quarter of 2005 as compared to $54.4 million in the third quarter of the prior year. Same-store sales increased 2.5%. The favorable impact of the Canadian exchange rate improved net sales by $1.3 million. Sales at our e-commerce subsidiary, Shoes.com, Inc., increased $4.2 million, or 91.3% to $8.7 million from $4.5 million in last year’s third quarter. The recently acquired Via Spiga stores contributed $1.6 million in net sales. We opened 32 new stores (primarily in outlet malls) and closed 20 resulting in 381 stores at the end of the third quarter of 2005 equal to the third quarter of the prior year. Sales per square foot increased to $83 from $81 in the year ago period.

Net sales increased $19.7 million, or 12.7%, to $174.3 million in the first nine months of 2005 as compared to $154.6 million in the first nine months of the prior year. Same-store sales increased 1.0%. The favorable impact of the Canadian exchange rate improved net sales by $4.2 million. Sales of our e-commerce subsidiary, Shoes.com, Inc., increased $10.9 million, or 99.0% to $22.0 million from $11.1 million. Sales per square foot increased to $244 from $236 in the year ago period.

Gross profit increased $1.7 million, or 6.6%, to $27.8 million in the third quarter of 2005 as compared to $26.1 million in the third 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 44.1% in the third quarter from 48.0% in the year ago quarter. This decline was driven by higher markdowns recorded in connection with our initiative to close underperforming Naturalizer stores and a relative increase in the portion of e-commerce sales, which carry a lower gross profit rate.

Gross profit increased $4.6 million, or 6.3%, to $77.7 million in the first nine months of 2005 as compared to $73.1 million in the first nine months 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 44.6% in the first nine months from 47.3% in the first nine months of the prior year. This margin decline was driven by higher markdowns recorded to clear seasonal inventory in our stores and in connection with our initiative to close underperforming Naturalizer stores and a relative increase in the portion of e-commerce sales, which carry a lower gross profit rate.

Selling and administrative expenses increased $7.1 million, or 25.5%, to $34.8 million for the third quarter of 2005 as compared to $27.7 million in the third quarter of the prior year. In connection with our Naturalizer restructuring and store closing initiative, we recorded charges of $4.3 million in the third quarter. The remainder of the increase is attributable to new stores, changes in the Canadian exchange rate and higher costs at our Shoes.com business.

Selling and administrative expenses increased $14.1 million, or 17.6%, to $93.7 million for the first nine months of 2005 as compared to $79.6 million in the first nine months of the prior year. We recorded charges of $6.4 million in the second and third quarters in connection with our Naturalizer restructuring and store closing initiative. The balance of the increase reflects growth in stores and our Shoes.com business.

Total debt obligations have increased by $124.0 million, or 86.4%, to $267.5 million at October 29, 2005, as compared to $143.5 million at October 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 $3.3 million, or 167.1%, to $5.3 million in the third quarter of 2005 from $2.0 million in the third 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 in 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.


	Thirty-nine Weeks Ended
($ millions)	October 29, 2005			October 30, 2004			Increase/ (Decrease)
Net cash provided (used) by operating activities	$	82.5		$	29.4		$	53.1
Net cash provided (used) by investing activities		(232.0	)		(30.2	)		(201.8	)
Net cash provided (used) by financing activities		118.2			19.9			98.3
Increase (decrease) in cash and cash equivalents	$	(31.3	)	$	19.1		$	(50.4	)

Working capital at October 29, 2005 was $299.4 million, which was $18.1 million higher than at January 29, 2005, and $20.9 million lower than at October 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, increased slightly to 1.9 to 1 at October 29, 2005 from the ratio at January 29, 2005 due to the seasonality of the business. The current ratio of 1.9 to 1 is lower than October 30, 2004, due primarily to the Bennett acquisition.

At October 29, 2005, we had $48.1 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 additional foreign earnings in the range of $30 - $32 million during the fourth quarter of 2005 to be utilized under the provisions of the Act. We are providing tax expense at the expected 5.25% effective rate under the Act as these current period earnings are being generated. Depending upon the ultimate amount repatriated in the fourth quarter, the Company may recognize additional tax expense of up to $0.8 million during the fourth quarter of 2005, related to such repatriation.

As described in Note 3 to the condensed consolidated financial statements, the Company may pay up to $42.5 million in contingent payments related to the Bennett acquisition. The payments may be earned upon the achievement of certain performance targets over the three years following the acquisition. A contingent payment of up to $25 million may be made in early 2006 based upon the financial results achieved by Bennett during fiscal 2005. The Company expects to have sufficient liquidity available to make such contingent payments.

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 and continuing consolidation 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 the Company’s Form S-4, filed with the Security and Exchange Commission on May 16, 2005, within the section entitled “Risks Relating to Our Business”, 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 October 29, 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 October 29, 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 October 29, 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 control over financial reporting for this division during the transition and integration period. No deficiencies have been identified at this time. We expect this integration process to be complete prior to the end of the fourth quarter of 2005.

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.

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)

July 31, 2005 - August 27, 2005	-		$	-		-		1,071,100

August 28, 2005 - October 1, 2005	33,121	(2)		32.93	(2)	-		1,071,100

October 2, 2005 - October 29, 2005	9,312	(2)		31.71	(2)	-		1,071,100

Total	42,433		$	32.67		-		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 November 30, 2005, incorporated herein by reference from Exhibit 3.1 to the Company’s Form 8-K filed with the SEC on December 1, 2005.
(10.1)		First Amendment to the Brown Shoe Company, Inc. Deferred Compensation Plan
(10.2)		Amendment to the Brown Shoe Company, Inc. Deferred Compensation Plan for Non-Employee Directors
(10.3)		Brown Shoe Company, Inc. Executive Retirement Plan incorporated herein by reference to Exhibit 10.01 to the Company’s Form 8-K filed with the SEC on December 1, 2005 (SEC File No. 001-2191)
(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 October 29, 2005

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


	October 29, 2005	October 30, 2004	January 29, 2005
Working capital ($ millions)	$299.4	$320.3	$281.3

Current ratio	1.9:1	2.3:1	1.8:1

Total debt as a percentage of total capitalization	39.0%	27.2%	26.6%

		BROWN SHOE COMPANY, INC.

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


	Pre-tax Charge Recorded in
($ Millions)	Second Quarter 2005		Third Quarter 2005
Severance and benefit costs	$	1.1	$	0.4
Cost to buy out leases prior to their normal expiration date		1.0		2.6
Write off fixed assets		0.6		1.3
Markdowns to liquidate store inventory		0.2		0.9
	$	2.9	$	5.2