Note 3

Acquisitions and Divestitures

American Sporting Goods Corporation

On February 17, 2011, the Company entered into a Stock Purchase Agreement with American Sporting Goods Corporation ("ASG") and ASG's stockholders, pursuant to which a subsidiary of the Company acquired all of the outstanding capital stock of ASG (the "ASG Stock") from the ASG stockholders on that date. The aggregate purchase price for the ASG Stock was $156.6 million in cash, including debt assumed by the Company of $11.6 million. The Stock Purchase Agreement also contained a provision to pay a $2.0 million cash earn-out contingent upon ASG's achievement of certain financial targets. Based on current projections, the Company does not believe that any contingent payments are likely to be payable. The operating results of ASG have been included in the Company's financial statements since February 17, 2011 and are consolidated within the Wholesale Operations segment.

ASG is a designer, manufacturer and marketer of a broad range of athletic footwear with a strong presence in walking, fitness and basketball. It was founded in 1983 and is headquartered in Aliso Viejo, California. The acquisition added performance and lifestyle athletic and outdoor footwear brands to the Company's portfolio, including Avia, rykä, Nevados and Yukon, and complements the Company's existing fitness and comfort offerings.

Effective February 17, 2011, the Company and certain of its subsidiaries exercised the $150.0 million designated event accordion feature under the Company's Credit Agreement to fund the majority of the purchase price for ASG, increasing the aggregate amount available under the Credit Agreement from $380.0 million to $530.0 million. The Credit Agreement continues to provide for access to an additional $150.0 million of optional availability pursuant to a separate accordion feature, subject to satisfaction of certain conditions and the willingness of existing or new lenders to assume the increase. See Note 11 to the condensed consolidated financial statements for additional information about the Company's Credit Agreement.

The Company incurred acquisition and integration costs of $1.1 million ($0.8 million on an after-tax basis, or $0.02 per diluted share) during the third quarter of 2011, $3.5 million ($2.9 million on an after-tax basis, or $0.08 per diluted share) during the thirty-nine weeks ended October 29, 2011 and $1.1 million ($0.7 million on an after-tax basis, or $0.02 per diluted share) during 2010. All costs are recorded as a component of restructuring and other special charges, net. In addition, during the thirty-nine weeks ended October 29, 2011, the Wholesale Operations segment included an increase in cost of goods sold related to the impact of the inventory fair value adjustment in connection with the acquisition of ASG of $3.9 million ($2.3 million on an after-tax basis, or $0.05 per diluted share). See additional information related to acquisition and integration costs in Note 6 to the condensed consolidated financial statements.

The total consideration paid by the Company in connection with the acquisition of ASG was $156.6 million. The cost to acquire ASG has been allocated to the assets acquired and liabilities assumed according to estimated fair values. The allocation has resulted in acquired goodwill of $61.2 million and intangible assets related to trade names, licensing agreements and customer relationships of $46.7 million. The goodwill and intangible assets have been allocated to the Wholesale Operations segment.

The Company has allocated the purchase price of ASG according to its estimate of the fair value of the assets and liabilities as of the acquisition date, February 17, 2011, as follows:

($ millions)		As of February 17, 2011
Cash and cash equivalents	$	3.1
Receivables		21.1
Inventories		46.5
Deferred income taxes		3.4
Prepaid expense and other current assets		12.2
Total current assets		86.3

Other assets		1.2
Goodwill		61.2
Intangible assets		46.7
Property and equipment		8.4
Total assets	$	203.8

Trade accounts payable	$	13.2
Other accrued expenses		18.0
Total current liabilities		31.2
Deferred income taxes		16.0
Total liabilities	$	47.2
Net assets	$	156.6

The Company's purchase price allocation contains uncertainties because it requires management to make assumptions and to apply judgment to estimate the fair value of acquired assets and liabilities. A single estimate of fair value results from a complex series of judgments about future events and uncertainties and relies heavily on estimates and assumptions. The judgments the Company used in estimating the fair values assigned to each class of acquired assets and assumed liabilities could materially affect the results of its operations. Management estimates the fair value of assets and liabilities based upon quoted market prices, the carrying value of the acquired assets and widely accepted valuation techniques, including discounted cash flows. Unanticipated events or circumstances may occur which could affect the accuracy of the Company's fair value estimates, including assumptions regarding industry economic factors and business strategies.

The Company has estimated the fair value of acquired receivables to be $21.1 million with a gross contractual amount of $22.1 million. The Company does not expect to collect $1.0 million of the acquired receivables. The Company has also estimated the fair value of inventories based on the estimated selling price of the work-in-process and finished goods acquired at the closing date less the sum of the costs to complete the work-in-process, the costs of disposal and a reasonable profit allowance for our post acquisition selling efforts and current replacement cost for raw materials acquired at the closing date. In estimating the fair values for intangible assets other than goodwill, the Company relied in part upon a report of a third-party valuation specialist. With respect to other acquired assets and liabilities, the Company used all available information to make its best estimate of fair values at the business combination date. The Company's allocation of purchase price was considered complete as of July 30, 2011.

Goodwill and intangible assets reflected above were determined to meet the criterion for recognition apart from tangible assets acquired and liabilities assumed. The goodwill recognized is primarily attributable to synergies and an assembled workforce and is not deductible for tax purposes.

The following table illustrates the unaudited pro forma effect on operating results as if the acquisition had been completed as of the beginning of 2010:


	Thirteen Weeks Ended				Thirty-nine Weeks Ended
(in thousands, except per share amounts)	October 29, 2011		October 30, 2010			October 29, 2011			October 30, 2010
					0
Net sales	$	713,788	$	774,190	$		1,961,880	$		2,070,878
Net earnings attributable to Brown Shoe Company, Inc.		33,644		23,580			36,430			43,884
Basic earnings per common share attributable to Brown Shoe Company, Inc. shareholders		0.80		0.54			0.84			1.01
Diluted earnings per common share attributable to Brown Shoe Company, Inc. shareholders		0.79		0.53			0.83			1.00

For purposes of the pro forma disclosures above, the primary adjustments for 2010 include: i) a non-cash cost of goods sold impact reflecting the sell-through of higher cost product due to a fair value adjustment to acquired inventory of $4.2 million ($3.2 million in the first quarter of 2010 and $1.0 million in the second quarter); ii) amortization of acquired intangibles of $1.5 million ($0.5 million in each of the first, second and third quarters); and iii) additional interest expense of $4.5 million ($1.5 million in each of the first, second and third quarters) assuming borrowings at the beginning of 2010 of $156.6 million at 3.5% interest under our Credit Agreement to fund the acquisition. The primary adjustments for 2011 include: i) the elimination of non-cash cost of goods sold impact related to the inventory fair value adjustment of $4.2 million ($2.7 million in the first quarter of 2011 and $1.5 million in the second quarter); and ii) the elimination of $1.6 million of expenses related to the acquisition incurred during the first quarter of 2011.

The above unaudited pro forma financial information is presented for informational purposes only and does not purport to represent what the Company's results of operations would have been had the Company completed the acquisition on the date assumed, nor is it necessarily indicative of the results of operations that may be expected in future periods.

During the period from the acquisition date of February 17, 2011 through October 29, 2011, the Company's condensed consolidated statement of earnings included net sales from ASG of $107.9 million (net of intercompany eliminations) and immaterial net earnings, which included an increase in cost of goods sold related to the impact of the inventory fair value adjustment in connection with the acquisition of ASG of $3.9 million ($2.3` million on an after-tax basis, or $0.05 per diluted share).

The Basketball Marketing Company, Inc. ("TBMC")

On October 25, 2011, the Company sold TBMC to Galaxy International for $55.4 million in cash. TBMC markets and sells footwear bearing the AND 1 brand name and was acquired in the Company's February 17, 2011 acquisition of ASG. TBMC was included in the Wholesale Operations segment of the Company. In conjunction with the sale, the Company recorded a gain of $21.6 million ($15.4 million on an after-tax basis, or $0.37 per share), wrote-off $21.6 million of goodwill and $8.0 million of intangible assets and other net assets of $4.2 million, which are reflected on the condensed consolidated statement of earnings as a component of discontinued operations. The Company utilized the proceeds from the sale to reduce borrowings under the revolving credit agreement.

TBMC was sold on October 25, 2011. Accordingly, the results of TBMC are reflected in the condensed consolidated statement of earnings as discontinued operations. Earnings from the discontinued operations of TBMC for the third quarter of 2011 included $6.5 million of net sales and $1.3 million of earnings before income taxes. Earnings from the discontinued operations of TBMC for the thirty-nine weeks ended October 29, 2011 included $19.1 million of net sales and $3.0 million of earnings before income taxes.

Edelman Shoe, Inc. ("Edelman Shoe")

Edelman Shoe is a leading designer and marketer of fashion footwear. The Sam Edelman brand was launched in 2004 and is primarily sold through department stores and independent retailers.

In 2007, the Company invested cash of $7.1 million in Edelman Shoe, acquiring 42.5% of the outstanding stock. On November 3, 2008, the Company invested an additional $4.1 million of cash in Edelman Shoe, acquiring 7.5% of the outstanding stock, bringing the Company's total equity interest to 50%.

Beginning November 3, 2008, the Company's consolidated financial statements included the accounts of Edelman Shoe as a result of the Company's determination that Edelman Shoe was a variable interest entity ("VIE") for which the Company was the primary beneficiary. At the beginning of 2010, the Company adopted amended consolidation guidance applicable to VIEs, evaluated the impact on the existing variable interests in Edelman Shoe and determined that Edelman Shoe continued to be a VIE that was appropriately consolidated by the Company.

On June 4, 2010, the Company acquired the remaining 50% of the outstanding stock of Edelman Shoe for $40.0 million, consisting of a combination of $32.7 million of cash, including transaction fees, and $7.3 million in shares of the Company's common stock. The acquisition of the remaining interest in Edelman Shoe was accounted for in accordance with the consolidation guidance applicable to noncontrolling interests, which requires changes in a parent's ownership interest in a subsidiary, without loss of control, to be reflected as an adjustment to the carrying amount of the noncontrolling interest with excess consideration recognized directly to equity attributable to the controlling interest. As a result, the Company's acquisition of the remaining interest in Edelman Shoe resulted in a reduction to total equity of $32.7 million, consisting of a net reduction of $24.1 million to total Brown Shoe Company, Inc. shareholders' equity and the elimination of $8.6 million of the noncontrolling interest in Edelman Shoe. As of June 4, 2010, Edelman Shoe is a wholly-owned subsidiary of the Company.