FORWARD-LOOKING STATEMENTS

This report contains certain forward-looking statements with respect to the Company's outlook for the future. These statements represent the Company's reasonable judgment with respect to future events and are subject to risks and uncertainties that could cause actual results to differ materially. The reader is cautioned that these forward-looking statements are subject to a number of risks, uncertainties or other factors that may cause (and in some cases have caused) actual results to differ materially from those described in the forward-looking statements. These risks and uncertainties include, but are not limited to, the risk factors described under Item 1A, "Risk Factors," of the Company's Annual Report on Form 10-K for the year ended December 31, 2008.

OVERVIEW

The Company is a distributor of men's casual, dress and fashion shoes. The principal brands of shoes sold by the Company are "Florsheim," "Nunn Bush" and "Stacy Adams." Inventory is purchased from third-party overseas manufacturers. The majority of foreign-sourced purchases are denominated in U.S. dollars. In the North American wholesale division ("wholesale division"), the Company's products are sold to shoe specialty stores, department stores and clothing retailers, primarily in the United States and Canada. The Company also has licensing agreements with third parties who sell its branded apparel, accessories and specialty footwear in the United States, as well as its footwear in Mexico and certain markets overseas. Licensing revenues are included in the Company's wholesale division. The Company's North American retail division ("retail division") consisted of 36 Company-owned retail stores in the United States and an Internet business as of September 30, 2009. Sales in retail outlets are made directly to consumers by Company employees. The Company also has foreign operations ("foreign") which include the recently acquired wholesale and retail businesses in Australia, South Africa, and Asia Pacific (see below and Note 2 of the consolidated condensed financial statements (unaudited) above), and its wholesale and retail businesses in Europe. In conjunction with the acquisitions, the Company refined its internal reporting structure and redefined its reportable segments. All prior period amounts have been restated to conform to the current presentation. The majority of the Company's operations are in the United States, and its results are primarily affected by the economic conditions and the retail environment in the United States.

On January 23, 2009, the Company acquired a 60% interest in a new subsidiary, Florsheim Australia Pty Ltd. ("Florsheim Australia"), which subsequently purchased the Florsheim wholesale and retail businesses in Australia, South Africa, and Asia Pacific. The vast majority of this business is conducted under the Florsheim name, with a small amount of business under the Stacy Adams and Nunn Bush brand names. The consolidated financial statements of Florsheim Australia have been included in the Company's 2009 consolidated financial statements since the date of acquisition. Acquisition costs of $400,000 were included in Florsheim Australia's selling and administrative expenses in 2009. The Company expects consolidated sales for Florsheim Australia to approximate $25 million in 2009. See Note 2 for more details of the purchase transaction.

Third Quarter Highlights

Consolidated net sales in the third quarter of 2009 were $57.9 million, an increase of $0.8 million or 1% over last year's third quarter. Net sales in 2009 included the sales of Florsheim Australia (see Note 2) which totaled $8.2 million for the quarter ended September 30, 2009. In the Company's wholesale division, net sales were down 13%, and same store sales in the retail division were down 10%, both reflecting the current challenging retail environment.

The Company's consolidated operating earnings for the third quarter were $4.6 million, down from $6.3 million last year. The decline reflects the decrease in operating earnings in the wholesale division, which were down $2.0 million due to lower licensing revenues, lower sales volumes and, to a lesser extent, lower gross margins. Operating earnings in the Company's retail division were down $450,000; while foreign operating earnings were up $745,000 in the current quarter, primarily related to Florsheim Australia.

Consolidated net earnings for the three months ended September 30, 2009 were $3.4 million as compared with last year's $4.3 million. Diluted earnings per share this period were $.29, down from $.37 in the third quarter of 2008.

Year to Date Highlights

Consolidated net sales for the first nine months of 2009 were $166.9 million, a decrease of $4.6 million or 3% compared with last year. Net sales in 2009, included the sales of Florsheim Australia (see Note 2) which totaled $20.3 million to date this year. In the wholesale division, net sales were down 14%, and same store sales in the retail division were down 10% compared with 2008, both due to the current challenging retail environment. Foreign sales were up $19.7 million, primarily due to the acquisition of Florsheim Australia this year.

The Company's consolidated operating earnings for the first nine months of 2009 were $10.1 million, down from $19.8 million last year. In the wholesale and retail divisions, operating earnings were down $9.2 million and $1.2 million, respectively, due to the lower sales volumes and, to a lesser extent, the lower gross margins as a percent of sales this year. Foreign operating earnings were up $751,000 and included approximately $400,000 of one-time acquisition costs incurred by Florsheim Australia (see Note 2).

Consolidated net earnings for the nine months ended September 30, 2009 were $8.0 million as compared with last year's $13.5 million. Diluted earnings per share through September 30, 2009 were $.70, down from $1.15 for the same period in 2008.

Financial Position Highlights

The Company's cash and marketable securities totaled $58.4 million at September 30, 2009 compared with $57.6 million at December 31, 2008. The Company had no outstanding debt at September 30, 2009 as compared with $1.3 million at December 31, 2008.

RESULTS OF OPERATIONS

Wholesale Division Net Sales

Sales in the Company's wholesale division for the three- and nine-month periods
ended September 30, 2009 and 2008 were as follows:

Wholesale Division Net Sales
                                 Three Months Ended September 30,                             Nine Months Ended September 30,
                                    2009                  2008             % Change             2009                   2008             % Change
                                      (Dollars in thousands)                                      (Dollars in thousands)
North American Net Sales
Stacy Adams                    $        11,622       $        12,911            -10.0 %   $         37,058       $         44,341            -16.4 %
Nunn Bush                               17,290                18,508             -6.6 %             49,808                 52,414             -5.0 %
Florsheim                               12,860                16,349            -21.3 %             35,912                 45,509            -21.1 %
Total Wholesale                $        41,772       $        47,768            -12.6 %   $        122,778       $        142,264            -13.7 %
Licensing                                  616                   991            -37.8 %              1,917                  3,010            -36.3 %
Total Wholesale Division       $        42,388       $        48,759            -13.1 %   $        124,695       $        145,274            -14.2 %

Wholesale sales in the three and nine months ended September 30, 2009 were impacted by the continued slowdown in consumer demand which began last fall and has caused retailers to maintain leaner inventory levels today compared to a year ago. Sales in 2009 were also affected by the loss of business with retailers who have closed their doors, as well as a reduction of shipments to retailers based on credit risk. Management believes Nunn Bush sales, although down, have performed well, despite the challenging economic climate in 2009 due to its position as a moderately priced brand in mid-tier department stores. Management believes the decreases at Stacy Adams were due to reduced consumer spending on fashion-oriented products this year. Florsheim sales were down, due to the opposite impact of the consumer behavior discussed for Nunn Bush, as it competes at the higher end of the pricing matrix in mid-tier department and chain stores.

The Company's licensing revenues consist of royalties earned on the sales of Stacy Adams apparel and accessories in the United States, Florsheim specialty footwear and accessories in the United States, and Florsheim footwear in Mexico and certain overseas markets. For the third quarter and first nine months of 2009, licensing revenues decreased primarily as a result of the acquisition of Florsheim Australia this year (see Note 2) and also due to a general trend of lower sales of the Company's licensed products in the current challenging retail environment.

Retail Division Net Sales

Net sales in the Company's retail division in the three months ended September 30 were $5.1 million in 2009 and $6.2 million in 2008. Retail sales for the first nine months were $15.7 million in 2009 and $19.4 million last year. The Company had two fewer stores this year compared with 2008. Same store sales were down approximately 10% in both the third quarter and first nine months of 2009, compared to the same periods of 2008. Stores are included in same store sales beginning in the store's 13th month of operations after its grand opening. The Company's management believes the decrease in same store sales this year was due to the difficult retail environment.

Foreign Net Sales

Beginning in 2009, net sales of the Company's foreign operations included the wholesale and retail sales of Florsheim Australia (see Note 2). In the third quarter and first nine months of 2009, net sales of the Company's foreign operations were up $8.3 million and $19.7 million, respectively compared with the same periods in 2008. Florsheim Australia net sales were $8.2 million in the third quarter and $20.3 million to date in 2009. Year to date net sales in Europe were down approximately $550,000 for the first nine months of 2009 compared with the same period last year.

Gross Earnings and Cost of Sales

For the third quarter, the Company's overall gross earnings were 37.4% of net sales compared with 36.6% of net sales in 2008. Wholesale gross earnings in the current quarter were 30.2% of net sales compared with 30.9% in the same period last year. In the retail division, gross earnings were 64.3% of net sales compared with 66.3% in the third quarter of 2008.

The Company's overall gross earnings year to date were 36.1% of net sales this year compared with 36.7% last year. Wholesale gross earnings for the first nine months of the year were 28.7% of net sales compared with 30.7% last year. Retail gross earnings were 64.3% of net sales compared with 66.5% in the first nine months of last year.

The quarter and year to date decreases in wholesale gross earnings as a percent of net sales this year reflect cost increases from the Company's overseas vendors and pricing pressures from retailers. In the retail division, the quarter and year to date declines in gross earnings as a percent of net sales this year were a result of increased promotions due to the challenging retail environment in 2009.

The Company's overall gross earnings as a percent of net sales for the quarter and year to date were impacted by the acquisition of Florsheim Australia (see Note 2) this year. Florsheim Australia has a higher component of retail versus wholesale sales and therefore, its overall margins are higher and increase the Company's overall gross earnings as a percent of net sales. The impact of this on the third quarter more than offset the decline in wholesale and retail margins, resulting in an overall increase in gross earnings as a percent of net sales for the quarter. For the nine months ended September 30, 2009, the impact was not enough to offset the decreases in wholesale and retail gross margins, and overall gross earnings as a percent of net sales for this period decreased.

The Company's cost of sales does not include distribution costs (e.g., receiving, inspection or warehousing costs). Distribution costs were approximately $2.0 million for the three-month period ended September 30, 2009 and the three-month period ended September 30, 2008. For the nine months ended September 30, 2009 and 2008, distribution costs were $6.1 million and $5.9 million, respectively. These costs were included in selling and administrative expenses. Therefore, the Company's gross earnings may not be comparable to other companies, as some companies may include distribution costs in cost of sales.

Selling and Administrative Expenses

The Company's selling and administrative expenses include, and are primarily related to, distribution costs, salaries and commissions, advertising costs, employee benefit costs, rent and depreciation. In the three and nine months ended September 30, 2009, selling and administrative costs increased $2.5 million and $7.1 million, respectively, as compared with the same periods in 2008. The increases were primarily due to the addition of Florsheim Australia (see Note 2) which contributed selling and administrative costs of $3.4 million and $9.1 million in the third quarter and first nine months of 2009, respectively. Included in Florsheim Australia's year to date selling and administrative costs were approximately $400,000 of one-time acquisition costs.

Wholesale selling and administrative costs for the third quarter and first nine months of 2009 were down approximately $500,000 and $400,000, respectively, compared with the same periods last year. In the wholesale division, increased pension and stock option expense were more than offset by lower salesmen's commissions and other employee costs and lower bad debt expense in both the third quarter and first nine months of 2009. Salesmen's commissions and other employee costs have decreased as a result of lower sales volume. Bad debt expense was down this year due to $380,000 of receivables written off in the third quarter of 2008 following the bankruptcy filings of two of the Company's customers.

In the retail division, selling and administrative costs for the third quarter and first nine months of 2009 were down approximately $400,000 and $1.6 million, respectively compared with 2008. The quarter and year to date decreases in retail selling and administrative expenses were due to two fewer stores this year as compared with last year.

As a percent of sales, wholesale selling and administrative expenses in the third quarter were 22.3% in 2009 and 20.5% in 2008. For the first nine months, wholesale selling and administrative expenses as a percent of sales were 22.8% in 2009 and 20.0% in 2008. In the retail division, selling and administrative expenses as a percent of sales for the third quarter were 71.0% in 2009 and 64.6% in 2008. For the first nine months, retail selling and administrative expenses as a percent of sales were 69.1% in 2009 and 64.0% in 2008. In both the wholesale and retail divisions, the increases this year in selling and administrative expenses as a percent of sales mainly resulted from the impact of lower sales volume in the current year, as many of the Company's selling and administrative costs are fixed in nature.

Other

Other income during the quarter ended September 30 was $373,000 in 2009 and $3,000 in 2008. For the nine months ended September 30, other income was $1.2 million in 2009 and $11,000 in 2008. The increases for the quarter and nine months ended September 30, 2009 were due primarily to foreign currency exchange gains on intercompany loans.

The Company's effective tax rate in the third quarter of 2009 was 34.3% compared with 36.3% in the third quarter of 2008. For the first nine months of 2009, the Company's effective tax rate was 34.0% compared with 36.4% for 2008. The decreases this year were due to a higher portion of municipal bond income relative to total earnings in 2009 and a lower effective tax rate associated with the earnings at Florsheim Australia.

LIQUIDITY AND CAPITAL RESOURCES

The Company's primary source of liquidity is its cash and short-term marketable securities. During the first nine months of 2009, the Company generated $17.9 million in cash from operating activities compared with $9.2 million in the same period one year ago. Approximately half of this increase was due to a larger decrease in inventory balances in the first nine months of 2009 compared to the same period of 2008, partially offset by lower net earnings in 2009 compared to 2008 and a $1 million pension plan contribution this year. The Company's lower inventory levels this year are a reflection of leaner inventory levels maintained by retailers as a reaction to the reduction in consumer demand.

The Company used approximately $9.3 million of cash for the Florsheim Australia acquisition (see Note 2). Capital expenditures were $935,000 in the first nine months of 2009 as compared with $2.0 million for the same period of 2008. Throughout 2008, the Company was remodeling its domestic retail stores. Those projects were complete by the end of 2008. The Company expects annual capital expenditures for 2009 to be between $1 million and $1.5 million.

The Company paid cash dividends of $4.9 million and $4.1 million during the nine months ended September 30, 2009 and 2008, respectively. On April 27, 2009, the Company's Board of Directors increased the quarterly dividend rate from $.14 to $.15 per share.

The Company continues to repurchase its common stock under its share repurchase program when the Company believes market conditions are favorable. To date in 2009, the Company has repurchased 116,164 shares at a total cost of $2.6 million. The Company currently has 1,387,418 shares available under its previously announced buyback program. See Part II, Item 2, "Unregistered Sales of Equity Securities and Use of Proceeds" below for more information.

As of September 30, 2009, the Company had a total of $50 million available under its borrowing facility, of which there were no outstanding borrowings at September 30, 2009. The facility includes one financial covenant that specifies a minimum level of net worth. The Company was in compliance with the covenant at September 30, 2009. The facility expires on April 30, 2010.

The Company will continue to evaluate the best uses for its free cash, including continued stock repurchases and acquisitions.

The Company believes that available cash and marketable securities, cash provided by operations, and available borrowing facilities will provide adequate support for the cash needs of the business in 2009.