Back to GetFilings.com

Table of Contents

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-K

For the fiscal year ended October 31, 2003

or

For the transition period from              to             

Commission File Number 0-24026

MAXWELL SHOE COMPANY INC.

(Exact name of registrant as specified in its charter)

(617) 364-5090

(Registrant’s telephone number, including area code)

Securities Registered Pursuant to Section 12(b) of the Act:

Securities Registered Pursuant to Section 12(g) of the Act:

Class A Common Stock,

par value $.01 per share

(Title of class)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).    Yes  x    No  ¨

The aggregate market value of the Class A Common Stock of the registrant held by non-affiliates of the registrant on January 15, 2004 based on the closing price of the Class A Common Stock on the NASDAQ National Market System on such date was $261,982,674.

The number of shares of the registrant’s Class A Common Stock outstanding at January 15, 2004, was 14,837,806 shares.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the proxy statement for the registrant’s 2004 Annual Stockholders Meeting are incorporated by reference into Part III herein.

Table of Contents

MAXWELL SHOE COMPANY INC.

INDEX TO ANNUAL REPORT ON FORM 10-K

For The Fiscal Year Ended October 31, 2003

1

Table of Contents

PART I

General

All references herein to the “Registrant” or to the “Company” mean Maxwell Shoe Company Inc., a Delaware corporation, and its predecessors and its consolidated subsidiaries, unless the context otherwise requires. The Company’s fiscal year ends on October 31; all references herein to a fiscal year mean the twelve-month period ended on October 31 of the particular year.

The Company designs, develops and markets casual and dress footwear for women and children under multiple brand names, each of which is targeted to a distinct segment of the footwear market. The Company offers casual and dress footwear for women in the moderately priced market segment under the Mootsies Tootsies® brand name, in the upper moderately priced market segment under the Sam & Libby® and Dockers® Footwear For Women brand names and in the better market segment under the AK Anne Klein brand name. The Company also sells moderately priced and upper moderately priced children’s footwear under both the Mootsies Tootsies® and Sam & Libby® brand names. The Company designs and develops private label footwear for selected retailers under the retailers’ own brand names. In 1997, the Company licensed the J. G. Hook® trademark to source and develop private label products for retailers who require brand identification. In October 2000, the Company acquired all the trademarks of joan and david helpern, incorporated and JOAN HELPERN DESIGNS, INC. (Joan & David®) and now sells contemporary footwear for women in the bridge segment under the Joan and David brand name. In 2002, the Company introduced and shipped the Circa Joan & David^™ brand. This footwear is sold in the better market segment.

Since 1987, when the Company first focused on its branded footwear strategy and, except for fiscal 1999 as noted below, the Company has increased net sales every year and consistently maintained profitability. In fiscal 1999, the Company’s net sales decreased 9.4% as compared to fiscal 1998 while net income increased 42.1%. This was largely a result of the sale of the Jones New York license to the Jones Apparel Group, Inc. and Jones Investment Co. (hereinafter collectively “Jones”). The Company’s financial success has been largely a result of its ability to design, develop and market footwear with contemporary styles at affordable prices. Retail prices for the Company’s footwear generally range from $20 to $70 for the Mootsies Tootsies®, Dockers® Footwear For Women and Sam & Libby® brand offerings, from $45 to $95 for the AK Anne Klein product lines, from $90 to $150 for the Circa Joan & David^™ and $180 and higher for Joan & David® footwear. The Company began shipping Joan & David® footwear in the fourth quarter of fiscal 2001. In the first fiscal quarter of 2002, the Company opened the Joan & David® Outlet store, an approximately 2,200 square foot store located in Wrentham, Massachusetts in the Wrentham Premium Outlet Mall. Substantially all of the Company’s products are manufactured overseas by independent factories selected by the Company and its overseas agents. The Company sells its footwear primarily to department stores and specialty stores in the United States as well as through national catalog retailers and cable television consumer shopping channels.

The Company’s strategy is to leverage its existing competitive strengths, including but not limited to its strong manufacturing relationships and focused brand management and to increase profitably in its share of the women’s and children’s footwear markets by further strengthening its existing footwear brands and its private label business and expanding its brand portfolio through a combination of acquisition, licensing and development of additional brands in the future.

Through advertising, promotion and packaging, the Company has built consumer and retail recognition for the Mootsies Tootsies® and Mootsies Kids® brand names, and management believes that Mootsies Tootsies® is currently one of the largest selling brands in the moderately priced segment of the women’s casual and dress footwear industry. The Company continued its brand expansion through the acquisition of the Sam & Libby® worldwide trademarks and tradenames in 1996. The Company has re-positioned the Sam & Libby® brand from its prior focus on the junior women’s market segment to the updated, career-oriented women market segment. In late 1998, the Company licensed the Dockers® Footwear For Women footwear brand name for women, in order to increase its brand offerings in the upper moderate and better industry segments. In 1999, the Company sold its Jones New York footwear license to Jones which had served the better footwear retail segment. In 1999, in order to service the better

2

Table of Contents

women’s footwear segment at retail, the Company licensed the AK Anne Klein footwear brands. The Company acquired the Joan & David® worldwide trademarks and tradenames in October 2000. The Joan & David® brand has served the bridge/designer zone for more than 25 years. The Company shipped the first Joan & David® footwear for the Fall 2001 footwear season and Circa Joan & David^™ for the Fall 2002 footwear season. The Company believes that there is a growing demand among retailers for footwear to market on a first cost basis with brand names.

Maxwell Shoe Company competes primarily in the women’s casual and dress footwear market, which emphasizes contemporary fashion, quality and value. The Company believes that there has been a shift in the “moderate” segment of the women’s casual and dress footwear market toward value priced footwear. The Company has positioned its Mootsies Tootsies® line to take advantage of this shift by offering value priced footwear that reflects current fashion trends. The Sam & Libby® brand is directed to appeal to the fashion forward customers in the upper moderate price range. The Company’s Dockers® Footwear For Women competes in the upper moderate and better industry segments. The Company believes that the better and bridge segments of this market has not been as affected by this shift due to a continuing interest in higher quality and brand name products, such as the Company’s AK Anne Klein and Joan & David® brands.

The Company, originally a closeout footwear business founded in 1949, was incorporated as Maxwell Shoe Company Inc. in Massachusetts in 1976. During the late 1980s, the Company shifted its focus to designing, developing and marketing full lines of branded women’s footwear. In order to implement this new strategy, the Company hired experienced senior management to strengthen its organizational infrastructure, developed cost-efficient product sourcing, implemented an advertising program and improved internal systems. In March 1994, Maxwell Shoe Company Inc. became a Delaware incorporated company.

Business Strategy

The Company’s strategy is to leverage its existing competitive strengths, to increase profitably in its share of the women’s and children’s footwear markets by further developing its existing footwear brands and its private label business and expanding its brand portfolio through a combination of acquisition, licensing and development of additional brands in the future.

Competitive Strengths. The Company has developed certain core operating strengths which have been significant sources of growth to date and which management believes will help the Company achieve further growth in the future. Such operating strengths include:

3

Table of Contents

Growth Strategy. By leveraging the above competitive strengths, the Company has pursued and will continue to pursue growth through various initiatives, including, but not limited to, the following:

4

Table of Contents

Product Lines

The Company’s products consist of nine lines of brand name footwear as well as private label footwear for selected retailers for sale under their own house brands. Each of the branded product lines is targeted to appeal to a different market segment of the footwear industry. The characteristics of the product lines sold by the Company are summarized in the following table:

Mootsies Tootsies®

The Mootsies Tootsies® brand line provides consumers with a wide selection of footwear with contemporary styles and quality at affordable prices primarily targeted at women ages 18 to 34. The line includes approximately 30 new styles each spring and fall season, as well as a number of core styles that are updated periodically based on fashion trends. The line principally consists of casual shoes, dress shoes, boots and sandals. Styles are available in a wide variety of colors and materials, including leather, sueded leather and fabric. All footwear in the line is designed to have soft construction for comfort.

Mootsies Kids®

The Mootsies Kids® brand line is targeted at girls in the misses market (ages 8 to 12) who desire contemporary footwear. The line consists of approximately 20 new styles each spring and fall that, in many cases, represent a miniature version of the Mootsies Tootsies® line. The children’s line is focused on casual shoes, party shoes, boots and sandals.

Sam & Libby® and Just Libby®

The Sam & Libby® line is updated casual and dress footwear targeted at female fashion customers, ages 21 to 35, and contains approximately 30 styles per season, consisting of casual shoes, dress shoes, boots and sandals. The acquisition of the Sam & Libby® brand with its trademarks registered in over 20 countries will bolster the Company’s efforts to develop and grow internationally, although the Company’s expansion to overseas markets will be a long-term effort.

5

Table of Contents

Sam & Libby® Kids

The Sam & Libby® Kids line is geared toward girls ages 8 to 14 and is targeted towards the updated and more fashion-conscious girl. The line will have approximately 20 styles each season often similar to the Sam & Libby® women’s styles. The children’s line is focused on dress shoes, casual shoes, casual athletic shoes, boots and sandals.

Dockers® Footwear For Women

The Dockers® Footwear For Women line targets women between the ages of 25-34 and has been designed to provide women with a new choice in stylish, comfortable casual footwear. The footwear line will complement the Dockers® apparel products and is specifically designed to be worn with khakis, complimenting a wide variety of versatile looks.

AK Anne Klein

The AK Anne Klein footwear line focuses on contemporary, quality footwear targeted at career-oriented women 30 years and older. The line capitalizes on the name recognition and reputation enjoyed by the Anne Klein apparel line produced by the Company’s licensor and the footwear is designed to complement the Anne Klein apparel. The Company’s AK Anne Klein footwear line consists of approximately 25 styles per season with all leather uppers and soles.

Joan & David® and Circa Joan & David^™

Prior to the Company’s ownership, the Joan & David® footwear collection for the last 25 years has focused on selling the high-end “designer” footwear segment. The new Joan & David® line focuses on the much larger bridge market, one that the Company believes is significantly larger than the designer market. The line attempts to capitalize on the esteem, recognition and reputation of the brand developed over the past 25 years. The product line targets young women (median age in upper 30s) with high family income well above the national median. The line consists of 30 styles that are contemporary, stylish and tasteful.

J. G. Hook® and Private Label Products

In response to the growing demand among retailers for footwear to market under their own brand names, the Company designs and sources private label women’s and children’s footwear for selected retailers. The Company’s private label business has minimal overhead and capital requirements primarily because the Company utilizes its existing branded product styles (thereby incurring no additional product development costs) and because the Company does not incur any costs related to purchasing, importing, shipping or warehousing of inventory, all of which costs are borne by the retailer. The Company has licensed the J. G. Hook® name to sell as a first cost product for retailers who require brand identification.

The following table sets forth the percentage of the Company’s net sales generated by each of its major product categories for the periods indicated (See also “—Consolidated Financial Statements—”):

Design and Product Development

The Company seeks to identify fashion trends and to translate such trends into contemporary footwear that appeal to its target market segments’ requirements for style, quality, fit and price. Management believes that its philosophy of marketing contemporary styles to a broad audience rather than “fashion forward” styles reduces the risks associated with changing fashion trends.

6

Table of Contents

Each branded product line has its own design team, including design staff, sales staff and a brand manager in an effort to design footwear that appeals to the characteristics of that line’s market segment. The designers research and confirm market trends by: (i) traveling extensively to fashion markets in the United States and Europe, (ii) attending trade shows, (iii) subscribing to fashion and color information services and (iv) commissioning market studies. In addition, product development efforts benefit from interaction with retailers, who provide information on current retail selling trends, and the Company’s buying agents, who provide information on industry trends. The designers for the AK Anne Klein footwear line also meet regularly with The Anne Klein Company to exchange product and fashion concepts. The designer for Dockers® Footwear For Women line meets regularly with the Dockers Company to exchange product and fashion concepts. See “—License Agreements.” Each line initially consists of between 100 and 200 prototypes each season from which the design team selects the styles that it believes will satisfy the target market segment’s requirements for style, quality, fit and price. Each line is further refined following presentations at industry shows.

Marketing and Customer Support

Each branded product line has its own sales organization, including a divisional executive who oversees all aspects of selling the line and works with a network of independent and employee sales representatives located throughout the United States. Certain of the independent sales representatives sell only the Company’s brands, and the rest of the independent sales representatives sell brands that do not compete directly with the Company’s brands. The Company develops spring and fall product lines for each of its brands. Each line is first introduced at industry trade shows prior to on-site sales visits by the independent sales representatives and the Company’s divisional head responsible for the line. In addition, the Company maintains showrooms in New York and Boston where buyers view products and place orders. While the Company’s products are distributed primarily in the United States, the Company also sells to independent wholesale distributors in Canada. Substantially all of the Company’s sales are transacted with customers in the United States.

In fiscal 2003, the Company sold products to approximately 1,000 accounts with over 7,000 retail locations. The Mootsies Tootsies® retailers, which market moderately priced apparel merchandise, include J. C. Penney Company, Inc., Kohl’s and DSW Shoe Warehouse. The AK Anne Klein footwear is distributed to those retailers who typically market merchandise at higher retail price points, including Federated Department Stores, Inc. (Macy’s), The May Department Stores Company (Lord & Taylor) and Saks Inc. (Parisian). The Sam & Libby® footwear lines are distributed to retailers such as Federated Department Stores, Inc., The May Department Stores Company, Bon Ton and Nordstrom. Dockers® Footwear For Women distributes footwear to Mervyn’s and specialty stores like Kohl’s. Joan & David® distributes footwear to Nordstrom, Macy’s, Bloomingdale’s and Lord & Taylor. The Company also markets its branded products through national catalog retailers such as Nordstrom and Chadwicks of Boston.

The Company’s largest customer, The TJX Companies, Inc., accounted for 13.3% and 10.2% of the Company’s net sales in fiscal 2003 and fiscal 2002, respectively. In fiscal 2003 the top three customers (The TJX Companies, Inc., DSW Shoe Warehouse and The May Department Stores Company) accounted for 35.0% of net sales. The Company’s top three customers in fiscal 2002 were DSW Shoe Warehouse, The May Department Stores Company, and The TJX Companies, Inc., which collectively accounted for 32.4% of net sales. While the Company seeks to build long-term customer relationships, revenues from any particular customer can fluctuate from period to period due to such customer’s purchasing patterns. In addition, the Company believes that although purchasing decisions have generally been made independently by each department store customer, there is a trend among department store customers toward more centralized purchasing decisions. The retail industry has also periodically experienced consolidation, and any future consolidation may result in loss of customers of the Company and lower profit margins on the Company’s footwear. In the future, the Company’s wholesale customers may consolidate, undergo restructuring or reorganizations, or realign their affiliations, any of which could decrease the number of stores that carry the Company’s products or increase the ownership concentration within the retail industry. Any termination or significant disruption of the Company’s relationships with one or more of the Company’s major customers could have a material adverse effect on the Company’s financial condition or results of operations. See Note 1 of “Notes to Consolidated Financial Statements.”

7

Table of Contents

The Company believes that its reputation for quality products and relationships with retailers will also be useful during the introduction of new brands that it may develop or acquire to fill other niches in the women’s footwear market.

The Company supports its customers through a variety of programs, including its in-stock inventory position for selected styles, the availability of EDI, co-op advertising and point of sale displays. In addition, the Company assists its customers in evaluating which products are more likely to appeal to their retail customers. Customers may return defective products in quantities of more than six pairs for full credit. Customer allowances are based on the Company’s ability to meet the particular customer’s objectives and specifications.

Advertising and Promotion

The Company works closely with its retailers in promoting its brands through its own and cooperative national consumer print advertising, in-store merchandising, point of sale promotions, in-store events, distinctive packaging and active solicitation of fashion editorial space.

Print advertisements for Mootsies Tootsies® are designed to build brand awareness, rather than market a particular footwear product, by linking the brand to a consumer’s lifestyle. The advertisements run in fashion/lifestyle publications such as Lucky, Glamour, and Instyle. Utilizing the print media, the Company seeks to reach a large percentage of its target audience, women ages 18 to 34, with a number of advertisements each selling season. Advertising for AK Anne Klein is largely executed through department store co-op programs. Additionally, the Company participates in image advertising through The Anne Klein Company. Major campaigns by The Anne Klein Company are planned via direct consumer media such as Vogue, Elle and W magazines to support the Anne Klein brands.

Print advertisements for Sam & Libby® and Dockers® Footwear For Women are designed to build brand awareness by creating a lifestyle viewpoint that appeals to the modern consumer. The advertisements will appear in fashion publications such as Glamour, Lucky and InStyle.

The print advertising program for the Joan & David® collection is appearing in national advertisements and will consist of consumer advertisements focused on upscale publications (such as The New Yorker, Vogue and Town & Country).

The Company also participates with its retail customers in cooperative advertising programs intended to take the brand awareness created by the national print advertising and channel it to local retailers where consumers can buy the Company’s brands. This includes local advertising on radio, television, and newspaper as well as Company participation in major catalogs for retailers such as Chadwicks. The Company’s co-op efforts are intended to maximize advertising resources by having its retailers share in the cost of promoting the Company’s brands. Also the Company believes that co-op advertising encourages the retailer to merchandise the brands properly and sell them aggressively on the sales floor.

The Company uses brand point-of-sale advertising to further promote its products in the store. Point-of-sale techniques used by the Company include point-of-sale displays, counter cards, banners and other visual in store merchandising displays. These materials mirror the look and feel of the national print advertising in order to reinforce brand image at the point-of-sale. The Company has also initiated concept shops for it’s Joan & David and AK Anne Klein brands at Macy’s. Management believes these efforts stimulate impulse sales and repeat purchases.

Manufacturing

The Company manufactures none of its products and does not own any manufacturing facilities. Mootsies Tootsies®, Mootsies Kids®, Sam & Libby® and Dockers® Footwear For Women are manufactured by unaffiliated third parties primarily in China and Brazil because of the ability of the suppliers in these countries to

8

Table of Contents

manufacture quality products at affordable prices. The AK Anne Klein and Circa Joan & David^™ footwear brands are primarily manufactured in China and also manufactured in Spain and Italy because Spanish and Italian suppliers can meet the Company’s quality requirements and their reputation for quality footwear is consistent with the brands’ image. The Joan & David® collection is primarily manufactured in Italy where fine craftsmanship and innovative footwear can be sourced.

The Company does not have long-term contracts with any of the factories that produce its footwear. The Company relies on its relationships with buying agents who are responsible for securing raw materials, selecting manufacturers, monitoring the manufacturing process, inspecting finished goods and coordinating shipments to the Company. These agents work regularly with numerous factories with the capacity to meet the Company’s product specifications for quality, fit, volume and price. By using buying agents rather than manufacturing products itself, the Company is able to maximize production flexibility while avoiding significant capital expenditures, materials and work-in-process inventory and costs of managing a production work force. To date, the Company has not encountered significant delivery or quality problems. The Company works with buying agents with access to numerous manufacturing facilities in order to maximize the Company’s sourcing flexibility. The Company believes it has built strong relationships with its agents and manufacturing facilities over time and through volume of business. Management believes that its buying agents do not represent other direct competitor branded footwear lines, and Universal Max Trading, the Company’s principal buying agent in China, has agreed to act exclusively for the Company in China. The Company pays its buying agents a percentage of the order price of products shipped to the Company.

Prior to the start of production, the Company submits specifications for products to the buying agent, who then provides a confirmation sample of each style for inspection by the Company. During production, the Company makes periodic reviews of products at the factory in addition to inspections conducted by the buying agent. The Company also inspects products upon receipt at its warehouse.

The Company maintains an in-stock position for selected styles of its footwear in order to minimize purchasing costs and the time necessary to fill customer orders. In order to maintain an in-stock position, the Company places orders for selected footwear with its manufacturers prior to the time the Company has received customers’ orders for such footwear. In order to reduce the risk of overstocking, the Company assesses demand for its products by soliciting input from its customers and monitoring retail sell-through throughout the selling season.

The Company believes that its ability to satisfy customer order demands is enhanced by designing its products to use common elements in raw materials, lasts and dyes. Whenever possible, the Company seeks to use factories that have previously produced the Company’s footwear because the Company believes that this enhances continuity and quality while holding down production costs.

The Company protects itself against currency fluctuations by purchasing products in U.S. dollars from China and Brazil. In order to minimize volatility in the price of products from Spain and Italy, the Company generally buys forward exchange contracts for Euro dollars in connection with the placement of orders for products.

Distribution

Following manufacture, the Company’s products are packaged in retail boxes bearing bar codes and shipped to the Company’s warehouse facility in Brockton, Massachusetts. When an order is received, it is filled in the warehouse and shipped to the customer by whatever means the customer requests, which is usually by common carrier.

The Company has an EDI system to which some of the Company’s larger customers are linked. This system allows these customers to automatically place orders with the Company, thereby eliminating the time involved in transmitting and inputting orders. The Company is working to add more of its customers to the system and to expand system capability to include direct billing, payment and shipping information.

9

Table of Contents

Restrictions on Imports

The Company’s operations are subject to compliance with relevant laws and regulations enforced by the United States Customs Service and to the customary risks of doing business abroad, including fluctuation in the value of currencies, increases in customs duties and related fees resulting from position changes by the United States Customs Service, import controls and trade barriers (including the unilateral imposition of import quotas), restrictions on the transfer of funds, work stoppages and, in certain parts of the world, political instability causing disruption of trade. These factors have not had a material adverse impact upon the Company’s operations to date. Imports into the United States are also affected by the cost of transportation, the imposition of import duties and increased competition from greater production demands abroad. The United States or the countries in which the Company’s products are manufactured may, from time to time, impose new quotas, duties, tariffs or other restrictions, or adjust presently prevailing quotas, duty or tariff levels, which could affect the Company’s operations and its ability to import products at current or increased levels. The Company cannot predict the likelihood or frequency of any such events occurring.

The Company’s use of common elements in raw materials, lasts and dyes give the Company the flexibility to duplicate sourcing in various countries in order to reduce the risk that the Company may not be able to obtain products from a particular country.

The Company’s imported products are subject to United States customs duties and, in the ordinary course of its business, the Company may, from time to time, be subject to claims for duties and other charges. United States customs duties currently range from 6% to 37.5% on the principal products currently imported by the Company. Because the Company has had no disputes with the United States Customs Service in the past, the Company is allowed to and does submit its footwear products to United States customs officials for pre-classification and customs duties rates determination prior to importation of such footwear products from abroad. For fiscal 2003, approximately 89.4% of the Company’s footwear was imported from China. As a result of a previous dispute with China over the protection of the intellectual property rights, the United States Trade Representative (“USTR”) is currently monitoring China’s adherence to a bilateral agreement with the United States to enforce intellectual property protections within China. In addition, recent concerns with China’s alleged failure to protect intellectual property rights and to comply with other commitments made as part of its accession to the World Trade Organization (“WTO”), have caused the U.S. government to indicate that it would consider filing a case against China in the WTO if China does not more readily fulfill its obligations. If the U.S. government takes action against China, the result of that action could, among other things, include the imposition of trade sanctions that could affect the ability of the Company to continue to import from China.

Backlog

At October 31, 2001, 2002 and 2003, the Company had unfilled customer orders of $78.6 million, $84.9 million and $92.7 million, respectively. The backlog as of October 31, 2003 represents an increase of 9.2% over fiscal year end 2002. The backlog at a particular time is affected by a number of factors, including seasonality and the scheduling of manufacturing and shipment of products. Orders generally may be canceled by customers without financial penalty. Accordingly, a comparison of backlog from period to period is not necessarily meaningful and may not be indicative of eventual actual shipments to customers. The Company expects that substantially all of its backlog as of October 31, 2003 will be filled during the first six months of fiscal 2004.

Compliance With Environmental Regulations

Compliance with federal, state and local provisions enacted or adopted for protection of the environment has had no material effect upon the Company’s operations.

10

Table of Contents

License Agreements

AK Anne Klein

Effective in July 1999, the Company entered into a license agreement (the “Anne Klein Agreement”), as amended, with Kasper A.S.L., Ltd., B.D.S., Inc. and Lion Licensing, Ltd. under which the Company has the exclusive right to use the AK Anne Klein, Kasper and Albert Nipon names in connection with the manufacture, advertising, promotion, distribution and sale of footwear for women. The Anne Klein Agreement, which was amended in March 2002, covers the United States, Canada and Puerto Rico. The Company extended the term of the Anne Klein Agreement for an additional five (5) year term ending December 31, 2007, with an option to extend the agreement, subject to certain conditions, through December 2012. The Company will pay Kasper A.S.L., Ltd. a royalty on all net sales and is responsible for a guaranteed minimum royalty payment during each year of the agreement. The licensor can terminate the agreement for a variety of reasons, including but not limited to default in performing any of the terms of the Anne Klein Agreement and bankruptcy of the licensee.

Dockers® Footwear For Women

In November 1998, the Company entered into a license agreement (the “Dockers® Footwear For Women Agreement”) with Levi Strauss Co. under which the Company has the exclusive right to use the Dockers® Footwear For Women name in connection with the development, manufacturing and marketing of footwear for women. The Dockers® Footwear For Women Agreement covers the United States (including its territories and possessions). The initial term of the agreement ended December 31, 2001 and was extended until May 2002, at which time the Company and Levi Strauss Co. entered into a new license agreement effective through December 31, 2005. The Company is obligated to pay Levi Strauss Co. a royalty on all net sales and is responsible for a guaranteed minimum royalty payment during each year of the Dockers® Footwear For Women Agreement. The licensor can terminate the agreement for a variety of reasons, including but not limited to default in performing any of the terms of the agreement and bankruptcy of the licensee.

J. G. Hook®

In April 1997, the Company entered into a license agreement (the “J. G. Hook® License Agreement”) with J. G. Hook®, Inc. pursuant to which the Company received the right to design, develop and market women’s and children’s shoes under the J. G. Hook® and Hook Sport brand names in exchange for payment of royalties based on net sales of products marketed under such brand names. The J. G. Hook® License Agreement was for an initial 18-month period ending September 30, 1998, with two one-year extension options. In September 1998, the Company exercised its first one-year option and renewed the J. G. Hook® License Agreement through September 1999. The Company later exercised its second one-year option and renewed the J. G. Hook® License Agreement through September 2000. In May 2000 the Company extended the license until December 2003. In May 2003, the Company extended the license until December 2006. The J. G. Hook® License Agreement is subject to early termination for various specified reasons, including any failure by the Company to meet its royalty obligations there under. The Company plans to use the J. G. Hook® label to sell footwear on a first cost basis.

The aggregate minimum royalty payments for all license agreements are $3.2 million, $3.3 million and $3.4 million for December 31, 2003, 2004 and 2005, respectively.

Inter-Pacific Corporation

In January 1997, the Company entered into a license agreement with Inter-Pacific Corporation (“IPC”), a 40-year-old California-based seller and distributor of men’s, women’s and children’s footwear. IPC had the exclusive rights to design, manufacture and distribute Sam & Libby® beachwear type footwear (E.V.A. sandals, jellies, aqua socks and injected molded slides) for men, women and children for an initial period from January 1997 to May 2000. IPC may also design and manufacture women’s slippers bearing the Sam & Libby® trademark. For the use of the Sam & Libby® trademark, IPC will pay the Company royalties at a rate based on sales volume. IPC exercised its option to extend the license agreement until May 2003. In March 2003, IPC extended the license until May 2006. Minimum royalties for this period, June 2003 until May 2006, are $450,000.

11

Table of Contents

Global Retail Inc.

In November 2001 the Company signed an exclusive multi-year licensing agreement with Global Retail Inc. to begin the development of freestanding retail stores throughout Europe and Asia for Joan & David® sportswear and accessory items as well as the roll-out of Joan & David® in-store shops in upscale department stores. Global Retail Inc., which is based in Hong Kong, is a widely recognized retail development and global manufacturing organization led by Chairman Jeffrey Fang. Global Retail Inc. has over 300 retail stores worldwide. Under the agreement, Global Retail Inc. will design, source, manufacture and market a full array of Joan & David® sportswear including knitwear, wovens, outerwear and dresses all incorporating high-end European design elements. The Company’s Joan & David® footwear will be prominently featured throughout the Global Retail-owned stores complementing the new offerings. The six initial stores and in-store shops opened in the Fall 2002 season. Presently there are 13 locations in Asia.

Trademarks

Mootsies Tootsies® and Mootsies Kids® are registered trademarks of the Company (or its affiliates). In addition, these trademarks have been registered in Canada, Japan and Taiwan and trademark registration applications are pending in several other countries. The Company’s United States trademark registration for Mootsies Tootsies® expires in 2010 and the registration for Mootsies Kids® expires in 2013, although both are renewable.

Sam & Libby® and Just Libby® are registered trademarks of the Company (or its affiliates). These trademarks were acquired by the Company in August 1996 from Sam & Libby, Inc. and are registered trademarks in the United States (see Note 1 of “Notes to Consolidated Financial Statements”). In addition, the Sam & Libby® and Just Libby® trademarks are registered in over 20 countries worldwide. The Company’s United States trademark registration of Sam & Libby® expires in 2011 and the registration of Just Libby® expires in 2005, although both are renewable.

In January 1997, the Company entered into a license agreement with IPC to license the Sam & Libby® trademarks for slippers and E.V.A. sandals, pursuant to which the Company will receive certain royalties and other revenues.

Dockers® Footwear For Women is a registered trademark of the Levi Strauss Co. in the United States. Under the Dockers® Footwear For Women Agreement, Levi Strauss Co. has the sole right to defend against any infringement of this trademark.

AK Anne Klein is a registered trademark of Kasper A.S.L., Ltd., or its wholly owned affiliates, in the United States. Under the Anne Klein License Agreement, Kasper A.S.L., Ltd. has the sole right to defend against any infringement of the trademarks.

Joan & David® and Joan Helpern Signature® are registered trademarks of the Company (or its affiliates). These trademarks were acquired in October 2000 from JOAN HELPERN DESIGNS, INC. and are registered trademarks in the United States and over 30 countries worldwide. The Company’s United States trademark registrations for Joan & David® and Joan Helpern Signature® expire between 2008 and 2014, and are renewable.

Competition

The women’s and kids’ fashion footwear markets are highly competitive. In fact, due to the consolidation of the industry as a result of the Jones New York acquisition of Nine West, the Company is in an industry with a dominant competitor in Jones New York. The Company’s products compete against other branded footwear and, in the case of Mootsies Tootsies®, against private label footwear sold by many large retailers, including some of the Company’s customers. Several of the Company’s competitors have substantially greater financial, distribution and marketing resources, as well as greater brand awareness than the Company. In addition, the general availability of

12

Table of Contents

offshore manufacturing capacity allows easy access by new market entrants. The Company believes its ability to compete successfully is based on its ability to design, develop and market value priced footwear that reflects current fashion trends.

Employees

At October 31, 2003, the Company employed 146 people, including officers, administrative, sales and warehouse personnel. None of the Company’s employees are represented by a union. The Company considers its relationship with its employees to be good.

Available Information

The Company’s internet website is www.maxwellshoe.com. The Company makes available free of charge on its website its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, reports filed pursuant to Section 16 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and amendments to those reports as soon as reasonably practicable after such materials are electronically filed or furnished to the SEC. Materials the Company files with the Securities and Exchange Commission may be read and copied at the SEC’s Public Reference Room at 450 Fifth Street, NW, Washington, DC 20549. This information may also be obtained by calling the Securities and Exchange Commission at 1-800-SEC-0330. The Securities and Exchange Commission also maintains an internet website that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the Securities and Exchange Commission at www.sec.gov. In addition, the Company has posted the charters for its Audit Committee and Compensation and Stock Option Committee on its website. These charters are not incorporated by reference. The Company will provide a copy of any of the foregoing documents to shareholders upon request.

The Company’s headquarters, which includes approximately 20,000 square feet of office space and 60,000 square feet of warehouse space, is located in Boston, Massachusetts The lease expires on December 31, 2011. The Company also leases a 215,000 square foot warehouse in Brockton, Massachusetts. This lease expires in 2007, subject to two five-year options to extend. In September 2001, the Company leased an additional 173,000 square feet of warehouse space adjacent to its existing Brockton space, approximately 120,000 square feet of which is subleased to an unaffiliated third party. This lease expires on September 30, 2004. The Company also leases a 7,800 square foot showroom in New York City under a lease that expires in 2008, subject to a five year option to extend. In November 2001, the Company leased approximately 2,200 square feet of retail space in the Wrentham Premium Outlet Mall in Wrentham, Massachusetts. The lease expires in 2006. The Company believes that these facilities are adequate for its current needs and that it will be able to obtain additional space at a reasonable cost if required in the future.

The Company is, from time to time, a party to litigation that arises in the normal course of its business operations. The Company does not believe it is presently a party to litigation that will have a material adverse effect on its business operations.

None.

13

Table of Contents

PART II

The Class A Common Stock is traded on the Nasdaq National Market System (“Nasdaq”) under the symbol MAXS. The following table sets forth for the fiscal periods indicated the range of high and low sale prices of the Class A Common Stock as reported by Nasdaq:

The number of stockholders of record of the Class A Common Stock on December 24, 2003 was 21. However, based on available information, the Company believes that the total number of Class A Common stockholders, including beneficial stockholders, is approximately 3,400.

Dividend Policy

The Company currently intends to retain any earnings for development of its business. Accordingly, the Company does not intend to pay cash dividends on its Common Stock in the foreseeable future. Any determination to pay cash dividends on the Common Stock in the future will be at the sole discretion of the Company’s Board of Directors and wi*ll depend upon, among other things, future earnings, operations, capital requirements, the general financial condition of the Company and general business conditions.

Equity Compensation Plan Information

The following table gives information about the Company’s Class A Common Stock that may be issued upon the exercise of options, warrants and rights under all of our existing equity compensation plans as of October 31, 2003.

14

Table of Contents

The following selected financial data are derived from audited financial statements of the Company. The following data should be read in conjunction with “Management’s Discussion and Analysis of Financial Conditions and Results of Operations.”

15

Table of Contents

Overview

The Company sells footwear for women and children to retailers located throughout the United States and Canada. Our core operating strengths have helped us to grow significantly in the past, and, management believes, will help us to achieve further growth in the future. These strengths include our portfolio of established brands, our strong manufacturing relationships, our emphasis on high volume, and our comprehensive customer relationships. The Company plans to continue to leverage these competitive strengths to pursue various growth initiatives, including growing sales of brands in our existing portfolio (which currently consists of nine lines), adding brands to our portfolio and increasing our private label business. While the Company seeks to build long-term customer relationships, revenues from any particular customer can fluctuate from period to period due to purchasing patterns. In fiscal 2003, the Company had three customers that accounted for 13.3%, 11.4% and 10.3% of net sales. At October 31, 2003, one customer accounted for 14.2% of trade receivables outstanding. Any termination or significant disruption of our relationships with one or more of our major customers could have a material adverse effect on the Company’s financial condition or results of operations. See Item 1 and Note 1 of “Notes to Consolidated Financial Statements”.

The Company does not manufacture its own products, but rather has them manufactured abroad because of supplier availability and manufacturing prices. The Company has no long-term contracts with these facilities. Instead, the Company has chosen to rely on relationships with buying agents with access to manufacturing facilities to maximize the Company’s sourcing flexibility. To protect itself against currency fluctuations, when purchasing from China and Brazil, the Company purchases products in U.S. dollars. To minimize volatility in the price of products purchased from Spain and Italy, the Company generally buys forward exchange contracts for Euro dollars in connection with the placement of orders for products. Because our products are manufactured abroad, risks and uncertainties relating to our business include the inability to source products because of adverse political, economic or health factors or the imposition of trade or duty restrictions.

To finance our operations and expansion, we have primarily relied on cash flows generated from operations and borrowings under its credit facility. Both cash provided by operating activities and working capital have increased from 2002 to 2003. Our credit facility is a $40.0 million discretionary demand credit facility bearing interest at either FleetBoston’s base rate or the Adjusted Eurodollar Rate plus 1.0%. As of October 31, 2003, there were no outstanding borrowings, $22.1 million was outstanding under letters of credit and $17.8 million was available for future borrowings.

Management believes the critical accounting policies and areas that require the most significant judgments and estimates in the preparation of the Company’s financial statements are revenue recognition and allowance for doubtful accounts, inventory valuation and income taxes. The Company recognizes revenue upon shipment of its products. Allowances for doubtful accounts are estimated based on estimates of losses related to customer receivable balances. The Company’s inventory is valued at the lower of cost or market.

The Company is a licensee under three agreements which allow for the manufacture and sale of various items of footwear. The Company generally must pay minimum royalties under these agreements regardless of sales volume. See Item 1 “—License Agreements” and Note 8 of “Notes to Consolidated Financial Statements”. We also lease equipment and office, retail and warehouse space under long-term non-cancelable operating leases expiring at various dates through January 31, 2011. Minimum payments under such leases are $2,328 and $2,333 in 2003 and 2004, respectively.

Critical Accounting Policies

Management’s discussion and analysis of its financial position and results of operations are based upon the Company’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The Company’s significant accounting policies are discussed in Note 1 to the Consolidated Financial Statements. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. Management believes the critical accounting policies and areas that require the most significant judgments and estimates to be used in the preparation of the consolidated financial statements are revenue recognition and allowance for doubtful accounts, inventory valuation and income taxes.

16

Table of Contents

Revenue Recognition and Allowance for Doubtful Accounts

The Company recognizes revenue upon shipment of its products. Allowances for doubtful accounts are estimated based on estimates of losses related to customer receivable balances. Estimates are developed by using standard quantitative measures based on historical losses, adjusting for current economic conditions and, in some cases, evaluating specific customer accounts for risk of loss. The establishment of reserves requires the use of judgment and assumptions regarding the potential for losses on receivable balances. Though the Company considers these balances adequate and proper, changes in economic conditions in specific markets in which the Company operates could have a material effect on reserve balances required.

Inventory Valuation

The Company’s inventories are valued at the lower of cost or market. Under certain market conditions, estimates and judgments regarding the valuation of inventory are employed by the Company to properly value inventory. These estimates could vary significantly, either favorably or unfavorably, from actual requirements if future economic conditions, customer inventory levels or competitive conditions differ from our expectations.

Income Taxes

As part of the process of preparing the Company’s consolidated financial statements, management is required to estimate income taxes in each of the jurisdictions in which it operates. The process involves estimating actual current tax expense along with assessing temporary differences resulting from differing treatment of items for book and tax purposes. These timing differences result in deferred tax assets and liabilities, which are included in the Company’s consolidated balance sheet.

Forward Looking Statements

“Forward-looking statements,” within the meaning of the Private Securities Litigation Reform Act of 1995 (“the Act”), include certain written and oral statements made, or incorporated by reference, by the Company or its representatives in this report, other reports, filings with the Securities and Exchange Commission (“the SEC”), press releases, conferences, or otherwise. Such forward-looking statements include, without limitation, any statement that may predict, forecast, indicate, or imply future results, performance, or achievements, and may contain the words “believe,” “anticipate,” “expect,” “estimate,” “intend,” “plan,” “project,” “will be,” “will continue,” “will likely result,” or any variations of such words with similar meaning. These statements are not guarantees of future performance and are subject to certain risks, uncertainties and assumptions that are difficult to predict; therefore, actual results may differ materially from those expressed or forecasted in any such forward-looking statements. Investors should carefully review the risk factors set forth in other reports or documents the Company files with the SEC, including Forms 10-Q, 10-K and 8-K.

Some of the other risks and uncertainties that should be considered include, but are not limited to, the following: international, national and local general economic and market conditions; the inability to source the Company’s products because of adverse political or economic factors or the imposition of trade or duty restrictions; concentration of production in China; potential disruption in supply chain or customer purchasing habits due to health concerns relating to severe acute respiratory syndrome or other related illnesses; changing consumer preferences; changing fashion trends; intense competition among other footwear brands; demographic changes; risk of the Company’s licensors of trademarks or other intellectual property rights filing bankruptcy and potentially rejecting license agreements to which the Company is a party; popularity of particular designs and products; seasonal and geographic demand for the Company’s products; fluctuations and difficulty in forecasting operating results, including, without limitation, the ability of the Company to continue, manage or forecast its growth and inventories;

17

Table of Contents

risk of unavailability or price increase in raw materials needed to make the Company’s products; new product development and commercialization; the ability to secure and protect trademarks; performance and reliability of products; customer service; adverse publicity; the loss of significant customers or suppliers; dependence on distributors, buying agents and independent contractors; increased cost of freight and transportation to meet delivery deadlines; changes in business strategy or development plans; general risks of doing business outside the United States; including without limitation, import duties, tariffs, quotas and political and economic instability; changes in government regulations; liability and other claims asserted against the Company; the ability to attract and retain qualified personnel; the risk of the Company’s customers filing bankruptcy and other factors referenced or incorporated by reference in this report and other reports.

The Company operates in a very competitive and rapidly changing environment. New risk factors can arise and it is not possible for management to predict all such risk factors, nor can it assess the impact of all such risk factors on the Company’s business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements.

Investors should also be aware that while the Company does, from time to time, communicate with securities analysts, it is against the Company’s policy to disclose to them any material non-public information or other confidential commercial information. Accordingly, investors should not assume that the Company agrees with any statement or report issued by any analyst irrespective of the content of the statement or report.

Furthermore, the Company has a policy against issuing or confirming financial forecasts or projections issued by others. Thus, to the extent that reports issued by securities analysts contain any projections, forecasts or opinions, such reports are not the responsibility of the Company.

The Company undertakes no obligation to release publicly the results of any revisions to these forward looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

18

Table of Contents

Results of Operations

The following table sets forth net sales by product line or category of business:

Fiscal 2003 Compared to Fiscal 2002

Net sales were $225.0 million in fiscal 2003 compared to $204.4 million in fiscal 2002, an increase of 10.1%. This increase was due primarily to the increased net sales of AK Anne Klein of 15.9% and Mootsies Tootsies of 6.8%. All branded divisions increased net sales in fiscal 2003. These increases have been achieved notwithstanding the challenging retail market in which the Company’s customers operate. No assurances can be given that these trends will continue. The other sales category refers to the net sales of Kasper and Albert Nipon Footwear.

Gross profit was $60.2 million in fiscal 2003 compared to $54.0 million in fiscal 2002, an increase of 11.4%. The gross profit improvement was a result of the increased net sales. The increase in gross profit as a percentage of net sales of 26.8% in fiscal 2003 compared to 26.4% in 2002 is due to a more favorable mix of net sales. The retail environment is still promotional.

Selling, general and administrative expenses were $37.3 million in fiscal 2003 as compared to $35.8 million in fiscal 2002, an increase of 4.3%. As a percentage of net sales, selling, general and administrative expenses decreased to 16.6% in fiscal 2003 as compared to 17.5% in fiscal 2002. This decrease was due to the Company’s ability to control expenses at a rate lower than the net sales growth rate.

Other income was $1.3 million for fiscal 2003 compared to other income of $1.2 million for fiscal 2002. Other income primarily consisted of interest income from cash equivalents.

The provision for income taxes was 38.0% in fiscal 2003 and 31.8% in fiscal 2002. The lower rate for fiscal 2002 was a result of the exercise of stock options, for which the Company received a tax benefit. The Company anticipates its 2004 tax rate to be consistent with the 38% rate in 2003.

Fiscal 2002 Compared to Fiscal 2001

Net sales were $204.4 million in fiscal 2002 compared to $182.2 million in fiscal 2001, an increase of 12.1%. This increase was due primarily to the increased net sales of AK Anne Klein of 29.5% and the $9.0 million increase in the net sales of Joan & David. Fiscal 2002 represented the first full year of shipments of Joan and David footwear. These increases have been achieved notwithstanding the challenging retail market in which the Company’s customers operate. No assurances can be given these trends will continue.

Gross profit was $54.0 million in fiscal 2002 compared to $50.7 million in fiscal 2001, an increase of 6.6%. The gross profit improvement was a result of the increased net sales. The decrease in gross profit as a percentage of net sales of 26.4% in fiscal 2002 compared to 27.8% in 2001 is due to the promotional activity at retail.

19

Table of Contents

Selling, general and administrative expenses were $35.8 million in fiscal 2002 as compared to $32.6 million in fiscal 2001, an increase of 9.9%. As a percentage of net sales, selling, general and administrative expenses decreased to 17.5% in fiscal 2002 as compared to 17.9% in fiscal 2001. This decrease was due to the Company’s ability to control expenses at a rate lower than the net sales growth rate.

Other income was $1.2 million for fiscal 2002 compared to other income of $1.7 million for fiscal 2001. Other income primarily consisted of interest income from cash equivalents. The decrease was attributable to lower interest rates.

The provision for income taxes was 31.8% in fiscal 2002 and 37.9% in fiscal 2001. The change in rate for fiscal 2002 was a result of the exercise of stock options, for which the Company received a tax benefit.

Liquidity and Capital Resources

The Company has relied primarily upon internally generated cash flows from operations and borrowings under its credit facility to finance its operations and expansion. Cash provided by operating activities totaled approximately $9.7 million in fiscal 2001, $7.7 million in fiscal 2002 and $24.8 million in fiscal 2003. At October 31, 2003, working capital was $143.7 million as compared to $124.1 million at October 31, 2002. Working capital may vary from time to time as a result of seasonal requirements, the timing of early factory shipments and the Company’s in-stock position, which requires increased inventories, and the timing of accounts receivable collections. Capital expenditures were $.5 million for the year ended October 31, 2003.

The Company currently has a $40.0 million discretionary demand credit facility bearing interest at either FleetBoston’s base rate or Adjusted Eurodollar Rate plus one percent (1.0%), renewable annually under certain conditions. The credit agreement provides the bank will both advance funds directly to the Company and issue letters of credit on behalf of the Company. As of October 31, 2003, there were no outstanding borrowings, $22.2 million was outstanding under letters of credit and $17.8 million was available for future borrowings.

The Company from time to time enters into forward exchange contracts in anticipation of future purchases of inventory denominated in foreign currency, principally the Euro. At October 31, 2003, forward exchange contracts totaling $0.3 million were outstanding with settlement dates ranging from November 3, 2003 through January 30, 2004.

The Company anticipates that it will be able to satisfy its cash requirements for fiscal 2003 primarily with its current cash on hand and cash flow from operations, supplemented, if needed, by borrowings under its demand credit facility.

Off-Balance Sheet Arrangements

The Company has no off-balance sheet arrangements and has not entered into any transactions involving unconsolidated, limited purpose entities.

Disclosures About Contractual Obligations

The following table represents the Company’s contractual obligations as of October 31, 2003:

Effects of Inflation

The Company believes that the relatively moderate rate of inflation over the past few years has not had a significant impact on the Company’s revenues or profitability.

20

Table of Contents

The Company does not believe that there is any material market risk exposure with respect to derivative or other financial instruments that would require disclosure under this item. The Company’s cash is held in checking accounts or highly liquid investments with original maturities of three months or less.

The Consolidated Financial Statements required in response to this section are submitted as part of Item 15(a) of this Report.

21

Table of Contents

INDEPENDENT AUDITORS’ REPORT

The Board of Directors and Stockholders

Maxwell Shoe Company Inc.

We have audited the accompanying consolidated balance sheet of Maxwell Shoe Company Inc. as of October 31, 2003, and the related consolidated statements of income, changes in stockholders’ equity and cash flows the year ended October 31, 2003. Our audit also included the financial statement schedule for the year ended October 31, 2003, listed in the Index at Item 15(a). These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audit. The accompanying consolidated financial statements and financial statement schedule as of October 31, 2002 and for each of the two years then ended were audited by other auditors whose report thereon dated December 17, 2002 expressed an unqualified opinion on those consolidated financial statements and financial statement schedule.

We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Maxwell Shoe Company Inc. as of October 31, 2003, and the consolidated results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule for the year ended October 31, 2003, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

KPMG LLP

Boston, Massachusetts

December 16, 2003

22

Table of Contents

REPORT OF ERNST & YOUNG LLP,

INDEPENDENT AUDITORS

The Board of Directors and Stockholders

Maxwell Shoe Company Inc.

We have audited the accompanying consolidated balance sheets of Maxwell Shoe Company Inc. as of October 31, 2001 and 2002, and the related consolidated statements of income, changes in stockholders’ equity and cash flows for each of the three years in the period ended October 31, 2002. Our audits also included the financial statement schedule listed in the Index at Item 15(a). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Maxwell Shoe Company Inc. at October 31, 2001 and 2002, and the consolidated results of its operations and its cash flows for each of the three years in the period ended October 31, 2002, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

ERNST & YOUNG LLP

Boston, Massachusetts

23

Table of Contents

MAXWELL SHOE COMPANY INC.

CONSOLIDATED BALANCE SHEETS

(In Thousands — except per share amounts)

24

Table of Contents

MAXWELL SHOE COMPANY INC.

CONSOLIDATED STATEMENTS OF INCOME

(In Thousands — except per share amounts)

25

Table of Contents

MAXWELL SHOE COMPANY INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands)

26

Table of Contents

MAXWELL SHOE COMPANY INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(In Thousands)