Back to GetFilings.com

Table of Contents

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

(Mark One)

For the fiscal year ended November 28, 2003

OR

For the transition period from             to             

Commission File Number: 1-04404

THE STRIDE RITE CORPORATION

(Exact Name of Registrant as Specified in its Charter)

Registrant’s telephone number, including area code: (617) 824-6000

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act:

None

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. ¨

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

As of May 30, 2003, the aggregate market value of the 39,123,934 shares of common stock held by non-affiliates of the Registrant was $352,115,406 based upon the closing price of $9.00 on the New York Stock Exchange composite tape on such date. (For this computation, the Registrant has excluded the market value of all shares of common stock reported as beneficially owned by executive officers and directors of the Registrant; such exclusion shall not be deemed to constitute an admission that any such person is an affiliate of the Registrant.) As of May 30, 2003, there were 39,418,625 shares of common stock outstanding.

Documents Incorporated By Reference

Certain information contained in the Registrant’s Proxy Statement relating to its Annual Meeting of Stockholders to be held April 15, 2004 is incorporated by reference in Part III, Items 10, 11,12, 13 and 14.

Table of Contents

TABLE OF CONTENTS

Table of Contents

PART I

Item 1.    Business.

General

The Stride Rite Corporation, a Massachusetts corporation founded in 1919, is a leading designer and marketer of high quality children’s footwear in the United States and is a major designer and marketer of athletic and casual footwear for children and adults. The business was founded on the strength of the Stride Rite^® children’s brand, but today includes a portfolio of well known American brands addressing different market segments within the footwear industry. In addition to the Stride Rite^® brand, we design and market footwear under the following owned or licensed brands: Keds^®, PRO-Keds^®, Grasshoppers^®, Sperry Top-Sider^®, Sperry^®, Munchkin^®, Tommy Hilfiger^®, Kid Smart^™ and Baby Smart^™. During 2004 we will begin marketing a line of children’s footwear under the Børn^® name through a licensing agreement.

We are predominantly a wholesaler of footwear, selling our products nationally in a wide variety of retail formats including department stores, independent shoe stores, value retailers, catalog retailers, e-commerce sites, mass retailers and specialty stores. We market our products in countries outside the United States and Canada through independent distributors and licensees. We import substantially all of our products from independent resources in the Far East, which manufacture footwear according to each brand’s specifications and quality standards.

We also market our products directly to consumers by selling children’s footwear through our Stride Rite children’s shoe stores and for all our brands through our “Stride Rite Family Footwear” and “Stride Rite, Keds, Sperry” outlet stores which are located in selected factory outlet centers.

Unless the context otherwise requires, all references to “we”, “us”, “our”, the “Company”, “Stride Rite” or “The Stride Rite Corporation” in this report refer to The Stride Rite Corporation and all of its wholly owned subsidiaries.

Our filings with the Securities and Exchange Commission including our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports are available free of charge on our Internet website, www.strideritecorp.com.

Products

Our wholly-owned subsidiary, Stride Rite Children’s Group, Inc., designs and markets children’s footwear, primarily for consumers between the ages of six months and ten years, including dress and recreational shoes, boots, sandals, athletic shoes and sneakers, in traditional and contemporary styles. Those products are marketed under the STRIDE RITE^®, MUNCHKIN^®, SPERRY^®, SPERRY TOP-SIDER^®, TOMMY HILFIGER^® and STREET HOT^® trademarks in medium to high price ranges and under our KID SMART^™ and BABY SMART^™ trademarks in medium to lower price ranges.

The Keds Corporation designs and markets sneakers and casual footwear for adults and children under the KEDS^® trademark and casual footwear for women under the GRASSHOPPERS^® label.

Sperry Top-Sider, Inc. designs and markets marine footwear and outdoor recreational, hand-sewn, dress and casual footwear for adults under our SPERRY TOP-SIDER^® and SPERRY^® trademarks. Products sold under the SPERRY TOP-SIDER^® label also include sneakers and sandals for men and women.

Tommy Hilfiger Footwear, Inc. designs and markets dress casual, sport casual and athletic footwear for adults using the TOMMY HILFIGER^® brand name under a license agreement with Tommy Hilfiger Licensing, Inc. During fiscal 2003 the design and marketing of the PRO-Keds^® product line was transferred to the Tommy Hilfiger footwear unit.

Table of Contents

Sales and Distribution

We sell our products nationwide to customers operating retail outlets, including premier department stores, value retailers and specialty stores, as well as to Stride Rite children’s shoe stores and other shoe stores operated by independent retailers. We maintain an in-stock inventory of certain styles of our various branded footwear in a wide range of sizes and widths for shipment to our wholesale customers. In addition, we sell footwear products to consumers through Stride Rite-owned stores, including children’s shoe stores, manufacturers’ outlet stores, Keds retail stores, and, prior to April 30, 2002, through the children’s leased footwear departments of certain Federated Department Stores. We also sell products directly to consumers through our e-commerce sites, www.keds.com and www.sperrytopsider.com. Additionally, we have agreements with various licensed and trade partners to sell our products. The Spring selling season which corresponds with our first and second quarters is our most important sales period. Our largest single customer in each year accounted for approximately 6%, 7% and 9% of consolidated net sales for the fiscal years ended 2003, 2002 and 2001, respectively. Information about geographic and segment operations appears in Note 14 to the consolidated financial statements.

We provide assistance to a limited number of qualified specialty retailers to enable them to operate independent Stride Rite children’s shoe stores. Such assistance sometimes includes the sublease of a desirable retail site by us to an independent dealer. There are approximately four independent dealers who currently sublease store locations from us.

We own two distribution centers, one located in Louisville, Kentucky with 520,000 square feet of space and the other in Huntington, Indiana with 409,000 square feet of space. Our Canadian subsidiary, Stride Rite Canada Limited, leases an additional 29,000 square feet of warehouse and office space in Mississauga, Ontario.

Generally, we use independent distributors and licensees to market our various product lines outside of the United States and Canada. International revenues, including sales of our Canadian subsidiary, represented approximately 4%, 5% and 4% of consolidated net sales for the fiscal years ended 2003, 2002 and 2001, respectively.

We are also a party to foreign license agreements in which independent companies operate Stride Rite retail stores outside the United States. A total of eight stores are currently operating in Costa Rica, Guatemala, Haiti, Honduras and Kuwait pursuant to such agreements. We also distribute all of our brands and products in Canada through our Canadian subsidiary.

International Sourcing

We purchase substantially all of our products from sources in China, Brazil, Vietnam and Indonesia. We currently maintain a staff of approximately 90 professional and technical personnel in Taiwan and China to supervise a substantial portion of our canvas and leather footwear production. During fiscal year 2004 the Taiwan office will be closed and their functions moved to China. We anticipate that overseas resources will continue to be utilized in the future. In addition, we use the services of buying agents to source merchandise.

Approximately 96% of our footwear products are manufactured by independently owned footwear manufacturers in China. Historically, China’s political and economic environment has not had a material adverse effect on our financial condition or results of operations. We cannot predict, however, the effect that future changes in economic or political conditions in China could have on the economics of doing business with our Chinese manufacturers.

Retail Operations

As of November 28, 2003, we operated 173 Stride Rite children’s shoe stores, 59 manufacturers’ outlet stores under the names “Stride Rite Family Footwear” and “Stride Rite, Keds, Sperry” which sell in-line products, closeouts and prior season goods for all of our owned and licensed brands, and 5 Keds retail stores

2

Table of Contents

which sell a full range of Keds products and certain other Company products. The Stride Rite children’s shoe stores carry a significant portion of the lines of our STRIDE RITE^® and SPERRY TOP-SIDER^® children’s footwear and a portion of the KEDS^® children’s product line and the TOMMY HILFIGER^® boys’ and girls’ lines. Our stores are located primarily in larger regional shopping centers, clustered generally in the major marketing areas of the United States. Most of our manufacturers’ outlet stores are located in shopping centers consisting only of outlet stores.

During fiscal 2003, we opened 10 Stride Rite children’s shoe stores and 1 manufacturers’ outlet store. During fiscal 2003, we closed 5 children’s shoe stores, 3 outlets and 1 Keds retail store. We currently plan to open approximately 17 retail stores in fiscal 2004 and we anticipate 4 of them to be from licensed dealer acquisitions. We will also continue our efforts to close underperforming retail locations in fiscal 2004, and expect to cease operations of approximately 8 stores during the year.

Sales through our retail operations accounted for approximately 25%, 24% and 22% of consolidated net sales for the fiscal years ended 2003, 2002 and 2001, respectively.

Apparel and Accessory Licensing Activities

License royalties accounted for approximately 1% of our consolidated net sales in each of the three most recent fiscal years ended in 2003. We have license agreements with a number of third parties pursuant to which apparel and accessories are designed, manufactured and sold under the KEDS^®, STRIDE RITE ^® and SPERRY TOP-SIDER^® trademarks. We continue to pursue new license opportunities.

Backlog

As of November 28, 2003 and November 29, 2002, we had a backlog of orders amounting to approximately $127,300,000 and $150,800,000, respectively. To a significant extent, the backlog at the end of each fiscal year represents orders for the upcoming Spring footwear styles. Substantially all of these orders are delivered or canceled during the first two quarters of the next fiscal year.

In all of our wholesale businesses, reorders from retail customers are an important source of revenue to supplement the orders taken in advance of the season. Over the years, the importance of reorder activity to a season’s success has grown as customers, especially larger retailers, have placed increased reliance on orders during the season which are transmitted via electronic data interchange (EDI) programs. Due to the shift from year-to-year, between future orders and reorders, backlog does not necessarily translate directly into sales.

Competition

We compete with a number of suppliers of children’s footwear, a few of which are divisions of companies that have substantially greater net worth or sales revenue than us. Management believes, however, that on the basis of sales, we are the largest supplier of nationally branded higher-end, non-athletic children’s footwear in the United States.

In the highly fragmented sneaker, casual and recreational footwear industry, numerous domestic and foreign competitors, some of which have substantially greater net worth or sales revenue than us, produce or market goods that are comparable to and compete with our products in terms of price and general level of quality.

Management believes that the creation of attractive styles, in multiple widths, together with specialized engineering for fit, durability, quality and high service standards including open stock positions are significant factors in competing successfully in the marketing of all types of footwear. Management believes that we are competitive in all such respects.

3

Table of Contents

In operating our own retail outlets, we compete in the children’s retail shoe industry with numerous businesses, ranging from large retail chains to single store operators.

Employees

As of November 28, 2003, we employed approximately 2,400 full-time and part-time employees. One collective bargaining unit represents a small number of these employees. Management believes that its relations with employees are good.

Environmental Matters

Our compliance with federal, state, local and foreign regulations with respect to the environment has not had, and is not expected to have, a material effect on our capital expenditures, earnings or competitive position.

Patents, Trademarks and Licenses

We have an existing trademark license agreement with Tommy Hilfiger Licensing, Inc., pursuant to which we design, market and sell footwear to adults and children. This license agreement will run through March 2007. Refer to the “Retention of Major Brand License” section in the “Certain Risk Factors Which May Affect Future Operating Results” heading, below, for additional discussion regarding the Tommy Hilfiger license agreement.

We also announced in December 2003 a licensing arrangement with H.H. Brown Shoe Company, Inc. to develop, market and sell an exclusive line of children’s footwear under the Børn name. This license agreement will run through March 2007 and covers the United States and Puerto Rico.

We believe that our patents and trademarks are important to our business and are generally sufficient to permit us to carry on our business as presently conducted.

Research and Development

We depend principally upon our design, engineering and marketing skills and the quality of our products for our ability to compete successfully. We conduct research and development for footwear products. However, the level of expenditures with respect to such activity is not material and is expensed as incurred.

Certain Risk Factors Which May Affect Future Operating Results

This form 10-K contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and Section 21E of the Securities Exchange Act of 1934. We caution investors that any forward-looking statements presented in this report and presented elsewhere by management from time to time are based on management’s beliefs and assumptions made by, and information currently available to, management. When used, the words “anticipate”, “believe”, “expect”, “intend”, “may”, “might”, “plan”, “estimate”, “project”, “should”, “will be”, “will result” and similar expressions which do not relate solely to historical matters are intended to identify forward-looking statements. Such statements are subject to risks, uncertainties and assumptions and are not guarantees of future performance, which may be affected by known and unknown risks, trends, uncertainties and factors that are beyond our control. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated or projected. We expressly disclaim any responsibility to update forward-looking statements. Accordingly, past results and trends should not be used by investors to anticipate future results or trends.

Mature Markets; Competition; Consumer Trends

Our strategy for growth depends upon increasing the acceptance of our current brands in our major markets, expanding into new markets and increasing the number of footwear products and brands that we sell. There can

4

Table of Contents

be no assurance that we will be able to successfully develop new branded products or acquire existing brands from third parties. The bulk of our sales are in the United States and Canada where the market is mature for many of our products. To grow our business, we must increase our market share at the expense of our competitors, and there can be no assurance we will be successful. Our efforts to expand sales outside the United States and Canada may not succeed.

Both the footwear industry specifically, and the fashion industry in general, are subject to rapid and substantial shifts in consumer tastes and preferences. There are many competitors in our markets with substantially greater financial resources, production, marketing and product development capabilities. Our performance may be hurt by our competitors’ product development, sourcing, pricing, innovation and marketing strategies. In addition, we expect the footwear marketplace in the United States to continue to experience the entry of brands from foreign companies.

The fashion and retail industries are subject to sudden shifts in consumer trends and consumer spending, on which our results are, in part, dependent. Consumer acceptance of our new products may fall below expectations and the launch of new product lines may be delayed. The results of our wholesale businesses are affected by the buying plans of our customers, which include large department stores, as well as smaller retailers. Our wholesale customers may not inform us of changes in their buying plans until it is too late for us to make the necessary adjustments to our product lines and marketing strategies. While we believe that purchasing decisions in many cases are made independently by individual stores or store chains, we are exposed to decisions by the controlling owner of a store chain, to decrease the amount of footwear products purchased from us. Moreover, the retail industry periodically experiences consolidation. We face a risk that our wholesale customers may consolidate, restructure, reorganize or realign in ways that could decrease the number of stores or the amount of shelf space that carry our products. We also face a risk that our wholesale customers could develop in-house brands or utilize the private labeling of footwear products. The impact that e-commerce will have on the retail industry in the future is uncertain and may adversely affect our business. Additionally, the strength or weakness of the overall economy as well as unseasonable weather conditions can have a substantial effect on our business.

Stride Rite-owned retail stores are increasingly significant to our business, especially with respect to the Stride Rite brand. We are currently evaluating Keds retail stores in five locations. During fiscal 2004 we are also evaluating a new retail concept aimed at a broader mid-priced audience. In the future, we may also evaluate new retail concepts to market the other footwear brands owned by us. The management of our Stride Rite Children’s Group does extensive research on potential sites for new stores, including demographic studies and an evaluation of the impact that potential locations would have on the results of our existing Stride Rite-owned stores and our network of locations operated by independent licensed dealers. Despite this careful evaluation, new Stride Rite stores may not meet sales expectations and new retail concepts may not achieve the expected financial results. The opening of new stores may also be delayed for a variety of reasons. During fiscal 2004 we plan to open approximately 17 retail stores.

Inventory Obsolescence

The fashion-oriented nature of our industry, the rapid changes in customer preferences and the extended product development and sourcing lead times also leave us vulnerable to an increased risk of inventory obsolescence. While we have successfully managed this risk in the past, and believe we can successfully manage it in the future, our revenue and operating margins will suffer if we are unable to do so.

Retention of Major Brand License

We have derived significant revenues and earnings in the past from our exclusive licensing agreement with Tommy Hilfiger Licensing, Inc. to produce and sell Tommy Hilfiger branded footwear. We have negotiated with

5

Table of Contents

Tommy Hilfiger Licensing, Inc. to amend and renew our Tommy Hilfiger license for a term expiring March 31, 2007. In early January 2004, we finalized the terms of the license and agreed to this extension. Whether our license with Tommy Hilfiger will remain in effect depends on our achieving certain minimum sales levels for the licensed products. We currently are exceeding these minimum sales levels. We believe we enjoy a good relationship with Tommy Hilfiger Licensing, Inc. and it is our intention to continue this license. The loss of the Tommy Hilfiger license would have a material adverse effect on our business.

Overseas Production and Raw Material Procurement

We purchase substantially all of our product lines and raw materials overseas and expect to do so for the foreseeable future. Our international sourcing subjects us to the risks of doing business abroad. Such risks include expropriation, acts of war or terrorism, political disturbances, strikes or other labor disputes, political instability and similar events, including trade sanctions, loss of normalized trade relations status, export duties, import controls, quotas, and other trading restrictions, as well as fluctuations in currency values. Moreover, we rely heavily on independent third-party manufacturing facilities, primarily located in China, to produce our products. If trade relations between the United States and China or other countries in which we manufacture our products deteriorate or are threatened by instability, our business may be adversely affected. We cannot predict the effect that changes in the economic and political conditions in China could have on the economics of doing business with Chinese manufacturers. Although we believe that we could find alternative manufacturing sources for our products with independent third-party manufacturing facilities in other countries, the loss of a substantial portion of our Chinese manufacturing capacity could have a material adverse effect on our business. Due to the substantial quantity of footwear manufactured in China and its importance to the footwear industry, a major disruption would make it difficult to find capacity elsewhere in the short-term that could accommodate the overall industry-wide demand. Also, if we were required to relocate a substantial portion of our manufacturing outside of China, there can be no assurance that we could obtain as favorable economic terms, which could adversely affect our performance.

Dependence on Logistical Systems

Our business operations are dependent on our logistical systems, which include our order management system and our computerized warehouse network. The logistical systems enable us to procure our footwear products from overseas manufacturers, transport it to our distribution facilities, store it and timely deliver it to our customers, in the correct sizes and styles. A disruption to the logistical systems could have a material adverse impact on our business.

Intellectual Property Risk

We believe that our patents and trademarks are important to our business and are generally sufficient to permit us to carry on our business as presently conducted. We cannot, however, know whether we will be able to secure patents or trademark protection for our intellectual property in the future or whether that protection will be adequate for future products. Further, we face the risk of ineffective protection of intellectual property rights in the countries where we source and distribute our products. Finally, we cannot be sure that our activities will not infringe on the proprietary rights of others. If we are compelled to prosecute infringing parties, defend our intellectual property or defend ourselves from intellectual property claims made by others, we may face significant expenses and liabilities.

6

Table of Contents

Item 2.    Properties.

We own an automated distribution center located in Louisville, Kentucky with 520,000 square feet of space and a distribution center located in Huntington, Indiana with 409,000 square feet of space. Our Canadian subsidiary leases approximately 29,000 square feet for administrative offices and warehousing in Mississauga, Ontario.

We lease approximately 163,000 square feet for our headquarters and administrative offices in Lexington, Massachusetts in a single tenant office building. We also lease 24,000 square feet of space in Richmond, Indiana for our customer service, order processing and tele-sales functions, and 25,000 square feet of space for our liaison offices in China and Taiwan. In addition, we lease smaller facilities for local sales offices and showrooms in various locations in the United States. During fiscal 2004, the Taiwan office will be closed and their functions moved to China.

As of November 28, 2003, we operated 237 retail stores throughout the country on leased premises that, in the aggregate, covered approximately 396,000 square feet of space. In addition, we are the lessee of 4 retail locations with a total of approximately 5,000 square feet that are subleased to independent Stride Rite dealers and other tenants.

For further information concerning our lease obligations, see Note 8 to our consolidated financial statements, which are contained in Item 8 to this report. Management believes that all of our properties and facilities are suitable, adequate and fit for their intended purposes.

Item 3.    Legal Proceedings.

We are a party to various litigation arising in the normal course of business. Management does not believe the ultimate resolution of any such litigation will have a material adverse effect on our financial position or results of operations.

Item 4.    Submission of Matters to a Vote of Security Holders.

None.

7

Table of Contents

PART II

Item 5.    Market for Registrant’s Common Equity and Related Stockholder Matters.

Our common stock is listed on the New York Stock Exchange under the symbol “SRR”. The following table sets forth the high and low closing sales prices on the New York Stock Exchange – Composite Tape. As of February 13, 2004, we had approximately 3,700 stockholders of record. We have paid a quarterly dividend of $.05 per share of common stock during our two most recent fiscal years.

COMMON STOCK PRICES

Securities Authorized for Issuance Under Equity Compensation Plans

The following table provides information as of November 28, 2003 regarding compensation plans (including individual compensation arrangements) under which equity securities of Stride Rite are authorized for issuance.

EQUITY COMPENSATION PLAN INFORMATION

8

Table of Contents

Item 6.    Selected Financial Data.

The selected financial data for Stride Rite, for the last five fiscal years set forth below, should be read in conjunction with, and is qualified in its entirety by reference to, our consolidated financial statements and the notes thereto and the other information contained elsewhere in this report.

Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Overview

The following discusses The Stride Rite Corporation’s results of operations and liquidity and capital resources. The discussion including known trends and uncertainties identified by management should be read in conjunction with the consolidated financial statements and related notes. This form 10-K contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and Section 21E of the Securities Exchange Act of 1934. We caution investors that any forward-looking statements presented in this report and presented elsewhere by management from time to time are based on management’s beliefs and assumptions made by, and information currently available to, management. When used, the words “anticipate”, “believe”, “expect”, “intend”, “may”, “might”, “plan”, “estimate”, “project”, “should”, “will be”, “will result” and similar expressions which do not relate solely to historical matters are intended to identify forward-looking statements. Such statements are subject to risks, uncertainties and assumptions and are not guarantees of future performance, which may be affected by known and unknown risks, trends, uncertainties and

9

Table of Contents

factors that are beyond our control. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated or projected. We expressly disclaim any responsibility to update forward-looking statements. Accordingly, past results and trends should not be used by investors to anticipate future results or trends.

Risks and uncertainties that may affect future performance are detailed from time to time in reports filed by the Company with the SEC, including Forms 10-Q and 10-K, and include, among others, the following: international, national and local general economic and market conditions; the size and growth of the overall footwear and general retail market; intense competition among designers, marketers, distributors and sellers of footwear; demographic changes; changes in consumer fashion trends that may shift to footwear styling not currently included in our product lines; popularity of particular designs and categories of products; seasonal and geographic demand for the Company’s products; difficulties in anticipating or forecasting changes in consumer preferences; delays in the opening of new stores; difficulties in implementing, operating and maintaining the Company’s complex information systems and controls, including, without limitation, the systems related to the Company’s retail stores, systems related to demand and supply planning, and inventory control; interruptions in data and communications systems; fluctuations and difficulty in forecasting operating results; the ability of the Company to sustain, manage or forecast its growth and inventories; the size, timing and mix of purchases of the Company’s products; the underperformance or delay of new products; the possible failure to retain the Tommy Hilfiger footwear license; the ability to secure and protect trademarks, patents and other intellectual property; performance and reliability of products; customer service; adverse publicity; the loss of significant suppliers or customers, such as department stores and specialty retailers, the consolidation or restructuring of such customers, including large department stores, which may result in unexpected store closings; dependence on China manufacturing; the ability to secure raw materials; delays and increased costs of freight and transportation to meet delivery deadlines; the impact on product development or manufacturing as a result of health risks such as SARS (Severe Acute Respiratory Syndrome); changes in business strategy or development plans; general risks associated with 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; and other factors referenced or incorporated by reference in this report and other reports.

The risks included here are not exhaustive. Other sections of this report may include additional factors which could adversely affect the Company’s business and financial performance. Moreover, the Company operates in a very competitive and rapidly changing environment. New risk factors emerge from time to time 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 as a prediction of actual results.

Investors should also be aware that while the Company does communicate with securities analysts from time to time, it is against our policy to disclose to them any material non-public information or other confidential information. Accordingly, investors should not assume that we agree 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. Therefore, to the extent that reports issued by securities analysts contain any projections, forecasts or opinions, such reports are not the responsibility of the Company.

Critical Accounting Estimates

The following discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to

10

Table of Contents

make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods.

We believe that the estimates, assumptions and judgments involved in the accounting policies described below have the greatest potential impact on our financial statements, therefore we consider these to be our critical accounting estimates. The most significant estimates included in these financial statements include valuation allowances and reserves for accounts receivable, inventory and income taxes. These areas are subject to the risks and uncertainties described above. Actual results, therefore, could differ from those estimates.

Revenue Recognition

Revenues consist of sales to customers and royalty income. Wholesale revenues are recognized when title passes and the risks and rewards of ownership have transferred to the customer, based on the shipping terms. Retail store revenues are recognized at the time of sale. Royalty income, which accounted for approximately $6.4 million, $6.2 million and $5.7 million in fiscal years 2003, 2002 and 2001, respectively, is recognized when earned. We permit merchandise returns from our customers under certain circumstances and engage in buy-down programs with certain retailers, principally in the form of product markdown allowances for obsolete and slow moving products that are in the retailer’s inventory. The buy-down programs are accounted for as a reduction in revenues. The returns allowance is recorded as a reduction to revenues for the estimated sales value of the projected merchandise returns and as a reduction in cost of products for the corresponding cost amount. Allowances for product markdowns are estimated and deducted from revenue at the time that revenue is recognized. Our procedure for estimating product returns and markdown allowances is based upon our historical experience, product sell-through performance by product and by customer, current and historical trends in the footwear industry and changes in demand for our products. From time to time actual results will vary from the estimates that were previously established. Due to the existence of good monitoring systems, our visibility into our customers’ inventory levels and the ongoing communication with our customers, we are able to identify variances in our estimates in a timely manner, that are then properly reflected in our financial statements.

Reserve for Uncollectable Accounts Receivable

We make ongoing estimates relating to the collectability of our accounts receivable balances and maintain a reserve for estimated losses resulting from the inability of our customers to make required payments. If actual losses differ from estimated losses there will be an effect on net income and liquidity. In determining the amount of the reserve, we consider our historical level of credit losses and make judgments about the creditworthiness of significant customers based on ongoing credit evaluations. These evaluations, which are performed by our corporate credit department, include, but are not limited to, analyzing our customer’s financial statements, maintaining a credit watch list to monitor accounts receivable exposure and reviewing the customer’s prior payment history. We predominantly sell our products to large retailers. Historically, we have not experienced significant losses related to trade receivables. However, there is a risk that some of these retail customers could experience financial difficulties, particularly in a weak economy, that may cause them to extend payment times or default on their obligations to us. If a large customer were to default on its financial obligations to us, we could experience a decrease in liquidity. We believe, however, that we have sufficient financial resources to mitigate the effect that a large default would have on our ability to continue to operate our business. In addition to the impact on liquidity, we could also experience a decrease in future revenues and operating margins related to this loss of business.

Inventory Reserves

The fashion oriented nature of our business, along with the potential for changes in customer preferences and the extended product development lead times, leave us vulnerable to the risk of inventory obsolescence both at our own stores and also to our wholesale inventories. We make ongoing estimates relating to the net realizable

11

Table of Contents

value of inventories, based upon our assumptions about future demand and market conditions. If we estimate that the net realizable value of our inventory is less than the cost of the inventory recorded on our books, we record a reserve equal to the difference between the cost of the inventory and the estimated net realizable value. If changes in market conditions result in reductions in the estimated net realizable value of our inventory below our previous estimate, we would increase our reserve in the period in which we made such a determination. We have continually managed these risks in the past and believe we can successfully manage them in the future. However, our revenues and operating margins may suffer if we are unable to effectively manage these risks.

Property and Equipment

Property and equipment is recorded at cost and is depreciated over its estimated useful life. When events or circumstances indicate that the carrying value of property and equipment may be impaired, we estimate the future undiscounted cash flows to be derived from the asset to determine its fair market value and whether or not a potential impairment exists. If the carrying value exceeds the estimate of future undiscounted cash flows, we then calculate the impairment as the excess of the carrying value of the asset over the estimate of its fair market value. Any impairment charges are recorded as part of selling and administrative expenses. We estimate future undiscounted cash flows using assumptions about their expected future operating performance. The estimates of undiscounted cash flows may change in future periods due to, among other things, technological changes, economic conditions, changes in business operations or inability to meet business plans. Such changes may result in impairment charges in the period in which such changes in estimates are made.

Defined Benefit Pension Plan

We sponsor a defined benefit pension plan. Major assumptions used in the accounting for this employee benefit plan include the discount rate, expected return on plan assets and rate of increase in employee compensation levels. Assumptions are determined based on our data and appropriate market indicators, and are evaluated each year as of the plan’s measurement date. A change in any of these assumptions would have an effect on net periodic pension benefit costs reported in the consolidated financial statements.

In fiscal 2003, the discount rate was lowered to 6.25%. The expected return on plan assets will remain at 8.5% in fiscal 2004, reflecting current economic conditions. Pension expense in 2004 is not expected to be negatively impacted by these changes. See Note 9 to the consolidated financial statements for further discussion.

Taxes

We record income tax liabilities utilizing known obligations and estimates of potential obligations. A deferred tax asset or liability is recognized whenever there are future tax effects from existing temporary differences and operating loss and tax credit carryforwards. We must make estimates and judgments on future taxable income, considering feasible tax planning strategies and taking into account existing facts and circumstances, to determine if a valuation allowance is necessary. A valuation allowance has not been assigned to our deferred tax assets since we believe it is more likely than not that we will fully realize the benefits of such tax assets. When we determine that deferred tax assets could be realized in greater or lesser amounts than recorded, the asset balance and income statement reflects the change in the period such determination is made. Due to changes in facts and circumstances and the estimates and judgments that are involved in determining the proper valuation allowance, differences between actual future events and prior estimates and judgments could result in adjustments to a future valuation allowance. We use an estimate of our annual effective tax rate at each interim period based on the facts and circumstances known at that time, while the actual effective tax rate is calculated at year-end. This estimation process periodically results in a change to our expected effective tax rate for the fiscal year. When this occurs, we adjust the income tax provision during the period in which the change in estimate occurs so that the year-to-date provision equals the expected annual rate. The preparation of federal and state tax returns requires interpretations, judgments and estimates which are subject to the review and audit of taxing authorities. We believe that the results of audits will not adversely affect earnings.

12

Table of Contents

Contingencies

The sale of Tommy Hilfiger branded footwear is a significant portion of our business. The Tommy Hilfiger footwear sales are contingent on our licensing agreement with Tommy Hilfiger Licensing, Inc. During fiscal 2003, we negotiated the renewal of the agreement for an additional term. In early January 2004, we finalized the terms of the license agreement, which will expire in March 2007. Whether our license with Tommy Hilfiger will remain in effect depends on our achieving certain minimum sales levels for the licensed products. We expect to continue to meet the minimum sales levels required by the Tommy Hilfiger license agreement. We believe that no provision is currently required for costs related to the potential loss of this license. If we lose the Tommy Hilfiger license, our business would be materially and adversely affected.

Results of Operations

Fiscal 2003 Compared to Fiscal 2002

Net Sales

The breakdown of net sales is as follows:

13

Table of Contents

The overall business climate remained difficult in 2003. Generally, the uncertainty of global unrest, a weak economy, the cold spring and a sluggish retail climate, particularly in soft goods, affected the Company’s overall sales. In addition, fashion trends did not favor canvas and leather sneaker styles, which weakened our sales results, particularly in our Keds brand.

During fiscal 2003, consolidated net sales increased $17.7 million to $550.1 million, or 3.3% above the sales level achieved in fiscal 2002. Revenues related to the Company’s wholesale brands increased $1.7 million while overall retail sales increased $13.5 million or 10.4% when compared to fiscal 2002. Unit shipments of current line merchandise during fiscal 2003 for the Company’s wholesale brands were 4.5% above the prior year. The average first quality wholesale selling price declined 5.3% from fiscal 2002.

First quality wholesale gross sales decreased by $15.4 million, or 4.2% below the wholesale gross sales level achieved in fiscal 2002. Offsetting this decrease was a $6.0 million increase in the sale of promotional products, a $7.6 million increase in closeout sales and a $3.3 million decrease in returns and allowances compared to the 2002 fiscal year, which resulted in the overall increase in wholesale net sales. This, combined with the strong retail store sales comparisons to last year, contributed to the overall increase of $17.7 million in consolidated net sales.

The overall increase in net sales of the Stride Rite Children’s Group was primarily attributable to increased sales of Children’s Group company-owned retail stores. In fiscal 2003, sales to independent retailers decreased 5.7% when compared to last year. This decrease reflects a trend of consistent sales declines in the Children’s Group wholesale sales primarily attributable to the negative impact of the economy on certain licensed partners and trade accounts as well as reductions in sales of the department store channel. Although the 2003 fourth quarter wholesale sales increased versus 2002, we expect the Stride Rite Children’s Group wholesale sales in 2004 to continue this gradual decline. Offsetting this decrease were sales levels of Children’s Group’s company-owned retail stores, which were up 10.4% from the comparable period last year. Sales at comparable Children’s Group retail stores (stores open for 52 weeks in each fiscal year) increased 4.7% in fiscal 2003. Driving this increase in the comparable stores category was a greater proportion of newer stores that are now included in the computation. These newer comparable stores generally have had greater comparable sales increases than our more mature stores. At the end of fiscal 2003, the Stride Rite Children’s Group operated 232 stores. This is a net increase of 3 stores, or 1.3% from the end of fiscal 2002. In fiscal 2003, ten children’s shoe stores and one outlet store were opened and five children’s shoe stores and three outlet stores were closed. Current plans call for the addition of approximately 17 retail stores, of which we anticipate 4 to be from licensed dealer acquisitions, during the 2004 fiscal year.

The decrease in the sales of Keds branded products was primarily the result of weaknesses in the women’s and children’s basic product lines, which were adversely affected by the cold spring, poor economy and a soft canvas sneaker market. The Grasshopper product line was also unfavorably affected, decreasing $2.8 million or 12% from fiscal 2002. Also contributing to the decline in Keds sales in 2003 was the disappointing performance of some new major product offerings and, to a lesser degree, the Keds children’s line. Somewhat offsetting these decreases was an increase in closeout sales. Keds closed one retail store in fiscal 2003, with no new store openings, to bring the total Keds retail store count to five. We are currently evaluating these five retail stores.

In fiscal 2003, the overall Tommy Hilfiger Footwear net sales growth can be attributed to the growth in the independent store channel achieved through the initial sales to large chains in the family footwear category slightly offset by a decline in the department stores. This increase in Tommy Hilfiger Footwear net sales was the result of growth in the women’s outdoor and dress casual styles in independent channels along with a similar growth pattern in the men’s dress and athletic styles. Also contributing to the overall increase in Tommy Hilfiger Footwear net sales was an increase of $1.2 million in the PRO-Keds product line, which remains relatively small. Going forward, we anticipate this trend of declining sales in the department stores and increased sales in the independent channels to continue.

14

Table of Contents

The major contributors to the increase in net sales of Sperry Top-Sider products were strong sales of both men’s and women’s performance boat shoes as well as promotional items. Sales in the department store and marine/outdoor channels showed growth over fiscal 2002.

The Stride Rite International division continued to be affected by weakness in the global economy, particularly in South America and the Middle East. This negatively impacted their net sales in fiscal 2003.

Gross Profit

In fiscal year 2003 our gross profit of $209.5 million increased $15.1 million or 7.7% above fiscal 2002. Our gross profit rate improved 1.6 percentage points to 38.1% as compared to the 36.5% rate achieved in fiscal 2002. The significant factors contributing to the improved gross margin were $3.1 million in lower closeout, excess inventory and obsolescence costs primarily achieved through improved inventory management; a decline in returns and allowances of $2.8 million; combined with an additional $9.4 million in gross margin related to the wholesale/retail mix of revenue that was positively impacted by the growth of revenues from our Company-owned retail stores which have somewhat higher gross profit margin than our wholesale businesses.

Operating Costs

Selling and administrative expenses in fiscal 2003 increased $11.4 million to $170.9 million or 7.2% above the expense level incurred in fiscal 2002. As a percent of sales, selling and administrative costs were 31.1% in fiscal 2003 compared to 29.9% in fiscal 2002. These increases were primarily attributable to increased pension expense of $2.3 million, increased advertising costs of $3.8 million and higher retail store expenses of $4.1 million. The increase in pension expense was primarily due to investment losses and changes in plan assumptions including the discount rate and the expected return on plan assets. Pension expense in fiscal 2004 is expected to remain at about the same level as fiscal 2003. During fiscal 2003, advertising costs were 4.8% of net sales versus 4.3% in fiscal 2002. Most of this increase was attributable to increased spending by both Keds and Sperry. Retail store expenses increased 7.0% in fiscal 2003 as compared to the prior fiscal year. The primary cause of this increase was the full year impact of the 58 new Children’s Group stores opened throughout fiscal 2002 as well as the addition of 11 stores in fiscal 2003.

Other Income and Taxes

Non-operating income (expense) increased our pre-tax earnings by $1.6 million in fiscal 2003 compared to $0.3 million in fiscal 2002. Investment income increased by $0.7 million in fiscal 2003, the result of the $750,000 gain on the sale of the Company’s minority interest in the Thailand factory joint venture, as well as a gain on a prior year investment, offset by lower investment income. Higher average investments were unable to offset lower average interest rates. Interest expense in fiscal 2003 decreased $0.4 million from fiscal 2002, as there were no short-term borrowings during fiscal 2003.

In fiscal 2003, the provision for income taxes increased $3.4 million due to an increase in pre-tax income combined with a higher effective tax rate. Our effective income tax rate was 36.7% in fiscal 2003 versus 31.9% in fiscal 2002. The higher tax rate in fiscal 2003 as compared to fiscal 2002 was due principally to a lower 2002 effective income tax rate which reflected a reduction in previously established tax accruals which were no longer needed. The effective income tax rate is expected to increase in fiscal 2004 to 37.5%.

Net Income

We earned $25.5 million in fiscal 2003, $1.4 million or 5.7% above fiscal 2002’s net income amount. The higher earnings in fiscal 2003 resulted from higher net sales and an increased gross profit percentage somewhat offset by higher selling and administrative expenses and a higher effective income tax rate.

15

Table of Contents

Fiscal 2002 Compared to Fiscal 2001

Net Sales

The breakdown of net sales is as follows:

During fiscal 2002, consolidated net sales increased $3.3 million to $532.4 million, or 0.6% above the sales level achieved in fiscal 2001. This increase was somewhat attributable to the Company’s sales performance during the fourth quarter, which was up 10.3% versus the fourth quarter of fiscal 2001. Performance comparatives of fiscal 2002 to fiscal 2001 after the third quarter of fiscal 2001 were affected by the general business slowdown occurring since the post 9/11 time-period. During fiscal 2002 the overall business climate remained difficult. Unit shipments of current line merchandise during fiscal 2002 for the Company’s wholesale brands were 1.6% below the prior year. The average first quality wholesale selling price declined 2.9% from fiscal 2001.

First quality wholesale gross sales decreased by $19.8 million, or 5.1% below the wholesale gross sales level achieved in fiscal 2001. The Company also recorded a $8.3 million reduction in the sale of closeout items versus the prior year. Partially offsetting these decreases was a $20.1 million increase in the sale of promotional products compared to the 2001 fiscal year. The increased sale of promotional products was a major reason for the sales increase for the 2002 fiscal year versus the prior year. Retail sales increased $11.5 million, or 9.8% versus the sales levels recorded in fiscal 2001. Higher sales allowances reduced gross sales by $4.0 million versus the 2001 fiscal year. This was partially offset by lower returns which decreased $1.5 million as compared to fiscal 2001. Royalty income increased by $0.5 million in fiscal 2002 as compared to the amount recorded in fiscal 2001.

Sales at comparable Children’s Group retail stores (stores open for 52 weeks in each fiscal year) decreased 0.8% for the fiscal year, following a 1.8% increase in fiscal 2001. Although the Children’s Group’s store count increased by only 4% from the prior fiscal year, 229 versus 220, there were a significant number of stores that were either opened or closed during fiscal 2002. The Children’s Group opened a total of 58 retail stores during the fiscal year. The Children’s Group closed 3 under-performing retail stores along with successfully exiting from the 46 Federated children’s leased department stores. Sales at stores newly opened during fiscal 2002 were sufficient to offset the sales declines that resulted from the exit of the Federated children’s leased department stores. Approximately 25% of the Children’s Group’s stores were newly opened during fiscal 2002.

The sales decrease of the Keds branded products was principally the result of weaknesses in the women’s basics product lines. During fiscal 2002 several women’s basic programs were transitioned to new product

16

Table of Contents

offerings. These transitions were not successfully received in the market and consequently they were not able to duplicate the performance realized in fiscal 2001. These declines were partially offset by both sales of PRO-Keds products, which were new for fiscal 2002 and the increased sale of promotional products. During fiscal 2003 the design and marketing of the PRO-Keds product line was transferred under the Tommy Hilfiger footwear unit to better match the customer profile for the development and marketing effort for the brand. Keds also opened one additional retail store in fiscal 2002 bringing the store count to six.

The major factors contributing to the sales increase of Tommy Hilfiger footwear products were the expansion of distribution to independents and shoe chain accounts as well as promotional products. This has lessened the Tommy Hilfiger footwear unit’s dependence on the department store sector, which has been experiencing a general weakness. Beginning with fiscal 2003, the Tommy Hilfiger children’s product line was transitioned to the Stride Rite Children’s Group.

The improvement in Sperry sales is primarily attributable to promotional items, increases in the sale of women’s products and fewer returns.

The increase in sales of the Stride Rite International division was principally due to increased sales of Tommy Hilfiger products.

Gross Profit

In fiscal year 2002 our gross profit of $194.4 million increased $4.1 million or 2.1% above fiscal 2001. Our gross profit rate improved 0.5 percentage points to 36.5% as compared to the 36.0% rate achieved in fiscal 2001. Included in the fiscal 2002 cost of sales was a reversal of $0.3 million of the prior fiscal year’s $1.8 million charge associated with the write-down of inventory caused by the exit of the leased department store business. Additional discussion regarding this write-down of inventory can be found in Note 7 to the consolidated financial statements. Negatively affecting the comparison of the 2002 fiscal year’s gross profit to the 2001 fiscal year amount was $6.2 million due to reduced first quality wholesale product sales and $4.4 million from increased sales allowances. Gross profit was also adversely affected by the west coast port’s labor dispute, as approximately $0.7 million in additional costs were spent in order to expedite the receipt of inventory. Offsetting these amounts was the increase in retail sales, which added $6.8 million to gross profit comparisons of fiscal 2002 versus 2001. Also contributing to the improvement of the gross profit comparisons was the performance of promotional and closeout items which added approximately $6.0 million to gross profit in fiscal year 2002, versus 2001.

Restructuring Charges

In the fourth quarter of fiscal 2002, the Company completed the prior year restructuring and recorded income of $75,000, (less than $0.01 per share after tax) related to the reversal of unused prior year restructuring accruals. In the fourth quarter of fiscal 2001, the Company recorded pre-tax restructuring charges of $3,059,000 ($.05 per share after tax) related to a restructuring of its administrative staff, the closing of the Wilmington, Massachusetts returns and product sample facility, the exit of the Federated leased department store business and retail system asset impairment costs. The fiscal 2001 restructuring included streamlining certain corporate and divisional operations reducing the administrative workforce by approximately 20% or 120 positions. Cash payments and other non-cash items for the restructuring included $2,181,000 related to severance payments and other employee benefit costs, $205,000 related to the consolidation of the Wilmington, Massachusetts returns and product sample facility into the Huntington, Indiana distribution center and $64,000 of other costs associated with the restructuring. The fiscal 2001 restructuring charges also included expenses associated with exiting the Federated leased department store business which resulted in a write down of leaseholds and other assets of $120,000 and the impairment cost associated with the existing retail system totaling $414,000. During fiscal 2002, the Company charged $2,187,000 of costs to the fiscal 2001 restructuring accrual balance. Included in fiscal 2002 cost of sales is a reversal of $0.3 million of the prior year’s $1.8 million charge associated with the

17

Table of Contents

write-down of inventory caused by the exit of the Federated leased department store business. The following table summarizes the accrued costs associated with the fiscal 2001 restructuring actions by type and related activity through November 29, 2002:

Operating Costs

Selling and administrative expenses (excluding restructuring charges) in fiscal 2002 decreased $1.6 million to $159.4 million or 1.0% below the expense level incurred in fiscal 2001. As a percent of sales, selling and administrative costs were 29.9% in fiscal 2002 compared to 30.4% in fiscal 2001. Included in expenses for fiscal 2001 were executive termination costs of $2.3 million. Pension expense added $0.6 million to operating costs as compared to fiscal 2001. Retail store expenses increased 20.3% in fiscal 2002 as compared to the prior fiscal year. The addition of 58 new Children’s Group retail stores during fiscal 2002 resulted in higher costs due to start-up requirements for these new stores. The disproportionate level of start-up costs more than offset the cost savings that resulted from the exit of the 46 Federated leased department stores during the second quarter of fiscal 2002. Offsetting a portion of the increased retail store expenses were reductions that resulted from the restructuring that was initiated in the fourth quarter of fiscal 2001 and advertising expenses which decreased 23.8% in fiscal 2002 as compared to fiscal 2001. During fiscal 2002 advertising costs were 4.3% of net sales versus 5.7% of net sales in fiscal 2001. Most of this decline was attributable to reductions in Keds advertising, the result of transitioning the product line.

Other Income and Taxes

Non-operating income (expense) increased our pre-tax earnings by $0.3 million in fiscal 2002 compared to $0.5 million in fiscal 2001. Investment income decreased by $1.6 million in fiscal 2002, the result of both lower interest rates and lower average investments. Interest expense in fiscal 2002 decreased from fiscal 2001, $1.0 million because of both lower average borrowing levels and lower average interest rates.

In fiscal 2002, the provision for income taxes increased $3.5 million due to an increase in pre-tax income combined with a higher effective tax rate. Our effective income tax rate was 31.9% in fiscal 2002 and 29.1% in fiscal 2001. The higher tax rate in fiscal 2002 as compared to fiscal 2001 was due principally to an increase in the need for certain state income tax accruals that were not necessary in the prior year. Our effective tax rates in 2002 and 2001 were reduced as compared to fiscal 2000 because of tax accruals previously established, which were no longer required.

Net Income

We earned $24.1 million in fiscal 2002, $5.1 million or 27.0% above fiscal 2001’s net income amount. After excluding last year’s after-tax non-recurring charges from the fiscal 2001 net income amount, the increase in net income for fiscal year 2002 would have been $3.0 million or 13.7%. The higher earnings in fiscal 2002 resulted from higher net sales, an increased gross profit percent, lower operating expenses and non-recurring charges somewhat offset by a higher income tax rate.

18

Table of Contents

Liquidity and Capital Resources

At the end of fiscal 2003, our balance sheet reflected a current ratio of 4.2 to 1 with no debt. Our cash and cash equivalents totaled $103.3 million at November 28, 2003, an increase of $30.2 million from the total cash and cash equivalents of $73.1 million at the end of fiscal 2002. This increase in our cash balance was primarily the result of a decrease in inventory as well as an overall increase in net sales and net income.

During fiscal 2003, our operations generated cash of $47.1 million, less than the operating cash flows of $56.8 million in fiscal 2002 yet higher than $32.9 million in fiscal 2001. Our accounts receivable level of $51.1 million, increased $3.0 million from the year earlier levels. The higher level of accounts receivable was primarily the result of the increase in fourth quarter sales, which were up $5.6 million or 5.7%. At November 28, 2003, our average day’s sales outstanding (DSO) totaled 40 days, favorable compared to both the DSO of 41 days at year-end 2002 and the DSO of 43 days at year-end 2001. Much of this improvement in DSO is attributable to more effectively pursuing past due receivables and a reduction in customer chargebacks. Year-end inventories totaled $81.9 million, which was $16.3 million or 16.6% lower than the $98.2 million at fiscal year-end 2002. The inventory decrease in fiscal 2003 followed a similar decrease of $14.3 million in fiscal 2002. Some portion of this decrease in inventory related to accelerated inventory receipts in fiscal 2002 in anticipation of the potential disruptions related to the labor dispute at the West Coast ports. During fiscal year 2003, our inventory turnover averaged 4.3 times which compares favorably to the lower turnover rates of 3.9 times during fiscal 2002 and 3.3 times realized in fiscal 2001. The improved inventory performance during fiscal 2003 was the result of shortened production lead times for certain products, which allow for reduced inventory quantities, more effective sale of close-out products and our ability to monitor the sell-through performance of our larger retail customers to better forecast product demand. We do not anticipate similar decreases in inventory levels in fiscal 2004.

Additions to property and equipment totaled $6.7 million in fiscal 2003 compared with $12.1 million in fiscal 2002 and $10.3 million in fiscal 2001. This decrease in capital spending is primarily attributable to the lower number of store openings in fiscal 2003. Capital expenditures in fiscal 2003 included $3.2 million related to both new retail stores and the renovation of existing retail locations and $1.0 million related to the new retail merchandise planning system. During fiscal 2003 we opened 11 Children’s Group retail stores. In fiscal years 2002 and 2001 we opened 59 and 34 new retail stores, respectively. During the 2004 fiscal year our current plans call for the addition of approximately 17 new retail stores. In fiscal year 2004, we are planning capital expenditures to be approximately $10 million. The opening of new stores, renovation of existing stores and the next phase of a new retail merchandise planning system are the most significant items planned. Funding for our capital expenditures is expected to be provided from internal sources. If business conditions are not favorable and do not allow for the funding of capital purchases internally, our plans will be re-evaluated.

Our pension liabilities increased $1.5 million in fiscal 2003 due to the declines in investment performance and interest rates. These pension liabilities are developed from actuarial calculations and valuations. Inherent in these valuations are assumptions, including discount rates and the expected return on plan assets. The expected long-term rate of return on our plan assets was developed by examining historical return rates based on the pension plan’s asset allocation and considering such factors as return differentials for active investment management. The expected rate of return was lowered in fiscal 2003 to 8.5% from 9.0% in fiscal 2002 in response to external factors, specifically lower market interest rates and plan asset returns. Due to the long-term nature of this assumption, it is not expected that the rate of return percentage will vary yearly. The expected long-term rate of return for fiscal year 2004 will be 8.5%, which is the same rate used in the prior fiscal year. The discount rate used for the calculation of plan liabilities at fiscal year end 2003 was 6.25%, which is 50 basis points below the 6.75% rate used in fiscal 2002. We consider market conditions, including changes in interest and investment rates, in developing these assumptions. At fiscal year end 2003 our non-cash minimum pension liability totaled $13.1 million. This liability was created by the shortfall of plan assets versus the accumulated benefit obligation. Pension expense, a non-cash item, for fiscal 2003 was $3.0 million and it is expected to remain at the same level in fiscal 2004. During the 2003 fiscal year we contributed $7.0 million to the Company’s defined benefit pension plan. Current plans for fiscal year 2004 anticipate a pension contribution of approximately $1.0 million.

19

Table of Contents

During fiscal year 2003 we returned $15.0 million to stockholders through share repurchases and cash dividends. We spent $7.2 million in fiscal 2003 to repurchase 717,900 common shares under our share repurchase program. Over the three-year period ended November 28, 2003, we repurchased a total of 3.6 million common shares at an aggregate cost of $28.2 million. As of November 28, 2003, we have 3.5 million shares remaining on our share repurchase authorization that the Board of Directors approved in September 2002. We believe that share repurchases are a good investment and an effective means of providing value to our stockholders. We plan to continue to make opportunistic share repurchases during the 2004 fiscal year. We have paid a dividend to our stockholders each quarter since we became a public company in 1960. We used $7.9 million of cash for dividend payments during fiscal 2003, which was a decrease, due to a lower share number as a result of stock repurchases, from the $8.3 million used in fiscal 2002, and the $8.3 million in fiscal 2001. Funds for these share repurchases and dividends were provided from internal sources. Under the terms of our revolving credit agreement, we are not allowed to make annual distributions to stockholders in excess of $40 million. Both dividend payments and share repurchases are considered distributions to stockholders.

During the normal course of business, our financial position and results of operations are routinely subject to a variety of risks, including the market risk associated with interest rate movements on short-term borrowings and cash equivalents. Additionally, economic conditions in countries where we source our products could negatively affect future inventory purchase commitments. We purchase substantially all of our inventory from outside the United States. Because these purchases are primarily denominated in U.S. dollars, we are not directly subject to foreign currency exchange rate fluctuations. Accordingly, we do not engage in forward foreign exchange and other similar contracts because the associated risk is not considered significant. If circumstances should change and we conclude that the hedging of foreign exchange risks becomes appropriate, we will begin to do so. We utilize cash from operations, short-term investments and short-term borrowings to fund our working capital and investment needs.

In addition to internal sources of funding, we maintain a bank line of credit to satisfy the seasonal borrowing requirements that are imposed by the sales patterns that are characteristic of Stride Rite and of the footwear industry. Because of these seasonal demands, there are times during the year when we are less liquid. During fiscal 2000, we entered into a three-year, revolving credit agreement with five banks providing for loans of up to $75 million. During the fourth quarter of fiscal 2002, we renewed this line of credit with substantially the same group of banks through October 31, 2005. The revolving credit agreement requires us to meet certain financial ratios and covenants and to maintain a minimum consolidated tangible net worth. Under the terms of the revolving credit agreement, we may borrow at interest rates that vary with LIBOR. In addition, the agreement calls for facility fees of 0.375% per annum on the committed line. At year-end 2003, we had no outstanding borrowings under this credit line, leaving the entire $75 million available for use. During fiscal 2003 we did not make any borrowings under our revolving credit agreement, during fiscal 2002, our borrowings averaged $14.6 million compared to the average borrowings of $26.5 million in fiscal 2001. As of November 28, 2003, letters of credit for $50.6 million were outstanding for the purchase of inventories. All letters of credit generally expire within one year.

Our significant long-term financial obligations as of November 28, 2003 are as follows:

Cash Payments Due During the Fiscal Years

(in thousands)

We do not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance-sheet arrangements or other contractually narrow or limited purposes. As such, we are not exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such relationships.

20

Table of Contents

Recent Accounting Pronouncements

In November 2002, the FASB issued Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others,” (FIN 45) which clarifies disclosure, recognition and measurement requirements related to certain guarantees. The disclosure requirements are effective for financial statements issued after December 15, 2002 and the recognition and measurement requirements are effective on a prospective basis for guarantees issued or modified after December 31, 2002. The adoption of FIN 45 did not have a material impact on our consolidated financial position or results of operations.

In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock Based Compensation – Transition and Disclosure, an amendment of FASB Statement No. 123.” This Statement amends SFAS No. 123, “Accounting for Stock-Based Compensation”, to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The provisions of this statement are effective for fiscal years ending after December 31, 2002. The Company has not elected to transition to the fair value based method of accounting for stock-based employee compensation at this time. See Note 1 for a discussion and the required disclosures.

In January 2003, the FASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities,” (FIN 46) which clarifies the application of Accounting Research Bulletin No. 51, “Consolidated Financial Statements,” relating to consolidation of certain entities, or VIE, which are defined as entities with a level of invested equity that is not sufficient to fund future activities to permit them to operate on a stand alone basis, or whose equity holders lack certain characteristics of a controlling financial interest. For entities identified as VIE, FIN 46 sets forth a model to evaluate potential consolidation based on an assessment of which party to the VIE, if any, bears a majority of the exposure to its expected losses, or stands to gain from a majority of its expected returns. FIN 46 also sets forth certain disclosures regarding interests in VIE that are deemed significant, even if consolidation is not required. In December 2003, a modification to FIN 46 was issued (FIN 46R) which delayed the effective date until no later than fiscal periods ending after March 31, 2004 and provided additional technical clarifications to implementation issues. The Company does not currently have any variable interest entities as defined in FIN 46R. We do not expect that the adoption of this statement will have a material impact on our consolidated financial statements.

In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity” (SFAS 150). SFAS 150 changes the accounting guidance for certain financial instruments that, under previous guidance, could be classified as equity or mezzanine equity by now requiring those instruments to be classified as liabilities (or assets in some circumstances) on the balance sheet. Further, SFAS 150 requires disclosure regarding the terms of those instruments and settlement alternatives. SFAS 150 is generally effective for all financial instruments entered into or modified after May 31, 2003, and is otherwise effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of this pronouncement did not have a material impact on the Company’s consolidated financial statements.

In December 2003, the FASB issued a revision to SFAS No. 132, “Employers’ Disclosure about Pensions and Other Postretirement Benefits, an Amendment of FASB Statements No. 87, 88 and 106 and a revision of FASB Statement No. 132” (SFAS 132R). This statement requires additional disclosure in relation to the types of plan assets, investment strategy, measurement date(s), plan obligations, cash flows and components of net periodic benefit cost recognized during interim periods. The provisions of this statement are effective for financial statements with fiscal years ending after December 15, 2003. The interim period disclosures are effective for interim periods beginning after December 15, 2003. The Company expects to adopt SFAS 132R in the first quarter of fiscal 2004. The adoption of this statement is not expected to have a material impact on the Company’s consolidated financial statements.

21

Table of Contents

Item 7A.    Quantitative and Qualitative Disclosures About Market Risk.

In the normal course of business, our financial position and results of operations are routinely subject to a variety of risks, including market risk associated with interest rate movements on borrowings and investments and currency rate movements on non-U.S. dollar denominated assets, liabilities and income. We regularly assess these risks and have established policies and business practices to protect against the adverse effect of these and other potential exposures.

We utilize cash from operations and short-term borrowings to fund our working capital and investment needs. Cash balances are normally invested in high-grade securities with terms shorter than three months. Because of the short-term nature of these investments, changes in interest rates would not materially affect the fair value of these financial instruments.

We have available a $75 million unsecured committed revolving line of credit as a source of financing for our working capital requirements. Borrowings under this revolving credit agreement bears interest at variable rates based on LIBOR plus an applicable spread. At November 28, 2003, we had no borrowings outstanding under this credit facility.

Assets and liabilities outside the United States are primarily located in Canada. Our investment in foreign subsidiaries with a functional currency other than the U.S. dollar, are generally considered long-term. We do not generally hedge these net investments.

Item 8.    Financial Statements and Supplementary Data.

The Financial Statements and Supplementary Data required by Item 8 are included in pages F-1 through F-22 and page S-1 attached to this report. An index to the Financial Statements appears in Item 15 to this report.

Item 9.    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

None.

Item 9A.    Evaluation of Disclosure Controls and Procedures

Our Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this annual report on Form 10-K. Based on this evaluation, our principal executive officer and principal financial officer have concluded that, as of the evaluation date, the Company’s disclosure controls and procedures are reasonably designed to alert them on a timely basis to material information relating to the Company (including its consolidated subsidiaries) required to be included in its reports filed or submitted under the Exchange Act.

22

Table of Contents

PART III

Item 10.    Directors and Executive Officers of the Registrant.

The information concerning our Directors, additional information regarding certain executive officers, and other information required by Item 10 of Part III of this report shall be included in the Proxy Statement relating to our 2004 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission pursuant to Regulation 14A within 120 days after the end of the Company’s last fiscal year and is incorporated herein by reference. The information with respect to our executive officers listed below is as of February 13, 2004.

23

Table of Contents

These executive officers are generally elected at the Board of Directors’ meeting held in conjunction with our Annual Meeting of Stockholders and serve at the pleasure of the Board.

24

Table of Contents

Code of Ethics

We have adopted a code of business conduct and ethics for our directors, officers (including our principal executive officer, principal financial officer and controller) and employees. The Code of Ethics is available on our website at http://www.strideritecorp.com. Stockholders may request a free copy of the Code of Ethics from the Company at the following address:

The Stride Rite Corporation

Attention: Investor Relations

191 Spring Street, PO Box 9191

Lexington, Massachusetts 02420

Corporate Governance Guidelines

We have adopted Corporate Governance Guidelines, which are available on our website at http://www.strideritecorp.com. Stockholders may request a free copy of the Corporate Governance Guidelines from the address set forth above under “Code of Ethics.”

Committee Charters

We have adopted charters for our Audit Committee, Compensation Committee and the Committee on the Board, each charter is available on our website at http://www.strideritecorp.com. Stockholders may request a free copy of any of these charters from the address set forth above under “Code of Ethics.”

Item 11.    Executive Compensation.

The information concerning Executive Compensation required by Item 11 shall be included in the Proxy Statement to be filed relating to our 2004 Annual Meeting of Stockholders and is incorporated herein by reference.

Item 12.    Security Ownership of Certain Beneficial Owners and Management.

The information concerning Security Ownership of Certain Beneficial Owners and Management required by Item 12 shall be included in our Proxy Statement to be filed relating to the 2004 Annual Meeting of Stockholders and is incorporated herein by reference.

Item 13.    Certain Relationships and Related Transactions.

None.

Item 14.    Principal Accountant Fees and Services.

The information concerning Principal Accountant Fees and Services required by Item 14 shall be included in the Proxy Statement to be filed relating to our 2004 Annual Meeting of Stockholders and is incorporated herein by reference.

25

Table of Contents

PART IV

Item 15.    Exhibits, Financial Statements and Schedules, and Reports on Form 8-K.

15(a)1 and 15(a)2.    Financial Statements and Schedules. The following financial statements and financial statement schedules are included as a part of this report in the pages indicated:

15(a)3.    Exhibits. The following exhibits are contained herein or are incorporated herein by reference:

26

Table of Contents

27

Table of Contents

15(b).    Reports on Form 8-K.

On September 23, 2003, the Company filed a current report on Form 8-K (Item 12) with respect to its press release announcing the Company’s financial results for the three and nine months ended August 29, 2003.

On January 15, 2004, the Company filed a current report on Form 8-K (Item 12) with respect to its press release announcing the Company’s financial results for the three and twelve months ended November 28, 2003.

15(c).    Exhibits. See Item 15(a)3 above.

28

Table of Contents

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Date:    February 5, 2004

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

29

Table of Contents

THE STRIDE RITE CORPORATION

CONSOLIDATED BALANCE SHEETS

The accompanying notes are an integral part of the consolidated financial statements.

F-1

Table of Contents

THE STRIDE RITE CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

The accompanying notes are an integral part of the consolidated financial statements.

F-2

Table of Contents

THE STRIDE RITE CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS