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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-K

For annual and transition reports pursuant to Sections 13 or 15(d)

of the Securities and Exchange Act of 1934

For the fiscal year ended November 30, 2003

OR

For the transition period from              to             

Commission File Number 1-8501

HARTMARX CORPORATION

101 North Wacker Drive, Chicago, Illinois 60606

Telephone No.: 312/372-6300

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 the 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         

The aggregate market value of common stock held by non-affiliates of the Registrant as of February 17, 2004 was $203,900,000.

On February 17, 2004, 35,386,467 shares of the Registrant’s common stock were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Certain portions of the Registrant’s definitive proxy statement dated February 17, 2004 for the Annual Meeting of Stockholders to be held April 15, 2004 are incorporated by reference into Part III of this report.

HARTMARX CORPORATION

INDEX TO ANNUAL REPORT ON FORM 10-K

PART I

Item 1—Business

General and Operating Segments

Hartmarx Corporation, a Delaware corporation, functions essentially as a holding company, overseeing the various operations of its subsidiaries and providing these subsidiaries with resources and services in financial, administrative, legal, human resources, advertising and other areas. The management of the respective operations has responsibility for optimum use of the capital invested in them and for planning their growth and development in coordination with the strategic plans of Hartmarx and the other operating entities (collectively, the “Company”).

Established in 1872, the Company believes it is the largest manufacturer and marketer of men’s suits and sport coats (“men’s tailored clothing”) in the United States. From this established position, Hartmarx has diversified into casual pants, men’s and women’s sportswear, including golfwear, dress furnishings (shirts and ties) and women’s career apparel.

The Company operates exclusively in the apparel business. Its operations are comprised of the Men’s Apparel Group (“MAG”) and Women’s Apparel Group. MAG designs, manufactures and markets men’s tailored clothing, slacks, sportswear (including golfwear) and dress furnishings (shirts and ties); products are sold under a broad variety of business and casual apparel brands, both owned and under license, to an extensive range of retail department and specialty stores. Product price points comprise luxury, premium and moderate. The Women’s Apparel Group markets women’s career apparel, sportswear and accessories to department and specialty stores under owned and licensed brand names and through a direct to consumer operation offering a wide range of apparel and accessories to business and professional women through its catalogs and e-commerce website. The Operating Segment Information in Management’s Discussion and Analysis of Financial Condition and Results of Operations, as well as in the accompanying Notes to Consolidated Financial Statements further describe the Company’s operations.

Substantially all of the Company’s products are sold to a wide variety of retail channels under established brand names or the private labels of major retailers. The Company owns two of the most recognized brands in men’s tailored clothing—Hart Schaffner Marx^®, which was introduced in 1887, and Hickey-Freeman^®, which dates from 1899. The Company also offers its products under other brands which it owns such as Sansabelt^®, Racquet Club^®, Palm Beach^®, Barrie Pace^®, Hawksley & Wight^®, Naturalife^®, Pusser’s of the West Indies^®, Coppley^®, Keithmoor^®, Cambridge^®, Royal Shirt^TM and Brannoch^®; and under exclusive license agreements for specified product lines including Tommy Hilfiger^®, Jack Nicklaus^®, Golden Bear^®, Bobby Jones^®, Burberry^® men’s tailored clothing, Austin Reed^®, Perry Ellis^®, Kenneth Cole^®, Ted Baker^®, Evan-Picone^®, Claiborne^®, Pierre Cardin^®, Lyle & Scott^®, Wimbledon^TM and Andrea Jovine^®. To broaden the distribution of the apparel sold under its owned and licensed trademarks, the Company has also entered into over 40 license or sublicense agreements with third parties for specified product lines to produce, market and distribute products in 33 countries outside the United States. Additionally, the Company has direct marketing activities primarily in Europe, but also in Asia, North America and South America, selling golfwear in 32 countries.

Effective July 1, 2001, a wholly-owned subsidiary of the Company acquired certain assets, properties and operations of the Consolidated Apparel Group, L.L.C. (“CAG”), a privately-held marketer of popular priced sportswear. This acquisition further expanded and diversified the Company’s sportswear product offerings.

During fiscal 2001, the Company initiated a number of gross margin improvement and cost reduction actions in response to reduced consumer confidence which affected sales of apparel at retail and to the overall weak apparel environment. These actions included the closing of six facilities engaged in fabric cutting and sewing operations, one distribution center and several administrative offices, the wind-up of certain moderate

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tailored clothing operations, early voluntary retirement programs and other administrative workforce reductions. Accordingly, in fiscal 2001, the Company reported a restructuring charge of $11.6 million, which included costs for severance and related fringe benefits, estimated closing costs for owned facilities or exit costs for leased facilities and the writedown of fixed assets to estimated fair values for facilities closed or to be closed. The Company’s operating results for fiscal 2001 also reflected additional costs and inefficiencies associated with these operations and related facility and employee reductions.

During fiscal 2002, the Company substantially completed the gross margin improvement and cost reduction actions that were initiated in fiscal 2001. The actions in fiscal 2002 included the closing of one facility engaged in sewing operations and other administrative workforce reductions. Accordingly, in fiscal 2002, the Company reported a restructuring charge of $.4 million for these actions and the resolution of several actions related to 2001, as described above. In order to further reduce the Company’s cost structure and curtail the need to eliminate additional job positions, effective February 1, 2002, all salaries exceeding $50,000 were temporarily reduced, ranging from 7% for the highest paid employees to 3% for the lowest paid. In the aggregate, the number of employees in manufacturing, selling and administrative areas was reduced by approximately 40% during fiscal 2002 and 2001. The Company currently employs approximately 4,100 people compared to 4,200 a year ago and 5,000 two years ago. These actions contributed to the reduction in overall operating expenses in 2002 and 2003.

Effective August 30, 2002, the Company entered into a new $200 million senior revolving credit facility which replaced a $200 million facility which was to mature in June 2003. The new facility enhanced the Company’s capital structure by providing for additional borrowing availability, lower interest rates, the immediate repayment of a 10.25% term loan of $15 million, the elimination of several financial covenants and the flexibility to retire the $25.3 million of 12.5% senior unsecured notes prior to their September 2003 maturity ($15 million of notes were retired in November 2002 and the remaining $10.3 million were retired in January 2003). Total debt was reduced by $19.0 million in fiscal 2003 and $48.2 million in fiscal 2002.

This 2003 Annual Report on Form 10-K contains forward-looking statements that are made in reliance upon the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Wherever possible, the Company has identified these forward-looking statements by words such as “anticipates”, “believes”, “could”, “continues”, “estimates”, “expects”, “may”, “intends”, “projects”, “plans”, “should”, “will” or the negatives thereof or other comparable terminology. Additionally, the Company may from time to time make other oral or written statements that are also forward-looking statements. While the Company believes that the assumptions underlying such forward-looking information are reasonable based on present conditions, forward-looking statements made by the Company are not guarantees of future performance as actual results could differ materially from those expressed or implied in the forward-looking statements as a result of various factors. Accordingly, the Company has identified various important risk factors which could cause the Company’s actual financial results to differ materially from any such results which might be projected, forecasted or estimated by the Company in written or oral forward-looking statements including, but not limited to, the following:

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Certain of the above described risk factors are also discussed in the “Liquidity and Capital Resources” caption in Management’s Discussion and Analysis of Financial Condition and Results of Operations in this Form 10-K. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

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Products Produced and Services Rendered

The Company’s merchandising strategy is to market a wide selection of men’s tailored clothing, sportswear and dress furnishings, and women’s career apparel and sportswear across a wide variety of fashion directions, price points and distribution channels. MAG represented approximately 89% of sales in 2003 and 91% of sales in 2002 and 2001. Women’s Apparel Group represented approximately 11% of sales in 2003 and 9% of sales in 2002 and 2001. As a manufacturer and marketer, the Company is responsible for the design, manufacture and sourcing of its apparel. Its men’s tailored clothing and slacks are manufactured in seven Company operated facilities located in the United States and three facilities in Canada, as well as at numerous independent contractors located principally outside of the United States. Some of the Company’s dress furnishings are produced at a Company operated facility in Canada. However, the Company utilizes domestic and foreign contract manufacturers to produce a substantial portion of its non-tailored clothing products, principally men’s and women’s sportswear, as well as women’s career apparel and sportswear in accordance with Company specifications and production schedules. Approximately one-third of the direct to consumer sales within the Women’s Apparel Group are of products directly sourced by the Company.

Sources and Availability of Raw Materials

Raw materials, which include fabric, linings, thread, buttons and labels, are obtained from domestic and foreign sources based on quality, pricing, fashion trends and availability. The Company’s principal raw material is fabric, including woolens, cottons, polyester and blends of wool and polyester. The Company procures and purchases its raw materials directly for its owned manufacturing facilities and may also procure and retain ownership of fabric relating to garments cut and assembled by contract manufacturers. In other circumstances, fabric is procured by the contract manufacturer directly but in accordance with the Company’s specifications. For certain of its product offerings, the Company and selected fabric suppliers jointly develop fabric for the Company’s exclusive use. Approximately 75 percent of the raw materials purchased by the Company is acquired from foreign mills. Purchases from foreign mills, especially with respect to higher quality fabrics, have increased in recent years reflecting both enhanced diversity of available styles relative to United States sourced fabric and reduced duties on such foreign purchases. A substantial portion of these purchases is denominated in United States dollars. Purchases from the Company’s largest fabric supplier represented approximately 5% of the Company’s total fabric requirements in fiscal 2003, down from 8% in 2002 and approximately 11% in 2001. No other supplier accounts for over 5% of the Company’s total raw material requirements. As is customary in the industry, the Company has no long-term contracts with its suppliers. The Company believes that a variety of alternative sources of supply are available to satisfy its raw material requirements.

Product lines are developed primarily for two major selling seasons, spring and fall, with smaller lines for the summer and holiday seasons. The majority of the Company’s products are purchased by its customers on an advance order basis, five to seven months prior to shipment. Seasonal commitments for a portion of the expected requirements are made approximately three to five months in advance of the customer order. Certain of the Company’s businesses maintain in-stock inventory programs on selected product styles giving customers the capability to order electronically with resulting shipment within one to two business days. Programs with selected fabric suppliers provide for availability to support in-stock marketing programs. The normal production process from fabric cutting to finished production is five to six weeks for tailored suits and sport coats and three to four weeks for tailored slacks. A substantial portion of sportswear and women’s apparel is produced by unaffiliated contractors utilizing Company designs.

Competition and Customers

The Company emphasizes quality, fashion, brand awareness and service in engaging in this highly competitive business. While no manufacturer of men’s clothing accounts for more than a small percentage of the total amount of apparel produced by the entire industry in the United States, the Company believes it is the largest domestic manufacturer and marketer of men’s tailored clothing and men’s slacks with expected retail

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prices over $50. The Company’s women’s apparel sales do not represent a significant percentage of the total market for women’s apparel sales. The Company’s customers include major department and specialty stores (certain of which are under common ownership and control), value-oriented retailers and direct mail companies. Sales in the United States were approximately 96% of total revenues. The Company’s largest customer, Dillard’s Department Stores, represented approximately 26%, 21% and 21% of consolidated sales in 2003, 2002 and 2001, respectively. No other customer exceeded 9% of net sales. The Company’s top ten customers represented approximately 56% of sales in 2003, 54% in 2002 and 51% in 2001.

Trademarks, Licensing Agreements and Research

A significant portion of the Company’s sales are of products carrying brands and trademarks owned by the Company. As noted previously, the Company also manufactures and markets products pursuant to exclusive license agreements with others. While the terms and duration of these license agreements vary, typically they provide for certain minimum payments and are subject to renewal and renegotiation.

In the apparel industry, new product development is directed primarily towards new fashion and design changes and does not require significant expenditures for research. The Company’s fixed assets include expenditures for new equipment developed by others. The Company does not spend material amounts on research activities relating to the development of new equipment.

Conditions Affecting the Environment

Regulations relating to the protection of the environment have not had a significant effect on capital expenditures, earnings or the competitive position of the Company. The making of apparel is not energy intensive, and the Company is not engaged in producing fibers or fabrics.

Employees

The Company presently has approximately 4,100 employees, of which approximately 93% are employed in MAG. Most of the employees engaged in manufacturing and distribution activities in the United States and Canada are covered by union contracts with the Union of Needletrades, Industrial & Textile Employees. The Company considers its employee relations to be satisfactory.

Seasonality; Working Capital

The men’s tailored clothing business has two principal selling seasons, spring and fall. Additional lines for the summer and holiday seasons are marketed in men’s and women’s sportswear. Men’s tailored clothing, especially at higher price points, generally tends to be less sensitive to frequent shifts in fashion trends, economic conditions and weather, as compared to men’s sportswear or women’s career apparel and sportswear. While there is typically little seasonality to the Company’s sales on a quarterly basis, seasonality can be affected by a variety of factors, including the mix of advance and fill-in orders, the distribution of sales across retail trade channels and overall product mix between traditional and fashion merchandise. The Company generally receives advance orders from its wholesale customers approximately five to seven months prior to shipment. Some of the Company’s operating businesses also routinely maintain in-stock positions of selected inventory in order to fill customer orders on a quick response basis.

Sales and receivables are recorded when inventory is shipped, with payment terms generally 30 to 60 days from the date of shipment. With respect to the tailored clothing advance order shipments, customary industry trade terms are 60 days. In-stock shipments generally have 30 day terms. Peak borrowing levels occur in late March and September, just prior to the collection of receivables from men’s tailored clothing advance order shipments. Additional borrowing availability under the Credit Facility is usually lowest in January and July, and highest in May and November.

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Availability of Reports Filed with the Securities and Exchange Commission, Code of Conduct, Corporate Governance Guidelines and Charters for Committees of the Board of Directors

We make available free of charge through our website, www.hartmarx.com, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with the Securities and Exchange Commission. Also available on our website under the heading “Investor Information” are current copies of the Company’s Corporate Governance Guidelines, and Charters for the Audit and Finance, Compensation and Stock Option, and Nominating and Governance Committees of the Board of Directors. Print copies of the current Corporate Governance Guidelines, or the respective committee charters are also available at no charge to stockholders upon request addressed to the Corporate Secretary at Hartmarx Corporation, 101 North Wacker Drive, Chicago, IL 60606. The Company’s Code of Conduct and Ethics will be available on the Company’s website under the heading “Investor Information” not later than the date of the Company’s annual meeting on April 15, 2004. Our internet website and the information contained therein or incorporated therein are not intended to be and are not incorporated into this Annual Report on Form 10-K.

Item 2—Properties

The Company’s principal executive and administrative offices are located in Chicago, Illinois. Its office, manufacturing and distribution operations are conducted at the following locations:

*Properties owned by the Registrant

The Company believes that its properties are well maintained and its manufacturing equipment is in good operating condition and sufficient for current production. For information regarding the terms of the leases and rental payments thereunder, refer to the “Commitments and Contingencies” note to the Consolidated Financial Statements of this Form 10-K.

Substantially all of the Company’s assets, including real property and equipment, are pledged as security under its senior credit facility or subject to mortgages with other lenders.

Item 3—Legal Proceedings

The Company is involved in various claims and lawsuits incidental to its business. In the opinion of management, these claims and lawsuits will not have a material adverse effect on the Company’s business, financial position, results of operations or cash flows.

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

None.

Executive Officers of the Company

Each of the executive officers of the Company listed below has served the Company in various executive capacities for at least the past five years. Each corporate officer is elected annually by the Board of Directors, normally for a one-year term and is subject to removal powers of the Board.

Mr. Hand was elected to his current position as Chairman in October 1992. From October 1992 until April 2002, he served as Chief Executive Officer. Mr. Hand will be retiring as Chairman in June 2004 but will continue to serve on the Board of Directors.

Mr. Patel was elected to his current position as President and Chief Executive Officer in April 2002. From February 1993 to April 2002, he served as President and Chief Operating Officer.

Mr. Morgan was elected to his current position as Executive Vice President, Chief Financial Officer and Treasurer in April 2001. From September 1995 to April 2001, he served as Executive Vice President and Chief Financial Officer.

Mr. Proczko was elected to his current position as Senior Vice President, General Counsel and Secretary in December 2001. From January 2000 to December 2001, he served as Vice President, Corporate Counsel and Secretary. From March 1993 to January 2000, he served as Assistant General Counsel.

Mr. Zahr was elected to his current position as Vice President and Controller in April 1998.

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PART II

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

Hartmarx Corporation common stock is traded on the New York and Chicago Stock Exchanges. The quarterly composite price ranges of the Company’s common stock for the past three fiscal years were as follows:

The most recent quarterly dividend paid was in November 1991, in the amount of $.15 per share. Generally, dividends may be paid so long as excess borrowing availability, as set forth in the Credit Facility, exceeds $25 million, after reflecting the payment of such dividends.

As of February 17, 2004, there were approximately 3,690 holders of the Common Stock. The number of holders was estimated by adding the number of registered holders furnished by the Company’s registrar together with the number of participants in the Company’s Savings Investment and Stock Ownership Plan.

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Item 6—Selected Financial Data

The following table summarizes data for the fiscal years 1999 through 2003. The Company’s complete audited financial statements and notes thereto for the three years ended November 30, 2003 appear elsewhere in this Annual Report on Form 10-K.

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Management’s Discussion and Analysis of Financial Condition and Results of Operations and Notes to Consolidated Financial Statements provide additional information relating to the comparability of the information presented above.

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

Overview

The Company operates exclusively in the apparel business. Its operations are comprised of the Men’s Apparel Group (“MAG”) and Women’s Apparel Group. MAG designs, manufactures and markets men’s tailored clothing, slacks, sportswear (including golfwear) and dress furnishings (shirts and ties). Products are sold at luxury, premium and moderate price points under a broad variety of apparel brands, both owned and under license, to an extensive range of retail channels. The Women’s Apparel Group markets women’s career apparel, sportswear and accessories to department and specialty stores under owned and licensed brand names and through a direct to consumer operation offering a wide range of apparel and accessories to business and professional women through catalogs and its e-commerce website.

Implementation of the Company’s operational strategies during the three-year period ended November 30, 2003 resulted in improvements in pre-tax earnings to $14.4 million in 2003 compared to pre-tax earnings of $1.4 million in 2002 and a pre-tax loss of $29.6 million in 2001; the earnings improvement was attributable to higher margins, as revenues declined during this three-year period to $561.8 million from $600.2 million. The earnings recovery and emphasis on working capital management were important factors in entering into a new Senior Credit Facility in August, 2002 enabling the early retirement of $40 million of high cost debt, significantly lowering interest expense to $7.4 million in 2003 from $15.5 million in 2002 and $14.4 million in 2001, and improving overall liquidity. Total debt of $104.4 million at November 30, 2003 declined $67 million from $171.6 million at November 30, 2001.

The Company’s principal operational challenges have been to address the following:

Following the introduction of Bobby Jones and Nicklaus golfwear more than a decade ago, the Company has gradually expanded its non-tailored clothing product offerings through internally developed programs, new licensing arrangements and acquisitions, including the acquisition of the Consolidated Apparel Group (“CAG”) during 2001. This product diversification has also opened up or expanded distribution channels for the Company’s products, such as through resort and “green grass” golf shops for the Company’s golf lines, warehouse clubs for moderate-priced sportswear and most recently, internet-based marketing for certain womenswear products. Sales of non-tailored apparel (men’s sportswear, golfwear, slacks and womenswear) increased to 44% of total sales in 2003 from 42% in 2001.

The Company began reducing the number of its domesticly owned tailored clothing facilities during the 1990’s in response to declining demand, and initiated sourcing of moderate-priced tailored clothing from non-domestic unaffiliated contractors in order to lower costs and improve margins. During 2001, the recessionary

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economic climate and generally weak apparel sales at retail resulted in the Company accelerating its gross margin improvement and cost reduction actions initiated previously. The actions during 2001 included the wind-up of certain moderate tailored clothing operations, the closing of six facilities engaged in fabric cutting and sewing operations, one distribution center and several administrative offices, early voluntary retirement programs and other administrative workforce reductions. Accordingly, in fiscal 2001, the Company reported a restructuring charge of $11.6 million, which included costs for severance and related fringe benefits, estimated closing costs for owned facilities or exit costs for leased facilities and the write-down of fixed assets to estimated fair values for facilities closed or to be closed. In addition to the restructuring charge, operating results for 2001 reflected other costs and inefficiencies included in the reported cost of sales and selling, general and administrative expense captions in the accompanying Consolidated Statement of Earnings associated with the wind-up of certain operations, primarily associated with moderate tailored clothing product categories, facility closings and employee reductions. One additional manufacturing facility was closed in 2002.

The improved operating results in 2002 and 2003 reflected the effect of the gross margin improvement and cost reduction actions. Consolidated gross margins increased during this three-year period to 30.2% in 2003 from 25.2% in 2001, reflecting lower product costs, improved manufacturing utilization of owned manufacturing facilities, elimination of lower margin programs and product offerings, and the changing product mix. Selling, general and administrative expenses have declined to $148.8 million in 2003 from $158.0 million in 2001, reflecting the effect of the restructuring actions and overall employment reductions in non-production areas of the Company. Based on current business conditions, the Company anticipates a low to mid single digit sales increase in 2004 compared to 2003, principally in the non-tailored product categories. Net earnings in 2004 are anticipated to increase from 2003 in the range of 25% to 40% from the higher sales and further improvement in operating margins.

Results of Operations

Consolidated revenues were $561.8 million in 2003 compared to $570.3 million in 2002 and $600.2 million in 2001. Earnings before interest, refinancing expense and taxes (“EBIT”) were $22.6 million in 2003 compared to earnings of $21.1 million in 2002 and a loss of $15.1 million in 2001. Results for 2002 included settlement proceeds of $4.5 million related to a legal action initiated in 1999 against the provider of an enterprise resource planning software, as well as $.4 million of restructuring charges, principally related to the closing of one manufacturing facility. Results for 2001 included restructuring charges of $11.6 million as well as costs and expenses included as a component of cost of sales and operating expenses associated principally with the wind-up of certain moderate tailored clothing operations, which included such items as underutilization of production facilities prior to closing and inventory losses associated with operations being eliminated.

The following summarizes sales and EBIT for the Company’s business segments (in millions):

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In the above table for 2002, the $.4 million restructuring charge is reflected as a reduction to MAG EBIT and the $4.5 million of settlement proceeds is included in the “Other and adjustments” caption, which represents expenses not directly allocated to a particular operating segment. Of the $11.6 million restructuring charges incurred in 2001, $9.5 million was attributable to MAG with the remainder included in the “Other and adjustments” caption.

MAG sales were $501.7 million in 2003, $521.1 million in 2002 and $547.4 million in 2001. The revenue decline in 2003 compared to 2002 was primarily attributable to lower tailored clothing product revenues, reflecting both lower tailored clothing advance orders and in-stock shipments, partially offset by higher sportswear product sales. Tailored clothing product revenues also represented the principal component of the overall revenue decline in 2002 compared to 2001, reflecting both lower tailored clothing advance orders and the actions initiated in prior years to reduce revenues in lower profit potential moderate priced tailored clothing product categories; these declines were partially offset by higher in-stock tailored clothing shipments and incremental sportswear product sales. Effective July 1, 2001, the Company acquired certain assets, properties and operations of CAG, a privately held marketer of popular priced sportswear. MAG EBIT was $29.9 million in 2003 compared to $30.6 million in 2002 and $2.6 million in 2001, with tailored clothing products representing the most significant contributor to earnings and cash flow in each year. Although MAG revenues declined $19.4 million in 2003 from 2002, EBIT was only $.7 million lower, reflecting a higher gross margin rate from the higher sportswear sales and the continuing favorable gross margin effects of restructuring actions taken in prior years. The $28.0 million improvement in 2002 EBIT compared to 2001 reflected the favorable effect of the restructuring actions in 2001, which more than offset the unfavorable impact of the lower sales, and the full year costs associated with the New York City Hickey-Freeman retail store which opened in October 2001.

Women’s Apparel Group sales, comprising approximately 11% of consolidated sales in 2003 compared to 9% in 2002 and 2001, aggregated $60.1 million in 2003, $49.2 million in 2002 and $52.8 million in 2001. The 2003 revenue increase was principally attributable to the launching of two branded programs during the year to retail customers as well as higher direct-to-consumer website sales. Revenues in 2002 were adversely affected by lower in-stock and direct-to-consumer catalog revenues due to the generally soft retail climate. Women’s Apparel Group generated EBIT of $4.3 million in 2003 compared to losses of $.9 million in 2002 and $3.1 million in 2001. The EBIT improvement in 2003 from 2002 was principally attributable to both the increased sales and improved operating margins. The operating loss in 2002, while improved from 2001, reflected the impact of the lower sales; operating margins in 2002 and 2001 were also adversely impacted by higher levels of customer allowances and inventory markdowns required to liquidate surplus inventories, as well as higher product development and catalog costs.

Gross Margins. The consolidated gross margin percentage of sales was 30.2% in 2003, 28.8% in 2002 and 25.2% in 2001. The improvement in the 2003 gross margin rate compared to 2002 as well as 2002 compared to 2001 reflected the favorable impact from the restructuring actions, ongoing programs to improve manufacturing utilization in owned facilities, reduced duties on fabric purchases, additional utilization of off-shore contractors for moderate priced tailored clothing, and from product mix changes with sportswear and womenswear products realizing a higher gross margin rate on sales compared to tailored clothing. MAG and Women’s Apparel Group gross margins each improved in 2003 compared to 2002 and in 2002 compared to 2001.

Selling, General and Administrative Expenses. Selling, general and administrative expenses were $148.8 million in 2003, $150.2 million in 2002 and $158.0 million in 2001. As a percentage of sales, the expense ratio was 26.5% in 2003 compared to 26.3% in 2002 and 26.3% in 2001. The increase relative to sales in 2003 compared to 2002 in part reflected changes in revenue mix towards men’s sportswear and women’s products with higher gross margin and operating expense ratios to sales. The small dollar decrease in 2003 compared to 2002 reflected the continuing effect of the restructuring actions and overall employment declines, although the expense ratio increased slightly due to the lower sales. The $7.8 million decrease in 2002 compared to 2001 reflected the effect of the favorable restructuring actions initiated during 2001, including the overall employment reductions and the salary reduction program effective February 1, 2002 for all employees earning more than $50,000. Partially offsetting these reductions during 2002 were $6.8 million of incremental expenses related to the inclusion of CAG and the Hickey-Freeman New York City store for the full year.

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Advertising expenditures, including costs related to the Barrie Pace catalogs, were $20.3 million in 2003, $21.6 million in 2002 and $25.2 million in 2001, representing 3.6%, 3.8% and 4.2% of consolidated sales, respectively. The $1.3 million decline in 2003 was principally in the women’s apparel segment, reflecting fewer catalog pages and mailings due to a greater emphasis on lower cost website opportunities. The $3.6 million decline in 2002 compared to 2001 primarily reflected reduced MAG expenditures in light of the lower sales.

Earnings before Interest and Taxes (“EBIT”). EBIT was $22.6 million in 2003, $21.1 million in 2002 and a loss of $15.1 million in 2001, representing 4.0%, 3.7%, and (2.5%) of sales, respectively. As noted previously, fiscal 2002 included settlement proceeds of $4.5 million related to a legal action initiated in 1999 against the provider of an enterprise resource planning software. The restructuring charge in 2002 consisted of $.9 million related to the costs of closing one manufacturing facility, partially offset by $.5 million of favorable adjustments from proceeds received in disposing of three production and administrative facilities which exceeded the fair values established in 2001 when the facilities were closed. The $11.6 million restructuring charge in 2001 included costs related to closing six facilities engaged in fabric cutting and sewing operations, one distribution center and several administrative offices, severance and fringe benefits related to manufacturing employees, voluntary early retirement programs and other administrative workforce reductions and writedown of fixed assets to estimated fair values.

Interest Expense. Interest expense was $7.4 million in 2003, $15.5 million in 2002 and $14.4 million in 2001, representing 1.3% of sales in 2003, 2.7% in 2002 and 2.4% in 2001. The $8.1 million decrease in 2003 from 2002 was principally attributable to the August 2002 refinancing, which enabled the Company to retire $40 million of high cost debt during the August 2002 through January 2003 period and reduce the effective interest rate on borrowings under its senior credit facility. Although average borrowing levels declined in 2002 compared to 2001, interest expense increased due to changes in the debt mix resulting in both higher effective borrowing rates and higher amortization of financing fees and expenses. Interest expense included non-cash amortization of financing fees and expenses of $.6 million in 2003, $1.6 million in 2002 and $.7 million in 2001. Fiscal 2003 and 2002 also included $.1 million and $2.1 million, respectively, of interest expense representing debt discount amortization related to the 12.5% senior unsecured notes. The effective interest rate for all borrowings, including non-cash amortization costs, was 5.5% in 2003, 10.7% in 2002 and 8.7% in 2001. The Company’s weighted average short term borrowing rate was 3.8% in 2003, 6.5% in 2002 and 7.5% in 2001.

Refinancing Expense. Fiscal 2003 included $.8 million related to the write-off of unamortized debt discount and issue costs from the January 2003 early retirement of the then outstanding $10.3 million of 12.5% senior unsecured notes. The $4.2 million of refinancing expense in 2002 comprised $2.8 million related to the write-off of unamortized financing fees under the replaced credit facility and $1.4 million attributable to the write-off of unamortized debt discount and financing fees from the early retirement of $15 million of the $25.3 million of 12.5% senior unsecured notes. There was also a small amount in 2001 related to the purchase of the Company’s then outstanding 10.875% Senior Subordinated Notes.

In April 2002, the Financial Accounting Standards Board issued SFAS No. 145, “Recission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections”. SFAS 145 is applicable for the Company’s 2003 fiscal year beginning December 1, 2002. SFAS 145, among other things, proscribes that any gain or loss on extinguishment of debt that does not meet the criteria of Opinion 30, as amended, will no longer be classified as an extraordinary item. Accordingly, the previously reported extraordinary items related to refinancing were reclassified as refinancing expense when reporting results for prior periods.

Net Earnings (Loss). Pre-tax earnings improved to $14.4 million in 2003 compared to $1.4 million in 2002 and a loss of $29.6 million in 2001. After reflecting an effective tax rate of 39.5% in 2003 and 2001, and 39.1% in 2002, net earnings were $8.7 million or $.25 per diluted share in 2003 compared to earnings of $.9 million or $.02 per diluted share in 2002 and a loss of $17.9 million or $.60 per diluted share in 2001.

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Liquidity and Capital Resources

Total debt at November 30, 2003 of $104.4 million decreased $19.0 million compared to the year earlier level. The reduction was funded primarily from the cash provided by operating activities, principally pre-tax earnings. Cash balances were $3.0 million at November 30, 2003 and $6.9 million at November 30, 2002. As discussed below, the Company has significant federal tax operating loss carryforwards available to offset current taxable income otherwise payable. While not impacting overall debt levels, the Company retired the remaining $10.3 million face value of its 12.5% senior unsecured notes in January 2003, following the $15 million early retirement in November 2002, utilizing availability under its Credit Facility, actions which contributed to the lower interest expense during 2003. The $15.6 million of borrowings classified as current at November 30, 2003 reflects anticipated debt reduction during fiscal 2004. Total debt, including borrowings classified as short term, represented 35% of the Company’s total $297 million capitalization at November 30, 2003, compared to 41% at November 30, 2002. The lower debt capitalization ratio was attributable to the decrease in total debt and higher shareholders’ equity at November 30, 2003 compared to 2002.

The information provided below describing the Company’s debt, credit facilities, guarantees and future commitments is included here to facilitate a review of the Company’s liquidity, pursuant to the Securities and Exchange Commission (“SEC”) Financial Reporting Release No. 61.

On January 16, 2002, the Company completed an exchange offer for its then outstanding 10.875% senior subordinated notes (“Old Notes”) due in January 2002, originally issued in March 1994 as part of a $100 million public offering. For each $1,000 principal amount of Old Notes outstanding, the Company paid $200 in cash and issued $800 principal amount of 12.5% senior unsecured notes (“New Notes”) due September 15, 2003 and 93 shares of common stock. Upon completion of the exchange offer, all of the $34.7 million of Old Notes then outstanding were retired and $25.3 million face value of New Notes and 2.9 million shares of common stock were issued. The New Notes were recorded at estimated fair value, net of unamortized debt discount. The New Notes were callable at face value in whole or in part at any time prior to maturity.

Effective August 30, 2002, the Company entered into a new $200 million senior revolving credit facility (“Credit Facility”), replacing a $200 million facility scheduled to mature in June 2003. Among other things, the new Credit Facility resulted in lower borrowing rates. All borrowings under the replaced facility, including the $15 million 10.25% term loan then outstanding, were repaid. The new Credit Facility has a three and one-half year term (i.e., through February 2006) with an additional one year renewal at the Company’s option (i.e., through February 2007), and also provides for a $50 million letter of credit sub-facility. Interest rates under the new facility are based on a spread in excess of either LIBOR or prime as the benchmark rate and on the level of excess availability. The weighted average interest rate was 3.5% at November 30, 2003, based on LIBOR and prime rate loans. The facility provides for an unused commitment fee of .375% per annum, based on the $200 million maximum, less the outstanding borrowings and letters of credit issued. Eligible receivables and inventories provide the principal collateral for the borrowings, along with certain other tangible and intangible assets of the Company. In November 2002, $15 million face value of the New Notes were retired and the remaining $10.3 million of New Notes were retired in January 2003. At November 30, 2003, the stated interest rate on all borrowings on a weighted average basis was approximately 4.9% compared to 5.9% at November 30, 2002.

The Credit Facility includes various events of default and contains certain restrictions on the operation of the business, including covenants pertaining to minimum net worth, operating leases, incurrence or existence of additional indebtedness and liens, and asset sales, as well as other customary covenants, representations and warranties, and events of default. During fiscal 2003 and as of November 30, 2003, the Company was in compliance with all covenants under the Credit Facility and its other borrowing agreements.

There are several factors which can affect the Company’s ability to remain in compliance with the financial covenants currently contained in its Credit Facility, and to a lesser extent, in its other borrowing arrangements.

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Risk factors are described in Item 1—Business of this Form 10-K. The following summarizes certain of the risk factors included in Item 1:

At November 30, 2003, the Company had approximately $23 million of letters of credit outstanding, relating to either contractual commitments for the purchase of inventories from unrelated third parties or for such matters as workers’ compensation requirements in lieu of cash deposits. Such letters of credit are issued pursuant to the Company’s Credit Facility and are considered as usage for purposes of determining borrowing availability. At November 30, 2003, additional borrowing availability under the credit facility was $95 million. Availability levels on any date are impacted by the level of outstanding borrowings under the Credit Facility, the level of eligible receivables and inventory and outstanding letters of credit. Availability levels generally decline towards the end of the first and third quarters and increase during the second and fourth quarters. During fiscal 2003, additional availability levels ranged from $25 million to $96 million. The Company has also entered into surety bond arrangements aggregating approximately $11 million with unrelated parties, primarily for the purposes of satisfying workers’ compensation deposit requirements of various states where the Company has operations. At November 30, 2003, there were an aggregate of approximately $5.1 million of outstanding foreign exchange contracts primarily related to anticipated inventory purchases to be made in the next twelve months and anticipated licensing revenues to be received in the next three months. Other than the Company’s ongoing guarantee of a $2.5 million industrial development bond included as a component of consolidated debt, the Company has not committed to and has not provided any guarantees of other lines of credit, repurchase obligations, etc., with respect to the obligations for any unconsolidated entity or to any unrelated third party.

The Company’s various borrowing arrangements are described in the accompanying Notes to the Consolidated Financial Statements and are either fixed rate or variable rate borrowing arrangements. None of the arrangements have rating agency “triggers” which would impact either the borrowing rate or borrowing commitment.

Off-Balance Sheet Arrangements. The Company has not entered into off balance sheet financing arrangements, other than operating leases, and has made no financial commitments or guarantees with any unconsolidated subsidiaries or special purpose entities. All of the Company’s subsidiaries are wholly owned and included in the accompanying consolidated financial statements. There have been no related party transactions nor any other transactions which have not been conducted on an arm’s-length basis.

The Company believes that its liquidity and expected cash flows are sufficient to finance its operations after due consideration of its various borrowing arrangements, other contractual obligations and earnings prospects.

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The accompanying Notes to Consolidated Financial Statements contain information regarding payments required under existing borrowing arrangements, lease obligation commitments and other contractual obligations. The following presents a summary of the Company’s significant contractual obligations:

Purchase commitments represent outstanding purchase commitments primarily related to the purchase of raw materials and finished goods.

Other long term obligations comprise minimum obligations related to licensing and employment agreements. With respect to licensing arrangements, the Company manufactures and markets certain of its product offerings pursuant to exclusive license agreements with unaffiliated licensors for specified product lines. Royalty amounts are generally based on a stipulated percentage of revenues, although certain of these agreements contain provisions for the payment of minimum annual royalty amounts. The licensing agreements are generally for a three to five year term with additional renewal options, provided that minimum sales levels are achieved. Under terms of the current agreements, the Company has minimum payments of approximately $16.9 million in 2004, $20.7 million in 2005 and 2006, $4.1 million in 2007 and 2008, and $2.0 million thereafter.

The Company has employment agreements in place covering certain of its corporate and subsidiary officers providing for the payment of base salaries and contingent additional compensation; severance amounts would be payable in lieu of compensation in the event of involuntary termination by the Company. Aggregate annual base salaries for these covered employees are approximately $2.5 million. In the event of a change in control and termination of employment, as defined in the agreements, the Company would be required to make severance payments in lieu of compensation under the employment agreements in addition to reimbursement payments to eliminate the effect of any excess personal income taxes, if any, associated with these payments.

Pension Plans. At November 30, 2003, the accumulated benefit obligation related to the Company’s pension plans was approximately $230 million. The Company contributed $8.9 million to the plans in 2003 and $12.6 million in 2002. Contributions to be made during fiscal 2004 are currently estimated at approximately $10 million. Funding requirements applicable to fiscal 2005 and subsequent years will be determined, in part, after consideration of fair market value of plan assets at the end of fiscal 2004 and the appropriate discount rate; however, it is not anticipated that funding requirements in 2005 will be significantly different than that experienced over the past several years.

Pension expense for the Company’s plans reflected in the accompanying financial statements, including amounts applicable to the non-qualified supplemental pension plan, was $9.0 million in 2003, $8.8 million in 2002 and $7.1 million in 2001. The principal assumptions to be utilized for 2004 in the determination of annual pension expense for financial reporting purposes are as follows:

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The discount rate was based on a review of published aggregate corporate long term bond rates and participants’ age and service levels. The asset return assumption takes into consideration expected long term returns based upon the weighted allocation of equities, fixed income and other asset components comprising the plan’s assets at November 30, 2003. The rate of compensation increase considers both historical and anticipated rates of future salary and other contingent compensation. The following illustrates the sensitivity to a one quarter percent (.25%) change in assumptions on annual pension expense based upon the most recent available actuarial valuation during 2003 and asset levels at November 30, 2003 (in millions):

Other Balance Sheet Components Impacting Liquidity. During 2003, the principal working capital components (i.e., receivables and inventories net of accounts payable and accrued expenses) had a small year over year aggregate increase following a significant reduction in requirements during 2002 compared to 2001. At November 30, 2003, net accounts receivable of $117.8 million decreased $8.4 million or 6.7% from November 30, 2002, principally attributable to improved collections. Inventories at November 30, 2003 were $124.0 million compared to $115.2 million at November 30, 2002 and $150.4 million at November 30, 2001. The 7.7% increase at year end 2003 compared to 2002 was principally attributable to earlier receipts relating to fiscal 2004 shipments; earlier in fiscal 2003, inventory levels were considerably higher, primarily in the tailored clothing product categories due to lower then expected in-stock sales and earlier production or receipt of finished products. Inventory levels at year-end 2002 also reflected out of stock conditions in selected product categories. The inventory reduction of 23% at November 30, 2002 vs. 2001 reflected, among other things, the lower sales and related actions to reduce inventory levels in light of the generally lackluster environment at retail for apparel products, as well as the de-emphasis or elimination of certain brands or programs that did not offer the prospects of adequate profitability over the longer term.

Deferred income taxes at November 30, 2003 aggregated $68.2 million compared to $73.1 million at November 30, 2002. Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes”, requires, among other things, the recognition of deferred tax assets, including the future benefit associated with operating loss carryforwards, a periodic evaluation of the likelihood that the deferred tax assets are realizable and the establishment of a valuation allowance, in certain circumstances, to offset deferred tax assets to the extent realization is not considered more likely than not. The Company has concluded that it is more likely than not that its deferred tax assets will be fully realized and that a tax valuation reserve is not required. Approximately $54 million of the total deferred income taxes has been classified as non-current, principally associated with the benefit recognized attributable to expected future utilization of operating loss carryforwards. At November 30, 2003, the Company had approximately $132 million of federal tax operating loss carryforwards available to offset future taxable income. Approximately $112 million of the $132 million of available operating loss carryforwards expire over the 2007-2010 periods, with the remainder expiring through 2022. As of November 30, 2003, the Company has concluded that it is more likely than not that there would be sufficient taxable earnings to fully utilize the operating loss carryforwards.

At November 30, 2003, net properties of $29.3 million decreased by $3.2 million, as capital additions were more than offset by depreciation expense. Capital additions were $2.6 million in 2003 compared to $3.4 million in 2002 and $9.8 million in 2001. Capital expenditures in 2001 included $5.9 million related to the new Hickey-Freeman flagship store and leasehold improvements for sportswear offices in New York City. Capital additions for 2004 are anticipated to approximate $5 million related to both owned manufacturing facilities and several additional Bobby Jones stores following the one opened during 2003 in Atlanta. Covenants under existing lending arrangements are not restricting capital additions otherwise being considered by the Company. Depreciation expense was $5.9 million in 2003, $6.3 million in 2002 and $6.8 million in 2001.

Shareholders’ equity of $192.5 million at November 30, 2003 represented $5.49 book value per share compared to $5.21 book value per share at November 30, 2002. The $13.9 million equity increase during 2003 reflected the net earnings for the year, ongoing equity sales to employee benefit plans, recognition of previously

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unearned employee benefits and the adjustment of the additional minimum liability related to the Company’s pension plan. Dividends have not been paid since 1991. During the first quarter of fiscal 2004, approximately $.8 million of the $1.3 million of unearned employee benefits reflected as a reduction of shareholders’ equity at November 30, 2003 will be recognized as compensation expense, principally attributable to the performance based vesting on February 10, 2004 of 606,500 restricted stock awards resulting from the market price of common shares exceeding $4.25 for thirty consecutive calendar days.

Critical Accounting Policies

The information provided below describing critical accounting policies is pursuant to Securities and Exchange Commission Financial Reporting Release No. 60 directing registrants to include a discussion of “critical” accounting policies or methods used in the preparation of financial statements.

The Company’s significant accounting policies are contained in the accompanying Notes to Consolidated Financial Statements. The financial statements have been prepared in conformity with generally accepted accounting principles and, accordingly, include amounts based on informed estimates and judgments of management with due consideration given to materiality. Accordingly, actual results could differ from those estimates. The following represents those critical accounting policies where materially different amounts would be reported under different conditions or using different assumptions.

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Recent Accounting Pronouncements

In fiscal 2003, the Company adopted Financial Accounting Standards Board SFAS No. 143— “Accounting for Asset Retirement Obligations”, SFAS No. 144—“Accounting for the Impairment or Disposal of Long-Lived Assets, SFAS No. 145—“Recession of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13 and Technical Corrections”, SFAS No. 146—“Accounting for Costs Associated with Exit or Disposal Activities”, SFAS No. 148—“Accounting for Stock Based Compensation—Transition and Disclosure”, SFAS No. 149—“Amendments of Statements 133 on Derivative Instruments and Hedging Activities”, SFAS No. 150—“Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity”, and FIN 45—“Guarantor’s Accounting and Disclosure Requirements for Guarantees Including Indirect Guarantees of Indebtedness of Others”. Other than the reclassification requirement of SFAS No.145, as discussed earlier, and the disclosure requirement of SFAS No. 148, as described in the accompanying Notes to Consolidated Financial Statements, adoption of these statements has had no effect on the Company’s reported financial position, results of operations, cash flows or financial statement disclosures.

In January 2003, the Financial Accounting Standards Board issued FIN 46 “Consolidation of Variable Interest Entities—An Interpretation of APB No. 51”. FIN 46 provides guidance on the identification of entities

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for which control is achieved through means other than through voting rights (“variable interest entities” or “VIE”) and how to determine when and which business enterprises should consolidate the VIE. This new model for consolidation applies to entities (1) where the equity investors (if any) do not have a controlling financial interest or (2) whose equity investment at risk is insufficient to finance that entity’s activities without receiving additional subordinated financial support from other parties. In addition, FIN 46 requires that both the primary beneficiary and all other enterprises with a significant variable interest in a VIE make additional disclosures. FIN 46 applies immediately to VIEs created after January 31, 2003 and to VIEs in which an enterprise obtains an interest after that date. It applies in the first fiscal year or interim period beginning after June 15, 2003, to VIEs in which an enterprise holds a variable interest that it acquired before February 1, 2003. In October 2003, the Board deferred the effective date of FIN 46 to the first reporting period after December 15, 2003 for VIEs created before February 1, 2003. The interpretation applies to the Company as of the beginning of fiscal 2004. As the Company does not have any VIEs, adoption of this statement is not expected to have a significant effect on the Company’s reported financial position, results of operations, cash flows or financial statement disclosures.

In December 2003, the Financial Accounting Standards Board issued SFAS No. 132 (Revised 2003)—“Employers’ Disclosures about Pensions and Other Postretirement Benefits”. SFAS 132 (Revised) retains the disclosures required by FAS 132 and requires additional disclosures relating to types of plan assets, investment strategy, measurement date(s), plan obligations, cash flows and components of net periodic benefit cost recognized in interim periods of defined benefit pension plans and other defined benefit postretirement plans. The provisions of SFAS 132 (Revised) are effective for financial statements issued for years ending after December 15, 2003 (the Company’s fiscal year beginning December 1, 2003) and for interim periods beginning after December 15, 2003 (the Company’s second quarter beginning March 1, 2004), at which time the additional disclosures will be included. The Company does not expect that adoption of this statement will have a significant effect on the Company’s reported financial position, results of operations or cash flows.

Outlook

Actions taken following the 2001 restructuring have contributed to the improved operating margins, strengthened balance sheet and enhanced liquidity. Over the past several years, the Company has lowered manufacturing and administrative costs through reduced production overheads, fewer warehousing and administrative facilities and head count reductions.

While revenues declined slightly in 2003, reflecting in part weak consumer spending during the first half of the year, the Company’s sales increased slightly during the second half; based on current conditions, a low to mid single digit sales increase is anticipated for fiscal 2004. In the Men’s Apparel Group, revenue increases are expected in the men’s sportswear product categories reflecting, among other things, growth in the Ted Baker and Bobby Jones product lines as well as from exclusive dedicated brand programs with several additional retailers, similar to the Austin Reed sportswear program initiated with Dillard’s last year. Men’s tailored clothing revenues in 2004 are anticipated to be about even with 2003. While consumers seem to be moving away from everyday casual dress, some of the department store channels did not realize tailored clothing increases during 2003. Should tailored clothing demand increase in this channel, the extensive range of well-recognized and diversified tailored clothing product offerings positions the Company to benefit from incremental operating margin opportunities. In the Women’s Apparel Group, additional volume is expected in the Andrea Jovine line, introduced in Fall 2003, from dedicated brand programs with certain retailers, and from further growth in the direct-to-consumer business with its increasing percentage of web-initiated orders.

The August, 2002 refinancing was the significant contributor to the more than 50% reduction in interest expense in 2003 to $7.4 million from $15.5 million in 2002, and which established a financing structure to complement the Company’s operational strategies. The improved operating performance and asset management emphasis were each important elements in reducing total debt by $67 million since November 2001. This reduced the ratio of total debt to capitalization to 35% at fiscal year end 2003 compared to 41% at November 30, 2002 and 48% at November 30, 2001. Additional debt reduction in the $15-$20 million range is

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anticipated during 2004, assuming no acquisitions. The Company continues to pursue prudent acquisitions which can produce positive cash flows, are accretive to earnings in the near to mid term, and which do not create excessive debt leverage.

The improving economy and stock market recovery in recent months are encouraging, although consumer spending for apparel in department stores, an important channel for the Company’s products, remains sluggish. The anticipated revenue increase for 2004 as noted above, along with the administrative expense structure currently in place, are expected to result in net earnings increasing in the range of 25%-40% over 2003’s net earnings of $8.7 million or $.25 per diluted share, based on current conditions. The Company’s longer term objectives are to increase revenues and continue pre-tax margin improvements, which would be realized from a combination of both internal revenue growth and from acquisitions.

Item 7A—Quantitative and Qualitative Disclosures About Market Risk

The Company does not hold financial instruments for trading purposes or engage in currency speculation. The Company enters into foreign exchange forward contracts from time to time to limit the currency risks, primarily associated with purchase obligations denominated in foreign currencies. Foreign exchange contracts are generally for amounts not to exceed forecasted purchase obligations or receipts and require the Company to exchange U.S. dollars for foreign currencies at rates agreed to at the inception of the contracts. These contracts are typically settled by actual delivery of goods or receipt of funds. The effects of movements in currency exchange rates on these instruments, which have not been significant, are recognized in earnings in the period in which the purchase obligations are satisfied or funds are received. As of November 30, 2003, the Company had entered into foreign exchange contracts, aggregating approximately $5.1 million corresponding to approximately 4.3 million Euros primarily related to inventory purchases in the next twelve months and 56 million Japanese yen primarily related to anticipated licensing revenues to be received in the next three months.

The Company is subject to the risk of fluctuating interest rates in the normal course of business, primarily as a result of the variable rate borrowings under its Credit Facility. Rates may fluctuate over time based on economic conditions, and the Company could be subject to increased interest payments if market interest rates rise rapidly. A 1% change in the effective interest rate on the Company’s anticipated borrowings under its Credit Facility would impact annual interest expense by approximately $.7 million. In the last three years, the Company has not used derivative financial instruments to manage interest rate risk.

The Company’s customers include major U.S. retailers (certain of which are under common ownership and control), several of whom reported declines in sales during various monthly periods of 2002 and 2003. The ten largest customers represented approximately 56% of consolidated sales during fiscal 2003 with the largest customer representing approximately 26% of sales. A decision by the controlling management of a group of stores or any other significant customer, whether motivated by competitive conditions, financial difficulties or otherwise, to decrease the amount of merchandise purchased from the Company, or change their manner of doing business, could have a material adverse effect on the Company’s financial conditions and results of operations.

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Item 8—Financial Statements and Supplementary Data

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REPORT OF INDEPENDENT AUDITORS

To the Shareholders and Board

of Directors of Hartmarx Corporation

In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Hartmarx Corporation and its subsidiaries at November 30, 2003 and 2002, and the results of their operations and their cash flows for each of the three years in the period ended November 30, 2003, in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the accompanying index presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of Hartmarx Corporation’s management; our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

PricewaterhouseCoopers LLP

Chicago, Illinois

January 20, 2004

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HARTMARX CORPORATION

CONSOLIDATED STATEMENT OF EARNINGS

(000’s Omitted)

(See accompanying notes to consolidated financial statements)

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HARTMARX CORPORATION

CONSOLIDATED BALANCE SHEET

(000’s Omitted)

(See accompanying notes to consolidated financial statements)

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HARTMARX CORPORATION

CONSOLIDATED STATEMENT OF CASH FLOWS

(000’s Omitted)