________________________________________________________________________________SECURITIES AND EXCHANGE COMMISSION
WASHINGTON,Washington, D.C. 20549
______________________FORM 10-K
(Mark(Mark One)
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
| x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED NOVEMBER 25, 2001
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| For the fiscal year ended November 24, 2002 |
Commission file number: 333-36234
LEVI STRAUSS & CO.
(Exact
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 94-0905160
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
Delaware (State or Other Jurisdiction of Incorporation or Organization) | 94-0905160 (I.R.S. Employer Identification No.) |
1155 BATTERY STREET, SAN FRANCISCO, CALIFORNIABattery Street, San Francisco, California 94111
(Address
(Address of Principal Executive Offices)
(415) 501-6000
(Registrant's
(Registrant’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act: None
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 xþ No --- ---
¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (P. (¶229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant'sregistrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of the Form 10-K or any amendment to this Form 10-K. [x]
x
Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes ¨ No þ
The Company is privately held. Nearly all of its common equity is owned by members of the families of several descendants of the Company'sCompany’s founder, Levi Strauss. There is no trading in the common equity and therefore an aggregate market value based on sales or bid and asked prices is not determinable.
Indicate the number of shares outstanding of each of the issuer'sissuer’s classes of common stock, as of the latest practicable date.
Common Stock $.01 par value ------ value—37,278,238 shares outstanding on February 1, 2002
2003
Documents incorporated by reference: None
LEVI STRAUSS & CO.
TABLE OF CONTENTS TO FORM 10-K
FOR FISCAL YEAR ENDING NOVEMBER 24, 2002
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PART I
ITEM
Overview
We are one of the world'sworld’s leading branded apparel companies with sales in more than 100 countries. We design and market jeans and jeans-related pants, casual and dress pants, tops, jackets and related accessories for men, women and children under our Levi's(R)Levi’s® and Dockers(R)Dockers® brands. Our products are distributed in the United States ("U.S.") primarily through chain retailers and department stores and abroad primarily through department stores and specialty retailers. We also maintain a network of approximately 840900 franchised or independently owned stores dedicated to our products outside the U.S.United States and operate a small number of company-owned stores.
Sales from company-owned stores represented approximately 1% of our total net sales for 2002.
LEVI'S(R) BRAND DOCKERS(R) BRAND
--------------- ----------------
PRODUCTS: Men's, women's and kids'-- Men's, women's and boys'--
jeans, jeans-related products, casual and dress pants,
knits and woven tops, outerwear shorts, skirts, knit and
and accessories woven tops, outerwear and
accessories
GEOGRAPHIC MARKETS: Men's and women's-- global Men's and women's-- global
Kids'-- primarily U.S. Boys'-- U.S. only
PERCENTAGE OF 2001
NET SALES: 75% 25%
We believe there is no other apparel company with a comparable global presence in either the jeans or casual pants segment of the apparel market. Since our founder, Levi Strauss, invented the blue jean in 1873, Levi’s® jeans have become one of the most successful and widely recognized brands in the history of the apparel industry. According to a study conducted by NPDFashionworld in December 2001, in the United States, the Levi’s® brand rated #1 among apparel companies in terms of brand awareness and brand retention (defined as the percent of all past-12-month purchasers who plan to buy the brand in the future). Our businessDockers® brand of casual pants, introduced in 1986, is widely recognized in the United States and a growing number of markets abroad. Sales of our Levi’s® brand products and sales of our Dockers® brand products represented approximately 74% and 26%, respectively, of our total net sales for 2002. Jeans, casual and dress pants represented approximately 86% of our total units sold in 2002.
In October 2002, we announced that we will be introducing a new casual clothing brand, the Levi Strauss Signature™ brand. We created the brand for value-conscious consumers who shop in mass channel retail stores. The Levi Strauss Signature™ brand will initially feature a range of denim and non-denim pants and shirts as well as denim jackets. We anticipate that the products will be available initially at Wal-Mart Stores, Inc. locations across the United States beginning in July 2003. According to data from Knowledge Networks and NPDFashionworld, the mass channel is the largest and fastest growing retail channel in the United States, reaching approximately 160 million shoppers and selling more than 31% of all jeans sold in 2001. Our entry into the mass channel reflects our strategy of reaching consumers in all segments of the population, wherever they buy their clothing, whether it is through high-end specialty stores, department stores, national chains or mass channel retailers.
We currently organizedorganize our business into three geographic divisions: the Americas, consisting of the U.S.,United States, Canada and Latin America; Europe, including the Middle East and Africa; and Asia Pacific. OurWe conduct our operations in the U.S. are
conductedUnited States primarily through Levi Strauss & Co., while our operations and outside the U.S. are conductedUnited States primarily through foreign subsidiaries owned directly or indirectly by Levi Strauss & Co. In fiscal year 2001,2002, we had approximately 3,300 retail customers operating more than 20,400 locations in the United States and Canada. In 2002, we had net sales of $4.3$4.1 billion, of which the Americas, Europe and Asia Pacific accounted for 67%65%, 25%26% and 8%9%, respectively. (FOR MORE FINANCIAL INFORMATION ABOUT OUR OPERATIONS
OUTSIDE THE U.S., SEE NOTE 18 TO THE CONSOLIDATED FINANCIAL STATEMENTS.) In
fiscal year 2000,
Business Turnaround Update
From 1998 to 2002, we hadexperienced a decrease in net sales from $6.0 billion to $4.1 billion due to both industry-wide and company-specific factors. In response, we have taken these actions:
| • | overhauled our product lines with new fits, fabrics and finishes in our core products, including more relevant fits and styles for women such as Levi’s® Superlow jeans, and introduced new market-leading innovations such as Dockers® Go Khaki™ pants and Dockers® Mobile™ pants; |
| • | broadened product availability by opening new franchise or other dedicated stores outside the United States, by entering additional multi-brand specialty stores and image department stores in the United States, by introducing lower-priced Levi’s® and Dockers® products in Europe and Asia, by entering new countries in Asia, and by positioning ourselves to enter the mass channel in the United States; |
We believe that through these initiatives we have successfully gained control of our business and are in the process of stabilizing and positioning our company to resume profitable growth. Our actions have enabled us to strengthen the overall financial health of the company. We believe achievementhave:
Our Business Strategy
Our vision is to market the most appealing and widely-worn casual clothing in the world. We are continuing to execute against the core business strategies underlying our business turnaround. We aim to continue to increase our financial strength and flexibility and meet our goal of
regaining investment grade ratingsresume profitable growth. We are focusing on our debt securities. To achieve these
goals, we have severalthe following key business strategies.
REINVIGORATE OUR BRANDS THROUGH PRODUCT INNOVATION AND INCREASED CONSUMER AND
CHANNEL RELEVANCE
strategies:
Innovate and lead from the core.
We believe that an integrated presentation of new and innovative products and marketing programs targeted to specific consumer and retail segments is crucial to generating consumer demand and increasing sales forof our products. We intend to:
ocontinue to focus on aggressively on:
| • | revitalizing our women’s line through targeted products such as Levi’s® Superlow jeans and a design and merchandising process better aligned with the needs of the women’s market; and |
Achieve operational excellence.
We are implementing strategiesprocesses and processes for loweringinitiatives to lower our worldwide sourcing costs, andto shorten our time to market, to more effectively fulfillingand reliably fulfill product demand, and replenishing
core items.to leverage our global scale. We intend to:
o improve operational flexibilitycontinue to focus on:
Revitalize retailer relationships and improve our presence at retail.
We distribute our products in a wide variety of retail formats around the world including chain and department stores, franchise stores dedicated to our brands, specialty retailers, and, specialty retailers. Through better relationships and collaborative
business planning with our customers, webeginning in July 2003, a mass channel retailer in the United States. We must ensure that the economics for our retail customers are attractive, that the right products are available and in-stockin stock at retail, and that our products are presented in ways that enhance brand appeal and attract consumers. We intend to:
o generatecontinue to focus on:
Sell where they shop.
We want to sell products to consumers where they shop. To do this, we must make relevant products accessible through multiple channels of distribution at price points that meet consumer expectations. We continue to focus on:
| • | entering the mass channel in the United States through the Levi Strauss Signature™ brand; |
We believe that our business strategies are directly aligned with industry forces and that we canare building the right core capabilities and operating processes to execute these strategies through adhering toin a manner consistent with our core
values to achieve our vision of marketing the most appealingvalues.
Our Brands and widely worn
casual clothing in the world.
OUR BRANDS AND PRODUCTS
Products
We market a broad linerange of branded jeanswear, casual wear and dress pants that appeal to diverse demographic groups in markets around the world. Through a number of sub-brands and product lines under the Levi's(R)Levi’s® and Dockers(R)Dockers® brands, and, beginning in July 2003, under the Levi Strauss Signature™ brand, we target specific consumer segments and provide product differentiation for our retail customers in our distribution channels.customers. We focus on creating new, innovative products relevant to our target consumers, as well as ensuring that our core traditional products are updated with new fits, finishes, fabricationsfabrics and colors.features. For example, our revamped U.S. product line reflects extensive fit testing involving over 14,000 consumers. We strive to leverage our global brand recognition, product design and marketing capabilities by taking products and design concepts developed in one region and introducing them in other geographic markets. 4
LEVI'S(R) BRAND
We also design and market global products, including, for example, the Levi’s® Type 1™jeans, which we introduced in Asia Pacific in late 2002 and jeans-related products underintroduced in Europe and the Levi's(R) brand aroundUnited States in January 2003.
Levi’s® Brand
Since the world. Since their invention of jeans by our founder Levi Strauss in 1873, Levi's(R) jeans havethe Levi’s® brand has become one of the most successful and widely recognized brands in the history of the apparel industry. Levi’s® brand products are now sold in more than 100 countries around the world. In fiscal year 2001,2002, sales of our Levi's(R)Levi’s® brand products represented approximately 75%74% of our net sales, and accounted for approximately 66%65% of net sales in the Americas, approximately 91% of net sales in Europe and approximately 95%96% of net sales in Asia Pacific.
Our Levi's(R)Levi’s® brand features a wide range of product offerings including:
o RED TAB(TM) PRODUCTS. Our Red Tab(TM) product line, identified by our
Tab Device trademark on the back pocket, encompasses a variety of core
jeans with different fits, fabrics (including denim, corduroy and
others) and finishes intended to appeal to a wide range of consumers.
Our core line is anchored by the classic 501(R) button-fly jean, the
best-selling five-pocket jean in history. Other products include
Levi's(R) Superlow jeans, 569(R) jeans, 579(TM) baggy-fit jeans and
Levi's(R) Nouveau jeans. We distribute Red Tab(TM) jeans, tops,
jackets and other products worldwide through many of our distribution
channels.
o LEVI'S(R) ENGINEERED JEANS(TM). Developed in Europe, Levi's(R)
Engineered Jeans(TM) represent our reinvention of the blue jean and
the first international jeanswear launch in our history. These jeans
are ergonomically engineered to fit the body's contours and have a
three-dimensional shape that we believe provides innovative design,
unique style, superior comfort and ease of movement. We target
Levi's(R) Engineered Jeans(TM) and related tops, jackets and other
products to 20- to 24-year-olds in Asia, Europe and the Americas
primarily through independent retailers, specialty stores and Levi's
Store(R) retail shops.
o SILVERTAB(R) PRODUCTS. Our Silvertab(R) line targets 15- to
19-year-olds, offering an urban-inspired product range featuring
premium denim finishes and technologically advanced fabrics, such as
micro canvas and "slicky" twill. We distribute Silvertab(R) jeans and
other products primarily through department stores and Levi's Store(R)
retail shops in the Americas.
o OTHER PRODUCTS. Other Levi's(R)brand products include:
Levi's(R)Vintage Clothing for jean "aficionados," a premium line
available through high-end specialty stores and independent retailers
in Europe, Asia and the U.S., and the Levi's(R)Red(TM)collection, a
product designed to reflect both our heritage and modern design
concepts.
DOCKERS(R) BRAND
offerings:
| • | Levi’s® Red Tab™ products are the core lines of the brand. They encompass a variety of jeans with different fits, fabrics and finishes intended to appeal to a wide range of consumers. Our core line is anchored by the classic 501® button-fly jean, the best-selling five-pocket jean in history. Other products include Levi’s® Superlow and Too Superlow jeans for juniors, Nouveau fit jeans for misses, Levi’s® 569® jeans, and the 529™ and 527™ jeans for men in low, straight and slim-fitting bootleg styles. In Europe, we offer Red Tab™ products in a number of new finishes, including the Optic Blue finish, a worn-in finish with a fresh, bright appearance. In Japan, we re-released the 501® jean during 2002, incorporating a range of new features, including slight changes in construction to improve the fit for Japanese women customers. |
| • | Levi’s® Vintage Clothing and the Levi’s® Red™ collections showcase our trend-initiating products designed to emphasize the Levi’s® heritage with a focus on detail inspired by modern design concepts. These premium lines are available through high-end specialty stores and independent retailers in Europe, Asia and the United States. |
| • | Levi’s®Engineered Jeans® products, developed in Europe, have a three-dimensional shape that we believe provides innovative design, unique style, superior comfort and ease of movement. We target Levi’s® Engineered Jeans® to 15- to 24-year-olds primarily in Europe and Asia through independent retailers and specialty stores. |
| • | Levi’s® Premium Red Tab™ line and theSpecial EditionLevi’s® Red Tab™ products are developed for consumers who prefer our core fits but are looking for enhanced finish detail. These products are available primarily through image specialty and image department stores in the United States. |
| • | Levi’s® Silvertab® products target 15- to 19-year-olds, offering an urban-inspired product range featuring premium denim finishes and technologically advanced fabrics, such as micro canvas and “slicky” twill. We distribute Silvertab® jeans and other products primarily through department stores and Levi’s® Store retail shops in the Americas. |
| • | Levi’s® Type 1™, Levi’s®Pure Blue™ and Levi’s® Directional Denim™ are new products we plan to release in all of our regions in the first half of 2003. These lines reflect a modern interpretation of the brand’s historical products. The Levi’s® Type 1™ jean reflects the trademarked components of the 501® jean, with enlarged branded rivets and buttons, exaggerated Arcuate Stitching Designs on back pockets and a bold back patch with an enlarged Levi’s® Tab Device. Directional Denim™ products incorporate details from our archives with a modern spin, and Pure Blue™ products feature a clean, rich, indigo shade inspired by the optical brighteners of the 1970s. |
| • | Other Levi’s® productsinclude tops, such as shirts and t-shirts, jackets and outerwear. We also work with established licensees to develop and market complementary products under the Levi’s® brand, including accessories, such as belts and bags. |
Dockers® Brand
We market casual clothing, primarily pants and tops, under the Dockers(R)Dockers® brand, in more than 4050 countries. We launched the brand in 1986 to address an emerging consumer interest in khaki pants. We believe that the Dockers(R)Dockers® brand, through its product offering and marketing, played a major role in the resurgence of khaki pants and the movement toward casual attire in the U.S. workplace by helping create a standard for business casual clothing. In fiscal year 2001,2002, sales of Dockers(R)Dockers® brand products represented approximately 25%26% of our net sales, accounting for approximately 34%35% of net sales in the Americas, approximately 9% of net sales in Europe and approximately 5%4% of net sales in Asia Pacific.
Our Dockers(R)Dockers® brand offerings are primarily targeted to men and women ages 25 to 39 and include:
o DOCKERS(R) BRAND. Dockers(R)
| • | Dockers® Brand. Dockers® brand products include a broad range of cotton and blend casual and dress casual pants that are the core lines of the brand, complemented by a variety of tops and seasonal pant products in a range of fits, fabrics, colors, styles and performance features. In 2002, we introduced the Dockers® Go Khaki™ pants and shirts with Stain Defender™ finish, a new stain repellent performance khaki treated with DuPont® Teflon®. Other Dockers® product lines include the Dockers® Dress Mobile™ and Flat Front Mobile™ pants, offering multiple hidden pockets for a streamlined look; the Ideal Stretch pant for women, introducing a lower rise to the traditional women’s stretch products; and the Dockers® Versatile Pant made of Synatural™, a synthetic wicking fiber. We distribute Dockers® brand products in the Americas, Europe and Asia through a variety of channels, including department stores and chain stores. |
| • | Dockers® Premium. The Dockers® Premium pant line includes a range of pants constructed from premium fabrics with sophisticated details in a range of finishes, fits, styles and colors. We distribute these products through department stores in the United States and throughout Europe. |
| • | Slates®, A Dockers® Brand. This Dockers® endorsed line of dress pants for men offers style and premium fabrics that are appropriate for more formal occasions. We position the brand between casual pants and tailored clothing and design and market it to meet the 30- to 39-year-old consumer’s desire for stylish value. We distribute this line to department stores and specialty stores in the United States. |
| • | Licensed Products. We work with established licensees to develop and market complementary products under the Dockers® brand, including outerwear and leather goods, men’s and women’s footwear, men’s sweaters, hosiery, golf apparel and kids’ apparel. We plan to debut a Dockers® Home collection in spring of 2003. |
Levi Strauss Signature™ Brand
In October 2002, we announced that we will be introducing a new casual clothing brand, products are the core lineLevi Strauss Signature™ brand. We created the brand for value-conscious consumers who shop in mass channel retail stores.
| • | Market Opportunity. According to data from Knowledge Networks and NPDFashionworld, the mass channel is the largest and fastest growing retail channel in the United States, reaching approximately 160 million shoppers and selling more than 31% of all jeans sold in 2001. By adding the Levi Strauss Signature™ brand to our portfolio of Levi’s® and Dockers® brands, we believe we will have jeanswear that will meet the needs of a broad range of consumers, with distinctive products in fits, fabrics and finishes that will be available where consumers shop and at prices that meet their expectations. |
| • | Products. The Levi Strauss Signature™ brand will initially feature a range of denim and non-denim pants and shirts as well as denim jackets. Each season, we expect that the brand will offer products with a different identity from our Levi’s® and Dockers® brands, with distinct finishes and differentiated designs, construction and styling that we believe will be relevant to mass channel consumers. Levi Strauss Signature™ products will have a distinctive logo, packaging and back waistband patch and they will not have the Tab Device or Arcuate Stitching Design trademarks of the Levi’s® brand. As a result, we intend that our customers and consumers will easily see the differences between the new brand and the Levi’s® brand and that their perception of our core Levi’s® brand will not be adversely affected. |
| • | Distribution. The Levi Strauss Signature™ brand will only be available through the mass channel and not through our current distribution channels. Based on our arrangement with Wal-Mart, we anticipate that Levi Strauss Signature™ products will be available initially at Wal-Mart locations across the United States beginning in July 2003. |
| • | Customers. Our entry into the mass channel does not affect our commitment to our current customers and brands. We continue to focus on creating innovative Levi’s® and Dockers® products for our customers, such as our Dockers® Go Khaki™ pants and shirts with Stain Defender™ finish we introduced in 2002 and our Levi’s® Type 1™ jeans we plan to introduce worldwide in early 2003. In addition, as part of our strategy of revitalizing our relationships with these customers, we are committed to continue to provide them with better economics through effective wholesale pricing, incentive, promotion and service programs. Our aim is to minimize any impact of our entry into the mass channel on our existing customer relationships. |
| • | Operations. We have implemented several measures designed to provide us with the necessary organizational resources to meet the operational requirements or expectations of both our current customers and our mass channel customer. We have created a new dedicated mass channel team to manage design, merchandising and marketing of the new Levi Strauss Signature™ brand. We are also aligning our supply chain capabilities with the expectations of mass retailers, as well as leveraging these processes and capabilities to continue to deliver improved service to our current customers. These actions include broadening our source base and making changes in our U.S. logistics operations so as to better meet the replenishment requirements of our entire customer base and to improve efficiencies in our distribution centers. |
Our Go-to-Market Process
We refer to the process from initial product concept to placement of the brand. They includeproduct on the retailer’s shelf as the “go-to-market process.” This process is the foundation of our operational model and is a broad rangekey element of casual pantsour strategy to achieve operational excellence. We work to integrate design, research and are complemented
by a variety of topsdevelopment, merchandising, marketing, supply chain and seasonal pant products in a range of fits,
fabrics, colors, stylessales functions through disciplined planning, standardized milestones and performance features. New for 2001 wasmetrics and clear accountability. Our goal is to translate consumer insight into relevant strategic direction and to deliver the innovative Dockers(R) Mobile(TM) Pant that features "invisible"
storage pockets for discreetly carrying hi-tech gadgets, while
maintaining a tailored look and feel. We distribute Dockers(R) brand
productsright product at the right time in the Americas, Europemost efficient way. We are continually evaluating ways to make this process faster, more disciplined and Asia throughefficient and to adapt better to reflect our global breadth.
At the beginning of our go-to-market process for every season, our brand merchandisers, designers and research and development teams explore fabric and design concepts driven by consumer preferences, brand direction and market trends to set the creative direction for the season. The product’s strategic direction is then communicated throughout our organization. Our demand planners evaluate volume potential. Our sales teams begin developing product positioning and sell-in strategies. Our supply chain organization analyzes potential sources, manufacturing capacities and costs.
We then develop and merchandise a varietyline, including recommendations about product features such as fabric, finish, sundries and patterns, make final decisions about products to be included in the line and develop integrated marketing plans. Once the product line is determined, our supply chain organization focuses on production and logistics execution, while our sales team focuses on retail operations, sell-in activities and order management to ensure proper assortment and placement of channels,products at retail. During the final stage of the process, we ship the final product to our customers and launch consumer and retail marketing programs.
Sourcing, Manufacturing and Logistics
Fabric and Raw Materials. We purchase the fabric and raw materials used in our business, particularly denim and twill, from several suppliers, including department storesCone Mills, Galey & Lord, including its Swift Denim subsidiary, American Cotton Growers and chain stores.
o DOCKERS(R)PREMIUM.Burlington Industries, Inc. In addition, we purchase thread, trim, buttons, zippers, snaps and various other product components from numerous suppliers, and we regularly engage in collaborations with fiber, fabric, finishing and components suppliers on developing and commercializing new product innovations. We have rigorous quality, safety and product integrity standards for fabric and other components of our products.
We do not have long-term raw materials or production contracts with any of our principal suppliers, except for Cone Mills, which until March 2003 is the sole worldwide supplier of the denim used for our 501® jeans, and which supplied approximately 22%, 25% and 26% in 2002, 2001 and 2000, respectively, of the total volume of fabrics we purchased worldwide. Our supply agreement with Cone Mills provides for a rolling five-year term, with the current term ending in 2007, unless either Cone Mills or we elect not to extend the agreement, upon which the agreement will terminate at the end of the then-current term. The Dockers(R)Premium pant line includescontract also aims to ensure our supply for three years following a rangechange of cotton pants constructedcontrol of Cone Mills. We may terminate the Cone Mills contract at any time upon 30 days notice. On May 13, 2002, we amended the exclusivity and requirements features of our supply agreement with Cone Mills. The amendment provides that, after March 30, 2003, we may purchase these denims from premiumother suppliers and Cone Mills may sell these denims to other customers. The amendment also allows us to purchase these denims for our European business from non-U.S. sources prior to March 30, 2003 if the European Union implements material tariffs against U.S.-produced denim. The amendment does not change any other provision of the supply agreement.
In 2002, we purchased approximately 75% of our total volume of fabrics with sophisticated
details in a range of finishes, fits, stylesfrom U.S. fabric mills. The U.S. textile industry continues to experience financial difficulty and colors.several mills are operating under bankruptcy protection. We distribute
these products through J.C. Penney Company, Inc. and department
storesbelieve that the difficulties in the U.S. 5
o SLATES(R), A DOCKERS(R)BRAND. This Dockers(R)-endorsed line of dress
pants for men offers dressier styletextile industry do not present a significant risk to us as we maintain a diverse source base and premiumcontinually explore opportunities to reduce our reliance on U.S. sources by sourcing fabrics that are
appropriate for more formal occasions.from suppliers located around the world. We position the brand between
casual pantshave not experienced any significant difficulty in obtaining fabric and tailored clothing and design and market itother raw materials to meet production needs in the 30-past.
Manufacturing and Finishing. We obtain our products from a combination of independent manufacturers and company-owned facilities. Since 1997, we have shifted our sourcing base substantially toward outsourcing by closing 37 company-owned production and finishing facilities in North America and Europe, including six plants in the United States and two plants in Europe in 2002. We believe that outsourcing allows us to 39-year-old consumer's desiremaintain production flexibility, in terms of both location and nature of production, while avoiding the substantial capital expenditures and costs related to operating a large internal production capability. We continue to own and operate 13 plants located in the United States, Canada, Europe, Asia and South Africa.
In the majority of cases, our purchased fabrics are shipped directly from fabric manufacturers to our own manufacturing plants, or directly to third party contractors for stylish value. The
Slates(R)brand "Fitzgerald," a poly-wool gabardine pant, remainedgarment construction. In these traditional “Cut-Make-Trim” arrangements, we retain ownership of the fabric throughout the manufacturing and finishing process. We use numerous independent manufacturers, principally in 2001 the top-selling individual slack sold in U.S. department storesLatin America and Asia, for the fifth consecutive year.production and finishing of our garments. We workalso use contractors who both produce or purchase fabric, sew and finish the garments. These “package” contractors represent a growing portion of our production and enable us to reduce working capital relating to work-in-process inventories. We typically conduct business with licenseesour contractors on an order-by-order basis. We inspect fabrics and finished goods as part of our quality control program to developensure that consumers receive products that meet our high standards.
We require all third party contractors who manufacture or finish products for us to abide by a stringent code of conduct that sets guidelines for employment practices such as wages and market complementary products under the Slates(R)name, includingbenefits, working hours, health and safety, working age and disciplinary practices, and for environmental, ethical and legal matters. We regularly assess manufacturing and finishing facilities to see if they are complying with our code of conduct. Our program includes periodic on-site facility inspections and continuous improvement activities. We also hire independent monitors to supplement our efforts.
In April 2000, we were named as an additional defendant in a broad assortment of knit and woven tops, dress shirts, sweaters,
hosiery, ties, sportcoats andclass action suit separates. This line is distributed
to department stores and specialty storesthat was filed by non-resident garment workers, who currently or formerly worked in Saipan (a U.S. commonwealth in the U.S.
o OTHER PRODUCTS. OurNorthern Mariana Islands), against several manufacturers operating on the island. The claims challenge working conditions for the operators in Saipan facilities and allege violation of the Racketeer Influenced and Corrupt Organization Act, the Alien Tort Claims Act and state common and international law. All other Dockers(R) product lines include Exact(R), a
dress pant line available through chain storesdefendants settled the lawsuit in September 2002. We have refused to join the settlement as we believe that the allegations about us in the U.S.; Dockers(R)
Recode(R),lawsuit are not true and we intend to vigorously defend this case.
Logistics. We operate dedicated distribution centers in a rangenumber of casualcountries and dress casual pantswe also outsource distribution activities to third party logistics providers. Distribution center activities include receiving finished goods from our plants and shirts sold
exclusivelycontractors, inspecting those products and shipping them to our customers. In the United States, we are entering into an arrangement with a third party logistics provider to operate warehouse facilities at three major U.S. ports of entry. The objective of this arrangement is to improve product flows into, and the efficiency of, our U.S. distribution centers, and to facilitate product warehousing and shipment to mass channel and other customers. We continually explore opportunities in U.S. department stores; Dockers(R)K-1 Khakis, a premium
khaki pant made from the original Cramerton(R) army clothall of our regions to improve efficiencies in both our in-bound and sold in
Europeout-bound logistics activities.
Sales, Distribution and Asia; and Dockers(R) Boys' products distributed in the U.S.
and targeted towards boys ages 4 to 14. We work with established
licensees to develop and market complementary products under the
Dockers(R) brand, including outerwear and leather goods, men's and
women's footwear, men's sweaters, hosiery and golf apparel.
SALES, DISTRIBUTION AND CUSTOMERS
Customers
We distribute our products onin a worldwide basis through selectedwide variety of retail channels,formats around the world including chain stores,and department stores, specialtyfranchise stores dedicated franchised stores, outlets, Internet sitesto our brands, specialty retailers, and, mail-order catalogs.beginning in July 2003, a mass channel retailer in the United States. Our distribution strategy focuses on:
o strengtheningon ensuring that the economics for our retail relationshipscustomers are attractive, that the right products are available and presence through improving
collaborative account planningin stock at retail and that our products are presented in ways that enhance brand appeal and attract consumers. This involves:
Americas
In the Americas, we distribute our products through national and regional chains, department stores, specialty stores and Levi's Store(R)Levi’s® Store retail shops. We have approximately 3,2003,300 retail customers operating more than 18,90020,400 locations in the U.S.United States and Canada. Sales of Levi's(R)Levi’s®and Dockers(R)Dockers®products to our top five and top ten10 customers in the U.S.United States accounted for approximately 35% and 45% of our total net sales in 2002, and approximately 53% and 69% of our Americas net sales in 2002, as compared to approximately 37% and 47% of our total net sales in fiscal year 2001, and approximately 55% and 71% of our Americas net sales in fiscal year 2001, as compared to approximately 36% and 48%
of our total net sales in fiscal year 2000, and approximately 54% and 70% of our
Americas net sales in fiscal year 2000. Net sales in the U.S. accounted for
approximately 93% of our Americas net sales in fiscal year 2001. Our top ten10 customers in fiscal year 2001,2002, on both an Americas and total company basis, were (in alphabetical order): Costco Wholesale Corporation, Casual Male Retail Group, Inc. (formerly Designs, Inc.), Dillards, Inc., Federated Department Stores, Inc., Goody'sGoody’s Family Clothing, Inc., J.C. Penney Company, Inc., Kohl'sKohl’s Corporation, The May Department Stores Company, the Mervyn'sMervyn’s unit of Target Corporation and Sears, Roebuck & Co. and Specialty Retailers. J.C. Penney Company, Inc. is the only customer that represented more than 10% of our total net sales, accounting for 13%approximately 12%, 12%13% and 11%12% of our total net sales in fiscal
years2002, 2001 and 2000, and 1999, respectively. It is possible that Wal-Mart may become one of our largest customers as a result of purchases of Levi Strauss Signature™ products. We also target limited distribution premium products like Levi's(R)Levi’s® Vintage Clothing to independent, image-conscious specialty stores in major metropolitan areas who cater to more fashion-forward, trend-influentialtrend-initiating consumers.
EUROPE
We regularly explore entry into new customers and development of new brands and products for both existing and potential customers. For example, during 2002 we entered Pacific Sunwear, a multi-brand specialty store. We also entered a number of image department stores including the Bloomingdales unit of Federated Department Stores, Inc., Neiman Marcus Group Inc., Nordstrom Inc. and Saks Incorporated. In addition, as part of our ongoing effort to build our business, we announced in October 2002 that we will be introducing a new casual clothing brand, the Levi Strauss Signature™ brand, for consumers who shop at mass channel retail stores. We anticipate that the products will be available initially at Wal-Mart locations across the United States beginning in July 2003.
Europe
Our European customers include large department stores, such as El Corte Ingles in Spain, Galeries Lafayette in France and Karstadt/Hertie in Germany; dedicated, single-brand Levi's Store(R)Levi’s® Store and Dockers(R)Dockers® Store retail shops; mail
ordermail-order accounts; and a substantial number of independent retailers operating either a single or small group of jeans-focused stores or general clothing stores. We depend forDuring 2002, nearly half our European sales onwere by these independent retailers, who are under increasing pressure from both vertically integrated specialty stores and department stores. The more varied and fragmented nature of European retailing means that we are less dependent on major customers than we are in the U.S.United States. In fiscal year 2001,2002, our top ten10 European customers accounted for approximately 9%11% of our total European net sales.
6
ASIA PACIFIC
In
Asia Pacific
During 2002, in Asia Pacific we generategenerated over half of our sales through the specialty store channel, which includes multi-brand as well as independently owned Levi's
Store(R)Levi’s® Store retail shops. The rest of our products are sold through department stores and general merchandise stores. As in Europe, the varied and fragmented nature of Asian retailing means we are less dependent on individual customers in the region. Our Asia Pacific business is heavily weighted toward Japan, which represented approximately 55%53% of our 20012002 net sales in the region.
DEDICATED STORES
Dedicated Stores
We have a network of approximately 840900 franchised or other independently owned stores selling Levi's(R)Levi’s® brand or Dockers(R)Dockers® brand products under the "Original Levi's Store(R)," "Levi's(R) Store"“Original Levi’s® Store,” “Levi’s® Store,” “Selvedge” and "Dockers(R) Store"“Dockers®” Store names in Europe, Asia, Canada and Latin America. These dedicated-format stores are strategically important as vehicles for demonstrating the breadth of our product line, enhancing brand image and generating sales. These stores also are an important distribution channel in newer and smaller markets in Eastern Europe, Asia Pacific and Latin America. We own and operate a small number of stores dedicated to the Levi's(R)Levi’s® brand, including stores in the U.S.United States located in New York, Chicago, Orange County (near Los Angeles), San Francisco, San Diego, Boston and Seattle and in Europe located in London, Milan, Paris and Berlin. Sales from company-owned stores represented approximately 1% of our total net sales for 2002.
We also own in the U.S.United States and Japan, and license third parties in the U.S.United States and abroad to operate, outlet stores for the disposition of closeout, irregular and return goods. Sales through our outlet channels in the U.S. representUnited States represented less than 5% of our total net sales.sales in 2002. We use the outlet store channel to support our brands by moving closeout and irregular goods as quickly as possible through the stores and by reducing the flow of goods to channels that are not consistent with our brand image and distribution strategies.
INTERNET
Internet
We operate web siteswebsites devoted to the Levi's(R)Levi’s® and Dockers(R)Dockers® brands as marketing vehicles to enhance consumer understanding of our brands. We do not sell products directly to consumers through these Internet web sites.internet websites. In the U.S.,United States, our products are currently sold online through specifically authorized third party Internetinternet sites that meet our standards, such aswww.macys.com, operated by Federated Department Stores, Inc.,www.jcpenney.com and
www.kohls.com.www.kohls.com, and visitors can link to authorized siteson-line retailers through our sites. In Canada and Europe, authorized dealers and mail order accounts who meet our standards relating to customer service, return policy, site content, trademark use and other matters may sell our products to consumers through their own Internetinternet sites.
ADVERTISING AND PROMOTION
Advertising and Promotion
We make substantial expenditures on advertising, retail and promotion activities in support of our brands to increase consumer relevance and to drive consumer demand. We expensed approximately $357.0$307.1 million, or 8.4%7.4% of total net sales, in 2002 on these activities in fiscal year 2001.activities. We advertise through a broad mix of media, including television, national publications, billboards and other outdoor vehicles. We execute region-specific marketing programs that are based on globally-consistentglobally consistent brand values. This approach allows us to achieve consistent brand positioning while allowinggiving us flexibility to optimize program execution in local markets.
Our marketing strategy focuses on:
o
We also use less traditional marketing vehicles, including event and music sponsorships, product placement in television shows, music videos and films and alternative marketing techniques, including street-level and nightclub events and similar targeted, small-scale activities. RecentIn 2002, our marketing activities includehave included: “Levi’s® Girlfriends,” the summerbrand’s first major campaign aimed at women in Europe, conducted in collaboration with MTV and fall 2001 U.S. tourSony; “Dockers® Defender of the Levi's(R) "Make Them Your Own Zone," a
custom-built tractor-trailer featuring games, product displays, video
"style-cam,"Week,” an integrated marketing program with Fox Sports; and karaoke that travels to concert venues, lifestyle festivalstie-ins between the Levi’s® brand in Korea and retail locations.
COMPETITION
the World Cup and Korean soccer star Song Chong Gug.
Competition
The worldwide apparel industry is highly competitive and fragmented. In all three of our regional markets we compete with numerous branded manufacturers, retailer private labels, designers and vertically integrated specialty store retailers.
The success of our business depends, in part, on our ability to:
o
We believe our competitive strengths include:
o
Americas
We face intense competition across all of our brands from vertically integrated specialty stores, mass merchandisers,merchants, retailer private labels, designer labels and other branded labels. We sell both basic and fashion-oriented products under the Levi's(R)Levi’s® and Dockers(R)Dockers® brands to retailers in diverse channels across a wide range of retail price points. As a result, we face a wide range of competitors, including:
o
Europe
While there is no one particularsingle brand with a strong pan-European presence across the entire European region, strong local brands and retailers exist in certain markets, including Diesel, in
ItalyG-Star and Scandinavia, Pepe in Spain and Lee Cooper in France.Miss Sixty. Our most significant competitors are vertically integrated specialty retailers, such as Zara, Hennes & Mauritz AB, EnergieNext and other vertically integrated specialty retailers, and
athleticCelio. Athletic wear firmscompanies such as adidas-Salomon,Adidas-Salomon AG also offer competitive products and are an increasing and effective competitive force in the European market. Our principal
U.S. competitors, includingCompanies based in the United States, such as Gap, Inc. and VF Corporation also compete in Europe. ASIA PACIFICThe casual apparel market in Europe is fragmented and there is currently no significant pan-European branded competitor of our Dockers® brand in Europe.
Asia Pacific
Japan continues to be our largest market in Asia Pacific, representing approximately 53% of regional net sales in 2002. Asia Pacific is a fragmented market with no strong pan-regional competitor. Competitors in the jeanswear market consist of both regional brands, such as Edwin, our principal competitorSomething and Bobson in Japan, and U.S. brands, including Lee,
Wranglersuch as Gap, Inc., VF Corporation and Guess? which offer basic products available in local markets.
Competitors in both jeanswear and casual apparelEarl Jeans. We also includeface competition from vertically integrated specialty stores, such as UNIQLO Gapand Giordano. Athletic wear companies such as Adidas-Salomon and Nike, Inc., Esprit compete in tops and Eddie Bauer in
Japan, and Giordano, a more value-focused retailer that operates throughout the
region.
SOURCING, MANUFACTURING AND RAW MATERIALS
Our supply chain strategy focuses on the linkagecasual pants.
Trademarks
Substantially all of our product supply to
consumer demand and improving our ability to ship product orders in a timely and
complete manner. We obtain our products from a combination of company-owned
facilities and independent manufacturers. Since 1997, we shifted our sourcing
base substantially toward outsourcingglobal trademarks are owned by closing 29 company-owned production and
finishing facilities in North America and Europe. We are now discussing with our
unions in the U.S. potential additional closures of manufacturing facilities in
the U.S. and are consulting with union and employee representatives regarding a
proposal to close two plants in Scotland. We believe that outsourcing allows us
to maintain production flexibility while avoiding the substantial capital
expenditures and costs related to maintaining a large internal production
capability.
Each of our operating regions operates a supply chain organization focused
on ensuring cost effective on-time delivery of product by managing execution
from design handoff to delivery at retail. The supply chain organization
includes demand forecasting, product development from design to
manufacturing-ready, product management, supplier relationships, manufacturing,
quality control and logistics support. Within our brands in each region,
merchandisers and designers create seasonal product plans that are driven by
consumer preferences, market trends and retail customer requirements. During the
development phase, the merchandisers and designers work closely with the product
managers to ensure manufacturing specifications and cost meet requirements for
each product in the seasonal plan. They also consult with forecast specialists
and sales representatives to determine the potential unit volume for the fashion
and replenishment products in the plan. Once the brand's seasonal plan is
finalized, product managers focus on delivering the products to retail.
We purchase the fabric and raw materials used in our business, particularly
denim and twill, from several suppliers, including Cone Mills, GaleyLevi Strauss & Lord,
including its Swift Denim subsidiary, American Cotton Growers and Burlington
Industries, Inc. In addition, we purchase thread, trim, buttons, zippers, snaps
and various other product components from numerous suppliers. We do not have
long-term raw materials or production contracts with any of our principal
suppliers, except for Cone Mills, which is the sole worldwide supplier of the
denim used for our 501(R) jeans, and which supplied approximately 25%, 26% and
22% in 2001, 2000 and 1999, respectively, of the total volume of fabrics we
purchased worldwide. Our contract with Cone Mills provides for a rolling
five-year term unless either Cone Mills or we elect not to extend the agreement,
upon which the agreement will terminate at the end of the then-current term. The
contract also ensures our supply for three years following a change of control
of Cone Mills. We may terminate the Cone Mills contract at any time upon 30 days
notice. We have not experienced any material difficulty in obtaining fabric and
other raw materials to meet production needs in the past.
The U.S. textile industry had a very difficult year in 2001. The slowdown
in the retail market and competition from foreign mills has resulted in a
significant drop in demand for U.S. produced fabrics and a deterioration of mill
profit margins. Several U.S. mills have filed for bankruptcy protection. On
November 15, 2001, Burlington Industries, Inc., our third largest supplier,
filed for bankruptcy protection. We have not experienced any material disruption
as a result of this action. In fiscal year 2001, we purchased approximately 70%
of our total volume of fabrics from U.S. fabric mills. We believe that the
troubled U.S. textile industry does not present a significant risk to us as we
are able to take advantage of our diverse supplier base and global sourcing
opportunities.
9
In the majority of cases, our purchased fabrics are shipped directly from
fabric manufacturers to our own manufacturing plants, or directly to third party
contractors for garment construction. In these traditional "Cut-Make-Trim"
arrangements, we retain ownership of the fabric throughout the manufacturing
process. We use numerous independent manufacturers, principally in Latin America
and Asia, for the production of our garments. We also use contractors who both
produce or purchase fabric, sew and finish the garments. These "package"
contractors represent a growing portion of our production and enable us to
reduce working capital relating to work-in-process inventories. We typically
conduct business with our contractors on an order-by-order basis. We inspect
fabrics and finished goods as part of our quality control program to ensure that
consumers receive products that meet our high standards.
We require all third party contractors who manufacture or finish products
on our behalf to abide by a stringent code of conduct that sets guidelines for
employment practices such as wages and benefits, working hours, health and
safety, working age and disciplinary practices, and for environmental, ethical
and legal matters. We assess working conditions and contractors' compliance with
our standards on a regular basis and implement improvement plans as needed.
We operate 21 dedicated distribution centers in 17 countries, as well as
outsourcing a small amount of distribution activities to third party logistics
providers. Distribution center activities include receiving finished goods from
our plants and contractors, inspecting those products and shipping them to our
customers.
TRADEMARKSCo. We regard our trademarks as our most valuable assets and believe they have substantial value in the marketing of our products. Levi's(R)Levi’s®, Silvertab(R)Dockers®, 501(R)Levi Strauss Signature™, Dockers(R)Silvertab®, Slates(R)501®, Slates®, the Wings and Anchor Design, the Arcuate trademark,Stitching Design, the Tab Device and the Two Horse(R)Horse® design are among our core trademarks. We protect these trademarks by registering them with the U.S. Patent and Trademark Office and with governmental agencies in other countries, particularly where our products are manufactured andand/or sold. We work vigorously to enforce and protect our trademark rights by engaging in regular market reviews, helping local law enforcement authorities detect and prosecute counterfeiters, issuing cease-and-desist letters against third parties infringing or denigrating our trademarks and initiating litigation as necessary. We also work with trade groups and industry participants seeking to strengthen laws relating to the protection of intellectual property rights in markets around the world. We grant licenses to other parties to manufacture and sell products with our trademarks in product categories and in geographic areas in which we do not operate.
SEASONALITY AND BACKLOG
Our
Seasonality and Backlog
Although the fourth quarter is typically our highest sales quarter, our sales do not vary substantially by quarter in any of our three regions, as the apparel industry has become less seasonal due to more frequent selling seasons and offerings of both basic and fashion oriented merchandise throughout the year. In addition, all
All of our orders are subject to cancellation. For those
reasons,As a result, our order backlog may not be indicative of future shipments.
SOCIAL RESPONSIBILITY
Government Regulation
Our operations are subject to the effects of international trade agreements and regulations such as the North American Free Trade Agreement and the Caribbean Basin Initiative, and the activities and regulations of the World Trade Organization. Generally, these trade agreements benefit our business by reducing or eliminating the duties and/or quotas assessed on products manufactured in a particular country. However, trade agreements can also impose requirements that adversely affect our business, such as limiting the countries from which we can purchase raw materials and setting quotas on products that may be imported from a particular country. We continuously monitor these trade-related matters pending with the U.S. government for potential positive or negative effects of these matters on our business. Imported products are also subject to customs duties which can represent a significant portion of the cost of the merchandise.
In addition, we are subject to regulation by the Federal Trade Commission in the United States relating principally to the labeling and advertising of our products. We are also subject to federal, state, local and foreign laws and regulations affecting our business, including, in the United States, those promulgated under the Occupational Safety and Health Act, the Consumer Product Safety Act, the Flammable Fabrics Act, the Textile Fiber Product Identification Act, the rules and regulations of the Consumer Products Safety Commission and comparable laws abroad. We believe that we are in substantial compliance with these regulations, as well as applicable federal, state, local, and foreign rules and regulations governing the discharge of materials hazardous to the environment. We do not expect any significant capital expenditures for environmental matters in the near future.
Social Responsibility
We have a long-standing corporate culture characterized by ethical conduct and social responsibility. Our culture and our core values are reflected in policies and initiatives that we believe distinguish us from others in the apparel industry. We were a pioneer in many social and cultural areas:
o
Our strong commitment to workers rights is reflected in our history of public advocacy for responsible trade policies. In 2001, we expressed our support for incorporating workplace standards and workers rights provisions within the context of trade agreements to members of the U.S. Congress, the U.S. Trade Representative and various other government entities.
We are active in the communities where we have a presence. We andTogether with the Levi Strauss Foundation, jointlywe contributed $13.6$13.7 million during fiscal year 20012002 to community agencies in more thanover 40 countries to support employee volunteerism and programs in to advance HIV/AIDS prevention and care, economic empowerment,development opportunities for women and youth empowerment and social justice.access to education. In addition, we support more than 80approximately 70 community involvement teams worldwide that facilitate employee volunteerism and raise funds for community projects.
EMPLOYEES
Employees
As of November 25, 2001,24, 2002, we employed approximately 16,700 employees, about
8,60012,400 people, approximately 4,770 of whom were located in the U.S.United States. Most of our production and distribution employees in the U.S.United States are covered by various collective bargaining agreements. Outside the U.S.,United States, most of our production and distribution employees are covered by either industry-sponsored and/or state-sponsored collective bargaining mechanisms. We consider our relations with our employees to be good and have not recently experienced any material job actions or labor shortages.
11
ITEM
Properties
We conduct manufacturing, distribution and administrative activities in owned and leased facilities. We have renewal rights infor most of our property leases. We anticipate that we will be able to extend these leases on terms satisfactory to us or, if necessary, locate substitute facilities on acceptable terms. We believe our facilities and equipment are in good condition and are suitable for our needs. Information about manufacturing, finishing and distribution facilities and other key operating properties in use as of November 25, 200124, 2002 is summarized in the following table:
Location | Primary Use | Leased/Owned | ||
United States | ||||
Little Rock, | Distribution | Owned | ||
Hebron, | Distribution | Owned | ||
Canton, | Distribution | Owned | ||
Henderson, | Distribution | Owned | ||
San Antonio, | Finishing | Owned | ||
San Antonio, | Manufacturing | Owned | ||
Westlake, | Data Center | Leased | ||
Other Americas | ||||
Buenos Aires, | Distribution | Leased | ||
Etobicoke, | Distribution | Owned | ||
Stoney Creek, | Manufacturing | Owned | ||
Brantford, | Finishing | Leased | ||
Edmonton, | Manufacturing | Leased | ||
Naucalpan, | Distribution | Leased | ||
Europe | ||||
Schoten, | Distribution | Leased | ||
Les Ulis, | Distribution | Leased | ||
Heustenstamm, | Distribution | Owned | ||
Kiskunhalas, | Manufacturing, Finishing and Distribution | Owned | ||
Milan, Italy | Distribution | Leased | ||
Amsterdam, Netherlands | Distribution | Leased | ||
Plock, Poland | Manufacturing and Finishing | Leased | ||
Warsaw, | Distribution | Leased | ||
Northhampton, U.K | Distribution | Owned | ||
Cape Town, South | Manufacturing, Finishing and Distribution | Leased | ||
Sabedell, | Distribution | Leased | ||
Bonmati, | Manufacturing | Owned | ||
Olvega, | Manufacturing | Owned | ||
Helsingborg, | Distribution | Owned | ||
Corlu, | Manufacturing, Finishing and Distribution | Owned | ||
Asia Pacific | ||||
Adelaide, | Manufacturing and Distribution | Leased | ||
Dongguan, China | Manufacturing | Leased | ||
Karawang, | Finishing | Leased | ||
Hiratsuka | Distribution | Owned | ||
Makati, | Manufacturing | Leased |
Our global headquarters and the headquarters of our Americas business are both located in leased premises in San Francisco, California. Our Europe and Asia Pacific headquarters are located in leased premises in Brussels, Belgium and Singapore. We also lease or own over 8794 administrative and sales offices in 3335 countries, as well as lease a small number of small warehouses in seven4 countries.
In addition, we have 5753 company-operated retail and outlet stores in ten
countries in leased premises of which eight are outletin 10 countries. We have 20 stores in the United
States,Americas region, 28 stores in the Europe region and 13 are5 stores located in Poland.the Asia Pacific region. In 2002, we opened 5 company-operated stores and closed 10 stores. We also own or lease a fewseveral facilities we formerly operated and have closed. We are now discussing with our
unions in the United States potential closures of manufacturing facilities in
the United States and are consulting with union and employee representatives
regarding a proposal to close two plants in Scotland.
13
ITEM
Item 3. LEGAL PROCEEDINGS
We are subject to claims against us, and we make claims against others, in
In the ordinary course of our business, includingwe have pending various cases involving contractual matters, employee-related matters, distribution questions, product liability claims, arising from the use of
our trademarkstrademark infringement and with respect to employmentother matters. We do not believe that
the resolution ofthere are any pending claimslegal proceedings that will materially adversely affecthave a material impact on our business.
ITEMfinancial position or results of operations.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of our security holders during our 20012002 fiscal fourth quarter.
14
PART II
ITEM
Item 5. MARKET FOR REGISTRANT'SREGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) Our shares of common stock are held by members of the families of several descendants of our founder, Levi Strauss, and by several former members of our management. There is no established public trading market for our shares and none of our shares are convertible into shares of any other class of stock or other securities.
All shares of our common stock are deposited in a voting trust, a legal arrangement that transfers the voting power of the shares to a trustee or group of trustees. The four voting trustees are Peter E. Haas, Sr., Peter E. Haas, Jr., Robert D. Haas and F. Warren Hellman. The voting trustees have the exclusive ability to elect and remove directors, amend our by-laws and take certain other actions which would normally be within the power of stockholders of a Delaware corporation. Our equity holders who, as a result of the voting trust, legally hold "voting“voting trust certificates",certificates,” not stock, retain the right to direct the trustees on specified mergers and business combinations, liquidations, sales of substantially all of our assets and specified amendments to our certificate of incorporation.
The voting trust will last until April 2011, unless the trustees unanimously decide, or holders of at least two-thirds of the outstanding voting trust certificates decide, to terminate it earlier. If Robert D. Haas ceases to be a trustee for any reason, then the question of whether to continue the voting trust will be decided by the holders. If Peter E. Haas, Sr. ceases to be a trustee, his successor will be his spouse, Miriam L. Haas. The existing trustees will select the successors to the other trustees. The agreement among the stockholders and the trustees creating the voting trust contemplates that, in selecting successor trustees, the trustees will attempt to select individuals who share a common vision with the sponsors of the 1996 transaction that gave rise to the voting trust, represent and reflect the financial and other interests of the equity holders and bring a balance of perspectives to the trustee group as a whole. A trustee may be removed if the other three trustees unanimously vote for removal or if holders of at least two-thirds of the outstanding voting trust certificates vote for removal.
Our common stock, as noted, and the voting trust certificates, are not publicly held or traded. All shares and the voting trust certificates are subject to a stockholders'stockholders’ agreement. The agreement, which expires in April 2016, limits the transfer of shares and certificates to other holders, family members, specified charities and foundations and to us. The agreement does not provide for registration rights or other contractual devices for forcing a public sale of shares, certificates or other access to liquidity. The scheduled expiration date of the stockholders'stockholders’ agreement is five years later than that of the voting trust agreement in order to permit an orderly transition from effective control by the voting trust trustees to direct control by the stockholders.
We may hold "annual stockholders' meetings"“annual stockholders’ meetings” to which all voting trust certificate holders are invited to attend. These meetings are not a "meeting“meeting of stockholders"stockholders” in the traditional corporate law sense; under the voting trust agreement, the trustees, not the voting trust certificate holders, elect the directors and vote the shares on most other corporate matters. In addition, the meetings are not official formal meetings, under the voting trust agreement, of the voting trust certificate holders. Instead, these annual gatherings are opportunities for the voting trust certificate holders to interact with the board of directors and management and to learn more about our business.
(b) As of January 1, 2002,2003, there were 166167 record holders of voting trust certificates.
(c) We did not declare or pay any dividends in our two most recent fiscal years. Our current bank credit facilities prohibitfacility prohibits our declaring or paying any dividends without first obtaining consents from our lenders. In addition, in January 2001 and December 2002 we entered into indentures relating to our 11.625% senior notes due 2008 and 12.25% senior notes due 2012, respectively, that limit our paying any dividends. For more detailed information about our bank credit facilities and senior notes, see "Management's“Management’s Discussion and Analysis of Financial Condition and Results of Operations -- Operations—Liquidity and Capital Resources"Resources” and Notes to Consolidated Financial Statements.
15
ITEM
Item 6. SELECTED FINANCIAL DATA
The following table summarizes our selected financial data. The following selected statements of income data and cash flow data for fiscal years2002 and the consolidated balance sheet data of such period is derived from our financial statements that have been audited by KPMG LLP. The following selected statements of income data and cash flow data for 2001, 2000, 1999 1998 and 19971998 and the consolidated statement of balance sheet data of such periods are derived from our financial statements that have been audited by Arthur Andersen LLP, independent public accountants. For a discussion of the risks relating to Arthur Andersen LLP’s audit of our financial statements, please see “Factors That May Affect Future Results—Risks relating to Arthur Andersen LLP.”
The financial data set forth below should be read in conjunction with, and is qualified by reference to, "Management's“Management’s Discussion and Analysis of Financial Condition and Results of Operations,"” our consolidated financial statements and the related notes to those financial statements, included elsewhere in this report. Certain prior year amounts have been reclassified to conform to the 20012002 presentation.
Year Ended | ||||||||||||||||||||
November 24, 2002 | November 25, 2001 | November 26, 2000 | November 28, 1999 | November 29, 1998 | ||||||||||||||||
(Dollars in Thousands) | ||||||||||||||||||||
Statements of Income Data: | ||||||||||||||||||||
Net sales | $ | 4,136,590 |
| $ | 4,258,674 |
| $ | 4,645,126 |
| $ | 5,139,458 |
| $ | 5,958,635 |
| |||||
Cost of goods sold |
| 2,451,785 |
|
| 2,461,198 |
|
| 2,690,170 |
|
| 3,180,845 |
|
| 3,433,081 |
| |||||
Gross profit |
| 1,684,805 |
|
| 1,797,476 |
|
| 1,954,956 |
|
| 1,958,613 |
|
| 2,525,554 |
| |||||
Marketing, general and administrative expenses |
| 1,332,798 |
|
| 1,355,885 |
|
| 1,481,718 |
|
| 1,629,845 |
|
| 1,834,058 |
| |||||
Other operating (income) |
| (34,450 | ) |
| (33,420 | ) |
| (32,380 | ) |
| (24,387 | ) |
| (25,310 | ) | |||||
Restructuring charges, net of reversals(1) |
| 124,595 |
|
| (4,286 | ) |
| (33,144 | ) |
| 497,683 |
|
| 250,658 |
| |||||
Global Success Sharing Plan(2) |
| — |
|
| — |
|
| — |
|
| (343,873 | ) |
| 90,564 |
| |||||
Operating income |
| 261,862 |
|
| 479,297 |
|
| 538,762 |
|
| 199,345 |
|
| 375,584 |
| |||||
Interest expense |
| 186,493 |
|
| 230,772 |
|
| 234,098 |
|
| 182,978 |
|
| 178,035 |
| |||||
Other (income) expense, net |
| 25,411 |
|
| 8,836 |
|
| (39,016 | ) |
| 7,868 |
|
| 34,849 |
| |||||
Income before taxes |
| 49,958 |
|
| 239,689 |
|
| 343,680 |
|
| 8,499 |
|
| 162,700 |
| |||||
Income tax expense |
| 24,979 |
|
| 88,685 |
|
| 120,288 |
|
| 3,144 |
|
| 60,198 |
| |||||
Net income | $ | 24,979 |
| $ | 151,004 |
| $ | 223,392 |
| $ | 5,355 |
| $ | 102,502 |
| |||||
Statements of Cash Flow Data: | ||||||||||||||||||||
Cash flows from operating activities | $ | 191,748 |
| $ | 141,900 |
| $ | 305,926 |
| $ | (173,772 | ) | $ | 223,769 |
| |||||
Cash flows from investing activities |
| (59,353 | ) |
| (17,230 | ) |
| 154,223 |
|
| 62,357 |
|
| (82,707 | ) | |||||
Cash flows from financing activities |
| (140,316 | ) |
| (139,890 | ) |
| (527,062 | ) |
| 224,219 |
|
| (194,489 | ) | |||||
Balance Sheet Data: | ||||||||||||||||||||
Cash and cash equivalents | $ | 96,478 |
| $ | 102,831 |
| $ | 117,058 |
| $ | 192,816 |
| $ | 84,565 |
| |||||
Working capital |
| 574,103 |
|
| 651,256 |
|
| 555,062 |
|
| 770,130 |
|
| 637,801 |
| |||||
Total assets |
| 3,017,284 |
|
| 2,983,486 |
|
| 3,205,728 |
|
| 3,670,014 |
|
| 3,867,757 |
| |||||
Total debt |
| 1,846,977 |
|
| 1,958,433 |
|
| 2,126,430 |
|
| 2,664,609 |
|
| 2,415,330 |
| |||||
Stockholders’ deficit(3) |
| (995,584 | ) |
| (935,943 | ) |
| (1,098,573 | ) |
| (1,288,562 | ) |
| (1,313,747 | ) | |||||
Other Financial Data: | ||||||||||||||||||||
EBITDA before net restructuring charges and related expenses(4) | $ | 507,077 |
| $ | 555,630 |
| $ | 596,599 |
| $ | 473,257 |
| $ | 845,579 |
| |||||
Capital expenditures |
| 59,088 |
|
| 22,541 |
|
| 27,955 |
|
| 61,062 |
|
| 116,531 |
| |||||
| (1) | We reduced overhead expenses and eliminated excess manufacturing capacity through extensive restructuring initiatives executed |
| (2) | In 1996, we |
| (3) | Stockholders’ deficit resulted from a 1996 recapitalization transaction in which our stockholders created new long-term governance arrangements for us, including the voting trust and |
| (4) | EBITDA before net restructuring charges and related expenses equals net income before interest expense, income tax expense, depreciation and amortization, other (income) expense, net, net charges associated with our restructuring activities discussed in note (1) above, restructuring related expenses, and charges and reversals associated with our Global Success Sharing Plan discussed in note (2) above. “Restructuring related expenses” is a |
| We believe that our investors find EBITDA before net restructuring charges and related expenses to be a useful analytical tool for measuring our ability to service our debt and for measuring our ability to generate cash for other purposes. In |
The calculation for EBITDA before net restructuring charges and related expenses is shown below:
Year Ended | ||||||||||||||||||
November 24, 2002 | November 25, 2001 | November 26, 2000 | November 28, 1999 | November 29, 1998 | ||||||||||||||
(Dollars in Thousands) | ||||||||||||||||||
Net income | $ | 24,979 | $ | 151,004 |
| $ | 223,392 |
| $ | 5,355 |
| $ | 102,502 | |||||
Interest expense |
| 186,493 |
| 230,772 |
|
| 234,098 |
|
| 182,978 |
|
| 178,035 | |||||
Income tax expense |
| 24,979 |
| 88,685 |
|
| 120,288 |
|
| 3,144 |
|
| 60,198 | |||||
Depreciation and amortization |
| 71,071 |
| 80,619 |
|
| 90,981 |
|
| 120,102 |
|
| 128,773 | |||||
Other (income) expense, net |
| 25,411 |
| 8,836 |
|
| (39,016 | ) |
| 7,868 |
|
| 34,849 | |||||
Restructuring charges, net of reversals |
| 124,595 |
| (4,286 | ) |
| (33,144 | ) |
| 497,683 |
|
| 250,658 | |||||
Restructuring related expenses |
| 49,549 |
| * |
|
| * |
|
| * |
|
| * | |||||
Global Success Sharing Plan |
| — |
| — |
|
| — |
|
| (343,873 | ) |
| 90,564 | |||||
EBITDA before net restructuring charges and related expenses | $ | 507,077 | $ | 555,630 |
| $ | 596,599 |
| $ | 473,257 |
| $ | 845,579 | |||||
| * | We did not separately identify restructuring related expenses until 2002. |
Item 7. MANAGEMENT'SMANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
This
Except for the historical information contained in this report, contains forward-lookingcertain matters discussed in this report, including (without limitation) statements including, in particular,
statements about our plans, strategiesunder “Business” and prospects under "Management's“Management’s Discussion and Analysis of Financial Condition and Results of Operations" and
"Business." Among theseOperations,” contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Although we believe that, in making any such statements, our expectations are based on reasonable assumptions, any such statement may be influenced by factors that could cause actual outcomes and results to be materially different from those projected.
These forward-looking statements regarding our
anticipated performance in fiscal year 2002, specificallyinclude statements relating to our net sales, gross profit, marketing, generalanticipated financial performance and administrative expenses,
advertising expense, inventories and capital expenditures.
We have based these forward-lookingbusiness prospects and/or statements on our current assumptions,
expectations and projections about future events. When used in this report,preceded by, followed by or that include the words "believe," "anticipate," "intend," "estimate," "expect," "project"“believe,” “anticipate,” “intend,” “estimate,” “expect,” “project,” “could,” “plans,” “seeks” and similar expressions are intended to identify forward-looking statements,
although not all forward-looking statements contain such words.expressions. These forward-looking statements speak only as of the date of this report,stated and we do not undertake any obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise.otherwise, even if experience or future events make it clear that any expected results expressed or implied by these forward-looking statements will not be realized. Although we believe that the expectations reflected in these forward-looking statements are reasonable, we can give no assurance that these expectations willmay not prove to be correct or that we willmay not achieve the financial results, savings or other benefits anticipated in the forward-looking statements. We disclose important factors,These forward-looking statements are necessarily estimates reflecting the best judgment of our senior management and involve a number of risks and uncertainties, some of which may be beyond our control, that could cause actual results to differ materially from management's expectations in this report,those suggested by the forward-looking statements, including, without limitation:
o changing domestic and international retail environments;
o
For more information on these and other factors, see "Factors“Factors That May Affect Future Results."” We caution prospective investorsyou to not to place undue reliance on these forward-looking statements. All subsequent written and oral forward-looking statements attributable to us are expressly qualified in their entirety by the cautionary statements and factors that may affect future results contained throughout this report.
18
CRITICAL ACCOUNTING POLICIES
In response
Overview
From 1998 to the SEC's Release No. 33-8040, "Cautionary Advice Regarding
Disclosure About Critical Accounting Policies,"2002, we identified the most critical
accounting principles upon which our financial status depends. We determined the
critical principles by considering accounting policies that involve the most
complex or subjective decisions or assessments. We identified our most critical
accounting policies to be those related to revenue recognition, foreign exchange
management, inventory valuation and restructuring reserves. We state these
accounting policiesexperienced a decrease in the notes to the consolidated financial statements and at
relevant sections in this discussion and analysis.
This discussion and analysis should be read in conjunction with our
consolidated financial statements and related notes included elsewhere in this
report.
RESULTS OF OPERATIONS
The following table summarizes, for the periods indicated, selected items
in our consolidated statements of income, expressed as a percentage of net sales (amounts may not foot duefrom $6.0 billion to rounding).
In late 1997,response, we began restructuringhave completed several significant strategic, operational and management initiatives, including closing 37 of our business to addressowned and operated production and finishing facilities worldwide, shifting the vast majority of our
deteriorating financial and operating performance. We reduced overhead expenses
and eliminated excess manufacturing capacity through extensive restructuring
initiatives. We shifted to increased outsourcing of production to independent contract manufacturers. Beginning in 1999, we putmanufacturers, putting in place a new senior management team.
We have adoptedteam, overhauling our product lines and executedintroducing new strategies focused onproducts, improving our relationships with retailers, broadening our product innovation,
operational performance, retail relations and financial discipline. We have
taken actions to improveavailability, improving our business planning, supply chain and other operational processes and internal capabilities. These efforts are beginning to
result in positive developments across several dimensionsimplementing a new operating model based on disciplined and integrated planning and execution.
We believe that through these initiatives we have successfully gained control of our business including improvementsand are in the process of stabilizing and positioning our products,company to resume profitable growth. Our actions have enabled us to strengthen the overall financial health of the company. We have:
In October 2002, we announced that we will be introducing a new casual clothing brand, the Levi Strauss Signature™ brand. We created the brand for value-conscious consumers who shop in mass channel retail stores. The Levi Strauss Signature™ brand will initially feature a range of denim and non-denim pants and shirts as well as denim jackets. We anticipate that the products will be available initially at Wal-Mart locations across the United States beginning in July 2003.
Results of Operations
The following table summarizes, for the periods indicated, selected items in our consolidated statements of income, expressed as a percentage of net sales (amounts may not total due to rounding).
Year Ended | |||||||||
November 24, 2002 | November 25, 2001 | November 26, 2000 | |||||||
Net sales | 100.0 | % | 100.0 | % | 100.0 | % | |||
Cost of goods sold | 59.3 |
| 57.8 |
| 57.9 |
| |||
Gross profit | 40.7 |
| 42.2 |
| 42.1 |
| |||
Marketing, general and administrative expenses | 32.2 |
| 31.8 |
| 31.9 |
| |||
Other operating (income) | (0.8 | ) | (0.8 | ) | (0.7 | ) | |||
Restructuring charges, net of reversals | 3.0 |
| (0.1 | ) | (0.7 | ) | |||
Operating income | 6.3 |
| 11.3 |
| 11.6 |
| |||
Interest expense | 4.5 |
| 5.4 |
| 5.0 |
| |||
Other (income) expense, net | 0.6 |
| 0.2 |
| (0.8 | ) | |||
Income before taxes | 1.2 |
| 5.6 |
| 7.4 |
| |||
Income tax expense | 0.6 |
| 2.1 |
| 2.6 |
| |||
Net income | 0.6 | % | 3.5 | % | 4.8 | % | |||
Net Sales Segment Data: | |||||||||
Geographic | |||||||||
Americas | 65.1 | % | 67.1 | % | 67.8 | % | |||
Europe | 26.4 |
| 25.0 |
| 23.8 |
| |||
Asia Pacific | 8.5 |
| 7.9 |
| 8.4 |
| |||
Year Ended November 24, 2002 as Compared to Year Ended November 25, 2001
Consolidated Net Sales. Net sales in 2002 decreased 2.9% to $4,136.6 million, as compared to $4,258.7 million in 2001. If currency exchange rates were unchanged from 2001, net sales would have decreased approximately 3.2% for 2002 compared to 2001. The decrease primarily reflected the impact of the weak retail and economic climates in many of the markets in which we operate. In the first half of 2002 we were in the early stages of introducing many of the products and ensuring every elementprograms whose marketplace impact we believed would increase over time. In the second half of 2002, net sales stabilized as these products and programs began to take hold.
Despite the product range contributescontinuation of weak economic and retail conditions in most major markets around the world, we anticipate that 2003 constant currency net sales will increase between 2% to brand image and profitability;
o offering products5% compared to multiple consumer segments at2002. We expect to continue expanding our reach to a broad range of consumers in 2003, including the faster growing women’s market, by offering relevant products at a wide range of price points;
o revitalizingpoints. We introduced Levi’s® Type 1™ jeans, a modern interpretation of the quintessential Levi’s® jeans, in Asia Pacific in late 2002 and in Europe and the United States in January 2003. In addition, we will be introducing the Levi Strauss Signature™ brand, which we expect to be available at Wal-Mart locations across the United States beginning in July 2003. We anticipate that the majority of our net sales growth in 2003 will be in the second half of the year as we continue to build our core business with new fabrics, fits and finishes and launch the Levi Strauss Signature™ brand.
Americas Net Sales. In the Americas, net sales in 2002 decreased 5.7% to $2,692.1 million, as compared to $2,856.1 million in 2001. If currency exchange rates were unchanged from 2001, net sales would have decreased approximately 4.9% for 2002 compared to 2001. This decrease primarily reflected the challenging U.S. retail relationships through improving collaborative
account planning and economic climate. The decline was mitigated by a number of factors in the Americas that continued to improve and have a positive impact during the year. These factors include:
| • | a revitalized women’s jeans product line, including Levi’s® Superlow jeans; |
| • | new market leading innovations, such as Dockers® Go! Khakis™ with Stain Defender; |
We regularly explore entry into new customers and development of new brands and products for both existing and potential customers. For example, we entered Pacific Sunwear, a multi-brand specialty store, and entered a number of image department stores including the Bloomingdales unit of Federated Department Stores, Inc., Nordstrom Inc. and Saks Incorporated.
Europe Net Sales. In Europe, net sales in terms2002 increased 2.5% to $1,093.1 million, as compared to $1,066.3 million in 2001. On a constant currency basis, net sales would have decreased 1.4% for 2002, compared to 2001. Net sales reflected a competitive and challenging marketplace, particularly in the United Kingdom, Italy and Germany where we experienced weak consumer demand, high retail inventories and increasing apparel price deflation. We stabilized our performance in Europe despite the challenging economic environment by taking various actions including:
| • | the roll-out of lower entry-priced products in both the Levi’s® and Dockers® brands; |
| • | aggressive promotions of 501® and 525™ jeans in core finishes; and |
Asia Pacific Net Sales. In our Asia Pacific region, net sales in 2002 increased 4.5% to $351.4 million, as compared to $336.2 million in 2001. If exchange rates were unchanged from 2001, net sales would have increased approximately 6.4% for 2002 compared to 2001. Sales growth reflected the positive impact of our product innovation, marketing programs and o reducingimproved retail distribution in an environment characterized by economic weakness and apparel price deflation across much of the costregion.
In Japan, which accounted for approximately 53% of our business in Asia during 2002, net sales in 2002 increased approximately 4.0% compared to the prior year period on a constant currency basis. The results in Japan reflected the positive impact of our premium and timesuper premium product lines, entry into the standard or lower priced segment, and the opening of additional independently-owned retail stores dedicated to the Levi’s® brand.
Gross Profit. Gross profit in 2002 was $1,684.8 million compared to $1,797.5 million in 2001. Gross margin decreased in 2002 to 40.7%, as compared to 42.2% in 2001.
Gross margin in 2002 was adversely affected by expenses of $49.5 million associated with product design, developmentplant closures in the United States and Scotland. Most of those expenses were for workers’ compensation and pension enhancements in the United States. Excluding these restructuring related expenses, gross margin for 2002 would have been 41.9% compared to 42.2% for 2001.
Our gross margins benefited from our lower sourcing activities.
As we go into 2002, we believeand fabric costs and the successful executionfavorable impact of these
strategies will continue to stabilize, and position us to ultimately grow,foreign currency movements as well as lower inventory markdown expenses. Negatively affecting our business.
YEAR ENDED NOVEMBER 25, 2001 AS COMPARED TO YEAR ENDED NOVEMBER 26, 2000
NET SALES. We recognize revenue from the sale of a product upon its
shipment to the customer. We recognize allowances, which offset sales, for
estimated returns, discounts andmargins were retailer promotions and incentives whenin the saleUnited States, which were recorded as a reduction of net sales, selective wholesale price reductions in the United States and Europe, entry into lower priced segments in all regions, and more expensive finishes, particularly in Europe.
Our largest supplier, Cone Mills Corporation, has been the sole supplier of the denim used worldwide for our 501® jeans. On May 13, 2002, we amended the exclusivity and requirements features of our supply agreement with Cone Mills. The amendment provides that, after March 30, 2003, we may purchase these denims from other suppliers and Cone Mills may sell these denims to other customers. The amendment also allows us to purchase these denims for our European business from non-U.S. sources prior to March 30, 2003 if the European Union implements significant tariffs against U.S. produced denim. The amendment does not change any other provisions of the supply agreement.
For 2003, we expect gross margins in the range of 40% to 42%. This range reflects cost savings associated with our 2002 plant closures. We plan to use these savings to provide our retail customers with better margins, while also investing in our products. In addition, our expected gross margins for 2003 do not reflect postretirement medical benefits related to manufacturing employees. Because we have closed most of our manufacturing plants, we will reflect these costs in marketing, general and administrative expenses starting in 2003.
Cost of goods sold is recorded.primarily comprised of cost of materials, labor and manufacturing overhead. Cost of goods sold also includes the cost of inbound freight, internal transfers, and receiving and inspection at manufacturing facilities as these costs vary with product volume. We estimate allowancesinclude substantially all the costs related to receiving and inspection at distribution centers, warehousing and other activities associated with our distribution network in marketing, general and administrative expenses. Our gross margins may not be comparable to those of other companies in our industry, since some companies may include costs related to their distribution network in cost of goods sold.
Marketing, general and administrative expenses. Marketing, general and administrative expenses in 2002 decreased 1.7% to $1,332.8 million compared to $1,355.9 million in 2001. These expenses as a percentage of sales in 2002 increased to 32.2% compared to 31.8% in 2001. The dollar decrease in marketing, general and administrative expenses in 2002 was primarily due to lower advertising expense and our continuing cost containment efforts, partially offset by higher employee incentive plan accruals. In addition, expenses in 2001 included a reversal of prior period accruals, in the amount of $18.0 million, associated with an employee long-term incentive plan as a result of changes in employee turnover assumptions based on actual experience.
Advertising expense in 2002 decreased 14.0% to $307.1 million, as compared to $357.3 million in 2001. Advertising expense as a percentage of sales in 2002 decreased to 7.4%, as compared to 8.4% in 2001. The decrease in advertising expense reflected lower media costs and our strategic decision to shift some of our U.S. advertising spending into sales incentive programs with retailers. The cost of those programs was recorded as a reduction of net sales. Cooperative advertising expense for 2002 and 2001 was $3.9 million and $21.5 million, respectively.
Marketing, general and administrative expenses also include distribution costs, such as costs related to receiving and inspection at distribution centers, warehousing, shipping, handling and certain other activities associated with our distribution network. These expenses totaled $183.7 million and $182.0 million for 2002 and 2001, respectively.
We expect marketing, general and administrative expenses as a percent of net sales for 2003 to be in the range of 32% to 34%, up slightly from 2002. This reflects increased costs for the sales, marketing and supply chain functions associated with our entry into the mass channel. We also expect advertising and promotion expenses to be higher than 2002, reflecting our ongoing commitment to investing in product and marketing for the Levi’s® Red Tab™ jeans business, but we expect expenses to remain at 7% to 8% of net sales. In addition, due to closing most of our manufacturing plants, marketing, general and administrative expenses for 2003 will reflect the inclusion of postretirement medical benefits related to manufacturing employees. In 2002 and prior years, we recorded these expenses in cost of goods sold.
We expect to record in the first quarter of 2003 a non-cash charge of approximately $20 million relating to a cumulative effect of a change in accounting for rent expense. We believe that the cumulative effect of the non-cash charge is not material to our historical operations in any period or to the trend of reported results of operations. In addition, we will discontinue amortization expense, a non-cash charge, for our goodwill and trademarks due to a new accounting standard effective the first quarter of 2003.
Other operating income. Royalty income in 2002 increased to $34.5 million as compared to $33.4 million in 2001. The increase reflected an expansion of licensed accessory categories.
Restructuring charges, net of reversals. In 2002, we recorded charges of $151.7 million associated with plant closures in the United States and Scotland and a restructuring initiative in Europe. These charges were offset by reversals of $27.1 million in 2002, based on updated estimates. In 2001, we reversed charges of $26.6 million primarily due to updated estimates related to prior years’ restructuring initiatives. This reversal was offset by recorded charges of $22.4 million associated with various overhead restructuring initiatives in 2001 that resulted in workforce reductions in the United States and Japan.(See “Restructuring Charges” below.)
Operating income. Operating income in 2002 was $261.9 million, as compared to $479.3 million in 2001. This decrease was primarily due to lower gross profit and the net restructuring charge of $124.6 million. This decrease was slightly offset by lower marketing, general and administrative expenses.
Interest expense. Interest expense in 2002 decreased 19.2% to $186.5 million, as compared to $230.8 million in 2001. This lower interest expense was primarily due to lower average debt levels combined with lower market data,
historical trends, invoicesinterest rates. In addition, interest expense in 2001 included the write-off of fees totaling $10.8 million related to our prior credit agreement dated January 31, 2000. We replaced that credit agreement with a new credit facility on February 1, 2001. The weighted average cost of borrowings for 2002 and information2001 was 9.14% and 9.47%, respectively, excluding the write-off of fees.
Other (income) expense, net. Other (income) expense, net in 2002 was a net expense of $25.4 million, as compared to a net expense of $8.8 million for the same period in 2001. This increase in net expense was primarily due to higher net losses from customers.derivative instruments used for foreign currency management activities, including sourcing, that do not qualify for hedge accounting. The increase in net expense was partially offset by a refund for a legal settlement associated with custom duties in Mexico and the related interest income on the refund.
Income tax expense. At November 24, 2002, we calculated that our effective income tax rate for 2002 was 50% compared to 37% for 2001. The increase in our annual effective income tax rate was primarily due to the combined effects of the computational impact of expenses not deductible for tax purposes and lower earnings for 2002 resulting from the restructuring charges and related expenses. Income tax expense in 2002 was $25.0 million compared to $88.7 million in 2001.
We reached a settlement on most issues with the Internal Revenue Service during 2002 in connection with the examination of our income tax returns for the years 1990 to 1995. We have completed an evaluation of the impact of this settlement on our deferred tax assets as well as accrued taxes and long-term tax liabilities. As a result of this review, we reclassified approximately $90.0 million from long-term liabilities to accrued taxes to reflect the estimated impact of the settlement and our deferred tax assets were increased for Internal Revenue Service audit adjustments for benefits reversing in future years. Our actualconsolidated U.S. income tax returns for 1996 to 1999 are under examination by the Internal Revenue Service. We expect this examination to be completed by early 2004.
Net income. Net income in 2002 was $25.0 million compared to $151.0 million in 2001. The decrease in 2002 was primarily attributable to lower earnings resulting from the net restructuring charges of $124.6 million and allowances have not materially differedrelated expenses of $49.5 million, lower net sales and higher net losses from our estimates.derivative instruments in 2002. The impact of these factors was partially offset by lower interest expense and lower marketing, general and administrative expenses.
Year Ended November 25, 2001 as Compared to Year Ended November 26, 2000
Consolidated Net Sales. Total net sales in fiscal year 2001 decreased 8.3% to $4.3 billion, as compared to $4.6 billion in fiscal year 2000. If currency exchange rates were unchanged from the prior year period, net sales for fiscal year 2001 would have declined approximately 6.5%. This decrease reflectsreflected volume declines primarily due to weak economies and retail markets in the United States ("U.S.") and Japan and the impact of a weaker euro and yen.
Although year over year total net sales continued to decline, the rate of decline narrowed to 8.3% in fiscal year 2001 as compared to 9.6% in fiscal year
2000 and 13.7% in fiscal year 1999. Our narrowingWe believed that the narrowed sales decline, in view of the then current economic and retail environment, reflectsreflected ongoing progress in our business turnaround and efforts to improve performance.
In fiscal years 2001, 2000 and 1999 we had one customer that represented
approximately 13%, 12% and 11%, respectively, of total net sales. No other
customer accounted for more than 10% of total net sales. In addition, a group of
key U.S. customers accounts for a significant portion of our total net sales.
Net sales to our ten largest U.S. customers totaled approximately 47%, 48% and
46% of total net sales during fiscal years 2001, 2000 and 1999, respectively.
We currently anticipateanticipated difficult retail and economic conditions to continue into 2002, along with the need for continued executional improvements, including greater focus on core products and innovation to the U.S. product line. As a result, in 2001, we believebelieved our 2002 constant currency net sales willwould decline in the low single digits and we are planningplanned our production and operating expenses accordingly.
Americas Net Sales. In the Americas, net sales in the U.S.United States accounted for approximately 93% of our Americas net sales in fiscal year 2001. Net sales in the Americas decreased 9.3% to $2.9 billion, as compared to $3.1 billion in fiscal year 2000, due primarily to a drop in volume. This decrease was primarily attributable to the weak economy and retail apparel market in the U.S.United States. We believebelieved retailers arewere reducing their open-to-buy and overall inventory levels in response to economic uncertainty and our improved ability to deliver products on time. Where we have
introduced updated and relevant products, such as our Levi's(R)Levi’s® Superlow jeans and Dockers(R) Mobile(TM)Dockers® Mobile™ pant, supported by the right advertising and retail programs, our data showsshowed improved sell-through to consumers. Our performance in the U.S.United States also reflected our targeted retailer promotions and incentives that drove sales volumes during the fourth quarter of fiscal year 2001.
20
Europe Net Sales. In Europe, net sales decreased 3.5% to $1.07 billion, as compared to $1.1 billion in fiscal year 2000. The small decrease in net sales was primarily due to the effects of translation to U.S. dollar reported results. If exchange rates were unchanged from the prior year period, net sales would have increased by approximately 0.7% in fiscal year 2001 compared to the prior year period. We
believeIn 2001, we believed the constant currency results indicateindicated that our business in Europe iswas beginning to stabilize as indicated by modest growth in net sales on a constant currency basis for the last three consecutive quarters of fiscal year 2001 compared to fiscal year 2000. We believebelieved this reflectsreflected the impact of our updated and innovative products, retail presentation programs and improved delivery performance in the region.region for 2001.
Asia Pacific Net Sales. In the Asia Pacific region, net sales decreased 14.3% to $336.2 million, as compared to $392.4 million in fiscal year 2000. If exchange rates were unchanged from the prior year period, the reported net sales decrease would have been approximately 5.0% in fiscal year 2001 compared to the prior year period. The decrease was primarily driven by the economic uncertainty in Japan and the effects of translation to U.S. dollar reported results. In Japan, which accountsaccounted for approximately 55% of our business in Asia in 2001, difficult business conditions
have resulted in the loss of some key customers due to retail consolidation, closure of retail store locations and bankruptcies. Except for Japan, our net sales in Asia Pacific increased for fiscal year 2001 compared to fiscal year
2000.
GROSS PROFIT.
Gross profit. Gross profit in fiscal year 2001 of $1.8 billion was 8.1% lower than the same period in 2000. Gross profit as a percentage of net sales, or gross margin, was essentially unchanged, increasing slightly to 42.2% in fiscal year 2001, as compared to 42.1% in fiscal year 2000. The increase in margin was due to lower sourcing and fabric costs and reduced inventory markdowns. We value inventories at the lower of average cost or market value and include materials, labor and manufacturing overhead. In determining inventory values, we give substantial consideration to the expected product selling price. These items were somewhat offset by costs associated with production down-time taken in our plants in response to the weak retail market in fiscal year 2001, as well as costs due to a product recall in Europe. The Caribbean Basin Initiative trade act was a key reason for the sourcing cost improvements. We
anticipate that gross margin in fiscal year 2002 will continue to be in our
target range of 40 to 42%.
MARKETING, GENERAL AND ADMINISTRATIVE EXPENSES.
Marketing, general and administrative expenses. Marketing, general and administrative expenses for fiscal year 2001 decreased 8.5% to $1.4 billion, as compared to $1.5 billion for fiscal year 2000. Marketing, general and administrative expenses as a percentage of sales for fiscal year 2001 decreased slightly to 31.8% as compared to 31.9% in fiscal year 2000. The dollar decrease in marketing, general and administrative expenses was primarily due to our continuing cost containment efforts, including a lower level of incentive plan accruals and advertising expenses, as well as lower volume-related costs. The lower incentive plan accruals includeincluded a reversal of $18.0 million associated with forfeitures under an employee long-term incentive plan in fiscal year 2001. Marketing, general and administrative expenses for fiscal year 2000 also included a pension curtailment benefit of $18.0 million. We continueIn 2001, we continued to look for opportunities to streamline our organization, in line with our core product focus and related initiatives to reduce business complexity. In fiscal year
2002, we expect that total marketing, general and administrative expenses will
range from 31 to 33% of net sales.
Advertising expense for fiscal year 2001 decreased 11.3% to $357.3 million, as compared to $402.7 million in the same period in 2000. Advertising expense as a percentage of sales in fiscal year 2001 decreased 0.3 percentage points to 8.4%, as compared to 8.7% for the same period in 2000. Advertising expense as a percentage of sales for fiscal year 2001 iswas consistent with our 2001 target range of 88% to 9%. In fiscal year 2002, we expect advertising expense to be
approximately 8% of net sales.
OTHER OPERATING INCOME.
Other operating income. For fiscal year 2001, licensing income increased 3.2% fromto $33.4 million, as compared to $32.4 million for the same period in 2000. This increase was primarily due to an increase in royalties from sales of merchandise, such as outerwear, shoes, belts, headwear and handbags, by licensees of our trademarks.
EXCESS CAPACITY/RESTRUCTURING CHARGES/REVERSALS.
Restructuring charges, net of reversals. For fiscal year 2001, we reversed charges of $26.6 million primarily due to updated estimates related to prior years'years’ restructuring initiatives. This reversal was offset by recorded charges of $22.4 million associated with various overhead restructuring initiatives in fiscal year 2001 that resulted in workforce reductions in the U.S.United States and Japan. In fiscal year 2000, we reversed charges of $33.1 million primarily due to updated estimates related to prior years'years’ restructuring initiatives.
OPERATING INCOME.
Operating income. For fiscal year 2001, operating income decreased $59.5 million to $479.3 million, as compared to $538.8 million for the same period in 2000. The decrease was primarily due to lower sales, partially offset by lower marketing, general and administrative expenses. In addition, we recorded a net reversal of $4.3 million in restructuring charges in fiscal year 2001 as compared to a $33.1 million reversal of restructuring charges in fiscal year
2000.
21
INTEREST EXPENSE.
Interest expense. Interest expense for fiscal year 2001 decreased 1.4% to $230.8 million, as compared to $234.1 million for the same period in 2000. This decrease was due to lower average debt levels, partially offset by a write-off of fees related to a credit agreement that was replaced by a new credit facility in February 2001.
OTHER INCOME/EXPENSE, NET.
Other (income) expense, net. For fiscal year 2001, we recorded $8.8 million of other expense, net, as compared to other income, net of $39.0 million for the same period in 2000. The net expense for fiscal year 2001 was primarily attributable to lower interest income and net losses from foreign currency exposures and the contracts to manage foreign currency exposures. In addition, the income reported in fiscal year 2000 included a $26.1 million gain from the sale of two office buildings in San Francisco located next to our corporate headquarters.
INCOME TAX EXPENSE.
Income tax expense. Income tax expense for fiscal year 2001 was $88.7 million compared to $120.3 million for the same period in 2000. The decrease for fiscal year 2001 was primarily due to lower earnings than in fiscal year 2000, partially offset by a higher effective tax rate of 37% in fiscal year 2001 compared to 35% in fiscal year 2000. The lower tax rate in fiscal year 2000 was due to a reevaluation of potential tax assessments.
NET INCOME.
Net income. Net income for fiscal year 2001 decreased by $72.4 million to $151.0 million from $223.4 million for the same period in 2000. The decrease was primarily due to lower sales, the impact of our foreign currency management activities and a lower net reversal in restructuring charges in fiscal year
2001. Fiscal yearIncluded in 2000 includedwas a pre-tax gain of $26.1 million from the sale of office buildings. The decrease was partially offset by a higher gross margin and lower marketing, general and administrative expenses.
YEAR ENDED NOVEMBER 26, 2000 AS COMPARED TO YEAR ENDED NOVEMBER 28, 1999
NET SALES. Total net sales in fiscal year 2000 decreased 9.6%
Restructuring Charges
Since late 1997 we have implemented extensive restructuring activities to $4.6
billion, as compared to $5.1 billion in fiscal year 1999. If currency exchange
rates were unchanged from the prior year period, net sales for fiscal year 2000
would have declined approximately 7%. This decrease reflects a combination of
factors including volume declines, a higher percentage of closeout sales related
to our efforts to clear inventories of slow movingreduce overhead expenses and obsolete fashion products
earlier in the year, and the impact of the depreciating euro. In the Americas,
net sales decreased 8.0% to $3.1 billion, as compared to $3.4 billion in fiscal
year 1999, due primarily to a drop in volume. In Europe, net sales decreased
18.8% to $1.1 billion, as compared to $1.4 billion in fiscal year 1999. In the
Asia Pacific region, net sales increased 9.5% to $392.4 million, as compared to
$358.4 million in fiscal year 1999. In fiscal years 2000 and 1999, we had one
customer that represented approximately 12% and 11%, respectively, of total net
sales. No other customer accounted for more than 10% of total net sales.
GROSS PROFIT. Gross profit as a percentage of net sales, or gross margin,
increased to 42.1% in fiscal year 2000, as compared to 38.1% in fiscal year
1999. The increase was primarily attributable to a better product mix,eliminate excess manufacturing capacity, as well as improved sourcing costsclosing 37 manufacturing facilities worldwide between 1997 and 2002, including closing in 2002 two manufacturing plants in Scotland and six manufacturing plants in the benefit of cost reductions resulting from
plantUnited States. The U.S. closures taken in prior years. Production downtime occurred in 1999 as
factory production was curtailed prior to fully closing some North American and
European plants.
MARKETING, GENERAL AND ADMINISTRATIVE EXPENSES. Marketing, general and
administrative expenses for fiscal year 2000 decreased 9.1% to $1.5 billion, as
compared to $1.6 billion for the same period in 1999. Marketing, general and
administrative expenses as a percentage of sales for fiscal year 2000 and fiscal
year 1999 were each approximately 32%. The dollar decrease in marketing, general
and administrative expenses was primarily due toreflected our continuing shift from a manufacturing to a marketing and product-driven organization. We closed the plants in Scotland in order to reduce average production costs in Europe. We believe these actions will improve our competitiveness and enable us to invest more resources in product, marketing and retail initiatives. These actions also increase the variable nature of our cost containment
efforts, lower salariesstructure, which we believe will help us maintain strong gross margins in a highly competitive and related expenses resulting from prior yearprice deflationary environment. We do not anticipate closing any more manufacturing or finishing facilities in the near future, although we cannot assure that we will not take further restructuring initiatives lower sales volume-related expenses, lower
advertising expenses, lower information technology expenses associated with
minimal year 2000 compliance costs in 2000 and an $18.0 million pension
curtailment benefit in fiscal year 2000. These decreases were partially offset
by increased costs for employee incentive plans in fiscal year 2000 due to
stronger performance against financial targets. Advertising expense for fiscal
year 2000 decreased 17.8% to $402.7 million, as compared to $490.2 million for
the same period in 1999 primarily due to our plans to better focus our marketing
support initiatives and to align them more effectively with new product
introductions and retail presentation.
OTHER OPERATING INCOME. For fiscal year 2000, licensing income increased
32.8% from the same period in 1999. The increase was primarily due to more focus
on expanding the number of licensed products such as outerwear, shoes and belts.
EXCESS CAPACITY/RESTRUCTURING CHARGES/REVERSALS. For fiscal year 2000, we
reversed charges of $33.1 million primarily due to updated estimates related to
prior years' restructuring initiatives. In fiscal year 1999, we recorded charges
of $497.7 million that were associated with our corporate overhead restructuring
initiatives and plant closures in North America and Europe.
22
GLOBAL SUCCESS SHARING PLAN. In fiscal year 2000, we recorded no expense
for the Global Success Sharing Plan. In fiscal year 1999, we reversed into
income $343.9 million of previously recorded expenses associated with the Global
Success Sharing Plan. This reversal of the Global Success Sharing Plan liability
was based on our lower estimate of financial performance through fiscal year
2001. Consequently no cash payments will be made under the Global Success
Sharing Plan.
OPERATING INCOME. For fiscal year 2000, we recorded operating income of
$538.8 million, as compared to $199.3 million for the same period in 1999. This
increase was due to an improved gross margin, lower marketing, general and
administrative expenses and the reversal of restructuring charges in fiscal year
2000. In addition, reported results in fiscal year 1999 were affected by charges
related to the restructuring initiatives, net of benefits for the Global Success
Sharing Plan reversal.
INTEREST EXPENSE. Interest expense for fiscal year 2000 increased 27.9% to
$234.1 million, as compared to $183.0 million for the same period in 1999. This
increase was due to higher interest rates associated with new credit facilities,
customer service center equipment financing agreements and higher market
interest rates.
OTHER INCOME/EXPENSE, NET. For fiscal year 2000 we recorded $39.0 million
of other income, net, as compared to other expense, net of $7.9 million for the
same period in 1999. The increase for fiscal year 2000 was primarily
attributable to a $26.1 million gain from the sale of two office buildings in
San Francisco located next to our corporate headquarters, an increase in
interest income and net gains in 2000 compared to net losses in 1999 from
foreign currency exposures and the contracts to manage foreign currency
exposures.
INCOME TAX EXPENSE. Income tax expense for fiscal year 2000 was $120.3
million compared to $3.1 million for the same period in fiscal year 1999. The
increase for fiscal year 2000 was primarily due to higher earnings than in
fiscal year 1999. Our effective tax rate for fiscal year 2000 was 35%, as
compared to 37% for the same period in fiscal year 1999. The lower tax rate in
fiscal year 2000 was due to a reevaluation of potential tax assessments.
NET INCOME. Net income for fiscal year 2000 increased by $218.0 million
from $5.4 million for the same period in 1999. Net income for fiscal year 2000
included higher operating income, partially offset by higher interest and tax
expense compared to the same period in 1999. In addition, fiscal year 2000
included a gain from the sale of office buildings and the reversal of
restructuring reserves.
EXCESS CAPACITY/RESTRUCTURING CHARGES/REVERSALS
future.
The following is a summary of the actions taken and related charges and
reversals associated with our excess manufacturing capacity and otherthese restructuring activities. Restructuring reservescharges include onlycertain costs associated with exitplant closures and business reorganization activities approvedand are recorded upon approval of, and commitment to, a restructuring plan by executive management. SuchThese costs primarily include employee severance, certain employee termination benefits and contractual obligations. Our restructuring charges also include property, plant and equipment write-offs. These costs are not associated with, nor do they benefit, continuing activities. We review and evaluate these activities periodically.
o During
The remainingfollowing table summarizes the plant closures and restructuring charges and the resulting cash and non-cash reductions. Non-cash reductions include reversals and asset write-offs.
Initial Provision | Cash Reductions | Non-cash Reductions | Balance as of November 24, 2002 | |||||||||
(Dollars in Thousands) | ||||||||||||
1997 to 1999 Plant Closures and Restructuring Initiatives | $ | 1,135,133 | $ | 937,102 | $ | 198,031 | $ | — | ||||
2001 Japan Restructuring Initiative |
| 2,031 |
| 1,734 |
| 297 |
| — | ||||
2001 Corporate Restructuring Initiatives |
| 20,331 |
| 11,521 |
| 6,689 |
| 2,121 | ||||
2002 U.S. Plant Closures |
| 129,676 |
| 44,933 |
| 22,654 |
| 62,089 | ||||
2002 Scotland Plant Closures |
| 20,477 |
| 15,324 |
| 5,153 |
| — | ||||
2002 Europe Restructuring Initiative |
| 1,568 |
| 202 |
| — |
| 1,366 | ||||
Total as of November 24, 2002 | $ | 1,309,216 | $ | 1,010,816 | $ | 232,824 | $ | 65,576 | ||||
The total balance is primarilyof the reserves at November 24, 2002 was $65.6 million, of which $52.4 million represented reserves for severance and employee benefits. We expect to utilize the majority of the reserve balance by the end of 2002.
23
o In February 1999, we announced the closure of 11 manufacturing
facilities in North America. Those facilities were closed by the end
of 1999, resulting in the displacement of approximately 5,900
employees. We recorded an initial charge of $394.1 million in 1999. In
fiscal years 2001 and 2000, $21.5 million and $13.3 million,
respectively, of the remaining reserve balance was reversed due to
updated estimates. The reversals were primarily associated with
employee benefitsbalances during 2003.
Liquidity and a lower amount than originally anticipated for
contractor settlements in 2001. As of November 25, 2001, the balance
in this reserve was $18.7 million. The remaining balance is primarily
for employee benefits and costs associated with a real estate lease
that will expire in September 2002. We expect to utilize the majority
of the reserve balance by the end of 2002.
o In fiscal year 1999, we recorded an initial charge to set up a reserve
of $48.9 million for corporate overhead reorganization initiatives in
the U.S. In fiscal years 2001 and 2000, $1.3 million and $9.0 million,
respectively, of the remaining reserve balance was reversed due to
updated estimates primarily associated with reductions in the number
of employee displacements needed to complete the initiative. As of
November 25, 2001, the balance of this reserve was $0.1 million, and
approximately 720 employees had been displaced. The remaining balance
is for severance and employee benefits. We expect to fully utilize the
reserve balance by the end of 2002.
o In fiscal year 1998, we recorded an initial charge to set up a reserve
of $61.1 million for corporate overhead reorganization initiatives in
the U.S., resulting in the displacement of approximately 770
employees. In fiscal year 2000, $3.7 million of the remaining reserve
balance was reversed due to updated estimates. The reversal was
primarily associated with employee benefits and higher sub-lease
income than initially projected. As of November 25, 2001, the balance
of this reserve was $1.5 million. The remaining balance is for costs
associated with a real estate lease, partially offset by sublease
income, which will expire in 2007.
o In fiscal year 1998, $82.1 million was recorded for the closure of two
North America finishing facilities. The two North America finishing
facilities were closed during 1999, resulting in the displacement of
approximately 990 employees. In fiscal years 2001 and 2000, $1.7
million and $13 thousand, respectively, of the remaining reserve
balance was reversed due to updated estimates associated with employee
benefits. As of November 25, 2001, the balance of this reserve was
$0.2 million. We expect to fully utilize the reserve balance by the
end of 2002.
o In fiscal year 1998, we recorded an initial restructuring charge to
set up a reserve of $107.5 million for reorganization initiatives and
the closure of two manufacturing and two finishing facilities in
Europe, resulting in the displacement of approximately 1,650
employees. The two manufacturing and two finishing facilities were
closed in 1999. As of November 25, 2001, the balance of this reserve
was $0.2 million. The remaining balance is primarily for employee
benefits. We expect to fully utilize the reserve balance by the end of
2002.
o In November 1997, we announced the closure of one finishing and ten
manufacturing facilities in North America. Those facilities were
closed by the end of 1998, resulting in the displacement of
approximately 6,400 employees. We recorded an initial charge to set up
a reserve of $386.8 million. In fiscal years 2001 and 2000, $1.9
million and $5.0 million, respectively, of the reserve balance was
reversed due to updated estimates primarily associated with employee
benefits and a lower amount than originally anticipated for a
contractor settlement in 2001. As of November 25, 2001, the balance of
this reserve was $48 thousand. The remaining balance is primarily for
employee benefits and costs associated with a real estate lease that
will expire in February 2002. We expect to fully utilize the reserve
balance by the end of 2002.
24
The following table summarizes the activities associated with the plant
closures and restructuring charges:
BALANCE AS
INITIAL OF
INITIAL ASSET CASH NOVEMBER 25,
PROVISION WRITE-OFFS REDUCTIONS REVERSALS 2001
---------- ----------- ---------- --------- ------------
(DOLLARS IN THOUSANDS)
2001 Corporate Restructuring Initiatives.............................. $ 20,331 $ -- $ 342 $ -- $19,989
2001 Japan Restructuring Initiative................................... 2,031 -- 25 -- 2,006
1999 European Restructuring and Plant Closures........................ 54,689 4,500 45,205 2,535 2,449
1999 North America Plant Closures..................................... 394,105 33,430 307,271 34,745 18,659
1999 Corporate Restructuring Initiatives.............................. 48,889 -- 38,560 10,216 113
1998 Corporate Restructuring Initiatives.............................. 61,062 2,985 52,834 3,735 1,508
1998 North America Plant Closures..................................... 82,073 23,399 56,740 1,711 223
1998 European Restructuring and Plant Closures........................ 107,523 10,026 97,272 -- 225
1997 North America Plant Closures..................................... 386,792 42,689 337,205 6,850 48
---------- -------- -------- ------- -------
Total as of November 25, 2001.................................... $1,157,495 $117,029 $935,454 $59,792 $45,220
========== ======== ======== ======= =======
The majority of the balances are expected to be utilized by the end of
2002.
We are now discussing with our unions in the U.S. potential additional
closures of manufacturing facilities in the U.S. and are consulting with union
and employee representatives regarding a proposal to close two plants in
Scotland. If we ultimately decide to close facilities, we will then record
restructuring charges relating to employee severance and benefits, and other
costs associated with facility exit activities.
LIQUIDITY AND CAPITAL RESOURCES
Capital Resources
Our principal capital requirements have been to fund working capital and capital expenditures. One of our business strategies is to focus on working
capital control through improved forecasting, inventory management and product
mix. We are also focusing on controlling operating expenses and using cash
generated from operations to reduce debt. As of November 25, 2001,24, 2002, our total cash and cash equivalents were $102.8$96.5 million, a $14.2 million decrease fromcompared with the $117.1$102.8 million cash balance as of November 26, 2000. Total debtreported as of November 25, 2001.
We recently completed the following financing transactions:
During 2003, we expect to have between $200 million and $300 million of the following primary cash requirements:
We anticipate that we will meet these obligations primarily through these financings and from cash provided by operations. We will obtain additional liquidity through our revolving 2003 bank credit facility, which will also be used to support letters of credit, and through cash on hand. We anticipate that net debt (gross debt less cash on hand) at the end of 2003 will approximate year end 2002 levels.
Total debt, other cash obligations and commitments. As of November 24, 2002, our total debt was $1,958.4 million, a $168.0 million decrease from the balance$1.847 billion, compared with $1.958 billion as of November 26, 2000. All25, 2001. As of January 31, 2003, our total debt was approximately $2.578 billion.
As of November 24, 2002, our 2001 credit facility consisted of $110.1 million of term loans and a $615.7 million revolving credit facility, of which $5.0 million of borrowings under the revolving credit facility was outstanding. Total availability under the revolving credit facility was reduced by $239.8 million of letters of credit allocated under the revolving credit facility, yielding a net availability of $370.9 million. Included in the $239.8 million of letters of credit at November 24, 2002 are $213.3 million of standby letters of credit with various international banks, of which $48.5 million serve as guarantees by the creditor banks to cover U.S. workers’ compensation claims. We pay fees on the standby letters of credit and borrowings against letters of credit are subject to interest at various rates.
At November 24, 2002, we had unsecured and uncommitted short-term credit lines available totaling $13.4 million at various rates. These credit arrangements may be canceled by the bank lenders upon notice and generally have no compensating balance requirements or commitment fees.
We have other current cash obligations for various liabilities categorized on the balance sheet as accounts payable, accrued liabilities, accrued salaries, wages and employee benefits and accrued taxes for our normal business operations. During 2002, we reclassified from long-term employee benefits to accrued salaries, wages and employee benefits, expected liabilities in 2003 of approximately $65 million under our long-term incentive compensation plan.
During 2002, we reached a settlement with the Internal Revenue Service on most of the issues in connection with the examination of our income tax returns for the years 1990 through 1995. As a result, during 2002 we reclassified approximately $90.0 million from long-term tax liabilities into accrued taxes. We anticipate paying the Internal Revenue Service an amount of approximately $115 million during the second quarter of 2003. After taking into account potential refunds from prior years’ overpayments and the tax effects of the interest deduction from this payment, we expect the net cash payment to be approximately $90 million.
We have numerous noncontributory pension plans covering substantially all of our employees. Our pension plan assets are principally invested in equity securities and fixed income securities. Based on the fair value of plan assets and interest rates estimated as of November 24, 2002, we recorded a charge of $86.0 million, net of tax of $49.9 million to stockholders’ deficit. This charge reflects the after tax additional minimum pension liability due to pension obligations exceeding assets. As a result of the projected deficit, we expect to make additional pre-tax contributions to the pension plans during the next four fiscal years, including a cash contribution of approximately $25 million in 2003.
We currently expect our balance sheet. debt levels less cash on hand at the end of 2003 to be approximately equal to our 2002 year-end debt level of approximately $1.85 billion. We expect peak borrowings, net of cash on hand, during 2003 to be approximately $200 to $300 million higher than this amount, reflecting seasonal working capital requirements and growth associated with our expected entry into the mass channel in the United States in the third quarter.
We have no off-balance sheet debt obligations.
Weobligations or material unconditional purchase commitments. Our total short-term and long-term debt principal payments, and minimum operating lease payments for facilities, office space and equipment as of November 24, 2002 for the next five years and thereafter are now discussing with our unions in the U.S. potential additional
closures of manufacturing facilities in the U.S. and are consulting with union
and employee representatives regarding a proposal to close two plants in
Scotland. If we ultimately decide to close facilities, we believe payment of
employee severance and benefits and other amounts associated with closures would
not have a significant impact on our liquidity.
CASH PROVIDED BY/USED FOR OPERATIONS.as follows:
Principal Payments* | Minimum Operating Lease Payments | |||||
Year | (Dollars in Thousands) | |||||
2003 | $ | 95,225 | $ | 64,211 | ||
2004 |
| 118,521 |
| 58,375 | ||
2005 |
| 56,203 |
| 55,051 | ||
2006 |
| 448,173 |
| 52,646 | ||
2007 |
| — |
| 47,887 | ||
Thereafter |
| 1,128,855 |
| 189,832 | ||
Total | $ | 1,846,977 | $ | 468,002 | ||
| * | The principal payments reflect the effects of refinancing the outstanding 6.80% notes due November 2003 and amounts outstanding on the 2001 bank credit facility. |
Cash provided by operating activities. Cash provided by operating activities in fiscal2002 was $191.7 million, as compared to $141.9 million in the same period in 2001. Trade receivables increased during 2002 primarily due to higher net sales in November 2002 compared to November 2001. Inventory decreased during 2002. We achieved the inventory reduction through retailer promotional and incentive programs and better inventory management. For the first half of 2003, we anticipate inventory to be higher than at year end 2002 as we prepare for the launch of the Levi Strauss Signature™ brand beginning in July 2003. Net deferred tax assets increased during 2002 primarily due to timing of unrealized foreign exchange gains/losses and the additional minimum pension liability.
Restructuring reserves increased during 2002 primarily due to restructuring charges associated with the United States plant closures. Accrued salaries, wages, and employee benefits increased during 2002 primarily due to higher employee incentive costs than in 2001. Accounts payable and accrued liabilities decreased during 2002 primarily due to lower contractor and advertising accruals. Accrued taxes increased and long-term tax liabilities decreased during 2002 primarily due to a reclassification of approximately $90.0 million in anticipation of a payment to the Internal Revenue Service in connection with an examination of our income tax returns for the years 1990 to 1995. Long-term employee benefits increased primarily due to an increase in our pension liability for anticipated contributions over the next four years.
Cash provided by operating activities in 2001 was $141.9 million, as compared to $305.9 million in the same period in 2000. Trade receivables decreased during fiscal year 2001 primarily due to lower net sales. Inventory decreased during fiscal year 2001, primarily in the fourth quarter. We achieved the inventory reduction through reduced production levels and increased retailer promotional and incentive activities in the U.S. In 2002, we expect inventory levels to increase modestly
above historical levels as we update core products and introduce new products in
the U.S.
United States.
Other current assets decreased during fiscal year 2001 primarily due to reimbursements of income and payroll taxes for overpayments made in fiscal year
2000. Other long-term assets increased during the year2001 primarily due to the capitalization of underwriting and other fees for the senior notes due 2008 issued in January 2001 and fees associated with the credit facility we entered into on February 1, 2001. Net deferred tax assets decreased during fiscal year 2001 primarily due to inventory adjustments and tax on unremitted foreign earnings.
25
Restructuring reserves decreased during fiscal year 2001 primarily due to spending and accrual reversals related to prior years'years’ restructuring initiatives, partially offset by 2001 restructuring charges. Accrued salaries, wages, and employee benefits decreased during fiscal year 2001 primarily due to the payment of annual employee incentives, partially offset by employee incentive accruals. Long-term employee benefits increased primarily due to increased accruals for long-term incentive plans. Accounts payable and accrued liabilities decreased during fiscal year 2001 primarily due to lower accruals for contractors and raw material purchases resulting from lower production needs. Accrued taxes decreased during fiscal year 2001 primarily due to a payment of approximately $40.0$40 million in the first quarter of 2001 to the Internal Revenue Service in connection with an examination of our income tax returns for the years 1986 to 1989.
In fiscal year 2000, cash provided by operating activities was $305.9
million, as compared to a use of cash of $173.8 million
Cash used for the same period in
1999. Although inventory increased, the composition of our inventory in fiscal
year 2000 was more current and relevant to the marketplace compared to the
composition of inventory in the prior year period. This reflected our efforts to
clear out old merchandise from fiscal year 1999. The decrease in income taxes
receivable during fiscal year 2000 primarily reflected income tax refunds of
$66.3 million received in March 2000 associated with a carryback of a net
operating loss reported on our 1999 income tax return. Restructuring reserves
and the related net deferred tax assets decreased during fiscal year 2000
primarily due to spending and accrual reversals related to the restructuring
initiatives. Accrued salaries, wages and employee benefits, and long-term
employee benefits increased during fiscal year 2000 primarily due to increased
accruals for employee incentive plans. Accrued taxes increased and other
long-term liabilities decreased during fiscal year 2000 due to a tentative
settlement with the Internal Revenue Service in connection with an examination
of our income tax returns for the years 1986 to 1989. The gain on dispositions
of property, plant and equipment was primarily due to the gain attributable to a
sale of two office buildings in San Francisco located adjacent to our corporate
headquarters.
CASH USED FOR/PROVIDED BY INVESTING ACTIVITIES.investing activities. Cash used for investing activities during fiscal year2002 was $59.4 million as compared to $17.2 million during 2001. Cash used for investing activities for 2002 resulted primarily from purchases of property, plant and equipment and realized losses on net investment hedges, partially offset by proceeds received on sales of property, plant and equipment. The purchases primarily related to sales office capital improvements and systems upgrades. We expect capital spending of approximately $70 million in 2003, primarily for system enhancements. The proceeds received on the sale of property, plant and equipment arose mainly from the sale during the first quarter of 2002 of an idle distribution center located in Nevada.
Cash used for investing activities during 2001 was $17.2 million, as compared to cash provided by investing activities of $154.2 million during the same period in 2000. Cash used for investing activities during the year resulted primarily from purchases of property, plant and equipment. In fiscal year 2000, cash provided by investing activities was primarily attributable to proceeds received from the sale of office buildings and realized gains on net investment hedges. Our capital spendingexpenditures for fiscal year 2001 waswere $22.5 million, as compared to $28.0 million for fiscal year 2000 and $61.1 million in fiscal year 1999. We
expect capital spending of approximately $50.0 to $70.0 million in fiscal year
2002, primarily2000.
Cash used for system enhancements.
CASH USED FOR FINANCING ACTIVITIES.financing activities. Cash used for financing activities for fiscal year 20012002 was $139.9$140.3 million as compared towith $139.9 million in 2001 and $527.1 million in the same
period in 2000. We used cash in 2002 primarily for repayment of existing debt. In fiscal year 2001, cash used for financing activities was primarily for repayment of existing debt offset by the senior notes issued in January 2001 and the U.S. receivables securitization transaction completed in July (SEE NOTE 7 TO THE
CONSOLIDATED FINANCIAL STATEMENTS).2001. In fiscal year 2000, cash used for financing activities was for repayment of existing debt.
FINANCIAL CONDITION
CREDIT AGREEMENTS.
Financial Condition
2003 Bank Credit Facility. On February 1, 2001,January 31, 2003, we entered into a $1.05 billion$750.0 million senior secured credit facility to replace theour then existing 20002001 credit facility.
The following is a summary description of the material terms of the new bank credit facility.
Our new bank credit facility on more favorable terms. The credit facility consistedconsists of a $700.0$375.0 million revolving credit facility and $350.0a $375.0 million ofTranche B term loans. This facility
reducesloan facility. We will use the borrowings under our borrowing costs and extends the maturity of our principalnew bank credit facility to August 2003. As of November 25, 2001, the credit facility
consisted of $252.6 million of term loans and a $625.0 million revolving credit
facility. There were no outstanding borrowings under the revolving credit
facility. Total availability under thefor working capital or general corporate purposes. The revolving credit facility was reduced by
$152 millionwill expire on March 31, 2006.
Our Tranche B term loan facility is subject to repayment based on a specified scheduled amortization, with the final payment of guarantees and lettersall amounts outstanding due on July 31, 2006. We are required to make principal amortization payments on the Tranche B term loan facility at a quarterly rate beginning in May 2003, with the substantial majority of the quarterly payments being due from the quarter ending in November 2005. Our bank credit issued under thefacility also requires mandatory prepayments in certain events, such as if there are asset sales. The interest rate for our revolving credit facility yielding a net availabilityvaries, for eurodollar rate loans, from 3.25% to 4.00% over the eurodollar rate (as defined in the credit agreement) or, for base rate loans, from 2.25% to 3.00% over the higher of $473.0 million.the Citibank base rate and the Federal Funds rate plus 0.50%, with the exact rate depending upon our performance under specified financial criteria. The interest rate for our Tranche B term loan facility is 4.00% over the eurodollar rate or 3.00% over the base rate. The bank credit facility also requires that we set aside sufficient funds to satisfy all principal and interest payments on the outstanding 6.80% notes due November 2003. We will use any remaining proceeds to refinance other outstanding indebtedness or for working capital or other general corporate purposes.
Our bank credit facility is guaranteed by certain of our material domestic subsidiaries and is secured in substantially the same manner as the 2000 credit
facility. Collateral includes:by domestic inventories, certain domestic equipment, trademarks, other intellectual property, 100% of the stock ofin certain domestic subsidiaries, 65% of the stock of certain foreign subsidiaries and other assets. BorrowingsExcluded from the assets securing the bank credit facility are all of our most valuable real property interests and all of the capital stock and debt of our affiliates in Germany and the United Kingdom and any other affiliates that become restricted subsidiaries under the facility bear interest at LIBOR or the agent bank's base
rate plus an incremental borrowing spread. Before the U.S. receivables
securitization transaction described below, the collateral also included
domestic receivables. In connection with the securitization transaction, the
lenders under theindenture governing our notes due 2003 and 2006.
The bank credit facility released their security interest in
receivables sold in that transaction, and retained security interests in certain
related assets.
26
The facility contains customary covenants restricting our activities as well as those of our subsidiaries, including limitations on usour, and our subsidiaries'subsidiaries’, ability to sell assets; engage in mergers; enter into operatingcapital leases or capital leases;certain leases not in the ordinary course of business; enter into transactions involving related parties derivatives or letters of credit; enter into intercompany transactions;derivatives; incur indebtedness or grant liens or negative pledges on our assets; make loans or other investments; pay dividends or repurchase stock or other securities; guaranty third party obligations; make capital expenditures; and make changes in our corporate structure. The credit agreementsagreement also containcontains financial covenants that we must satisfy on an ongoing basis, including maximum leverage ratios and minimum coverage ratios.
The credit agreement contains customary events of default, including payment failures; failures to satisfy other obligations under the credit agreements; material judgments; pension plan terminations or specified underfunding; substantial voting trust certificate or stock ownership changes; specified changes in the composition of our board of directors; and invalidity of the guaranty or security agreements. If an event of default occurs, our lenders could terminate their commitments, declare immediately payable all borrowings under the credit facilities and foreclose on the collateral, including our trademarks.
2001 Bank Credit Facility. On February 1, 2001, we entered into a $1.05 billion senior secured credit facility to replace our then existing 2000 bank credit facility on more favorable terms. The facility was amended on July 11, 2001 to permit us to enter into the domestic receivables securitization transaction, on January 29, 2002 to amend several of the financial covenants in conjunction with our anticipated plant closures, on July 26, 2002 to permit us to adopt a deferred compensation plan to be effective in 2003, and on November 25, 2002 to permit us to use a portion of the net proceeds from notes issuances to refinance a portion of our $350.0 million 6.80% notes due November 1, 2003 and also to provide that, for purposes of determining compliance with the leverage ratio financial covenant under the bank credit facility, the amount of debt taken into account for purposes of that computation will be reduced by an amount of any net proceeds from the notes issuances segregated in separate designated bank or investment accounts.
The 2001 bank credit facility originally consisted of a $700.0 million revolving credit facility and $350.0 million of term loans. The $350.0 million of term loans includes two tranches, Tranche A for $100.0 million and Tranche B for $250.0 million. As of November 25,24, 2002, our credit facility consisted of $110.1 million of term loans and a $615.7 million revolving credit facility, of which $5.0 million of borrowings under the revolving credit facility was outstanding. Total availability under the revolving credit facility was reduced by $239.8 million of letters of credit allocated under the revolving credit facility, yielding a net availability of $370.9 million. Included in the $239.8 million of letters of credit at November 24, 2002 are $213.3 million of standby letters of credit with various international banks, of which $48.5 million serve as guarantees by the creditor banks to cover U.S. workers’ compensation claims.
On January 31, 2003, we entered into a new bank credit facility to replace the 2001 bank credit facility that was due to mature on August 29, 2003.
Senior Unsecured Notes Due 2003 and 2006. In 1996, we issued $800.0 million in notes to qualified institutional buyers in reliance on Rule 144A under the Securities Act. We issued the notes in two series: $350.0 million seven-year notes maturing in November 2003 and $450.0 million ten-year notes maturing in November 2006. The seven-year notes bear interest at a rate of 6.80%. The ten-year notes bear interest at a rate of 7.00%. These notes are unsecured and rank equally with all of our other existing and future unsecured and unsubordinated debt. The indenture governing these notes contains customary events of default and restricts our ability and the ability of our subsidiaries and future subsidiaries, to:
In May 2000, we filed a registration statement on Form S-4 under the Securities Act with the SEC relating to an exchange offer for the notes. The exchange offer gave holders of these notes the opportunity to exchange the notes for new notes that are registered under the Securities Act. The new notes are identical in all material respects to the old notes except that the new notes are registered.
The exchange offer ended on June 20, 2000. As a result of the exchange offer, all but $20,000 of the $350.0 million aggregate principal amount of 6.80% old notes due 2003 were exchanged for the 6.80% new notes due 2003, and all $450.0 million aggregate principal amount of the 7.00% old notes due 2006 were exchanged for the 7.00% new notes due 2006.
We were not obligated by any agreement including the 2001 bank credit facility agreements to engage in the exchange offer. We initiated the exchange offer to give holders of these notes the opportunity to exchange the old notes for registered notes.
Our 6.80% notes due 2003 mature on November 1, 2003, at which time we will be required to repay or refinance these notes. On December 4, 2002, we used a portion of the net proceeds from the issuance of the 12.25% notes due December 2012 to repurchase $72.8 million of the 6.80% notes due November 1, 2003. We intend to use a portion of the remaining net proceeds from the December 2002 notes issuance, plus the $47.3 million net proceeds from the January 2003 issuance of an additional $50.0 million of these notes and the $99.8 million net proceeds from the January 2003 issuance of an additional $100.0 million of these notes, to refinance (whether through payment at maturity, repurchase or otherwise) all of the remaining aggregate principal amount of our 6.80% notes due November 1, 2003. On January 22, 2003, we purchased approximately $27.0 million of the 6.80% notes due November 1, 2003.
Senior Unsecured Notes Due 2008. On January 18, 2001, we issued two series of notes payable for an aggregate of $497.5 million to qualified institutional buyers in reliance on Rule 144A under the Securities Act and outside the United States in accordance with Regulation S under the Securities Act. These notes are unsecured obligations, rank equally with all of our other existing and future unsecured and unsubordinated debt, and may be redeemed at any time after January 15, 2005. The issuance was divided into two series: U.S. $380.0 million notes and 125.0 million euro notes. Both series of notes are seven-year notes maturing on January 15, 2008 and bear interest at 11.625% per annum, payable semi-annually in January and July of each year. These notes are callable beginning January 15, 2005. These notes were offered at a discount of $5.2 million to be amortized over the term of the notes. Costs representing underwriting fees and other expenses of $14.4 million on the original issue are amortized, using an approximate effective-interest rate method, over the term of the notes. We used net proceeds from the offering to repay a portion of the indebtedness outstanding under our then effective credit facility.
The indentures governing these notes contain covenants that limit our and our subsidiaries’ ability to incur additional debt; pay dividends or make other restricted payments; consummate specified asset sales; enter into transactions with affiliates; incur liens; impose restrictions on the ability of a subsidiary to pay dividends or make payments to us and our subsidiaries; merge or consolidate with any other person; and sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of our assets or our subsidiaries’ assets. If we experience a change in control as defined in the indentures governing the notes, then we will be required under the indentures to make an offer to repurchase the notes at a price equal to 101% of the principal amount plus accrued and unpaid interest, if any, to the date of repurchase. If these notes receive and maintain an investment grade rating by both Standard and Poor’s and Moody’s and we and our subsidiaries are and remain in compliance with the financialindentures, then we and our subsidiaries will not be required to comply with specified covenants contained in the indentures.
In March 2001, we filed a registration statement on Form S-4 under the facility.
Effective January 29,Securities Act with the SEC relating to an exchange offer for these notes. The exchange offer gave holders the opportunity to exchange the notes for new notes that are registered under the Securities Act. The new notes are identical in all material respects to the old notes except that the new notes are registered under the Securities Act. The indenture governing these notes contains the same covenants as for the original issuance under Rule 144A of the Securities Act.
The exchange offer ended on April 6, 2001. As a result of the exchange offer, all but $200 thousand of the $380.0 million aggregate principal amount of old dollar notes were exchanged for new dollar notes, and all but €595 thousand of the €125.0 million aggregate principal amount of old euro notes were exchanged for new euro notes.
Senior Unsecured Notes Due 2012. On December 4, 2002, we completedissued $425.0 million in notes to qualified institutional buyers in reliance on Rule 144A under the Securities Act. These notes are unsecured obligations that rank equally with all of our other existing and future unsecured and unsubordinated debt. These notes are 10-year notes maturing on December 15, 2012 and bear interest at 12.25% per annum, payable semi-annually in arrears on December 15 and June 15, commencing on June 15, 2003. These notes are callable beginning December 15, 2007. We issued these notes at a discount of $6.0 million to be amortized over the term of the notes using an amendmentapproximate effective-interest rate method. We will amortize costs representing underwriting fees and other expenses of approximately $12.6 million over the term of notes. We used approximately $125.0 million of the net proceeds from the offering to repay remaining indebtedness under our 2001 bank credit facility as of the close of business on December 3, 2002. We used a portion of the net proceeds to repurchase $72.8 million of the 6.80% notes due November 1, 2003.
On January 22, 2003 and on January 23, 2003, we issued an additional $100 million of these notes at a premium of $3.0 million and an additional $50.0 million of these notes at a discount of $0.7 million. We will amortize both the discount and premium over the term of the notes using an approximate effective-interest rate method. The notes issued in these additional offerings were issued under the same indenture as, have the same terms as, and constitute the same issue of, the December 2002 notes. We intend to use a portion of the remaining net proceeds from the December 2002 notes issuance, plus the $47.3 million net proceeds from the issuance of an additional $50 million of these notes and the $99.8 million net proceeds from the issuance of an additional $100 million of these notes to refinance (whether through payment at maturity, repurchase or otherwise) all of the remaining aggregate principal amount of our 6.80% notes due November 1, 2003. We will use any remaining proceeds to refinance other outstanding indebtedness or for working capital or other general corporate purposes. On January 22, 2003, we purchased approximately $27.0 million of the 6.80% notes due November 1, 2003.
Credit Ratings. On August 14, 2002, Moody’s Investors Service downgraded our 2001 bank credit facility from “Ba3” to “B1” and our notes due 2003, 2006 and 2008 from “B2” to “Caa1.” According to a press release announcing the downgrade, Moody’s based this decision on its concerns relating to our principallevel of cash generation, our ability to refinance debt, including our 2001 bank credit agreement.facility maturing in August 2003 and our notes maturing in November 2003, and our ability to pay costs associated with plant closures we undertook in 2002. On November 25, 2002, Moody’s upgraded our outlook from negative to stable and announced it would upgrade its ratings for our notes due 2003, 2006 and 2008 to “B3” upon completion of the issuance of the $425.0 million senior notes payable on December 4, 2002. On January 7, 2003, Moody’s upgraded our senior unsecured debt ratings to “B3” from “Caa1.” The amendment has three principal features. First,“B2” senior implied rating and the amendment excludes“B1” rating on our 2001 bank credit facility were confirmed.
On November 12, 2002, Standard and Poor’s Ratings Service downgraded our long-term corporate credit rating from “BB” to “BB-” and our 2001 bank credit facility from “BB+” to “BB,” while reaffirming our senior unsecured debt rating as “BB-” and upgraded our outlook from negative to stable. According to a press release announcing its action, Standard and Poor’s based this decision on its expectation that our credit measures will not improve significantly in the computation of earnings for covenant compliance
purposes certain cash expenses, as well as certain non-cash costs,near term. Standard and Poor’s expressed concerns relating to our entry into the mass channel, including significant execution risk associated with logistics, production and delivery response to serve the mass channel, the potential plant closureseffect on our brand franchise, and the potential reaction of our existing retailers. Standard and Poor’s also noted that the ratings reflected our leveraged financial profile, the highly competitive nature of our industry, and the inherent fashion risk in our industry.
Yen-denominated Eurobond Placement
In November 1996, we issued a ¥20 billion principal amount eurobond (equivalent to approximately $180.0 million at the time of issuance) due November 22, 2016, with interest payable at 4.25% per annum. The bond is redeemable at our option at a make-whole redemption price, based on market rates at the time of redemption, commencing in November 2006 and on any subsequent semi-annual interest payment date. We treat the bond as a hedge of our net investment in our Japanese subsidiary.
The bond includes customary events of default and covenants limiting our activities similar to the events of default and covenants contained in the U.S.indenture governing our senior unsecured notes due in 2003 and Scotland2006.
European Receivables Financing
In February 2000, several of our European subsidiaries, including Levi Strauss Germany GmbH, Levi Strauss (U.K.) Limited, Levi Strauss Continental S.A., Levi Strauss Italia s.r.l., and Levi Strauss De Espana, S.A., each entered into a receivables-backed securitization financing agreement with ABN AMRO BV and other lenders to borrow up to $125.0 million. Borrowings under the facilities were used to reduce the commitment levels under our 2001 bank credit facility. Interest rates under this agreement are variable based on commercial paper market conditions, and the debt ratings of the underlying conduit. Borrowings are collateralized by a security interest in 2002.the receivables of these subsidiaries.
As of November 24, 2002, an equivalent of $51.2 million was outstanding under these facilities. We have borrowed the following amounts under these facilities:
The securitization agreements contain covenants governing the activities of the subsidiaries and the quality of the receivables that may be used to support the borrowings, including, among other things, a requirement that our subsidiaries service the receivables securing their borrowings.
We provide a limited guaranty to support borrowings under the agreements. We guaranty performance by the subsidiaries of their servicing obligations. We also guaranty the collectibility of the receivables in an amount not made
final decisions regarding potential plant closures. to exceed 10% of the outstanding amount as of the termination date under the securitization agreements.
The amendment also excludessecuritization agreements contain customary termination events for these arrangements, including the subsidiaries’ failure to make payments or otherwise comply with their obligations under the securitization agreements, bankruptcy events, material adverse changes in financial position or receivables collection procedures, cross default to other indebtedness, failure of the portfolio to meet certain performance standards or a change in control.
The facilities, which have an annual renewable option upon agreement of all parties, mature on February 28, 2003. We will not renew these facilities.
Customer Service Center Equipment Financing
In December 1999, we borrowed $89.5 million from those computationsa group of lenders under a five-year credit facility secured by most of the non-cash portionequipment located at our customer service centers in Nevada, Mississippi and Kentucky. These customer service centers are our principal product distribution facilities in the United States. The equipment in the customer service centers securing this facility is not part of the collateral securing our long-term incentive
compensation plans. Second,2003 bank credit facility. As of November 24, 2002, there was approximately $71.8 million principal amount outstanding under this facility. Approximately $19.7 million in excess collateral equipment value remains available to secure additional third party funding. Borrowings of $44.8 million under the amendment reduces by 0.25first tranche bear interest at a fixed rate equal to the yield on four-year U.S. Treasury notes at the time of funding plus an incremental borrowing spread. Borrowings of $27.0 million under the second tranche bear interest at a floating quarterly rate equal to the 90-day London Interbank Offered Rate plus an incremental borrowing spread based on our leverage ratio at the time of the interest payment. The borrowings amortize over five years, with 50% and 80% of the principal amount of the required tighteningfirst tranche and second tranche, respectively, due at maturity.
The credit facility is structured as a lease intended as security. This means that we retain ownership of the leverage ratio beginningequipment, the lenders have a security interest in the equipment and the transaction is considered a secured financing, and not a lease, for tax, accounting, bankruptcy, financial reporting and commercial law purposes.
The transaction documents include customary covenants governing our activities, including, among other things, limitations on our ability to sell, lease, relocate or grant liens in the equipment held in these customer service centers.
In some circumstances, we are permitted to sell or, with the fourth quarter of
2002. Third, the amendment tightens the senior secured leverage ratio. The
amendment did not change the interest rate, sizelenders’ approval, obtain a release of the facility or required
payment provisionslenders’ security interest in, the equipment in the customer service centers upon repayment of a portion of the facility.
U.S. RECEIVABLES SECURITIZATION. debt attributable to that equipment. We can also enter into agreements with third party “outsource” providers to operate one or more of the customer service centers.
The transaction documents include customary events of default. If we default, the lenders could accelerate the maturity date of our loans, enter these customer service centers and take possession of our equipment held there.
Domestic Receivables Securitization
On July 31, 2001, we completed a receivables securitization transaction involving receivables generated from sales of products to our U.S.domestic customers. The transaction involved the issuance by Levi Strauss Receivables Funding, LLC, anour indirect subsidiary, of $110.0 million of secured term notes. The notes, which are secured by trade receivables originated by Levi Strauss & Co., bear interest at a rate equal to the one-month LIBOR rateLondon Interbank Offered Rate plus 0.32% per annum, and have a stated maturity date of November 2005. Net proceeds of the offering were used to repay a portion of the outstanding debt under our senior secured2001 bank credit facility. The transaction did
not meet the criteria for sales accounting under Statement of Financial
Accounting Standards No. ("SFAS") 140 and therefore is accounted for on our
balance sheet as a secured borrowing. The purpose of the transaction was to lower our interest expense and diversify funding sources. The notes were issued in a private placement transaction in accordance with Rule 144A under the Securities Act.
Under the securitization arrangement, collections on receivables remaining after payment of interest and fees relating to the notes are used to purchase new receivables from Levi Strauss & Co. The securitization agreements provide that, in specified cases, the collections will not be released but will instead be deposited and used to pay the principal amount of the notes. Those circumstances include, among other things, failure to maintain the required level of overcollaterization due to deterioration in the credit quality, or overconcentration or dilution in respect of, the receivables, failure to pay interest or other amounts which is not cured, breaches of covenants, representations and warranties or events of bankruptcy relating to us and certain of our subsidiaries. Non-release of collections in these limited circumstances could have an adverse effect on our liquidity.
NOTES OFFERING.
On April 25, 2002, we obtained an amendment to the domestic receivables securitization agreements. Before the amendment, the manner in which sales incentives were treated in the calculation of net eligible U.S. trade receivables decreased net eligible receivables as well as substantially increased the targeted amount. The amendment revises the way sales incentives are treated in calculating the amount of net eligible receivables.
Industrial Development Revenue Refunding Bond
In January 2001, we1995, the City of Canton, Mississippi issued two seriesan industrial development revenue refunding bond with a principal amount of notes payable,
U.S. $380.0$10.0 million, dollar notes and 125.0 million euro notes, totaling the equivalent of $497.5 million to qualified institutional investors. The notes are
unsecured obligations and may be redeemed at any time after January 15, 2005.
The notes mature on January 15, 2008. We used the net proceeds from the offering
to repay a portion of the indebtedness outstanding under the 2000 credit
facility.
The indentures governing the notes contain covenants that limit our and
our subsidiaries' ability to incur additional debt; pay dividends or make other
restricted payments; consummate specified asset sales; enter into transactions
with affiliates; incur liens; impose restrictions on the ability of a subsidiary
to pay dividends or make paymentswere loaned to us and our subsidiaries; merge or
consolidate with any other person; and sell, assign, transfer, lease, convey or
otherwise disposeto help finance the cost of all or substantially allacquiring a customer service center in Canton. Interest payments are due monthly at a variable rate based upon the J.J. Kenny Index, reset weekly at a maximum rate of our assets or the assets of our
subsidiaries. If the notes receive and maintain an investment grade rating by
both Standard and Poor's Ratings Service and Moody's Investors Service and we
and our subsidiaries are and remain in compliance with the indentures, then we
and our subsidiaries will not be required to comply with specified covenants
contained in the indentures.
On August 31, 2001, Moody's Investors Service downgraded the ratings of
both our senior secured credit facility and our senior unsecured notes. The
senior secured credit facility was downgraded to "Ba3" from "Ba2"13.00%, and the senior
unsecured notes were downgradedprincipal amount is due June 1, 2003. The bond is secured by a letter of credit that expires on June 15, 2003, which we have the opportunity to "B2" from "Ba3" with a negative outlook
primarily due, according to Moody's, to our declining sales and excess
inventory. As of November 25, 2001, inventory decreased $42.1 million compared
to the balance reported as of November 26, 2000.
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FOREIGN CURRENCY TRANSLATION
extend or renew. We do not anticipate renewing this financing.
Foreign Currency Translation
The functional currency for most of our foreign operations is the applicable local currency. For those operations, assets and liabilities are translated into U.S. dollars using period-end exchange rates and income and expense accounts are translated at average monthly exchange rates. The U.S. dollar is the functional currency for foreign operations in countries with highly inflationary economies and certain other subsidiaries. The translation adjustments for these entities are included in other“Other (income) expense, net.
FOREIGN EXCHANGE MANAGEMENT
”
Effects of Inflation
We believe that inflation in the regions where most of our sales occur has not had a significant effect on our net sales or profitability.
Critical Accounting Policies
Our critical accounting policies upon which our financial position and results of operations depend are those relating to revenue recognition, inventory valuation, restructuring reserves, income tax assets and liabilities, and derivatives and foreign exchange management activities. We summarize our most critical accounting policies below.
Revenue recognition. We recognize revenue when the goods are shipped and title passes to the customer provided that: there are no uncertainties regarding customer acceptance; persuasive evidence of an arrangement exists; the sales price is fixed or determinable; and collectibility is probable. Revenue is recognized net of an allowance for estimated returns, discounts and retailer promotions and incentives when the sale is recorded.
We recognize allowances for estimated returns, discounts and retailer promotions and incentives when the sale is recorded. Allowances principally relate to our U.S. operations and are primarily comprised of volume-based incentives and other returns and discounts. For volume-based retailer incentive programs, reserves for volume allowances are calculated based on a fixed formula applied to sales volumes. We estimate non-volume- based allowances using historical customer claim rates, adjusted as necessary for special customer and product-specific circumstances. Actual allowances may differ from estimates due primarily to changes in sales volume based on retailer or consumer demand. Actual allowances have not materially differed from estimates.
We entered into cooperative advertising programs with certain customers. The majority of cooperative advertising programs were discontinued in the first quarter of fiscal 2002. We recorded payments to customers under cooperative advertising programs as marketing, general and administrative expenses because an identifiable benefit was received in return for the consideration and we could reasonably estimate the fair value of the advertising received. Cooperative advertising expense for 2002, 2001 and 2000 was $3.9 million, $21.5 million and $25.0 million, respectively.
Inventory valuation. We value inventories at the lower of cost or market value. Inventory costs are based on standard costs, which are updated periodically and supported by actual cost data. We include materials, labor and manufacturing overhead in the cost of inventories. In determining inventory market values, we give substantial consideration to the expected product selling price based on historical recovery rates. In determining our expected selling prices, we consider various factors including estimated quantities of slow-moving inventory by reviewing on-hand quantities, outstanding purchase obligations and forecasted sales. We then estimate expected selling prices based on our historical recovery rates for sale of slow-moving inventory through various channels and other factors, such as market conditions and current consumer preferences. Our estimates may differ from actual results due to the quantity and quality and mix of products in inventory, consumer and retailer preferences and economic conditions.
Restructuring reserves. Upon approval of a restructuring plan by management with the appropriate level of authority, we record restructuring reserves for certain costs associated with plant closures and business reorganization activities. Such costs are recorded as a current liability and primarily include employee severance, certain employee termination benefits, including out-placement services and career counseling, and contractual obligations. The principal components of the reserves relate to employee severance and termination benefits, which we estimate based on agreements with the relevant union representatives or plans adopted SFAS 133, "Accounting for Derivative Instrumentsby us that are applicable to employees not affiliated with unions. These costs are not associated with nor do they benefit continuing activities. Inherent in the estimation of these costs are assessments related to the most likely expected outcome of the significant actions to accomplish the restructuring. Changing business conditions may affect the assumptions related to the timing and Hedging
Activities,"extent of facility closure activities. We review the status of restructuring activities on a quarterly basis and, if appropriate, record changes based on updated estimates.
Income tax assets and liabilities. In establishing our deferred income tax assets and liabilities, we make judgments and interpretations based on the first dayenacted tax laws and published tax guidance that are applicable to our operations. We record deferred tax assets and liabilities and evaluate the need for valuation allowances to reduce the deferred tax assets to realizable amounts. The likelihood of fiscal year 2001 (see "New Accounting
Standards" below.) SFAS 133 requiresa material change in our expected realization of these assets is dependent on future taxable income, our ability to use foreign tax credit carryforwards and carrybacks, final U.S. and foreign tax settlements, and the effectiveness of our tax planning strategies in the various relevant jurisdictions. We are also subject to examination of our income tax returns for multiple years by the Internal Revenue Service and other tax authorities. We periodically assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision for income taxes. Changes to our income tax provision or in the valuation of the deferred tax assets and liabilities may affect our annual effective income tax rate.
Derivatives and foreign exchange management activities. We recognize all derivatives to be recognized as assets orand liabilities at their fair value.values. The fair values are determined using widely accepted valuation models and reflect assumptions about currency fluctuations based on current market conditions. The fair values of derivative instruments used to manage currency exposures are sensitive to changes in market conditions and to changes in the timing and amounts of forecasted exposures. We actively manage our foreign currency exposures primarily
to maximize the U.S. dollar value over the long term. We attempt to take a
long-term view of managing exposures on an economic basis, using forecasts to develop exposure positions and engaging in active management of those exposures
withto maximize the objective of protecting future cash flows and mitigating risks. As a
result, notU.S. dollar value over the long-term. Not all exposure management activities and foreign currency derivative instruments will qualify for hedge accounting treatment. ForChanges in the fair values of those derivative instruments that do not qualifyingqualify for hedge accounting changesare recorded in “Other (income) expense” in the consolidated statement of operations. As a result, our net income may be subject to volatility. The derivative instruments that do qualify for hedge accounting currently hedge our net investment position in our subsidiaries. For these instruments, we document the hedge designation, by identifying the hedging instrument, the nature of the risk being hedged and the approach for measuring hedge effectiveness. Changes in fair value are
classified into earnings. We use a varietyvalues of derivative instruments including
forward, swap and option contracts, to protect against foreign currency
exposures related to sourcing, net investment positions, royalties and cash
management. We hold derivative positions onlythat do qualify for hedge accounting are recorded in currencies to which we have
exposure. We have established a policy for a maximum allowable levelthe “Accumulated other comprehensive income (loss)” section of losses
that may occur as a result of our currency exposure management activities. The
maximum level of loss is based on a percentage of the total forecasted currency
exposure being managed.
INTEREST RATE MANAGEMENT
Stockholders’ Deficit.
We are exposed to interest rate risk. It is our policy and practice to use derivative instruments, primarily interest rate swaps and options, to manage and reduce interest rate exposures using a mix of fixed and variable rate debt. For transactions that do not qualify for hedge accounting or in which management has elected not to designate transactions for hedge accounting, changes in fair value are classified into earnings.
EFFECTS OF INFLATION
We believe that the relatively moderate rates of inflation which have been
experienced in the regions where most of our sales occur have not had a
significant effect on our net sales or profitability.
EURO CONVERSION
On January 1, 1999, eleven European Union member states (Germany, France,
the Netherlands, Austria, Italy, Spain, Finland, Ireland, Belgium, Portugal and
Luxembourg) adopted the euro as their common national currency. On January 1,
2001, Greece adopted the euro as its common national currency. Until January 1,
2002, either the euro or a participating country's national currency was
accepted as legal tender. Beginning on January 1, 2002, euro-denominated bills
and coins were issued, and by March 1, 2002, only the euro will be accepted as
legal tender.
We have a multi-functional euro project team responsible for ensuring our
ability to operate effectively during the euro transition phase and through
final euro conversion. Our total program costs as of November 25, 2001 are not
material. We have developed marketing and pricing strategies for implementation
throughout the more open European market.
We were able to make and receive payments in euros and convert financial
and information technology systems to be able to use euros as the base currency
in relevant markets prior to January 1, 2002. Based on the analysis and actions
taken to date, we do not expect the euro conversion to materially affect our
consolidated financial position, results of operations or cash flow.
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NEW ACCOUNTING STANDARDS
We adopted SFAS 133, "Accounting for Derivative Instruments and Hedging
Activities," on the first day of fiscal year 2001. SFAS 133 establishes
accounting and reporting standards for derivative instruments including certain
derivative instruments embedded in other contracts, and for hedging activities.
In summary, SFAS 133 requires all derivatives to be recognized as assets or
liabilities at fair value. Fair value adjustments are made either through
earnings or equity, depending upon the exposure being hedged and the
effectiveness of the hedge. Due to the adoption of SFAS 133, we reported a net
transition gain in other income/expense for fiscal year 2001 of $87 thousand.
This transition amount was not recorded as a separate line item as a change in
accounting principle, net of tax, due to the minimal impact on results of
operations. In addition, we recorded a transition amount of $0.7 million (or
$0.4 million net of related income taxes) that reduced other comprehensive
income.
We adopted SFAS 140, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities," which replaces SFAS 125, "Accounting
for Transfers and Services of Financial Assets and Extinguishments of
Liabilities," in fiscal year 2001. SFAS 140 revises the methods for accounting
for securitizations and other transfers of financial assets and collateral as
outlined in SFAS 125, and requires certain additional disclosures. The adoption
of SFAS 140 had no financial impact.
New Accounting Standards
The Financial Accounting Standards Board ("FASB"(“FASB”) issued SFAS 142, "Goodwill“Goodwill and Other Intangible Assets,"” dated June 2001, which2001. SFAS 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized but instead be reviewed annually for impairment using a fair-value based approach. Intangible assets that have a finite life will continue to be amortized over their respective estimated useful lives. We will adopt the provisions of SFAS 142 during the first quarter of 2003. Goodwill and trademarks have indefinite lives and will no longer be amortized starting November 25, 2002 but instead will be reviewed periodically for impairment. Amortization expense for goodwill and trademarks for 2002 was $8.8 million and $1.9 million, respectively. We believe that the majority of the amortization in prior periods relates to assets which would not be subject to amortization under SFAS 142.
The FASB issued SFAS 143, “Accounting for Asset Retirement Obligations,” dated June 2001. SFAS 143 changes the way companies recognize and measure retirement obligations that are legal obligations and result from the acquisition, construction, development, or normal operation of a long-lived asset. We will adopt the provisions of SFAS 143 on the first day of fiscal year 2003. Amortization
expense for fiscal year 2001 was $10.7 million. We are currently evaluatingdo not believe that the impact adoption mayof SFAS 143 will have a material impact on our financial position andcondition or results of operations.
The FASB issued SFAS 144, "Accounting“Accounting for the Impairment or Disposal of Long-Lived Assets,"” dated August 2001. This statement supercedes SFAS 121, "Accounting“Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,"” and the accounting and reporting provisions of APBAccounting Principles Board (“APB”) Opinion No. 30, "Reporting“Reporting Results of Operations - Operations—Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions."” SFAS 144 requires that onethe same accounting model be used for long-lived assets to be disposed of by sale, whether previously held and used or newly acquired, and it broadens the presentation of discontinued operations to include more disposal transactions. We will adopt the provisions of SFAS 144 on the first day of fiscal year 2003 and we are currently evaluating2003. We do not believe that the impactadoption of SFAS 144 maywill have a material impact on our financial position andcondition or results of operations.
The FASB issued SFAS 145, “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections,” dated April 2002. SFAS 145 states that gains and losses from extinguishment of debt that do not meet the criteria for classification as extraordinary items in APB Opinion No. 30, “Reporting the Results of Operations—Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions,” should not be classified as extraordinary items. Accordingly, SFAS 145 rescinds SFAS 4 “Reporting Gains and Losses from Extinguishment of Debt,” and SFAS 64, “Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements.” SFAS 145 is effective for us on the first day of fiscal year 2003. We do not believe SFAS 145 will have a material impact on our financial condition or results of operations, except that certain reclassifications may occur on our statement of income.
The FASB issued SFAS 146, “Accounting for Costs Associated with Exit or Disposal Activities,” dated June 2002. SFAS 146 addresses financial accounting and reporting for costs associated with exit or disposal activities. In summary, SFAS 146 requires that the liability and cost shall be recognized and measured initially at its fair value in the period in which the liability is incurred, except for one-time termination benefits that meet certain requirements. SFAS 146 is effective prospectively for exit or disposal activities initiated after December 31, 2002. We do not believe that the adoption of SFAS 146 will have a material impact on our financial condition or results of operations.
FACTORS THAT MAY AFFECT FUTURE RESULTS
RISKS RELATING TO OUR SUBSTANTIAL DEBT
WE HAVE SUBSTANTIAL DEBT AND INTEREST PAYMENT REQUIREMENTS THAT MAY RESTRICT OUR
FUTURE OPERATIONS AND IMPAIR OUR ABILITY TO MEET OUR OBLIGATIONS.
Risks relating to our substantial debt
We have substantial debt and interest payment requirements that may restrict our future operations and impair our ability to meet our obligations under the notes.
As of November 24, 2002, our total debt was $1.847 billion and we had $370.9 million of additional borrowing capacity under our 2001 bank credit facility. As of January 31, 2003, our total debt was approximately $2.578 billion and we had $207.5 million of additional borrowing capacity under our 2003 bank credit facility and approximately $635 million of cash on hand. Our substantial debt may have important consequences. For instance, it could:
o
All borrowings under our 2003 bank credit facilitiesfacility are, and will continue to be, at variable rates of interest. As a result, increases in market interest rates may require a greater portion of our cash flow to be used to pay interest.
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Our ability to satisfy our obligations and to reduce our total debt depends on our future operating performance and on economic, financial, competitive and other factors, many of which are beyond our control. We cannot provide assuranceassure that our business will generate sufficient cash flow or that future financings will be available to provide sufficient proceeds to meet these obligations or to successfully execute our business strategy.
RESTRICTIONS IN OUR BANK CREDIT FACILITIES AND OUR SENIOR NOTES MAY LIMIT OUR
ACTIVITIES.
Our
Restrictions in our notes indentures and our 2003 bank credit facilities and thefacility may limit our activities.
The indentures relating to our 11.625%
senior unsecured notes due 2003, 2006, 2008 and 2012 and our 2003 bank credit facility contain customary restrictions, including covenants limiting our ability to incur additional debt, grant liens, make investments, consolidate, merge or acquire other businesses, sell assets, pay dividends and other distributions, make capital expenditures, and enter into transactions with affiliates. We also are required to meet specified financial ratios under the terms of our 2003 bank credit facilities.facility. These restrictions may make it difficult for us to successfully execute our business strategy or to compete in the worldwide apparel industry with companies not similarly restricted.
Our
If we are unable to refinance our 2003 bank credit facilities mature in August 2003facility and our 6.80%7.00% notes due 2006 prior to maturity, we may be forced to take actions that would not otherwise be in our long-term economic interest.
Our 2003 credit facility term loans mature in Novemberon July 31, 2006 and our revolving 2003 credit facility matures on March 31, 2006, at which time we will be required to repay or refinance those borrowings. We cannot provide assurance thatthe facility. In addition, our 7.00% notes due 2006 mature on November 1, 2006, at which time we will be ablerequired to obtain replacement financing at that timerepay or that any available replacement
financing will be on terms acceptable to us.refinance these notes. If we are unable to obtain acceptable replacement financing, we will not be able to satisfy our obligations under our 2003 bank credit facilitiesfacility or the 7.00% notes due 2003 and may be required to take other actions to avoid defaulting on those facilities,under that facility and our 7.00% notes, including selling assets or surrendering assets to our lenders, which would not otherwise be in our long-term economic interest.
SINCE OUR NOTES ARE EFFECTIVELY SUBORDINATED TO ALL OF OUR SECURED DEBT AND THE
LIABILITIES OF OUR SUBSIDIARIES, WE MAY NOT HAVE SUFFICIENT ASSETS TO PAY
AMOUNTS OWED ON THE NOTES IF A DEFAULT OCCURS.
Since our notes are effectively subordinated to all of our secured debt and the liabilities of our subsidiaries, we may not have sufficient assets to pay amounts owed on our notes if a default occurs.
Our senior notes due 2003, 2006, 2008 and 20082012 are general senior unsecured obligations that rank equal in right of payment with all of our existing and future unsecured and unsubordinated debt. TheOur notes are effectively subordinated to all of our secured debt to the extent of the value of the assets securing that debt. The notes are also structurally subordinated to all obligationsAs of November 24, 2002, we had $1.847 billion of debt, of which approximately $380.2 million was secured by most of our assets, including our trademarks and the assets and stock of our material U.S. subsidiaries. As of January 31, 2003, we had approximately $2.578 billion of debt.
Because our 2003 bank credit facilities arefacility is a secured obligations,obligation, failure to comply with theits terms of our bank credit facilities or our inability to pay our lenders at maturity would entitle those lenders immediately to foreclose on most of our assets, including our trademarks and the capital stock of all of our U.S. and most of our foreign subsidiaries, and the assets of our material U.S. subsidiaries, which serve as collateral. In that event, those secured lenders would be entitled to be repaid in full from the proceeds of the liquidation of those assets before those assets would be available for distribution to other creditors, and, lastly, toincluding the holders of our capital stock. In addition, we
have a receivables securitization facility relating
Our notes are also structurally subordinated to all obligations of our U.S. customer
receivables. Under that facility, an indirect subsidiary of ours issued notes
secured by U.S. trade receivables sold by us to the subsidiary on an ongoing
basis. The subsidiary owns the receivables and the transaction is designed to
minimize the risk that the receivables would be subject to claims by our
creditors in the event of a bankruptcy case.
Holderssubsidiaries since holders of the notes due 2003, 2006 and 2008 arewill only be creditors of Levi Strauss & Co. and not of our subsidiaries. As of November 24, 2002, the liabilities of our subsidiaries were approximately $820 million. The ability of our creditors to participate in any distribution of assets of any of our subsidiaries upon liquidation or bankruptcy will be subject to the prior claims of that subsidiary'ssubsidiary’s creditors, including trade creditors, and any prior or equal claim of any equity holder of that subsidiary. In 2001, an indirect subsidiary of ours issued notes pursuant to a domestic receivables securitization facility, which notes were secured by U.S. trade receivables we had sold to the subsidiary. In addition, in 2000 several of our European subsidiaries entered into a receivables-backed securitization financing agreement where borrowings are collateralized by a security interest in the receivables of these subsidiaries. Our notes are structurally subordinated to the obligations of these subsidiaries under these arrangements. In addition, the ability of our creditors to participate in distributions of assets of our subsidiaries will be limited to the extent that the outstanding shares of capital stock of any of our subsidiaries are either pledged to secure other creditors, such as under our 2003 bank credit facilities,facility, or are not owned by us. As a result, creditors receive less, proportionately, than
If our secured creditors and the creditors offoreign subsidiaries are unable to distribute cash to us when needed, we may be unable to satisfy our subsidiaries.
IF OUR FOREIGN SUBSIDIARIES ARE UNABLE TO DISTRIBUTE CASH TO US WHEN NEEDED, WE
MAY BE UNABLE TO SATISFY OUR OBLIGATIONS UNDER THE NOTES.
obligations under our notes.
We conduct our foreign operations through foreign subsidiaries, which in fiscal year 20012002 accounted for approximately 38%39% of our net sales. As a result, we depend in part upon dividends or other intercompany transfers of funds from our foreign subsidiaries for the funds necessary to meet our debt service obligations.obligations, including payments on the notes. We only receive the cash that remains after our foreign subsidiaries satisfy their obligations. If those subsidiaries are unable to pass on the amount of cash that we need, we will be unable to make payments to our noteholders. Any agreements our foreign subsidiaries enter into with other parties, as well as applicable laws and regulations limiting the right and ability of non-U.S. subsidiaries and affiliates to pay dividends and remit earnings to affiliated companies, absent special conditions,
may restrict the ability of our foreign subsidiaries to pay dividends or make other distributions to us.
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RISKS RELATING TO THE INDUSTRY IN WHICH WE COMPETE
THE WORLDWIDE APPAREL INDUSTRY IS HEAVILY INFLUENCED BY GENERAL ECONOMIC CYCLES.
Our ability to borrow may be adversely affected by changes in our credit ratings.
The credit ratings assigned to our indebtedness affect both our ability to borrow and the terms of our borrowings. On August 14, 2002, Moody’s Investors Service downgraded our 2001 bank credit facility from “Ba3” to “B1” and our notes due 2003, 2006 and 2008 from “B2” to “Caa1.” According to a press release announcing the downgrade, Moody’s based this decision on its concerns relating to our level of cash generation, our ability to refinance debt, including our 2001 bank credit facility maturing in August 2003 and our notes maturing in November 2003, and our ability to pay costs associated with plant closures we undertook in 2002.On November 25, 2002, Moody’s upgraded our outlook from negative to stable and announced it would upgrade its ratings for our notes due 2003, 2006 and 2008 to “B3” upon completion of this offering. On January 7, 2003, Moody’s upgraded our senior unsecured debt ratings to “B3” from “Caa1.” The “B2” senior implied rating and the “B1” rating on our 2001 bank credit facility were confirmed.
On November 12, 2002, Standard and Poor’s Ratings Service downgraded our long-term corporate credit rating from “BB” to “BB-” and our 2001 bank credit facility from “BB+” to “BB,” while reaffirming our senior unsecured debt rating as “BB-” and upgraded our outlook from negative to stable. According to a press release announcing its action, Standard and Poor’s based this decision on its expectation that our credit measures will not improve significantly in the near term. Standard and Poor’s expressed concerns relating to our entry into the mass channel, including significant execution risk associated with logistics, production and delivery response to serve the mass channel, the potential effect on our brand franchise, and the potential reaction of our existing retailers. Standard and Poor’s also noted that the ratings reflected our leveraged financial profile, the highly competitive nature of our industry, and the inherent fashion risk in our industry.
Although these downgrades did not trigger any material obligations or provisions under our contractual relationships, it is possible that these or other rating agencies may further downgrade our credit ratings or change our outlook in the future. The risks associated with our entry into the mass channel, including the potential negative effect on our existing customers or our brands and the significant working capital required, together with our substantial debt have been cited as some of the reasons for the recent revisions in our credit ratings. If we are unable to execute successfully our mass channel initiative, our credit ratings could be further downgraded in the future which could adversely impact our ability to borrow and the terms, including interest rates, of our borrowings. If our credit ratings are further downgraded, we could be required to, among other things, provide additional guarantees, collateral, letters of credit or cash to support our contractual obligations, including hedging obligations and indebtedness, and it could increase our cost of capital, make our efforts to raise capital more difficult and have an adverse impact on our business and financial condition.
Risks relating to the industry in which we compete
Our sales are heavily influenced by general economic cycles.
Apparel is a cyclical industry that is heavily dependent upon the overall level of consumer spending. Purchases of apparel and related goods tend to be highly correlated with cycles in the disposable income of our consumers. Our customers anticipate and respond to adverse changes in economic conditions and uncertainty by reducing inventories and canceling orders, a condition we
experienced in 2001 in the U.S. and which may continue in 2002.orders. As a result, any substantial deterioration in general economic conditions or increases in interest rates, or acts of war, terrorist or political events that diminish consumer spending and confidence in any of the regions in which we compete, could reduce our sales and adversely affect our business and financial condition.
Intense competition in the worldwide apparel industry could reduce our sales of our products.
WE FACE INTENSE COMPETITION IN THE WORLDWIDE APPAREL INDUSTRY.
and prices.
We face a variety of competitive challenges from other domestic and foreign jeanswear and casual apparel marketers, fashion-oriented apparel marketers, specialty retailers and retailers of private label jeanswear and casual apparel products, some of which have greater financial and marketing resources than we do. We compete with these companies primarily on the basis of:
o
Increased competition in the worldwide apparel industry, including from international expansion of vertically-integrated specialty stores, andfrom mass merchantschannel retailers developing exclusive labels or expanding the brands they carry and from Internet-basedinternet-based competitors, could reduce our sales and prices and adversely affect our results of operations.
THE WORLDWIDE APPAREL INDUSTRY IS EXPERIENCING PRICE DEFLATION.
business and financial condition.
The worldwide apparel industry continues to experience price deflation.deflation, which has, and may continue to, affect our results of operations.
The worldwide apparel industry has experienced price deflation in recent years. The deflation is attributable to weak economic conditions, increased competition, increased product sourcing in lower cost countries, growth of the mass merchant channel of distribution, emerging commoditization of the khaki market in the U.S.United States and reduced relative spending on apparel and increased value-consciousness on the part of consumers.consumers reflecting, in part, general economic conditions. Downward pressure on prices may:
o limit our abilityhas, and may continue to:
Because of our high debt level, we may be less able to respond effectively to these developments than our competitors who have less financial leverage.
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THE SUCCESS OF OUR BUSINESS DEPENDS UPON OUR ABILITY TO OFFER INNOVATIVE
PRODUCTS.
Our
The success of our business depends upon our ability to offer innovative and upgraded products.
The worldwide apparel industry is characterized by constant product innovation due to changing consumer preferences and by the rapid replication of new products by competitors. As a result, our success depends in large part on our ability to continuously develop, market and deliver innovative excitingproducts at a pace and intensity competitive with other brands in our segments. In addition, we must create products that appeal to multiple consumer segments at a range of price points. Any failure on our part to regularly develop innovative products and update core products or anticipate, identifycould:
The increasing importance of product innovation in apparel requires us to strengthen our internal research and commercialization capabilities, to rely more on markdowns, whichsuccessful commercial relationships with third parties such as fiber, fabric and finishing providers and to compete and negotiate effectively for new technologies and product components. The exposure of our business to changes in consumer preferences is heightened by our increasing reliance on offshore manufacturers, as offshore outsourcing may harm our business. At the same time,increase lead times between production decisions and customer delivery. In addition, our focus on tight management of inventory may result, from time to time, in our not having an adequate supply of products to meet consumer demand and cause us to lose sales. The exposure of our business to changes inMoreover, if we misjudge consumer preferences, is
heightened by our increasing reliance on offshore manufacturers, as offshore
outsourcingbrand image may be significantly impaired.
Increases in the price of raw materials or their reduced availability could increase lead times between production decisionsour cost of sales and customer
delivery.
INCREASES IN THE PRICE OF RAW MATERIALS OR THEIR REDUCED AVAILABILITY COULD
INCREASE OUR COST OF SALES AND DECREASE OUR PROFITABILITY.
decrease our profitability.
The principal fabrics used in our business are cotton, synthetics, wools and blends. The prices we pay for these fabrics are dependent on the market price for raw materials used to produce them, primarily cotton. The price and availability of cotton may fluctuate significantly, depending on a variety of factors, including crop yields.yields, weather, supply conditions, government regulation, economic climate and other unpredictable factors. Any raw material price increases could increase our cost of sales and decrease our profitability unless we are able to pass higher prices on to our customers. Moreover, any decrease in the availability of cotton could impair our ability to meet our production requirements in a timely manner.
OUR BUSINESS IS SUBJECT TO RISKS ASSOCIATED WITH IMPORTING PRODUCTS.
Our business is subject to risks associated with importing products.
We import raw materials and finished garments into all of our operating regions. Substantially all of our import operations are subject to:
o quotas imposed by bilateral textile agreements between the countries
where our facilities are located and foreign countries;
o customs dutiesto tariffs imposed on imported products and quotas imposed by the governments where
our facilities are located; and
o penalties imposed for, or adverse publicity relating to, violations by
foreign contractors of labor and wage standards.trade agreements. In addition, the countries in which our products are manufactured or imported may from time to time impose additional new quotas, duties, tariffs or other restrictions on our imports or adversely modify existing restrictions. Adverse changes in these import costs and restrictions, or our or our suppliers’ failure to comply with customs or similar laws, could harm our business. RISKS RELATING TO OUR BUSINESS
WE MAY BE UNABLE TO REVERSE OR RECOVER FROM CONTINUING DECLINES IN SALES WHICH
HAVE IMPAIRED OUR COMPETITIVE AND FINANCIAL POSITIONS.
We cannot assure that future trade agreements will not provide our competitors with an advantage over us, or increase our costs, either of which could have an adverse effect on our business and financial condition.
Our operations are also subject to the effects of international trade agreements and regulations such as the North American Free Trade Agreement and the Caribbean Basin Initiative, and the activities and regulations of the World Trade Organization. Generally, these trade agreements benefit our business by reducing or eliminating the duties and/or quotas assessed on products manufactured in a particular country. However, trade agreements can also impose requirements that adversely affect our business, such as limiting the countries from which we can purchase raw materials and setting quotas on products that may be imported into the United States from a particular country. In addition, the World Trade Organization may commence a new round of trade negotiations that liberalize textile trade by further eliminating quotas or reducing tariffs. The elimination of quotas on World Trade Organization member countries by 2005 and other effects of these trade agreements could result in increased competition from developing countries which historically have lower labor costs, including China and Taiwan, both of which recently became members of the World Trade Organization. This increased competition could have an adverse effect on our business and financial condition.
Our ability to import products in a timely and cost-effective manner may also be affected by problems at ports or issues that otherwise affect transportation and warehousing providers, such as labor disputes. These problems could require us to locate alternative ports or warehousing providers to avoid disruption to our customers. These alternatives may not be available on short notice or could result in higher transit costs, which could have an adverse impact on our business and financial condition.
Risks relating to our business
We may not have recovered from continuing declines in net sales which have impaired our competitive and financial positions.
Our business has declined in recent years. Net sales declined from $7.1$6.0 billion in 19961998 to $4.3$4.1 billion in 2001,2002, a decrease of 40%30.6%. Our market research indicated that during that period we experienced significant brand equity and market position erosion in all of the regions in which we operate. Ouroperate, including a substantial deterioration in the perception of the Levi’s® brand by younger consumers. In response to these trends, we have made extensive strategic, operational and management changes designed to improve our performance, but these changes may not have the desired sustained effect on our business or on our financial condition.
In addition, our declining business, and the actions we took in response to that decline, prevented us from repaying the substantial debt we incurred in theour 1996 transactionreorganization as quickly as we then intended. As a result, our financial condition remains highly leveraged, reducing our operating flexibility and impairing our ability to respond to developments in the worldwide apparel industry as effectively as competitors that do not have comparable financial leverage.
In response
We may be unable to these trends, we have made substantial strategic,
operational and management changes. We do not know whether those changes will
have the desired effect onmaintain or increase our worldwide operations or on the financial results
of any ofsales through our operating regions.
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WE MAY BE UNABLE TO MAINTAIN OR INCREASE OUR SALES THROUGH OUR CURRENT
DISTRIBUTION CHANNELS.
primary distribution channels.
In the U.S.,United States, chain stores and department stores are currently the primary distribution channels for our products. We may be unable to increase sales of our apparel products through these distribution channels, since other channels, including vertically integrated specialty stores and mass merchants,channel retailers, account for mosta large portion of the growthsales in jeanswear and casual wear sales in the U.S.United States. Our lack of a substantial presence in the vertically integrated specialty store market, where companies such as Gap Inc., Abercrombie & Fitch Co. and American Eagle Outfitters compete, weakens our ability to market to younger consumers. Moreover,Although we do not sellplan on entering the mass channel in the United States through sales of Levi Strauss Signature™ products to mass merchantsWal-Mart in 2003, we may not experience the U.S., such as
Wal-Mart Stores, Inc., the Target division of Target Corporation and Kmart
Corporation, aincrease in sales we anticipate. Entry into new distribution channel that continues to increase its share of
overall retail spending, as well as its share of jeanswear and casual wear
sales. At the same time, entrychannels or expansion into distributionof existing channels requires investment, imposes new capability and service requirements and creates the risk of reduced sales and support from existing customers.
In Europe, we depend heavily on independent jeanswear retailers, which account for approximately half of our sales in that region. Independent retailers in Europe have experienced increasing difficulty competing against large department stores and increasingly prevalent vertically integrated specialty stores. Further declinescompetition in the independent retailer channel may adversely affect the sales of our products in Europe. In addition, we do not currently sell products to mass channel retailers in Europe, who participate in a market segment that is growing in importance as consumer value-consciousness and price pressure continue to take hold in the region.
In Asia, we experienced declines in recent years in our core department stores channels in Japan and Australia, our two largest businesses in the region. Our business in
Japan experiencedIn 2001, a number of customer bankruptcies andour customers in Japan declared bankruptcy. As a result, we face increasing pressure to open new distribution channels throughout the region. If we are unable to do so, our sales in the region may decline.
We also do not have a large portfolio of company-owned stores and Internetinternet distribution channels, possessed byunlike some of our competitors. Although we own a small number of stores located in selected major urban areas, we operate those stores primarily as "flagships"“flagships” for marketing and branding purposes and do not expect them to produce substantial unit volume or sales. As a result, we have less control than some industryof our competitors over the distribution and presentation at retail of our products, which we believe has adversely affected our performance and could make it more difficult for us to implement our strategy.
Our expected entry into the U.S. mass channel creates risks for us and may not be successful.
In October 2002, we announced that we will be introducing a new casual clothing brand, the Levi Strauss Signature™ brand. We created the brand for value-conscious consumers who shop in mass channel retail stores. We anticipate that the products will be available initially at Wal-Mart locations across the United States beginning in July 2003. We face a number of risks with respect to our mass channel initiative, any of which may adversely affect our sales, business and financial condition.
| • | We will need considerable organizational resources and discipline to ensure that our Levi Strauss Signature™ products are manufactured and delivered in accordance with the service requirements of Wal-Mart and other mass channel retail customers, while at the same time meeting the requirements of our existing customers. These service requirements will require us to ensure that our products are manufactured in large volumes in accordance with appropriate quality controls and are delivered in a timely manner. If Wal-Mart is dissatisfied with our products or performance for any reason, or if sales are less than expected, Wal-Mart may elect not to continue our arrangement, which could adversely affect our business and financial condition and make it more difficult for us to pursue similar arrangements with other mass channel retailers. |
| • | Sales of Levi Strauss Signature™ products through the mass channel may result in reduced sales of our other brands. If these reductions are greater than anticipated, they could have an adverse impact on our sales and margins. In addition, by offering a new less expensive brand in the mass channel, we may adversely affect the perception of our core Levi’s® brand by both consumers who purchase our products and by our current customers who sell our products, which could result in an overall decrease in sales of our products. |
| • | Creating and launching a new brand in the mass channel involves considerable investment, particularly in the inventory and organization necessary to meet product launch as well as ongoing service requirements. As a result, our working capital requirements associated with the mass channel will be substantial and will initially be made prior to our receipt of any information regarding actual consumer acceptance of our new brand. In addition, we anticipate that we will not begin generating revenues from sales of Levi Strauss Signature™ products until the second half of 2003. As a result, we will incur operating expenses and will need considerable working capital until that time and we will not begin recouping investment until after that time. |
We depend on a group of key U.S. customers for a significant portion of our sales. A GROUP OF KEY U.S. CUSTOMERS ACCOUNTS FOR A SIGNIFICANT PORTION OF OUR SALES.
significant adverse change in a customer relationship or in a customer’s financial position could harm our business and financial condition.
Net sales to our ten largest customers, all of which are located in the U.S.,United States, totaled approximately 47%45% and 48%47% of total net sales during fiscal yearsfor 2002 and 2001, and 2000.respectively. One customer, J. C.J.C. Penney Company, Inc., accounted for approximately 12% and 13% of our fiscal year 2001 net sales for 2002 and 12%2001, respectively. It is possible that Wal-Mart may become one of our fiscal year
2000 net sales.largest customers as a result of purchases of Levi Strauss Signature™ products. Moreover, we believe that consolidation in the retail industry has centralized purchasing decisions and given customers greater leverage over suppliers like us, and we expect thatthis trend to continue, includingcontinue. If this consolidation continues, our net sales and results of operations may be increasingly sensitive to a deterioration in Europe,
Canada and Mexico.
the financial condition of, or other adverse developments with, one or more of our customers.
While we have long-standing customer relationships, we do not have long-term contracts with any of them.them, including J.C. Penney, or our new customer, Wal-Mart. As a result, purchases generally occur on an order-by-order basis, and the relationship, as well as particular orders, can generally be terminated by either party at any time. A decision by a major customer, whether motivated by competitive considerations, financial difficulties, economic conditions or otherwise, to decrease its purchases from us or to change its manner of doing business with us, could adversely affect our business and financial condition. In addition, during recent years, various retailers, including some of our customers, have experienced significant changes and difficulties, including consolidation of ownership, increased centralization of buyingpurchasing decisions, restructurings, bankruptcies and liquidations. For example, several of our key retail customers in Japan filed for bankruptcy in fiscal year
2001.
These and other financial problems of some of our retailers, as well as general weakness in the retail environment, increase the risk of extending credit to these retailers. A significant adverse change in a customer relationship or in a customer'scustomer’s financial position could cause us to limit or discontinue business with that customer, require us to assume more credit risk relating to that customer'scustomer’s receivables, limit our ability to collect amounts related to previous purchases by that customer, or result in required prepayment of our U.S. and European receivables securitization arrangements, all of which could harm our business and financial condition.
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OUR REVENUES ARE DEPENDENT ON SALES OF JEANS PRODUCTS.
Our revenues are dependent on sales of branded jeans products. If our sales of these products significantly decline, our market share and our results of operations will be adversely affected.
Our revenues are derived mostly from sales of branded jeans products. Our Levi's(R)Levi’s® brand, which consists primarily of denim bottoms, generated approximately 75%74% of our total net sales in 2001. Sales2002. In 2002, net sales of Levi's(R)Levi’s® brand products accounted for approximately 66%65% of net sales in the Americas, approximately 91% of net sales in Europe and approximately 95%96% of net sales in Asia Pacific. Our success is
dependentWe expect the relative percentage of our total net sales represented by jeans products will increase following our expected entry in 2003 into the mass channel in the United States with our Levi Strauss Signature™ brand. Because of our dependence on the strength of consumer demand for branded jeans products, any significant decrease in our sales of these products could adversely affect our market share and our
ability to continually develop, source and offer innovative jeans products of
superior fit, finish and fabric at prices that generate acceptable margins for
both us and for our retail customers.
In addition, in many countries outside the U.S., the appeal of the brand
and of Levi's(R) jeans products as a more fashionable, premium product together
with the higher cost of doing business in those areas, and local retail and
market conditions has resulted in higher prices for those products than in the
U.S. The increasingly global business environment, the emergence of the
Internet, the rise of mass merchants in multiple markets and other factors could
contribute to increased price and value-consciousness on the part of consumers.
Our success is dependent in part on our responding to these developments by
offering products across a variety of price points targeted effectively to
channel and consumer segments. Our inability to do so could have an adverse
effect onharm our business and financial condition.
WE RELY ON INDEPENDENT MANUFACTURERS FOR MOST OF OUR PRODUCTION.
Our reliancedependence on independent manufacturers forreduces our ability to control the majority of our
productionmanufacturing process, which could harm our operations. sales, reputation and overall profitability.
We have in recent years substantially increased our use of independent contract manufacturers. As a result, we depend upon ouron independent contract manufacturers to secure a sufficient supply of raw materials and maintain sufficient manufacturing and shipping capacity.capacity in an environment characterized by declining prices, continuing cost pressure and increased demands for product innovation and speed-to-market. This dependence could subject us to difficulty in obtaining timely delivery of products of acceptable quality. In addition, a contractor'scontractor’s failure to ship products to us in a timely manner or to meet the required quality standards could cause us to miss the delivery date requirements of our customers. The failure to make timely deliveries may cause our customers to cancel orders, refuse to accept deliveries, impose non-compliance charges through invoice deductions or other charge-backs, demand reduced prices or reduce future orders, any of which could harm our sales, reputation and overall profitability. We require contractors to meet our standards in terms of working
conditions, environmental protection and other matters before we are willing to
place business with them. As such, we may not be able to obtain the lowest-cost
production. In addition, any failure by our independent manufacturers to adhere
to labor or other laws or appropriate labor or business practices, and the
potential negative publicity relating to any of these events, could harm our
business and reputation.
We do not have material long-term contracts with any of our independent manufacturers and any of these manufacturers may unilaterally terminate their relationship with us at any time. In addition, the recent trend in the apparel industry towards outsourcing has intensified competition for quality contractors, some of which have long-standing relationships with our competitors. For example, in November 2001, our principal competitor in the
U.S., VF Corporation, announced it was closing manufacturing facilities in the
U.S. and increasing its use of contract manufacturers. Our reliance on
independent manufacturers may increase in the next year. We are now discussing
with our unions in the U.S. potential additional closures of manufacturing
facilities in the U.S. and are consulting with union and employee
representatives regarding a proposal to close two plants in Scotland. If we
ultimately close facilities, our reliance on independent manufacturers will
increase. To the extent we are not able to secure or maintain relationships with manufacturers that are able to fulfill our requirements, our business would be harmed.
WE RELY ON
We require contractors to meet our standards in terms of working conditions, environmental protection and other matters before we are willing to place business with them. As such, we may not be able to obtain the lowest-cost production. In addition, the labor and business practices of independent apparel manufacturers have received increased attention from the media, non-governmental organizations, consumers and governmental agencies in recent years. Any failure by our independent manufacturers to adhere to labor or other laws or appropriate labor or business practices, and the potential litigation, negative publicity and political pressure relating to any of these events, could harm our business and reputation.
We rely on a few key suppliers for a large portion of our fabric purchases. A FEW KEY SUPPLIERS FOR A LARGE PORTION OF OUR FABRIC PURCHASES.
significant adverse change in a supplier relationship or in a supplier’s financial position could harm our business and financial condition.
Three vendors, Cone Mills Corporation, Burlington Industries, Inc. and Galey & Lord, Inc., including its Swift Denim subsidiary, and Burlington Industries, Inc. supplied approximately 45%49% of our total volume of fabric purchases worldwide in 2001.2002. Cone Mills, our largest supplier, supplies various fabrics to us and, until March 30, 2003, is the sole supplier of the denim used for our 501(R)501® jeans. Purchases from Cone Mills accounted for approximately 25%22% of our total fabric purchases in 2001. Our supply agreement
with Cone Mills provides for a rolling five-year term unless either Cone Mills
or we elect not to extend the agreement, upon which the agreement will terminate
at the end of the then-current term. Cone Mills and we may also terminate the
agreement in the event of bankruptcy or insolvency of the other party or a
material breach by the other that is not cured within a specified time period.
We may also terminate the agreement at any time upon 30 days notice to Cone
Mills.
34
The U.S. textile industry had a very difficult year in 2001. The slowdown
in the retail market and competition from foreign mills has resulted in a
significant drop in demand for U.S. produced fabrics and a deterioration of mill
profit margins. Several U.S. mills have filed for bankruptcy protection.
Burlington Industries, Inc., our third largest supplier, filed for bankruptcy
protection on November 15, 2001.
2002.
We do not have long-term supply agreements with any principal suppliers other than Cone Mills, and we compete with other apparel companies for supply capacity.capacity and product innovations. We cannot provide assurance that we willmay not be able to obtain adequate supply if there occurs a significant disruption in any of our supplier relationships, including any disruption caused by a change of control, bankruptcy or other financial or operating difficulty of any of our suppliers,
orsuppliers. We may also not be able to obtain adequate supply if there occurs a significant disruption in the markets for the fabrics or other raw materials we purchase, including disruptions arising from mill closures, or consolidation resulting from excess industry capacity, trade restrictions or otherwise. Any of thosethese disruptions could impair our ability to deliver products to customers in a timely manner and harm our business.
OUR SUCCESS IS DEPENDENT ON OUR ABILITY TO EXECUTE MULTIPLE INITIATIVES AT THE
SAME TIME.
business and financial condition.
We are engaging in a number of major activities at the same time including:
o rationalizing and updating our product lines;
o broadening price points in all regions where we compete;
o initiatingimplementing substantial changes in our information systemssystems. These actions could disrupt our business.
We are installing, on a phased basis over the next four years, an enterprise resource planning system in the U.S.United States and Asia;
o rolling out new collaborative account planning, replenishment and
marketing programs with customers;
o making organizational changesAsia. In addition, in the United States we are entering into an arrangement with a third party logistics provider to operate warehouse facilities at three major U.S. ports of entry in order to improve product flows into, and Japan to reflect product
line and sales strategies; and
o considering potential plant closures in the U.S. and Scotland.
Our ability to execute multiple initiatives in a difficult retail
environment with minimal business disruption is dependent on the strengthefficiency of, our planning,U.S. distribution centers, and to facilitate product warehousing and shipment to mass channel and other customers. We are also entering the qualitymass channel with our Levi Strauss Signature™ products. These actions require us to make substantial modifications to our information technology systems and business processes. We are aware of integration acrossthe inherent risks associated with replacing or upgrading core business functionssystems, including cost, management time and the success
of our management team in leading and motivating our employees.business disruption. We cannot provide assuranceassure that we will be able to execute successfully all oflaunch these initiatives.
WE HAVE RECENTLY MADE SUBSTANTIAL CHANGES IN OUR MANAGEMENT TEAM.
We made substantial changes in our management team in the last year. The
president of our Americas business left us in February 2001 after 10 months in
the position. Philip Marineau, our Chief Executive Officer, is now the acting
president of the Americas. We appointed new leaders of our U.S. Levi's(R) brand,
our European Levi's(R) brand, our European Dockers(R) brandsystems and our U.S. sales
organization. We cannot provide assuranceprocesses or that our management teamthey will be able
to work together successfully to execute our strategy, andoccur without disruption. Any disruptions could have a material adverse effect on our business and financial condition may suffer if they failcondition.
The success of our business depends on our ability to do so.
THE SUCCESS OF OUR BUSINESS DEPENDS ON OUR ABILITY TO STRENGTHEN OUR INTERNAL
CAPABILITIES AND HUMAN RESOURCES.
attract and retain qualified employees.
We need talent, skillstalented and experienceexperienced personnel in a number of areas including our core business activities. Our success is dependent upon strengthening our internal
capabilities, including our management bench strength,depth across our business and at a rapid pace. An inability to retain and attract qualified personnel or the loss of any of our current key executives could harm our business. Our ability to retainattract and attractretain qualified employees has beenis adversely affected by the San Francisco location of our corporate and Americas headquarters due to the high cost of living in the San Francisco area. Other factors that have affected
Our success depends on the continued protection of our ability to retaintrademarks and attract employees include the disruption associated with
our restructuring initiatives and our deteriorating financial position in recent
years.
35
OUR SUCCESS DEPENDS ON THE CONTINUED PROTECTION OF OUR TRADEMARKS AND OTHER
PROPRIETARY INTELLECTUAL PROPERTY RIGHTS.
other proprietary intellectual property rights.
Our trademarks and other intellectual property rights are important to our success and competitive position, and the loss or inability to enforce trademarks and other proprietary intellectual property rights could harm our business. We devote substantial resources to the establishment and protection of our trademarks and other proprietary intellectual property rights on a worldwide basis. We cannot provide assuranceassure that our efforts to establish and protect our trademarks and other proprietary intellectual property rights will be adequate to prevent imitation of our products by others or to prevent others from seeking to block sales of our products. Moreover, we cannot provide assuranceassure that others will not assert rights in, or ownership of, our trademarks and other proprietary intellectual property or that we will be able to successfully resolve those claims. In addition, the laws and enforcement mechanisms of some foreign countries may not allow us to protect our proprietary rights to the same extent as we do in the U.S.United States and other countries. Because our brand recognition is such an important
part of our strategy, we are especially dependent upon the protection of our
trademarks.
OUR INTERNATIONAL OPERATIONS EXPOSE US TO POLITICAL AND ECONOMIC RISKS.
Our international operations expose us to political and economic risks.
In fiscal year 2001,2002, we generated approximately 38%39% of our net sales outside the U.S.,United States, and a substantial amount of our products came from sources outside of the country of distribution. As a result, we are subject to the risks of doing business abroad, including:
o political
The functional currency for most of our foreign tax treaties and policies; and
o restrictions onoperations is the transfer of funds to or from foreign countries.
Our reported financial performance onapplicable local currency. As a U.S. dollar denominated basis is
also subject toresult, fluctuations in currency exchange rates. For example, during
fiscal year 2001, changes in foreign currency rates, particularly the euro, were
responsible for the entire net sales decline from the prior year period for our
Europe division. If currency exchange rates were unchanged fromaffect the prior year
period, net sales for fiscal year 2001 would have increased approximately 1% forresults of our Europe division. Approximately $85.3 millionoperations and the value of our foreign assets, which in turn may adversely affect reported earnings and the comparability of period-to-period results of operations. For 2002, the decrease in total net sales for fiscal year 2001, aswas 2.9% compared to the same period in 2000, was2001 but would have decreased 3.2% due to the effects of translating non-U.S. currency reported sales results into U.S. dollars. OUR EARNINGS MAY FLUCTUATE BECAUSE OF OUR EXPOSURE MANAGEMENT POLICIES.
WeIn addition, although we engage in hedging activities to manage our foreign currency exposures, in a way that makes it unlikely
thatour earnings may be subject to volatility since we will obtain hedge accounting treatment for all of our exposure
management activities due to the adoption of SFAS 133, "Accounting for
Derivative Instruments and Hedging Activities." We take a long-term view of
managing our exposures on an economic basis. We use forecasts to develop
exposure positions and engage in active management of those exposures with the
objective of protecting future cash flows and mitigating risks. As a result, not
all of our exposure management activities and foreign currency derivative
instruments will qualify for hedge accounting treatment under SFAS 133. We are required to record in income the changes in the market values of thoseour exposure management instruments that do not qualify for hedge accounting treatmenttreatment. Changes in currency exchange rates may also affect the relative prices at which we and foreign competitors sell products in the same market. In addition, changes in the value of the relevant currencies may affect the cost of certain items required in our operations.
Adverse outcomes resulting from examination of our income tax returns may affect our liquidity and asannual effective income tax rate.
Our consolidated U.S. income tax returns for the years 1986 through 1995 were the subject of an examination by the Internal Revenue Service. In 2001, we reached a settlement with the Internal Revenue Service that covered most of the issues for the years 1986 through 1989. During 2002, we reached a settlement with the Internal Revenue Service on most of the issues for the years 1990 through 1995. As a result, during 2002 we reclassified approximately $90.0 million from long-term tax liabilities into accrued taxes. We anticipate paying the Internal Revenue Service an amount of approximately $115 million during the second quarter of 2003. After taking into account potential refunds from prior years’ overpayments and the tax effects of the interest deduction from this payment, we expect the net cash payment to be approximately $90 million.
Our consolidated U.S. income tax returns for the years 1996 to 1999 are presently under examination by the Internal Revenue Service. We have not yet reached a settlement with the Internal Revenue Service for these years. We cannot assure that we will be able to reach a settlement for 1996 to 1999, and for other open issues, on terms that are acceptable to us. In addition, our earningsincome tax returns for other years may be the subject of future examination by tax authorities. An adverse outcome resulting from any settlement or future examination may lead to volatility.
36
OUR APPROACH TO CORPORATE GOVERNANCE MAY LEAD US TO TAKE ACTIONS THAT CONFLICT
WITH OUR CREDITORS' INTERESTS AS HOLDERS OF NOTES.
a deficiency in our provision for income taxes on our income statement and adversely affect our liquidity. In addition, changes to our income tax provision or in the valuation of the deferred tax assets and liabilities may affect our annual effective income tax rate.
Our approach to corporate governance may lead us to take actions that conflict with our creditors’ interests as holders of notes.
All of our common stock is owned by a voting trust described under "Principal“Principal Stockholders."” Four voting trustees have the exclusive ability to elect and remove directors, amend our by-laws and take other actions which would normally be within the power of stockholders of a Delaware corporation. Although the voting trust agreement gives the holders of two-thirds of the outstanding voting trust certificates the power to remove trustees and terminate the voting trust, three of the trustees, as a group based on their ownership of voting trust certificates, have the ability to block all efforts by the two-thirds of the holders of the voting trust certificates to remove a trustee or terminate the voting trust. In addition, the concentration of voting trust certificate ownership in a small group of holders, including these three trustees, gives this group the voting power to block stockholder action on matters for which the holders of the voting trust certificates are entitled to vote and direct the trustees under the voting trust agreement.
Our principal stockholders created the voting trust in part to ensure that we would continue to operate in a socially responsible manner while seeking the greatest long-term benefit for our stockholders, employees and other stakeholders and constituencies. We measure our success not only by growth in economic value, but also by our reputation, the quality of our constituency relationships and our commitment to social responsibility. As a result, we cannot provide assuranceassure that the voting trustees will cause us to be operated and managed in a manner that benefits our creditors or that the interests of the voting trustees or our principal equity holders will not diverge from our creditors.
ITEM
Risks relating to Arthur Andersen LLP.
Holders of our notes may have no effective remedy against Arthur Andersen LLP in connection with a material misstatement or omission in any of our financial statements audited by Arthur Andersen.
Our consolidated financial statements for each of the two fiscal years ended November 25, 2001 were audited by Arthur Andersen LLP, independent certified public accountants. On June 15, 2002, Arthur Andersen was convicted of federal obstruction of justice charges arising from the U.S. government’s investigation of Enron Corp. On August 31, 2002, Arthur Andersen LLP ceased practicing before the SEC.
Because our former key engagement team personnel have since left Arthur Andersen LLP, Arthur Andersen LLP did not participate in the preparation of this report, reissue its audit report with respect to the financial statements included in this report, or consent to the inclusion in this report of its audit report. As a result, holders of our notes may have no effective remedy against Arthur Andersen LLP in connection with a material misstatement or omission in the financial statements to which its audit report relates. In addition, even if such holders were able to assert such a claim, as a result of its recent conviction of Federal obstruction of justice charges and other lawsuits, Arthur Andersen LLP may fail or otherwise have insufficient assets to satisfy claims made by investors that might arise under Federal securities laws or otherwise with respect to its audit report.
Issues related to Arthur Andersen LLP may impede our ability to access the capital markets.
If the SEC ceases accepting financial statements audited by Arthur Andersen LLP, we would be unable to access the public capital markets unless KPMG LLP, our current independent accounting firm, or another independent accounting firm, is able to audit the financial statements originally audited by Arthur Andersen LLP. In addition, investors in any subsequent offerings for which we use Arthur Andersen LLP’s audit reports will not be entitled to recovery against Arthur Andersen LLP under Section 11 of the Securities Act for any material misstatements or omissions in those financial statements. Furthermore, Arthur Andersen LLP will be unable to participate in the “due diligence” process that would customarily be performed by potential investors in our securities, which process includes having Arthur Andersen LLP perform procedures to assure the continued accuracy of its report on our audited financial statements and to confirm its review of unaudited interim periods presented for comparative purposes. As a result, we may not be able to bring to the market successfully an offering of our securities. Consequently, our financing costs may increase or we may miss attractive market opportunities.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
DERIVATIVE FINANCIAL INSTRUMENTS
DERIVATIVE FINANCIAL INSTRUMENTS
We are exposed to market risk primarily related to foreign exchange, interest rates and, indirectly through fabric prices, the price of cotton. We actively manage foreign currency and interest rate risks with the objective of reducing fluctuations in actual and anticipated cash flows by entering into a variety of derivative instruments including spot, forwards, options and swaps. We are exposed to credit loss in the event of nonperformance by the counterparties to the foreign exchange contracts. However, we believe these counterparties are creditworthy financial institutions and do not anticipate nonperformance. We currently do not manage our exposure to the price of cotton with derivative instruments. FOREIGN EXCHANGE RISK
We hold derivative positions only in currencies to which we have exposure.
The tables below give an overview of the fair values of derivative instruments reported as an asset or liability and the realized and unrealized gains and losses associated with our foreign exchange management activities reported in “Other (income) expense, net.” The derivatives expire at various dates through August 2003.
At November 24, 2002 | At November 25, 2001 | |||||||
Risk Exposures | Fair value asset (liability) | Fair value asset (liability) | ||||||
(Dollars in Thousands) | ||||||||
Foreign Exchange Management | ||||||||
Sourcing | $ | (3,636 | ) | $ | 10,976 |
| ||
Net Investment |
| 303 |
|
| 6,068 |
| ||
Royalties |
| 1,189 |
|
| 729 |
| ||
Cash Management |
| (82 | ) |
| 1,521 |
| ||
Euro Notes Offering |
| (625 | ) |
| (1,169 | ) | ||
Total | $ | (2,851 | ) | $ | 18,125 |
| ||
Interest Rate Management | $ | — |
| $ | (2,266 | ) | ||
Year Ended November 24, 2002 | Year Ended November 25, 2001 | |||||||||||||||
Other (income) expense, net | Other (income) expense, net | |||||||||||||||
(Dollars in Thousands) | Realized | Unrealized | Realized | Unrealized | ||||||||||||
Foreign Exchange Management | ||||||||||||||||
Sourcing | $ | 60,716 |
| $ | 13,851 |
| $ | 10,696 |
| $ | 4,176 |
| ||||
Net Investment |
| 10,132 |
|
| (116 | ) |
| 2,146 |
|
| (60 | ) | ||||
Royalties |
| 3,372 |
|
| (1,037 | ) |
| (8,044 | ) |
| 2,537 |
| ||||
Cash Management |
| (18,172 | ) |
| (683 | ) |
| (2,228 | ) |
| (790 | ) | ||||
Transition Adjustments |
| — |
|
| — |
|
| 828 |
|
| — |
| ||||
Euro Notes Offering |
| (10,167 | ) |
| (545 | ) |
| 5,738 |
|
| 1,169 |
| ||||
Total | $ | 45,881 |
| $ | 11,470 |
| $ | 9,136 |
| $ | 7,032 |
| ||||
Interest Rate Management | $ | 2,266 | (1) | $ | (2,266 | ) | $ | — |
| $ | 1,476 |
| ||||
Transition Adjustments |
| — |
|
| — |
|
| — |
|
| 1,246 |
| ||||
Total | $ | 2,266 |
| $ | (2,266 | ) | $ | — |
| $ | 2,722 |
| ||||
| (1) | Recorded as an increase to interest expense. |
FOREIGN EXCHANGE RISK
Foreign exchange market risk exposures are primarily related to cash management activities, raw material and finished goods purchases (sourcing), net investment positions and royalty flows from affiliates.
We use a variety of derivative instruments, including forward, swap and option contracts, to protect against foreign currency exposures related to sourcing, net investment positions, royalties and cash management.
We calculate our maximum allowable level of loss based on a percentage of the total forecasted currency exposures. The allowable percentage loss depends on various elements including our leverage ratio as defined in our foreign exchange policy. We implemented this policy in 2001. For 2001, the policy permitted a 6% loss against a set of benchmark rates. The allowable loss for 2002 and 2001 was approximately $45.0 million and $30.0 million, respectively.
At November 24, 2002, we had U.S. dollar spot and forward currency contracts to buy $972.9 million and to sell $238.3 million against various foreign currencies. We also had euro forward currency contracts to buy 7.9 million euro against various foreign currencies and to sell 9.9 million euro against various foreign currencies. We had no U.S. dollar option contracts outstanding at November 24, 2002. We had euro option currency contracts to sell 30.0 million euro against various foreign currencies. These contracts are at various exchange rates and expire at various dates through August 2003.
We entered into option contracts to manage our exposure to numerous foreign currencies. At November 24, 2002, we bought Swedish Krona options resulting in a net long position against the euro of $29.0 million should the options be exercised.
The following table presents notional amounts, average exchange rates and fair values for forward and swap contracts by currency. All amounts are stated in U.S. dollar equivalents. The notional amount represents the total net position outstanding as of the stated date. A positive amount represents a long position in U.S. dollar versus the exposure currency, while a negative amount represents a short position in U.S. dollar versus the exposure currency. The net position is the sum of all buy transactions minus the sum of all sell transactions. The unrealized gain (loss) is the fair value of the outstanding position. The average forward rate is the forward rate weighted by the total of the transacted amounts. All transactions will mature before JanuaryAugust 2003.
37
OUTSTANDING FORWARD AND SWAP TRANSACTIONS
(DOLLARS IN THOUSANDS EXCEPT AVERAGE RATES)
AS OF AS OF
NOVEMBER 25, NOVEMBER 26,
CURRENCY DATA 2001 2000
-------- ---- ------------ ------------
Australian Dollar.......................... Notional amount $24,488 $3,522
Unrealized loss (629) (23)
Average forward rate 0.51 0.52
Argentine Peso............................. Notional amount $1,847 $3,151
Unrealized loss (116) (51)
Average forward rate 0.94 0.65
Canadian Dollar............................ Notional amount $12,713 $11,021
Unrealized gain (loss) 334 (41)
Average forward rate 1.57 1.56
Swiss Franc................................ Notional amount $(11,996) $(8,426)
Unrealized loss (19) (8)
Average forward rate 1.66 1.80
Danish Krona............................... Notional amount $11,879 --
Unrealized loss (133) --
Average forward rate 0.12 --
Euro ..................................... Notional amount $180,309 $69,045
Unrealized gain 8,662 5,439
Average forward rate 0.89 0.83
British Pound.............................. Notional amount $114,831 $65,862
Unrealized gain 805 1,413
Average forward rate 1.42 1.43
Greek Drachma.............................. Notional amount -- $1,689
Unrealized gain -- 103
Average forward rate -- 398.40
Hungarian Forint .......................... Notional amount $5,867 --
Unrealized gain 46 --
Average forward rate 227 --
Japanese Yen............................... Notional amount $43,283 $54,168
Unrealized gain 4,029 2,198
Average forward rate 120.48 107.57
Mexican Peso............................... Notional amount $7,095 $1,511
Unrealized loss (133) (194)
Average forward rate 9.36 9.80
Norwegian Krona............................ Notional amount $5,730 --
Unrealized loss (55) --
Average forward rate 9.02 --
New Zealand Dollar......................... Notional amount $(3,008) $(1,681)
Unrealized gain (loss) 26 (2)
Average forward rate 0.41 0.40
38
Swedish Krona.............................. Notional amount $54,209 $54,630
Unrealized gain 829 501
Average forward rate 10.63 10.16
Singapore Dollar........................... Notional amount $(8,269) --
Unrealized loss (96) --
Average forward rate 1.81 --
Taiwan Dollar.............................. Notional amount $ 3,979 --
Unrealized loss (38) --
Average forward rate 34.86 --
South African Rand......................... Notional amount $ 2,808 $ 3,482
Unrealized gain 285 258
Average forward rate 9.57 7.24
------- -------
Total Unrealized Gain................. $13,797 $ 9,593
======= =======
Outstanding Forward and Swap Transactions
(Dollars in Thousands Except Average Rates)
As of November 24, 2002 | As of November 25, 2001 | |||||||||||||||||||
Currency | Average Forward Rate | Notional Amount | Fair Value | Average Forward Rate | Notional Amount | Fair Value | ||||||||||||||
Australian Dollar | 0.56 | $ | 22,863 |
| $ | (388 | ) | 0.51 | $ | 24,488 |
| $ | (629 | ) | ||||||
Argentine Peso | — |
| — |
|
| — |
| 0.94 |
| 1,847 |
|
| (116 | ) | ||||||
Brazilian Real | 3.43 |
| 518 |
|
| 22 |
| — |
| — |
|
| — |
| ||||||
Canadian Dollar | 1.57 |
| 9,482 |
|
| 98 |
| 1.57 |
| 12,713 |
|
| 334 |
| ||||||
Swiss Franc | 1.49 |
| (16,639 | ) |
| 5 |
| 1.66 |
| (11,996 | ) |
| (19 | ) | ||||||
Danish Krona | 7.49 |
| 15,115 |
|
| (12 | ) | 8.33 |
| 11,879 |
|
| (133 | ) | ||||||
Euro | 0.99 |
| 415,527 |
|
| (1,764 | ) | 0.89 |
| 180,309 |
|
| 8,662 |
| ||||||
British Pound | 1.57 |
| 150,500 |
|
| — |
| 1.42 |
| 114,831 |
|
| 805 |
| ||||||
Hungarian Forint | 237.55 |
| (12,616 | ) |
| (160 | ) | 227 |
| 5,867 |
|
| 46 |
| ||||||
Japanese Yen | 122.69 |
| 37,797 |
|
| 1,136 |
| 120.48 |
| 43,283 |
|
| 4,029 |
| ||||||
Mexican Peso | 10.14 |
| 11,243 |
|
| 33 |
| 9.36 |
| 7,095 |
|
| (133 | ) | ||||||
Norwegian Krona | 7.33 |
| 7,025 |
|
| 17 |
| 9.02 |
| 5,730 |
| �� |
| (55 | ) | |||||
New Zealand Dollar | 0.50 |
| (5,921 | ) |
| 3 |
| 0.41 |
| (3,008 | ) |
| 26 |
| ||||||
Swedish Krona | 9.19 |
| 87,888 |
|
| (1,834 | ) | 10.63 |
| 54,209 |
|
| 829 |
| ||||||
Singapore Dollar | 1.76 |
| 1,045 |
|
| 3 |
| 1.81 |
| (8,269 | ) |
| (96 | ) | ||||||
Taiwan Dollar | 35.07 |
| 6,301 |
|
| (62 | ) | 34.86 |
| 3,979 |
|
| (38 | ) | ||||||
South African Rand | 9.27 |
| 4,584 |
|
| 52 |
| 9.57 |
| 2,808 |
|
| 285 |
| ||||||
Total | $ | 734,712 |
| $ | (2,851 | ) | $ | 445,765 |
| $ | 13,797 |
| ||||||||
The following table presents notional amounts, average strike rates and fair values of outstanding foreign currency options. All amounts are stated in U.S. dollar equivalents. The notional amount represents the total net position outstanding as of the stated date should the option be exercised. A positive amount represents a long position in U.S. dollars, while a negative amount represents a short position in U.S. dollars, versus the relevant currency. The market value is the fair value of the option transaction reported in our financial statements. The average strike rate is weighted by the total of the notional amounts. All transactions will expireexpired before January 2003.
39
OUTSTANDING OPTIONS TRANSACTIONS
(DOLLARS IN THOUSANDS EXCEPT AVERAGE RATES)
AS OF AS OF
NOVEMBER 25, NOVEMBER 26,
CURRENCY DATA 2001 2000
-------- ---- ------------ ------------
Australian Dollar..............................Notional amount -- $ 12,750
Market value -- 75
Average strike rate -- 0.52
Canadian Dollar................................Notional amount $(44,000) $ 10,000
Market value (3) 158
Average strike rate 1.57 1.53
Euro...........................................Notional amount $61,344 $634,588
Market value 4,559 5,091
Average strike rate 0.89 0.88
British Pound..................................Notional amount -- $ (8,444)
Market value -- --
Average strike rate -- 1.32
Japanese Yen...................................Notional amount -- $ 20,000
Market value -- 1,041
Average strike rate -- 109.18
Mexican Peso...................................Notional amount -- $ 5,000
Market value -- (76)
Average strike rate -- 9.84
Swedish Krona..................................Notional amount $21,673 --
Market value (242) --
Average strike rate 11.12 --
South African Rand.............................Notional amount $ 5,000 $ --
Market value 14 --
Average strike rate 9.76 7.69
------- -------
Total Market Value........................ $ 4,328 $ 6,289
======= =======
INTEREST RATE RISK
December 2002.
Outstanding Options Transactions
(Dollars in Thousands Except Average Rates)
As of November 24, 2002 | As of November 25, 2001 | ||||||||||||||||||
Currency | Average Strike Rate | Notional Amount | Fair Value | Average Strike Rate | Notional Amount | Fair Value | |||||||||||||
Canadian Dollar | — | $ | — |
| $ | — | 1.57 | $ | (44,000 | ) | $ | (3 | ) | ||||||
Euro | — |
| 30,078 |
|
| — | 0.89 |
| 61,344 |
|
| 4,559 |
| ||||||
Swedish Krona | 8.68 |
| (29,021 | ) |
| — | 11.12 |
| 21,673 |
|
| (242 | ) | ||||||
South African Rand | — |
| — |
|
| — | 9.76 |
| 5,000 |
|
| 14 |
| ||||||
Total | $ | 1,057 |
| $ | — | $ | 44,017 |
| $ | 4,328 |
| ||||||||
Interest Rate Risk
We have an interest rate risk management policy designed to manage the interest rate risk on our borrowings by entering into a variety of interest rate derivatives.
The following table provides information about our derivative financial instruments and other financial instruments that are sensitive to changes in interest rates. For debt obligations, the table presents principal cash flows and related weighted average interest rates by expected maturity dates. For interest rate swaps, the table presents notional amounts and interest rates by contractual maturity dates. The applicable floating rate index is included for variable rate instruments. Notional amounts are the amounts outstanding at the end of the stated period. All amounts are stated in U.S. dollar equivalents.
40
Interest Rate Table as of November 24, 2002
(Dollars in Thousands Unless Otherwise Stated)
Year Ended | Fair Value 2002 | ||||||||||||||||||||||||||||||
2002 | 2003 | 2004 | 2005 | 2006 | 2007 | 2008 | |||||||||||||||||||||||||
Debt Instruments | |||||||||||||||||||||||||||||||
Fixed Rate (US$) | $ | 1,239,658 |
| $ | 868,465 |
| $ | 861,571 |
| $ | 830,000 |
| $ | 380,000 |
| $ | 380,000 |
|
| — |
| $ | 1,158,064 | ||||||||
Average Interest Rate |
| 8.36 | % |
| 9.11 | % |
| 9.11 | % |
| 9.12 | % |
| 11.63 | % |
| 11.63 | % |
| — |
|
| — | ||||||||
Fixed Rate (Yen 20 billion) | $ | 167,134 |
| $ | 166,667 |
| $ | 166,667 |
| $ | 166,667 |
| $ | 166,667 |
| $ | 166,667 |
| $ | 166,667 |
| $ | 116,667 | ||||||||
Average Interest Rate |
| 4.25 | % |
| 4.25 | % |
| 4.25 | % |
| 4.25 | % |
| 4.25 | % |
| 4.25 | % |
| 4.25 | % |
| — | ||||||||
Fixed Rate (Euro 125 million) | $ | 130,933 |
| $ | 126,250 |
| $ | 126,250 |
| $ | 126,250 |
| $ | 126,250 |
| $ | 126,250 |
|
| — |
| $ | 114,414 | ||||||||
Average Interest Rate |
| 11.63 | % |
| 11.63 | % |
| 11.63 | % |
| 11.63 | % |
| 11.63 | % |
| 11.63 | % |
| — |
|
| — | ||||||||
Variable Rate (US$) | $ | 262,628 |
| $ | 135,741 |
| $ | 24,365 |
| $ | — |
|
| — |
|
| — |
|
| — |
| $ | 262,628 | ||||||||
Average Interest Rate* |
| 3.77 | % |
| 2.61 | % |
| 4.55 | % |
| — |
|
| — |
|
| — |
|
| — |
|
| — | ||||||||
Variable Rate (Euro) | $ | 51,161 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
| $ | 51,161 | ||||||||
Average Interest Rate* |
| 3.39 | % |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — | ||||||||
| * | Assumes no change in short-term interest rates |
Interest Rate Table as of November 25, 2001
(Dollars in Thousands Unless Otherwise Stated)
Year Ended | Fair Value 2001 | |||||||||||||||||||||||||||||||
2001 | 2002 | 2003 | 2004 | 2005 | 2006 | 2007 | ||||||||||||||||||||||||||
Debt Instruments | ||||||||||||||||||||||||||||||||
Fixed Rate (US$) | $ | 1,244,705 |
| $ | 1,224,774 |
| $ | 868,571 |
| $ | 861,571 |
| $ | 830,000 |
| $ | 380,000 |
| $ | 380,000 |
| $ | 985,523 |
| ||||||||
Average Interest Rate |
| 8.36 | % |
| 8.45 | % |
| 9.11 | % |
| 9.11 | % |
| 9.12 | % |
| 11.63 | % |
| 11.63 | % |
| — |
| ||||||||
Fixed Rate (Yen 20 billion) | $ | 164,413 |
| $ | 164,413 |
| $ | 164,413 |
| $ | 164,413 |
| $ | 164,413 |
| $ | 164,413 |
| $ | 164,413 |
| $ | 113,115 |
| ||||||||
Average Interest Rate |
| 4.25 | % |
| 4.25 | % |
| 4.25 | % |
| 4.25 | % |
| 4.25 | % |
| 4.25 | % |
| 4.25 | % |
| — |
| ||||||||
Fixed Rate (Euro 125 million) | $ | 114,378 |
| $ | 110,250 |
| $ | 110,250 |
| $ | 110,250 |
| $ | 110,250 |
| $ | 110,250 |
| $ | 110,250 |
| $ | 85,719 |
| ||||||||
Average Interest Rate |
| 11.63 | % |
| 11.63 | % |
| 11.63 | % |
| 11.63 | % |
| 11.63 | % |
| 11.63 | % |
| 11.63 | % |
| — |
| ||||||||
Variable Rate (US$) | $ | 401,429 |
| $ | 147,076 |
| $ | 25,741 |
| $ | 24,365 |
|
| — |
|
| — |
|
| — |
| $ | 401,429 |
| ||||||||
Average Interest Rate* |
| 6.84 | % |
| 4.21 | % |
| 7.59 | % |
| 7.59 | % |
| — |
|
| — |
|
| — |
|
| — |
| ||||||||
Variable Rate (Euro) | $ | 41,366 |
| $ | 41,366 |
| $ | 41,366 |
|
| — |
|
| — |
|
| — |
|
| — |
| $ | 41,366 |
| ||||||||
Average Interest Rate* |
| 4.03 | % |
| 4.03 | % |
| 4.03 | % |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
| ||||||||
Interest Rate Derivative | ||||||||||||||||||||||||||||||||
Financial Instruments | ||||||||||||||||||||||||||||||||
Related to Debt | ||||||||||||||||||||||||||||||||
Interest Rate Options | ||||||||||||||||||||||||||||||||
Combination Pay fix 8.10%/ Pay fix 6.72% vs. Receive 3 month LIBOR | $ | 75,000 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
| $ | (614 | ) | ||||||||
Collar = Locked fixed payer rate in average 6.75%-7.20% range | $ | 200,000 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
| $ | (1,652 | ) | ||||||||
| * | Assumes no change in short-term interest rates |
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Independent Auditors’ Report
The Stockholders and Board of Directors
Levi Strauss & Co.:
We have audited the accompanying consolidated balance sheet of Levi Strauss & Co. and subsidiaries as of November 24, 2002, and the related consolidated statements of income, stockholders’ deficit and comprehensive income and cash flows for the fiscal year ended November 24, 2002. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit. The November 25, 2001 and November 26, 2000 balance sheets, and the related consolidated statements of income, stockholders’ deficit and comprehensive income and cash flows for the fiscal years ended November 25, 2001 and November 26, 2000 were audited by other auditors who have ceased operations. Those auditors expressed an unqualified opinion on those financial statements in their report dated December 21, 2001 (except with respect to the matters discussed in Note 20, as to which the date is January 29, 2002).
We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the 2002 financial statements referred to above present fairly, in all material respects, the financial position of Levi Strauss & Co. as of November 24, 2002, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.
/s/ KPMG LLP | ||
KPMG LLP | ||
San Francisco, CA
February 5, 2003
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of
Levi Strauss & Co.:
We have audited the accompanying consolidated balance sheets of Levi Strauss & Co. (a Delaware corporation) and subsidiaries as of November 25, 2001 and November 26, 2000, and the related consolidated statements of income, stockholders'stockholders’ deficit and cash flows for each of the three fiscal years in the period ended November 25, 2001. These financial statements are the responsibility of the Company'sCompany’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Levi Strauss & Co. and subsidiaries as of November 25, 2001 and November 26, 2000, and the results of their operations and their cash flows for each of the three fiscal years in the period ended November 25, 2001 in conformity with accounting principles generally accepted in the United States.
Our audit was made for the purpose of forming an opinion on the basic financial statements taken as a whole. Schedule II listed in the index of financial statements (not presented herein) is presented for the purpose of complying with the Securities and Exchange Commission'sCommission’s rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
/s/ Arthur Andersen LLP | ||
ARTHUR ANDERSEN LLP | ||
San Francisco, California
December 21, 2001 (except with respect to the matters discussed in Note 20, as to which the date is January 29, 2002).
43
LEVI STRAUSS & CO. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
NOVEMBER 25, NOVEMBER 26,
2001 2000
------------ ------------
ASSETS
Current Assets:
Cash and cash equivalents ............................................................... $ 102,831 $ 117,058
Trade receivables, net of allowance for doubtful accounts of $26,666 in 2001 and
$29,717 in 2000........................................................................ 621,224 660,128
Inventories:
Raw materials........................................................................ 97,261 120,760
Work-in-process...................................................................... 50,499 84,871
Finished goods....................................................................... 462,417 446,618
----------- -----------
Total inventories............................................................... 610,177 652,249
Deferred tax assets...................................................................... 189,958 250,817
Other current assets..................................................................... 110,252 168,621
----------- -----------
Total current assets............................................................ 1,634,442 1,848,873
Property, plant and equipment, net of accumulated depreciation of $527,647 in 2001 and
$495,986 in 2000........................................................................... 514,711 574,039
Goodwill and other intangibles, net of accumulated amortization of $175,603 in 2001 and
$164,826 in 2000........................................................................... 254,233 264,956
Non-current deferred tax assets............................................................... 484,260 439,692
Other assets.................................................................................. 95,840 78,168
----------- -----------
TOTAL ASSETS.................................................................... $ 2,983,486 $ 3,205,728
=========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities:
Current maturities of long-term debt and short-term borrowings........................... $ 162,944 $ 231,290
Accounts payable......................................................................... 234,199 268,473
Restructuring reserves................................................................... 45,220 71,595
Accrued liabilities...................................................................... 301,620 395,660
Accrued salaries, wages and employee benefits............................................ 212,728 257,021
Accrued taxes............................................................................ 26,475 69,772
----------- -----------
Total current liabilities....................................................... 983,186 1,293,811
Long-term debt, less current maturities....................................................... 1,795,489 1,895,140
Postretirement medical benefits............................................................... 544,476 545,574
Long-term employee related benefits........................................................... 384,751 358,849
Long-term tax liabilities..................................................................... 174,978 166,854
Other long-term liabilities................................................................... 16,402 20,588
Minority interest ............................................................................ 20,147 23,485
----------- -----------
Total liabilities............................................................... 3,919,429 4,304,301
----------- -----------
Stockholders' Deficit:
Common stock--$.01 par value; 270,000,000 shares authorized; 37,278,238 shares
issued and outstanding................................................................. 373 373
Additional paid-in capital............................................................... 88,808 88,808
Accumulated deficit...................................................................... (1,020,860) (1,171,864)
Accumulated other comprehensive loss..................................................... (4,264) (15,890)
----------- -----------
Stockholders' deficit........................................................... (935,943) (1,098,573)
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT..................................... $ 2,983,486 $ 3,205,728
=========== ===========
The accompanying notes are an integral part of these financial statements.
44
LEVI STRAUSS & CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
YEAR ENDED YEAR ENDED YEAR ENDED
NOVEMBER 25, NOVEMBER 26, NOVEMBER 28,
2001 2000 1999
----------- ----------- -----------
Net sales.................................................. $ 4,258,674 $ 4,645,126 $ 5,139,458
Cost of goods sold......................................... 2,461,198 2,690,170 3,180,845
----------- ----------- -----------
Gross profit.......................................... 1,797,476 1,954,956 1,958,613
Marketing, general and administrative expenses............. 1,355,885 1,481,718 1,629,845
Other operating (income)................................... (33,420) (32,380) (24,387)
Excess capacity/restructuring charges (reversals).......... (4,286) (33,144) 497,683
Global Success Sharing Plan (reversal)..................... -- -- (343,873)
----------- ----------- -----------
Operating income...................................... 479,297 538,762 199,345
Interest expense........................................... 230,772 234,098 182,978
Other (income) expense, net................................ 8,836 (39,016) 7,868
----------- ----------- -----------
Income before taxes................................... 239,689 343,680 8,499
Provision for taxes........................................ 88,685 120,288 3,144
----------- ----------- -----------
Net income............................................ $ 151,004 $ 223,392 $ 5,355
=========== =========== ===========
Earnings per share-- basic and diluted..................... $ 4.05 $ 5.99 $ 0.14
=========== =========== ===========
Weighted-average common shares outstanding................. 37,278,238 37,278,238 37,278,238
=========== =========== ===========
The accompanying notes are an integral part of these financial statements.
45
LEVI STRAUSS & CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
(DOLLARS IN THOUSANDS)
ACCUMULATED
ADDITIONAL OTHER
COMMON PAID-IN ACCUMULATED COMPREHENSIVE STOCKHOLDERS'
STOCK CAPITAL DEFICIT INCOME (LOSS) DEFICIT
------ ---------- ----------- ------------- -------------
BALANCE AT NOVEMBER 29, 1998..................... $ 373 $88,812 $(1,400,611) $ (2,321) $(1,313,747)
------ ------- ----------- -------- -----------
Net income....................................... -- -- 5,355 -- 5,355
Other comprehensive income (net of tax).......... -- -- -- 19,830 19,830
------ ------- ----------- -------- -----------
Total comprehensive income....................... -- -- 5,355 19,830 25,185
------ ------- ----------- -------- -----------
BALANCE AT NOVEMBER 28, 1999..................... 373 88,812 (1,395,256) 17,509 (1,288,562)
------ ------- ----------- -------- -----------
Treasury stock................................... -- (4) -- -- (4)
------ ------- ----------- -------- -----------
Net income....................................... -- -- 223,392 -- 223,392
Other comprehensive income (net of tax).......... -- -- -- (33,399) (33,399)
------ ------- ----------- -------- -----------
Total comprehensive income....................... -- -- 223,392 (33,399) 189,993
------ ------- ----------- -------- -----------
BALANCE AT NOVEMBER 26, 2000..................... 373 88,808 (1,171,864) (15,890) (1,098,573)
------ ------- ----------- -------- -----------
Net income....................................... -- -- 151,004 -- 151,004
Other comprehensive income (net of tax).......... -- -- -- 11,626 11,626
------ ------- ----------- -------- -----------
Total comprehensive income....................... -- -- 151,004 11,626 162,630
------ ------- ----------- -------- -----------
BALANCE AT NOVEMBER 25, 2001..................... $ 373 $88,808 $(1,020,860) $ (4,264) $ (935,943)
====== ======= =========== ======== ===========
The accompanying notes are an integral part of these financial statements.
46
LEVI STRAUSS & CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
YEAR ENDED YEAR ENDED YEAR ENDED
NOVEMBER 25, NOVEMBER 26, NOVEMBER 28,
2001 2000 1999
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................................................... $ 151,004 $ 223,392 $ 5,355
Adjustments to reconcile net cash provided by (used for) operating
activities:
Depreciation and amortization........................................... 80,619 90,981 120,102
Gain on dispositions of property, plant and equipment................... (1,017) (24,683) (3,802)
Unrealized foreign exchange gains....................................... (22,995) (5,194) (10,130)
Decrease in trade receivables........................................... 30,541 54,032 57,643
Decrease (increase) in income taxes receivable.......................... -- 70,000 (70,000)
Decrease (increase) in inventories...................................... 41,933 (20,949) 106,979
Decrease (increase) in other current assets............................. 71,416 (17,974) (47,284)
(Increase) decrease in other long-term assets........................... (18,811) (22,436) 18,572
Decrease in net deferred tax assets..................................... 13,952 55,179 29,340
(Decrease) increase in accounts payable and accrued liabilities......... (123,404) 33,073 11,362
(Decrease) increase in restructuring reserves........................... (26,375) (216,686) 43,630
(Decrease) increase in accrued salaries, wages and employee benefits.... (44,316) 70,859 (22,974)
(Decrease) increase in accrued taxes.................................... (43,587) 49,618 (32,640)
Increase (decrease) in long-term employee related benefits.............. 24,749 43,320 (376,204)
Increase (decrease) in other long-term liabilities...................... 3,155 (52,075) 149
Other, net.............................................................. 5,036 (24,531) (3,870)
----------- ---------- -----------
Net cash provided by (used for) operating activities............... 141,900 305,926 (173,772)
----------- ---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment................................... (22,541) (27,955) (61,062)
Proceeds from sale of property, plant and equipment.......................... 5,773 114,048 69,455
(Increase) decrease in gains (losses) on net investment hedges............... (462) 67,978 53,736
Other, net .................................................................. -- 152 228
----------- ---------- -----------
Net cash (used for) provided by investing activities............... (17,230) 154,223 62,357
----------- ---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt..................................... 1,913,872 376,196 1,462,052
Repayments of long-term debt................................................. (2,044,560) (903,371) (1,230,145)
Net (decrease) increase in short-term borrowings............................. (9,202) 118 (7,688)
Other, net .................................................................. -- (5) --
----------- ---------- -----------
Net cash (used for) provided by financing activities............... (139,890) (527,062) 224,219
----------- ---------- -----------
Effect of exchange rate changes on cash...................................... 993 (8,845) (4,553)
----------- ---------- -----------
Net (decrease) increase in cash and cash equivalents......... (14,227) (75,758) 108,251
Beginning cash and cash equivalents.......................................... 117,058 192,816 84,565
----------- ---------- -----------
ENDING CASH AND CASH EQUIVALENTS............................................. $ 102,831 $ 117,058 $ 192,816
=========== ========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest................................................................ $ 182,156 $ 202,355 $ 172,688
Income taxes............................................................ 110,354 56,982 82,675
Restructuring initiatives............................................... 22,089 183,542 416,123
The accompanying notes are an integral part of these financial statements.
47
LEVI STRAUSS & CO. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands, Except Share Data)
November 24, 2002 | November 25, 2001 | |||||||
ASSETS | ||||||||
Current Assets: | ||||||||
Cash and cash equivalents | $ | 96,478 |
| $ | 102,831 |
| ||
Trade receivables, net of allowance for doubtful accounts of $24,857 in 2002 and $26,666 in 2001 |
| 660,516 |
|
| 621,224 |
| ||
Inventories: | ||||||||
Raw materials |
| 98,987 |
|
| 97,261 |
| ||
Work-in-process |
| 74,048 |
|
| 50,499 |
| ||
Finished goods |
| 418,679 |
|
| 462,417 |
| ||
Total inventories |
| 591,714 |
|
| 610,177 |
| ||
Deferred tax assets |
| 221,574 |
|
| 205,294 |
| ||
Other current assets |
| 88,611 |
|
| 94,916 |
| ||
Total current assets |
| 1,658,893 |
|
| 1,634,442 |
| ||
Property, plant and equipment, net of accumulated depreciation of $478,447 in 2002 and $527,647 in 2001 |
| 482,446 |
|
| 514,711 |
| ||
Goodwill and other intangibles, net of accumulated amortization of $187,480 in 2002 and $175,603 in 2001 |
| 243,410 |
|
| 254,233 |
| ||
Non-current deferred tax assets |
| 573,844 |
|
| 484,260 |
| ||
Other assets |
| 58,691 |
|
| 95,840 |
| ||
Total Assets | $ | 3,017,284 |
| $ | 2,983,486 |
| ||
LIABILITIES AND STOCKHOLDERS’ DEFICIT | ||||||||
Current Liabilities: | ||||||||
Current maturities of long-term debt and short-term borrowings | $ | 95,225 |
| $ | 162,944 |
| ||
Accounts payable |
| 233,771 |
|
| 234,199 |
| ||
Restructuring reserves |
| 65,576 |
|
| 45,220 |
| ||
Accrued liabilities |
| 270,446 |
|
| 301,620 |
| ||
Accrued salaries, wages and employee benefits |
| 314,385 |
|
| 212,728 |
| ||
Accrued taxes |
| 105,387 |
|
| 26,475 |
| ||
Total current liabilities |
| 1,084,790 |
|
| 983,186 |
| ||
Long-term debt, less current maturities |
| 1,751,752 |
|
| 1,795,489 |
| ||
Postretirement medical benefits |
| 548,930 |
|
| 544,476 |
| ||
Long-term employee related benefits |
| 527,418 |
|
| 384,751 |
| ||
Long-term tax liabilities |
| 66,879 |
|
| 174,978 |
| ||
Other long-term liabilities |
| 11,558 |
|
| 16,402 |
| ||
Minority interest |
| 21,541 |
|
| 20,147 |
| ||
Total liabilities |
| 4,012,868 |
|
| 3,919,429 |
| ||
Stockholders’ Deficit: | ||||||||
Common stock—$.01 par value; 270,000,000 shares authorized; 37,278,238 shares issued and outstanding |
| 373 |
|
| 373 |
| ||
Additional paid-in capital |
| 88,808 |
|
| 88,808 |
| ||
Accumulated deficit |
| (995,881 | ) |
| (1,020,860 | ) | ||
Accumulated other comprehensive loss |
| (88,884 | ) |
| (4,264 | ) | ||
Stockholders’ deficit |
| (995,584 | ) |
| (935,943 | ) | ||
Total Liabilities and Stockholders’ Deficit | $ | 3,017,284 |
| $ | 2,983,486 |
| ||
The accompanying notes are an integral part of these financial statements.
LEVI STRAUSS & CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Thousands, Except Share Data)
Year Ended November 24, 2002 | Year Ended November 25, 2001 | Year Ended November 26, 2000 | ||||||||||
Net sales | $ | 4,136,590 |
| $ | 4,258,674 |
| $ | 4,645,126 |
| |||
Cost of goods sold |
| 2,451,785 |
|
| 2,461,198 |
|
| 2,690,170 |
| |||
Gross profit |
| 1,684,805 |
|
| 1,797,476 |
|
| 1,954,956 |
| |||
Marketing, general and administrative expenses |
| 1,332,798 |
|
| 1,355,885 |
|
| 1,481,718 |
| |||
Other operating (income) |
| (34,450 | ) |
| (33,420 | ) |
| (32,380 | ) | |||
Restructuring charges, net of reversals |
| 124,595 |
|
| (4,286 | ) |
| (33,144 | ) | |||
Operating income |
| 261,862 |
|
| 479,297 |
|
| 538,762 |
| |||
Interest expense |
| 186,493 |
|
| 230,772 |
|
| 234,098 |
| |||
Other (income) expense, net |
| 25,411 |
|
| 8,836 |
|
| (39,016 | ) | |||
Income before taxes |
| 49,958 |
|
| 239,689 |
|
| 343,680 |
| |||
Income tax expense |
| 24,979 |
|
| 88,685 |
|
| 120,288 |
| |||
Net income | $ | 24,979 |
| $ | 151,004 |
| $ | 223,392 |
| |||
Earnings per share—basic and diluted | $ | 0.67 |
| $ | 4.05 |
| $ | 5.99 |
| |||
Weighted-average common shares outstanding |
| 37,278,238 |
|
| 37,278,238 |
|
| 37,278,238 |
| |||
The accompanying notes are an integral part of these financial statements.
LEVI STRAUSS & CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT
(Dollars in Thousands)
Common Stock | Additional Paid-In Capital | Accumulated Deficit | Accumulated Other Comprehensive Income (Loss) | Stockholders’ Deficit | |||||||||||||||
Balance at November 28, 1999 | $ | 373 | $ | 88,812 |
| $ | (1,395,256 | ) | $ | 17,509 |
| $ | (1,288,562 | ) | |||||
Treasury stock |
| — |
| (4 | ) |
| — |
|
| — |
|
| (4 | ) | |||||
Net income |
| — |
| — |
|
| 223,392 |
|
| — |
|
| 223,392 |
| |||||
Other comprehensive loss (net of tax) |
| — |
| — |
|
| — |
|
| (33,399 | ) |
| (33,399 | ) | |||||
Total comprehensive income (loss) |
| — |
| — |
|
| 223,392 |
|
| (33,399 | ) |
| 189,993 |
| |||||
Balance at November 26, 2000 |
| 373 |
| 88,808 |
|
| (1,171,864 | ) |
| (15,890 | ) |
| (1,098,573 | ) | |||||
Net income |
| — |
| — |
|
| 151,004 |
|
| — |
|
| 151,004 |
| |||||
Other comprehensive income (net of tax) |
| — |
| — |
|
| — |
|
| 11,626 |
|
| 11,626 |
| |||||
Total comprehensive income |
| — |
| — |
|
| 151,004 |
|
| 11,626 |
|
| 162,630 |
| |||||
Balance at November 25, 2001 |
| 373 |
| 88,808 |
|
| (1,020,860 | ) |
| (4,264 | ) |
| (935,943 | ) | |||||
Net income |
| — |
| — |
|
| 24,979 |
|
| — |
|
| 24,979 |
| |||||
Other comprehensive loss (net of tax) |
| — |
| — |
|
| — |
|
| (84,620 | ) |
| (84,620 | ) | |||||
Total comprehensive income (loss) |
| — |
| — |
|
| 24,979 |
|
| (84,620 | ) |
| (59,641 | ) | |||||
Balance at November 24, 2002 | $ | 373 | $ | 88,808 |
| $ | (995,881 | ) | $ | (88,884 | ) | $ | (995,584 | ) | |||||
The accompanying notes are an integral part of these financial statements.
LEVI STRAUSS & CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
Year Ended November 24, 2002 | Year Ended November 25, 2001 | Year Ended November 26, 2000 | ||||||||||
Cash Flows from Operating Activities: | ||||||||||||
Net income | $ | 24,979 |
| $ | 151,004 |
| $ | 223,392 |
| |||
Adjustments to reconcile net cash provided by (used for) operating activities: | ||||||||||||
Depreciation and amortization |
| 71,071 |
|
| 80,619 |
|
| 90,981 |
| |||
Asset write-offs associated with 2002 restructuring charge |
| 25,708 |
|
| — |
|
| — |
| |||
Gain on dispositions of property, plant and equipment |
| (1,600 | ) |
| (1,017 | ) |
| (24,683 | ) | |||
Unrealized foreign exchange (gains) losses |
| 13,579 |
|
| (22,995 | ) |
| (5,194 | ) | |||
Decrease (increase) in trade receivables |
| (2,554 | ) |
| 30,541 |
|
| 54,032 |
| |||
Decrease (increase) in income taxes receivable |
| (522 | ) |
| — |
|
| 70,000 |
| |||
Decrease (increase) in inventories |
| 41,362 |
|
| 41,933 |
|
| (20,949 | ) | |||
Decrease (increase) in other current assets |
| 18,889 |
|
| 69,985 |
|
| (17,974 | ) | |||
(Increase) decrease in other long-term assets |
| 16,581 |
|
| (18,811 | ) |
| (22,436 | ) | |||
(Increase) decrease in net deferred tax assets |
| (102,305 | ) |
| 7,834 |
|
| 55,179 |
| |||
(Decrease) increase in accounts payable and accrued liabilities |
| (90,188 | ) |
| (123,404 | ) |
| 33,073 |
| |||
(Decrease) increase in restructuring reserves |
| 20,357 |
|
| (26,375 | ) |
| (216,686 | ) | |||
(Decrease) increase in accrued salaries, wages and employee benefits |
| 95,250 |
|
| (44,316 | ) |
| 70,859 |
| |||
(Decrease) increase in accrued taxes |
| 86,135 |
|
| (36,038 | ) |
| 49,618 |
| |||
Increase in long-term employee related benefits |
| 69,151 |
|
| 24,749 |
|
| 43,320 |
| |||
Increase (decrease) in other long-term liabilities |
| (98,304 | ) |
| 3,155 |
|
| (52,075 | ) | |||
Other, net |
| 4,159 |
|
| 5,036 |
|
| (24,531 | ) | |||
Net cash provided by operating activities |
| 191,748 |
|
| 141,900 |
|
| 305,926 |
| |||
Cash Flows from Investing Activities: | ||||||||||||
Purchases of property, plant and equipment |
| (59,088 | ) |
| (22,541 | ) |
| (27,955 | ) | |||
Proceeds from sale of property, plant and equipment |
| 13,286 |
|
| 5,773 |
|
| 114,048 |
| |||
Cash inflow (outflow) from net investment hedges |
| (13,551 | ) |
| (462 | ) |
| 67,978 |
| |||
Other, net |
| — |
|
| — |
|
| 152 |
| |||
Net cash (used for) provided by investing activities |
| (59,353 | ) |
| (17,230 | ) |
| 154,223 |
| |||
Cash Flows from Financing Activities: | ||||||||||||
Proceeds from issuance of long-term debt |
| 653,935 |
|
| 1,913,872 |
|
| 376,196 |
| |||
Repayments of long-term debt |
| (795,843 | ) |
| (2,044,560 | ) |
| (903,371 | ) | |||
Net (decrease) increase in short-term borrowings |
| 1,592 |
|
| (9,202 | ) |
| 118 |
| |||
Other, net |
| — |
|
| — |
|
| (5 | ) | |||
Net cash used for financing activities |
| (140,316 | ) |
| (139,890 | ) |
| (527,062 | ) | |||
Effect of exchange rate changes on cash |
| 1,568 |
|
| 993 |
|
| (8,845 | ) | |||
Net decrease in cash and cash equivalents |
| (6,353 | ) |
| (14,227 | ) |
| (75,758 | ) | |||
Beginning cash and cash equivalents |
| 102,831 |
|
| 117,058 |
|
| 192,816 |
| |||
Ending Cash and Cash Equivalents | $ | 96,478 |
| $ | 102,83 |
| $ | 117,058 |
| |||
Supplemental Disclosures of Cash Flow Information: | ||||||||||||
Cash paid during the year for: | ||||||||||||
Interest | $ | 157,637 |
| $ | 182,156 |
| $ | 202,355 |
| |||
Income taxes |
| 103,770 |
|
| 106,923 |
|
| 65,892 |
| |||
Restructuring initiatives |
| 78,531 |
|
| 22,089 |
|
| 183,542 |
| |||
The accompanying notes are an integral part of these financial statements.
LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
Note 1: SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
Significant Accounting Policies
Basis of Presentation and Principles of Consolidation
The consolidated financial statements of Levi Strauss & Co. and its wholly-owned and majority-owned foreign and domestic subsidiaries ("(“LS&CO."” or "Company"“Company”) are prepared in conformity with generally accepted accounting principles in the United States ("(“U.S."”). All significant intercompany balances and transactions have been eliminated. LS&CO. is privately held primarily by descendants and relatives of its founder, Levi Strauss.
The Company'sCompany’s fiscal year consists of 52 or 53 weeks, ending on the last Sunday of November in each year. The 2002, 2001 2000 and 19992000 fiscal years consisted of 52 weeks and ended November 24, 2002, November 25, 2001 and November 26, 2000, and November 28,
1999, respectively. The fiscal year end for certain foreign subsidiaries is November 30 due to certain local statutory requirements. All references to years relate to fiscal years rather than calendar years.
Certain prior year amounts have been reclassified to conform to the 2001current presentation.
ESTIMATES
The preparation
Nature of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and the
related notes to the financial statements. Changes in such estimates, based on
more accurate future information, may affect amounts reported in future periods.
NATURE OF OPERATIONS
Operations
The Company is one of the world'sworld’s leading branded apparel companies with operations in more than 45 countries and sales in more than 100 countries. The Company designs and markets jeans and jeans-related pants, casual and dress pants, tops, jackets and related accessories, for men, women and children, under the Levi's(R)Levi’s® and Dockers(R)Dockers® brands. The Company markets its Levi's(R)Levi’s® and Dockers(R)Dockers® brand products in three geographic regions: the Americas, Europe and Asia Pacific. As of November 24, 2002, the Company employed approximately 12,400 employees.
In October 2002, the Company announced that it will be introducing a new casual clothing brand, the Levi Strauss Signature™ brand. The stockholders'Company created the brand for value-conscious consumers who shop in mass channel retail stores. The Levi Strauss Signature™ brand will initially feature a range of denim and non-denim pants and shirts as well as denim jackets. The Company anticipates that the products will be available initially at Wal-Mart locations across the United States beginning in July 2003.
The stockholders’ deficit resulted from a 1996 transaction in which the Company'sCompany’s stockholders created new long-term governance arrangements, including a voting trust and stockholdersstockholders’ agreement. As a result, shares of stock of a former parent company, Levi Strauss Associates Inc., including shares held under several employee benefit and compensation plans, were converted into the right to receive cash. The funding for the cash payments in this transaction was provided in part by cash on hand and in part from proceeds of approximately $3.3 billion of borrowings under bank credit facilities. The Company'sCompany’s ability to satisfy its obligations and to reduce its total debt depends on the Company'sCompany’s future operating performance and on economic, financial, competitive and other factors, many of which are beyond the Company'sCompany’s control.
The Company relies on a number of suppliers for its manufacturing processes, particularlyprocesses. The Company’s largest supplier, Cone Mills Corporation, which has been and remains the sole supplier of the denim used worldwide for 501(R) jeans throughits 501® jeans. On May 13, 2002, the Company's only
long-termCompany amended the exclusivity and requirements features of its supply contract. agreement with Cone Mills. The amendment provides that, after March 30, 2003, the Company may purchase these denims from other suppliers and Cone Mills may sell these denims to other customers. The amendment also allows the Company to purchase these denims for its European business from non-U.S. sources prior to March 30, 2003 if the European Union implements material tariffs against U.S. produced denim. The amendment does not change any other provisions of the supply agreement.
In 2002, 2001 2000 and 1999,2000, Cone Mills Corporation supplied approximately 25%22%, 26%25% and 22%26%, respectively, of the total volume of fabrics purchased worldwide by the Company. The loss of Cone Mills Corporation or other principal suppliers could have an adverse effect on the Company'sCompany’s results of operations.
For 2002, 2001 2000 and 1999,2000, the Company had one customer, J.C. Penney Company, Inc., that represented approximately 13%12%, 12%13% and 11%12%, respectively, of net sales. No other customer accounted for more than 10% of net sales. A group of key U.S. customers accounts for a significant portion of the Company'sCompany’s total net sales. Net sales to the Company'sCompany’s ten largest customers, all of which are located in the U.S., totaled approximately 47%45%, 48%47% and 46%48% of total net sales during fiscal years2002, 2001 and 2000, respectively.
Estimates and 1999, respectively.
48
LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
MostCritical Accounting Policies
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the Company's production and distribution employeesamounts reported in the U.S. are
covered by various collective bargaining agreements. Outsidefinancial statements and the U.S., mostrelated notes to the financial statements. Changes in such estimates, based on more accurate future information, may affect amounts reported in future periods.
During 2002, the Company identified the critical accounting policies upon which its financial position and results of the Company's productionoperations depend as those relating to revenue recognition, inventory valuation, restructuring reserves, income tax assets and distribution employees are covered by either
industry-sponsored and/or state-sponsored collective bargaining mechanisms.liabilities, and derivatives and foreign exchange management activities. The Company considerssummarizes its relationscritical accounting policies below.
| • | Revenue recognition. The Company recognizes revenue when the goods are shipped and title passes to the customer provided that: there are no uncertainties regarding customer acceptance; persuasive evidence of an arrangement exists; the sales price is fixed or determinable; and collectibility is probable. Revenue is recognized net of an allowance for estimated returns, discounts and retailer promotions and incentives when the sale is recorded. |
| The Company recognizes allowances for estimated returns, discounts and retailer promotions and incentives when the sale is recorded. Allowances principally relate to the Company’s U.S. operations and are primarily comprised of volume-based incentives and other returns and discounts. For volume-based retailer incentive programs, reserves for volume allowances are calculated based on a fixed formula applied to sales volumes. The Company estimates non-volume-based allowances using historical customer claim rates, adjusted as necessary for special customer and product-specific circumstances. Actual allowances may differ from estimates due primarily to changes in sales volume based on retailer or consumer demand. Actual allowances have not materially differed from estimates. |
| The Company entered into cooperative advertising programs with certain customers. The majority of cooperative advertising programs were discontinued in the first quarter of fiscal 2002. The Company recorded payments to customers under cooperative advertising programs as marketing, general and administrative expenses because an identifiable benefit was received in return for the consideration and the Company could reasonably estimate the fair value of the advertising received. Cooperative advertising expense for 2002, 2001 and 2000 was $3.9 million, $21.5 million and $25.0 million, respectively. |
| • | Inventory valuation. The Company values inventories at the lower of cost or market value. Inventory costs are based on standard costs, which are updated periodically and supported by actual cost data. The Company includes materials, labor and manufacturing overhead in the cost of inventories. In determining inventory market values, substantial consideration is given to the expected product selling price based on historical recovery rates. In determining its expected selling prices, the Company considers various factors including estimated quantities of slow-moving inventory by reviewing on-hand quantities, outstanding purchase obligations and forecasted sales. The Company then estimates expected selling prices based on its historical recovery rates for sale of slow-moving inventory through various channels and other factors, such as market conditions and current consumer preferences. Estimates may differ from actual results due to the quantity and quality and mix of products in inventory, consumer and retailer preferences and economic conditions. |
| • | Restructuring reserves. Upon approval of a restructuring plan by management with the appropriate level of authority, the Company records restructuring reserves for certain costs associated with plant closures and business reorganization activities. Such costs are recorded as a current liability and primarily include employee severance, certain employee termination benefits, including out-placement services and career counseling, and contractual obligations. The principal components of the reserves relate to employee severance and termination benefits, which the Company estimates based on agreements with the relevant union representatives or plans adopted by the Company that are applicable to employees not affiliated with unions. These costs are not associated with nor do they benefit continuing activities. Inherent in the estimation of these costs are assessments related to the most likely expected outcome of the significant actions to accomplish the restructuring. Changing business conditions may affect the assumptions related to the timing and extent of facility closure activities. The Company reviews the status of restructuring activities on a quarterly basis and, if appropriate, records changes based on updated estimates.(See “New Accounting Standards” below on the issuance of SFAS 146,“Accounting for Costs Associated with Exit or Disposal Activities.”) |
| • | Income tax assets and liabilities. In establishing its deferred income tax assets and liabilities, the Company makes judgments and interpretations based on the enacted tax laws and published tax guidance that are applicable to its operations. The Company records deferred tax assets and liabilities and evaluates the need for valuation allowances to reduce the deferred tax assets to realizable amounts. The likelihood of a material change in the Company’s expected realization of these assets is dependent on future taxable income, its ability to use foreign tax credit carryforwards and carrybacks, final U.S. and foreign tax settlements, and the effectiveness of its tax planning strategies in the various relevant jurisdictions. The Company is also subject to examination of its income tax returns for multiple years by the Internal Revenue Service and other tax authorities. The Company periodically assesses the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of its provision for income taxes. Changes to the Company’s income tax provision or in the valuation of the deferred tax assets and liabilities may affect its annual effective income tax rate. |
| • | Derivatives, foreign exchange, and interest rate management activities. The Company recognizes all derivatives as assets and liabilities at their fair values. The fair values are determined using widely accepted valuation models and reflect assumptions about currency fluctuations based on current market conditions. The fair values of derivative instruments used to manage currency exposures are sensitive to changes in market conditions and to changes in the timing and amounts of forecasted exposures. The Company actively manages foreign currency exposures on an economic basis, using forecasts to develop exposure positions to maximize the U.S. dollar value over the long-term. Not all exposure management activities and foreign currency derivative instruments will qualify for hedge accounting treatment. Changes in the fair values of those derivative instruments that do not qualify for hedge accounting are recorded in “Other (income) expense” in the consolidated statement of operations. As a result, net income may be subject to volatility. The derivative instruments that do qualify for hedge accounting currently hedge the Company’s net investment position in its subsidiaries. For these instruments, the Company documents the hedge designation, by identifying the hedging instrument, the nature of the risk being hedged and the approach for measuring hedge effectiveness. Changes in fair values of derivative instruments that do qualify for hedge accounting are recorded in the “Accumulated other comprehensive income (loss)” section of Stockholders’ Deficit. |
| The Company is exposed to interest rate risk. It is the Company’s policy and practice to use derivative instruments, primarily interest rate swaps and options, to manage and reduce interest rate exposures using a mix of fixed and variable rate debt. For transactions that do not qualify for hedge accounting or in which management has elected not to designate transactions for hedge accounting, changes in fair value are classified into earnings. |
Other Significant Accounting Policies
Cost of Goods Sold
Cost of goods sold is primarily comprised of cost of materials, labor and manufacturing overhead. Cost of goods sold also includes the cost of inbound freight, internal transfers, and receiving and inspection at manufacturing facilities.
Marketing, General and Administrative Expenses
Marketing, general and administrative expenses are primarily comprised of costs relating to advertising, marketing, selling, distribution, information resources and other corporate functions. Marketing, general and administrative expenses also include distribution costs, such as costs related to receiving and inspection at distribution centers, warehousing, shipping, handling and certain other activities associated with its employeesthe Company’s distribution network. These expenses totaled $183.7 million, $182.0 million and $183.1 million for 2002, 2001 and 2000, respectively. Shipping and handling charges billed to be good and has not
recently experienced any material job actions or labor shortages. As of
November 25, 2001, the Company employed approximately 16,700 employees.
Approximately 65% of the Company's employeesCompany’s customers are covered by collective
bargaining agreements, of which about 33% will expire within one year. The
Company is now discussing with its unions in the U.S. potential closures of
manufacturing facilities in the U.S. and is consulting with union and employee
representatives regarding a proposal to close two plants in Scotland. (SEE NOTE
20 TO THE CONSOLIDATED FINANCIAL STATEMENTS.)
REVENUE RECOGNITION
Revenue from the sale of products is recognized upon shipment of products
to customers. Allowances for estimated returns, discounts and retailer
promotions and incentives are recognized when sales are recorded and are based
on various market data, historical trends and information from customers. Actual
returns, discounts and retailer promotions and incentives have not been
materially different from estimates.
ADVERTISING COSTS
insignificant.
Advertising Costs
In accordance with Statement of Position ("SOP"(“SOP”) 93-7, "Reporting“Reporting on Advertising Costs,"” the Company expenses advertising costs as incurred. Advertising expense is recorded in marketing, general and administrative expenses. For fiscal years2002, 2001 2000 and 19992000 total advertising expense was $307.1 million, $357.3 million and $402.7 million, respectively.
Other Operating Income
Other operating income represents royalties earned for the use of the Company’s trademarks in connection with the manufacturing, advertising, distribution and $490.2sale of products by the licensees. The Company enters into licensing agreements with the majority of the agreements having a term of at least one year. The amounts receivable under these licensing agreements are royalties based on sale of products by the licensees. Such amounts are earned and recognized as products are sold by licensees based on licensing rates as set forth in the licensing agreements. The earnings process is complete when the licensees sell the products.
Royalty income for the years ended November 24, 2002, November 25, 2001 and November 26, 2000 was $34.5 million, $33.4 million and $32.4 million, respectively.
OTHER OPERATING INCOME
Royalties from sales
Other (Income) Expense, net
Significant components of merchandise by licenseesother (income) expense, net are summarized below:
Year Ended November 24, 2002 | Year Ended November 25, 2001 | Year Ended November 26, 2000 | ||||||||||
Currency transaction (gains) losses | $ | 45,029 |
| $ | 11,985 |
| $ | (960 | ) | |||
Interest income |
| (7,911 | ) |
| (3,555 | ) |
| (12,311 | ) | |||
Gains on disposal of assets |
| (1,600 | ) |
| (1,017 | ) |
| (24,683 | ) | |||
Other |
| (10,107 | ) |
| 1,423 |
|
| (1,062 | ) | |||
Total | $ | 25,411 |
| $ | 8,836 |
| $ | (39,016 | ) | |||
Currency transaction (gains) losses include gains and losses of our trademarks are
recognized when earnedforeign exchange management contracts of $57.4 million and are recorded$16.2 million in other operating income.
MINORITY INTEREST
2002 and 2001, respectively. The remaining amounts primarily reflect (gains) losses for remeasurement of foreign currency transactions. The Company adopted SFAS 133 effective the first day of fiscal year 2001.
Minority Interest
Minority interest is included in other income/“Other (income) expense, net,” and includes a 16.4% minority interest of Levi Strauss Japan K.K., the Company'sCompany’s Japanese affiliate, and a 49.0% minority interest of Levi Strauss Istanbul Konfeksigon, the Company'sCompany’s Turkish affiliate.
EARNINGS PER SHARE
Earnings Per Share
Basic earnings per share ("EPS"(“EPS”) is computed by dividing net income by the weighted-average number of common shares outstanding for the period and excludes the dilutive effect of common shares that could potentially be issued. Diluted EPS is computed by dividing net income by the weighted-average number of common shares outstanding plus all potential dilutive common shares. The Company does not have any potentially dilutive shares. Therefore, basic and diluted EPS are the same. The weighted-average number of common shares outstanding is 37,278,238 for all periods presented.
CASH AND CASH EQUIVALENTS
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. Cash equivalents are stated at amortized cost, which approximates fair market value.
INVENTORY VALUATION
Inventories are valued at the lower of average cost or market value
Property, Plant and include materials, labor and manufacturing overhead. In determining inventory
values, the Company gives substantial consideration to the expected product
selling price.
49
LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
PROPERTY, PLANT AND EQUIPMENT
Equipment
Property, plant and equipment are carried at cost, less accumulated depreciation. The cost is depreciated on a straight-line basis over the estimated useful lives of the related assets. Buildings are depreciated over 20 to 40 years, and leasehold improvements are depreciated over the lesser of the life of the improvement or the initial lease term. Machinery and equipment includes furniture and fixtures, automobiles and trucks, and computers, and are depreciated over a range from three to 20 years. The Company adopted SOP 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use," in the first quarter of fiscal
year 2000. SOP 98-1 requires certain costs for computer software developed or
obtained for internal use to be capitalized. Capitalized internal-use software is carried at cost less accumulated amortization and is amortized over three years on a straight-line basis.
GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill and Other Intangible Assets
Goodwill and other intangibles are carried at cost, less accumulated amortization. Goodwill resulted primarily from a 1985 acquisition of LS&CO. by Levi Strauss Associates Inc., a former parent company that was subsequently merged into the Company in 1996. Goodwill is being amortized on a straight-line basis over 40 years through the year 2025. Other intangibles consist primarily of tradenames,trademarks, which were valued as a result of the 1985 acquisition. TradenamesTrademarks and other intangibles are being amortized over the estimated useful lives of the related assets, which range from six to 40 years. (SEE "NEW ACCOUNTING
STANDARDS" BELOW ON THE ISSUANCE OF STATEMENT OF FINANCIAL ACCOUNTING STANDARDS
NO. ("SFAS"(See “New Accounting Standards” below on the issuance of Statement of Financial Accounting Standards No.(“SFAS”) 142, "GOODWILL AND OTHER INTANGIBLE ASSETS" FOR CHANGES IN FISCAL
YEAR 2003.“Goodwill and Other Intangible Assets.”)
LONG-LIVED ASSETS
Long-Lived Assets
In accordance with SFAS 121, "Accounting“Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to beBe Disposed of,"Of,” the Company reviews long-lived assets, including goodwill and other intangibles, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If the carrying amount of an asset exceeds the expected future undiscounted cash flows, the Company measures and records an impairment loss for the excess of the carrying value of the asset over its fair value. (SEE "NEW ACCOUNTING STANDARDS" BELOW ON THE ISSUANCE OF(See “New Accounting Standards” below on the issuance of SFAS 144, "ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS" FOR CHANGES IN
FISCAL YEAR 2003.)
INCOME TAXES
Deferred income tax assets and liabilities are recognized“Accounting for the expected
future tax consequences attributable to temporary differences between the
financial statement carrying amountsImpairment or Disposal of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using the enacted tax rates expected to apply to taxable incomeLong-Lived Assets” for implementation in the years in
which those temporary differences are expected to reverse.
TRANSLATION ADJUSTMENT
2003.)
Translation Adjustment
The functional currency for most of the Company'sCompany’s foreign operations is the applicable local currency. For those operations, assets and liabilities are translated into U.S. dollars using period-end exchange rates and income and expense accounts are translated at average monthly exchange rates. Net changes resulting from such translations are recorded as a separate component of accumulated“Accumulated other comprehensive income (loss)” in the consolidated financial statements.
The U.S. dollar is the functional currency for foreign operations in countries with highly inflationary economies and certain other subsidiaries. The translation adjustments for these entities are included in other income/“Other (income) expense, net.
SELF-INSURANCE
”
Self-Insurance
The Company is partially self-insured for workers'workers’ compensation and certain employee health benefits. Accruals for losses are made based on the Company'sCompany’s claims experience and actuarial assumptions followed in the insurance industry. Actual losses could differ from accrued amounts.
50
LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Workers’ Compensation- (continued)
SECURITIZATIONS
The Company carries insurance deductibles of $200,000 per occurrence for workers’ compensation. Insurance has been purchased for significant claims in excess of $200,000 per occurrence up to statutory limits. Aggregate insurance in the amount of $5.0 million was purchased for claims occurring during the period December 1, 2000 through November 30, 2001, in excess of $20.0 million in the aggregate. Aggregate insurance in the amount of $5.0 million is under negotiation for claims occuring during the period December 1, 2001 through November 30, 2002, in excess of $25.0 million in the aggregate.
Health Benefits - The Company provides medical coverage to substantially all eligible active and retired employees and their dependents under a fully self-insured arrangement. There is stop-loss coverage for active salaried employees (as well as those salaried retirees who retired after June 1, 2001) who have a $2.0 million lifetime limit on their medical coverage. This stop-loss coverage provides payment on the excess of any individual claim incident over $500,000 in any given year.
Securitizations
The Company accounts for securitization of receivables in accordance with SFAS 140, "Accounting“Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." (SEE "NEW ACCOUNTING STANDARDS" BELOW ON THE
ISSUANCE OF SFAS 140, "ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL
ASSETS AND EXTINGUISHMENTS OF LIABILITIES.")
FOREIGN EXCHANGE MANAGEMENT
The Company adopted SFAS 133, "Accounting for Derivative Instruments and
Hedging Activities," on the first day of fiscal year 2001 (see "New”
New Accounting Standards" below). SFAS 133 requires all derivatives to be recognized as assets
or liabilities at fair value. The Company manages foreign currency exposures
primarily to maximize the U.S. dollar value over the long term. The Company
attempts to take a long-term view of managing exposures on an economic basis,
using forecasts to develop exposure positions and engaging in active management
of those exposures with the objective of protecting future cash flows and
mitigating risks. As a result, not all exposure management activities and
foreign currency derivative instruments will qualify for hedge accounting
treatment. For derivative instruments not qualifying for hedge accounting,
changes in fair value are classified into earnings. The Company uses a variety
of derivative instruments, including forward, swap and option contracts, to
protect against foreign currency exposures related to sourcing, net investment
positions, royalties and cash management. The Company holds derivative positions
only in currencies to which it has exposure. The Company has established a
policy for a maximum allowable level of losses that may occur as a result of its
currency exposure management activities. The maximum level of loss is based on a
percentage of the total forecasted currency exposure being managed.
INTEREST RATE MANAGEMENT
The Company is exposed to interest rate risk. It is the Company's policy
and practice to use derivative instruments, primarily interest rate swaps and
options, to manage and reduce interest rate exposures using a mix of fixed and
variable rate debt. For transactions that do not qualify for hedge accounting or
in which management has elected not to designate transactions for hedge
accounting, changes in fair value are classified into earnings.
NEW ACCOUNTING STANDARDS
The Company adopted SFAS 133, "Accounting for Derivative Instruments and
Hedging Activities," on the first day of fiscal year 2001. SFAS 133 establishes
accounting and reporting standards for derivative instruments including certain
derivative instruments embedded in other contracts, and for hedging activities.
In summary, SFAS 133 requires all derivatives to be recognized as assets or
liabilities at fair value. Fair value adjustments are made either through
earnings or equity, depending upon the exposure being hedged and the
effectiveness of the hedge. Due to the adoption of SFAS 133, the Company
reported a net transition gain in other income/expense for fiscal year 2001 of
$87 thousand. This transition amount was not recorded as a separate line item as
a change in accounting principle, net of tax, due to the minimal impact on the
Company's results of operations. In addition, the Company recorded a transition
amount of $0.7 million (or $0.4 million net of related income taxes) that
reduced other comprehensive income. (SEE NOTE 10 TO THE CONSOLIDATED FINANCIAL
STATEMENTS.)
The Company adopted SFAS 140, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities," which replaces SFAS 125,
"Accounting for Transfers and Services of Financial Assets and Extinguishments
of Liabilities," in fiscal year 2001. SFAS 140 revises the methods for
accounting for securitizations and other transfers of financial assets and
collateral as outlined in SFAS 125, and requires certain additional disclosures.
The adoption of SFAS 140 had no financial impact on the Company. (SEE NOTE 7 TO
THE CONSOLIDATED FINANCIAL STATEMENTS.)
Standards
The Financial Accounting Standards Board ("FASB"(“FASB”) issued SFAS 142, "Goodwill“Goodwill and Other Intangible Assets,"” dated June 2001. SFAS 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized but instead be reviewed annually for impairment using a fair-value based approach. Intangible assets that have a finite life will continue to be amortized over their respective estimated useful lives. The Company will adopt the provisions of SFAS 142 during the first quarter of 2003. Goodwill and trademarks have indefinite lives and will no longer be amortized starting November 25, 2002 but instead will be reviewed periodically for impairment. Amortization expense for goodwill and trademarks for 2002 was $8.8 million and $1.9 million, respectively. The Company believes that the majority of the amortization in prior periods relates to assets which would not be subject to amortization under SFAS 142.
The FASB issued SFAS 143, “Accounting for Asset Retirement Obligations,” dated June 2001. SFAS 143 changes the way companies recognize and measure retirement obligations that are legal obligations and result from the acquisition, construction, development, or normal operation of a long-lived asset. The Company will adopt the provisions of SFAS 143 on the first day of fiscal year 2003. Amortization
expense for fiscal year 2001 was $10.7 million. The Company is currently
evaluatingdoes not believe that the impact adoption mayof SFAS 143 will have a material impact on its financial position andcondition or results of operations.
51
LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
The FASB issued SFAS 144, "Accounting“Accounting for the Impairment or Disposal of Long-Lived Assets,"” dated August 2001. This statement supercedes SFAS 121, "Accounting“Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,"” and the accounting and reporting provisions of APBAccounting Principles Board (“APB”) Opinion No. 30, "Reporting“Reporting Results of Operations - ReportingOperations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions."” SFAS 144 requires that the same accounting model be used for long-lived assets to be disposed of by sale, whether previously held and used or newly acquired, and it broadens the presentation of discontinued operations to include more disposal transactions. The Company will adopt the provisions of SFAS 144 on the first day of fiscal year 2003 and is currently
evaluating2003. The Company does not believe that the impactadoption of SFAS 144 maywill have a material impact on its financial position andcondition or results of operations.
The FASB issued SFAS 145, “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections,” dated April 2002. SFAS 145 states that gains and losses from extinguishment of debt that do not meet the criteria for classification as extraordinary items in APB Opinion No. 30, “Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions,” should not be classified as extraordinary items. Accordingly, SFAS 145 rescinds SFAS 4 “Reporting Gains and Losses from Extinguishment of Debt,” and SFAS 64, “Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements.” SFAS 145 is effective for the Company on the first day of fiscal year 2003. The Company does not believe SFAS 145 will have a material impact on its financial condition or results of operations, except that certain reclassifications may occur on the statement of income.
The FASB issued SFAS 146, “Accounting for Costs Associated with Exit or Disposal Activities,” dated June 2002. SFAS 146 addresses financial accounting and reporting for costs associated with exit or disposal activities. In summary, SFAS 146 requires that the liability and cost shall be recognized and measured initially at its fair value in the period in which the liability is incurred, except for one-time termination benefits that meet certain requirements. SFAS 146 is effective prospectively for exit or disposal activities initiated after December 31, 2002. The Company does not believe that the adoption of SFAS 146 will have a material impact on its financial condition or results of operations.
Note 2: Accumulated Other Comprehensive Income (Loss)
Transition Adjustments | ||||||||||||||||||||||||||||
Additional Minimum Pension Liability | Cash Flow Hedges | Net Investment Hedges | Cash Flow Hedges | Net Investment Hedges | Translation Adjustments | Totals | ||||||||||||||||||||||
(Dollars in Thousands) | ||||||||||||||||||||||||||||
Accumulated other comprehensive income (loss) at November 28, 1999 | $ | (778 | ) | $ | — |
| $ | — |
| $ | — |
| $ | 2,681 |
| $ | 15,606 |
| $ | 17,509 |
| |||||||
Gross changes |
| 1,235 |
|
| — |
|
| — |
|
| — |
|
| 57,341 |
|
| (70,302 | ) |
| (11,726 | ) | |||||||
Tax |
| (457 | ) |
| — |
|
| — |
|
| — |
|
| (21,216 | ) |
| — |
|
| (21,673 | ) | |||||||
Other comprehensive income (loss), net of tax |
| 778 |
|
| — |
|
| — |
|
| — |
|
| 36,125 |
|
| (70,302 | ) |
| (33,399 | ) | |||||||
Accumulated other comprehensive income (loss) at November 26, 2000 |
| — |
|
| — |
|
| — |
|
| — |
|
| 38,806 |
|
| (54,696 | ) |
| (15,890 | ) | |||||||
Gross changes |
| — |
|
| (828 | ) |
| 120 |
|
| 4,844 |
|
| 5,029 |
|
| 8,357 |
|
| 17,522 |
| |||||||
Tax |
| — |
|
| 306 |
|
| (44 | ) |
| (1,792 | ) |
| (2,408 | ) |
| — |
|
| (3,938 | ) | |||||||
Subtotal |
| — |
|
| (522 | ) |
| 76 |
|
| 3,052 |
|
| 2,621 |
|
| 8,357 |
|
| 13,584 |
| |||||||
Reclassification of cash flow hedges to other income/expense (net of tax of $1,151) |
| — |
|
| 522 |
|
| — |
|
| (2,480 | ) |
| — |
|
| — |
|
| (1,958 | ) | |||||||
Other comprehensive income, net of tax |
| — |
|
| — |
|
| 76 |
|
| 572 |
|
| 2,621 |
|
| 8,357 |
|
| 11,626 |
| |||||||
Accumulated other comprehensive income (loss) at November 25, 2001 |
| — |
|
| — |
|
| 76 |
|
| 572 |
|
| 41,427 |
|
| (46,339 | ) |
| (4,264 | ) | |||||||
Gross changes |
| (135,813 | ) |
| — |
|
| (120 | ) |
| (239 | ) |
| (20,759 | ) |
| 15,058 |
|
| (141,873 | ) | |||||||
Tax |
| 49,860 |
|
| — |
|
| 44 |
|
| 88 |
|
| 7,682 |
|
| — |
|
| 57,674 |
| |||||||
Subtotal |
| (85,953 | ) |
| — |
|
| (76 | ) |
| (151 | ) |
| (13,077 | ) |
| 15,058 |
|
| (84,199 | ) | |||||||
Reclassification of cash flow hedges to other income/expense (net of tax of $248) |
| — |
|
| — |
|
| — |
|
| (421 | ) |
| — |
|
| — |
|
| (421 | ) | |||||||
Other comprehensive income, net of tax |
| (85,953 | ) |
| — |
|
| (76 | ) |
| (572 | ) |
| (13,077 | ) |
| 15,058 |
|
| (84,620 | ) | |||||||
Accumulated other comprehensive income (loss) at November 24, 2002 | $ | (85,953 | ) | $ | — |
| $ | — |
| $ | — |
| $ | 28,350 |
| $ | (31,281 | ) | $ | (88,884 | ) | |||||||
NOTE 3: EXCESS MANUFACTURING CAPACITY/RESTRUCTURING RESERVES
RESTRUCTURING RESERVES
The following is a description of the actions taken associated with the Company’s reorganization initiatives. Severance and employee benefits relate to severance packages, out-placement services and career counseling for employees affected by the plant closures and reorganization initiatives. Reductions consist of payments for severance and employee benefits, other restructuring costs and foreign exchange differences. The balance of severance and employee benefits and other restructuring costs are included under restructuring reserves on the balance sheet.
2002 Reorganization Initiative
In November 2002, the Company announced a reorganization initiative in Europe intended to realign the Company’s resources with our European sales strategy to better service customers and reduce operating costs. This initiative affects the Company’s operations in several countries and involves moving from a country or regional-based sales organization to a key account structure. The Company recorded an initial charge of $1.6 million reflecting an estimated displacement of 40 employees. As of November 24, 2002, approximately 10 employees have been displaced. The table below displays the activity and liability balance of this reserve.
Europe Reorganization Initiative
Balance At 11/25/01 | Charges | Reductions | Reversals | Balance At 11/24/02 | ||||||||||||
(Dollars in Thousands) | ||||||||||||||||
Severance and employee benefits | $ | 0 | $ | 1,568 | $ | (202 | ) | $ | 0 | $ | 1,366 | |||||
Total | $ | 0 | $ | 1,568 | $ | (202 | ) | $ | 0 | $ | 1,366 | |||||
2002 PLANT CLOSURES
The Company announced in March 2002 the closure of two manufacturing plants in Scotland in order to reduce average production costs in Europe. The Company recorded an initial charge in the second quarter of 2002 of $20.5 million consisting of $3.1 million for asset write-offs, $15.7 million for severance and employee benefits and $1.7 million for other restructuring costs. The charge reflected an estimated displacement of 650 employees, all of whom have been displaced. The two manufacturing plants were closed by the end of the second quarter of 2002. During the third quarter of 2002 the remaining reserve balance of $2.1 million was reversed due to the earlier than anticipated sale of the manufacturing plants. The table below displays the activity of this reserve.
The Company announced in April 2002 the closure of six U.S. manufacturing plants. The decision reflected the Company’s continuing shift from a manufacturing to a marketing and product-driven organization. The Company recorded an initial charge in the second quarter of 2002 of $129.7 million consisting of $22.7 million for asset write-offs, $89.6 million for severance and employee benefits and $17.4 million for other restructuring costs. The charge reflects an estimated displacement of 3,300 employees at the affected plants and approximately 250 employees at the remaining U.S. finishing facility. The Company closed the six manufacturing plants in three phases: two plants were closed in June 2002, two plants were closed in July 2002 and the final two plants were closed in September 2002. As of November 24, 2002, approximately 3,295 employees had been displaced at the manufacturing plants and approximately 245 employees had been displaced at the finishing facility. The table below displays the activity and liability balance of this reserve.
2002 Scotland Plant Closures
Balance At 11/25/01 | Charges | Reductions | Reversals | Balance At 11/24/02 | |||||||||||||
(Dollars in Thousands) | |||||||||||||||||
Severance and employee benefits | $ | — | $ | 15,691 | $ | (14,703 | ) | $ | (988 | ) | $ | — | |||||
Other restructuring costs |
| — |
| 1,732 |
| (621 | ) |
| (1,111 | ) |
| — | |||||
Total | $ | — | $ | 17,423 | $ | (15,324 | ) | $ | (2,099 | ) | $ | — | |||||
2002 U.S. Plant Closures
Balance At 11/25/01 | Charges | Reductions | Balance At 11/24/02 | ||||||||||
(Dollars in Thousands) | |||||||||||||
Severance and employee benefits | $ | — | $ | 89,625 | $ | (40,734 | ) | $ | 48,891 | ||||
Other restructuring costs |
| — |
| 17,397 |
| (4,199 | ) |
| 13,198 | ||||
Total | $ | — | $ | 107,022 | $ | (44,933 | ) | $ | 62,089 | ||||
2001 REORGANIZATION INITIATIVES
Reorganization Initiatives
In November 2001, the Company instituted various reorganization initiatives in the U.S. that includesincluded simplifying product lines and realigning the Company's
resources.Company’s resources to those product lines. The Company recorded an initial charge of $20.3 million in November 2001 reflecting an estimated displacement of 517500 employees. During 2002, the Company reversed charges of $6.7 million from the initial charge of $20.3 million. The reversals were due to changes in the estimated number of employees to be affected from approximately 500 to approximately 335 primarily due to attrition. As of November 25, 200124, 2002, approximately 125315 employees have been displaced. The endingtable below displays the activity and liability balance forof this reserve is displayed in the table below.
reserve.
In November 2001, the Company instituted various reorganization initiatives in Japan. These initiatives were prompted by business declines as a result of the prolonged economic slowdown, in Japan, political uncertainty, major retail bankruptcies and dramatic shrinkage of the core denim jeans market.market in Japan. The Company recorded an initial charge of $2.0 million in 2001 reflectingNovember 2001. The charge reflected an estimated displacement of 22 employees. The ending balance for this reserve is displayed
in the table below.
52
LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
U.S. REORGANIZATION INITIATIVES
BALANCE BALANCE
AT AT
11/26/00 CHARGES REDUCTIONS 11/25/01
-------- ------- ---------- --------
(DOLLARS IN THOUSANDS)
Severance and employee benefits...... $ -- $20,331 $(342) $19,989
---- ------- ------ -------
Total........................... $ -- $20,331 $(342) $19,989
==== ======= ====== =======
JAPAN REORGANIZATION INITIATIVES
BALANCE BALANCE
AT AT
11/26/00 CHARGES REDUCTIONS 11/25/01
-------- ------- ---------- --------
(DOLLARS IN THOUSANDS)
Severance and employee benefits...... $ -- $1,657 $ -- $1,657
Other restructuring costs............ -- 374 (25) 349
---- ------ ---- ------
Total........................... $ -- $2,031 $(25) $2,006
==== ====== ==== ======
CORPORATE REORGANIZATION INITIATIVES
In 1998,employees, all of whom have been displaced. During 2002, the Company instituted various corporate reorganization
initiatives, displacing approximately 770 employees. The goal of these
initiatives was to reduce overhead costs and consolidate operations. The Company
recorded initialreversed charges of $61.1$0.3 million in 1998 that consistedfrom the initial charge of $3.0 million
for asset write-offs, $50.1 million for severance and employee benefits and $7.9
million for other restructuring costs. In fiscal year 2000, $3.7 million of the
remaining reserve balance was reversed$2.0 million. The reversals were primarily due to updated estimates.lower than anticipated contractor costs. The reversal
was primarily associated with employee benefitstable below displays the activity and higher sub-lease income than
initially projected. The endingliability balances forof this reserve are displayed inreserve.
Corporate Restructuring Initiatives
Balance At 11/26/00 | Charges | Reductions | Balance At 11/25/01 | Reductions | Reversals | Balance At 11/24/02 | ||||||||||||||||||
(Dollars in Thousands) | ||||||||||||||||||||||||
Severance and employee benefits | $ | — | $ | 20,331 | $ | (342 | ) | $ | 19,989 | $ | (11,179 | ) | $ | (6,689 | ) | $ | 2,121 | |||||||
Total | $ | — | $ | 20,331 | $ | (342 | ) | $ | 19,989 | $ | (11,179 | ) | $ | (6,689 | ) | $ | 2,121 | |||||||
Japan Reorganization Initiatives
Balance At 11/26/00 | Charges | Reductions | Balance At 11/25/01 | Reductions | Reversals | Balance At 11/24/02 | ||||||||||||||||||
(Dollars in Thousands) | ||||||||||||||||||||||||
Severance and employee benefits | $ | — | $ | 1,657 | $ | — |
| $ | 1,657 | $ | (1,645 | ) | $ | (12 | ) | $ | — | |||||||
Other restructuring costs |
| — |
| 374 |
| (25 | ) |
| 349 |
| (64 | ) |
| (285 | ) |
| — | |||||||
Total | $ | — | $ | 2,031 | $ | (25 | ) | $ | 2,006 | $ | (1,709 | ) | $ | (297 | ) | $ | — | |||||||
1997—1999 PLANT CLOSURESAND RESTRUCTURING INITIATIVES
From 1997 to 1999 the table below.
In line with these overhead reorganization initiatives, the Company
recorded additional charges of $48.9 million in 1999 that consisted of $45.0
million for severance and employee benefits and $3.9 million for other
restructuring costs. In fiscal years 2001 and 2000, $1.3 million and $9.0
million, respectively, of the remaining reserve balance was reversed due to
updated estimates primarily associated with reductions in the number of employee
displacements needed to complete the initiative. As of November 25, 2001,
approximately 720 employees had been displaced. The ending balances for this
reserve are displayed in the table below.
SUMMARY
The total balance of the reserves at November 24, 2002 was $65.6 million compared to $45.2 million at November 25, 2001. The majority of the balances are expected to be utilized by the end of 1998, displacing approximately
6,400 employees.2003. The Company recorded an initial charge of $386.8 million in
1997 that consisted of $42.7 million for asset write-offs, $327.8 million for
severancefollowing table summarizes the activities and employee benefits and $16.3 million for other restructuring costs.
In fiscal years 2001 and 2000, $1.9 million and $5.0 million, respectively, of
the reserve balance was reversed due to updated estimates primarilyliability balances associated with employee benefits and a lower amount than originally anticipated for a
contractor settlement in 2001. The ending balances for this reserve are
displayed in the table below.
The Company announced in November 1998 the closure of two more finishing
centers in the U.S. that were closed by the end of 1999, displacing
approximately 990 employees. The Company recorded an initial charge of $82.1
million in 1998 that consisted of $23.4 million for asset write-offs, $56.5
million for severance and employee benefits and $2.2 million for other
restructuring costs. In fiscal years 2001 and 2000, $1.7 million and $13
thousand, respectively, of the remaining reserve balance was reversed due to
updated estimates primarily associated with employee benefits. The ending
balances for this reserve are displayed in the table below.
The Company announced in February 1999 the closure of 11 additional
manufacturing facilities in North America that were closed by the end of 1999,
displacing approximately 5,900 employees. The Company recorded an initial charge
of $394.1 million in 1999 that consisted of $33.4 million for asset write-offs,
$299.4 million for severance and employee benefits and $61.3 million for other
restructuring costs. In fiscal years 2001 and 2000, $21.5 million and $13.3
million, respectively, of the remaining reserve balance was reversed due to
updated estimates. The reversals were primarily associated with employee
benefits and a lower amount than originally anticipated for contractor
settlements in 2001. The ending balances of this reserve are displayed in the
table below.
Corporate Restructuring Initiatives
Balance as of November 25, 2001 | Charges | Reversals | Reductions | Balance as of November 24, 2002 | |||||||||||
(Dollars in Thousands) | |||||||||||||||
2002 Europe Restructuring Initiative | $ | — | $ | 1,568 | $ | — | $ | 202 | $ | 1,366 | |||||
2002 Scotland Plant Closures |
| — |
| 17,423 |
| 2,099 |
| 15,324 |
| — | |||||
2002 U.S. Plant Closures |
| — |
| 107,022 |
| — |
| 44,933 |
| 62,089 | |||||
2001 Corporate Restructuring Initiatives |
| 19,989 |
| — |
| 6,689 |
| 11,179 |
| 2,121 | |||||
2001 Japan Restructuring Initiative |
| 2,006 |
| — |
| 297 |
| 1,709 |
| — | |||||
1997–1999 Plant Closures and Restructuring Initiatives |
| 23,225 |
| — |
| 18,041 |
| 5,184 |
| — | |||||
Restructuring Reserves | $ | 45,220 |
| 126,013 | $ | 27,126 | $ | 78,531 | $ | 65,576 | |||||
2002 Plant Closures—Asset Write-offs |
| 25,708 | |||||||||||||
2002 Restructuring Charges | $ | 151,721 | |||||||||||||
Note 4: Income Taxes
The balance of severance and
employee benefits and other restructuring costs are included under restructuring
reserves on the balance sheet.
The Company is now discussing with its unions in the U.S. potential
additional closures of manufacturing facilities in the U.S. and is consulting
with union and employee representatives regarding a proposal to close two plants
in Scotland. (SEE NOTE 20 TO THE CONSOLIDATED FINANCIAL STATEMENTS.)
55
non-U.S. components of income before taxes are as follows:
LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
NOTE 4: INCOME TAXES
The U.S. and non-U.S. components of income before taxes are as follows:
2001 2000 1999
-------- --------- --------
(DOLLARS IN THOUSANDS)
U.S. ................................................. $120,329 $ 185,161 $ 6,025
Non-U.S. ............................................. 119,360 158,519 2,474
-------- --------- --------
Total............................................ $239,689 $ 343,680 $ 8,499
======== ========= ========
The provision for taxes consists of the following:
2001 2000 1999
-------- --------- --------
(DOLLARS IN THOUSANDS)
Federal-U.S.
Current............................................... $ 27,010 $ (9,417) $(53,441)
Deferred.............................................. (2,966) 23,851 20,589
-------- --------- --------
$ 24,044 $ 14,434 $(32,852)
======== ========= ========
State-U.S.
Current............................................... $ (4,322) $ 3,758 $ (521)
Deferred.............................................. 11,513 6,552 776
-------- --------- --------
$ 7,191 $ 10,310 $ 255
======== ========= ========
Non-U.S.
Current............................................... $ 49,707 $ 62,249 $ 32,663
Deferred.............................................. 7,743 33,295 3,078
-------- --------- --------
$ 57,450 $ 95,544 $ 35,741
======== ========= ========
Total
Current............................................... $ 72,395 $ 56,590 $(21,299)
Deferred.............................................. 16,290 63,698 24,443
-------- --------- --------
$ 88,685 $ 120,288 $ 3,144
======== ========= ========
2002 | 2001 | 2000 | ||||||||
(Dollars in Thousands) | ||||||||||
U.S. | $ | (75,322 | ) | $ | 120,329 | $ | 185,161 | |||
Non-U.S. |
| 125,280 |
|
| 119,360 |
| 158,519 | |||
Total | $ | 49,958 |
| $ | 239,689 | $ | 343,680 | |||
The provision for taxes consists of the following:
2002 | 2001 | 2000 | ||||||||||
(Dollars in Thousands) | ||||||||||||
Federal-U.S. | ||||||||||||
Current | $ | 8,673 |
| $ | 27,010 |
| $ | (9,417 | ) | |||
Deferred |
| (46,020 | ) |
| (2,966 | ) |
| 23,851 |
| |||
$ | (37,347 | ) | $ | 24,044 |
| $ | 14,434 |
| ||||
State-U.S. | ||||||||||||
Current | $ | 5,139 |
| $ | (4,322 | ) | $ | 3,758 |
| |||
Deferred |
| (3,640 | ) |
| 11,513 |
|
| 6,552 |
| |||
$ | 1,499 |
| $ | 7,191 |
| $ | 10,310 |
| ||||
Non-U.S. | ||||||||||||
Current | $ | 67,231 |
| $ | 49,707 |
| $ | 62,249 |
| |||
Deferred |
| (6,404 | ) |
| 7,743 |
|
| 33,295 |
| |||
$ | 60,827 |
| $ | 57,450 |
| $ | 95,544 |
| ||||
Total | ||||||||||||
Current | $ | 81,043 |
| $ | 72,395 |
| $ | 56,590 |
| |||
Deferred |
| (56,064 | ) |
| 16,290 |
|
| 63,698 |
| |||
$ | 24,979 |
| $ | 88,685 |
| $ | 120,288 |
| ||||
At November 25, 2001,24, 2002, cumulative non-U.S. operating losses of $198.2$206.5 million generated by the Company were available to reduce future non-U.S. taxable income. Approximately $103.6$85.5 million of the non-U.S. operating losses expire between the years 20022003 and 20112012 and the remainder of the non-U.S. losses carry forward indefinitely.
Income taxes duerelated to translation gainsnet investment and lossescash flow hedges were $(8.1) million, $2.8 million and $21.2 million for 2002, 2001 and 2000, respectively, and are recorded in cumulative
translation adjustment, a component of accumulated“Accumulated other comprehensive income and(loss)” in the balance sheet. Income taxes related to additional minimum pension liability were $2.8 million, $21.2$(49.9) million and $8.7$0.5 million for 2001,2002 and 2000, respectively, and 1999,
respectively.
are recorded in “Accumulated other comprehensive income (loss)” in the balance sheet.
Temporary differences which give rise to deferred tax assets and liabilities at November 25, 200124, 2002 and November 26, 200025, 2001 were as follows:
56
LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
2001 2000
DEFERRED DEFERRED
TAX ASSETS TAX ASSETS
(LIABILITIES) (LIABILITIES)
------------- -------------
(DOLLARS IN THOUSANDS)
Postretirement benefits......................... $201,184 $207,318
Employee compensation and benefit plans......... 177,510 159,321
Inventory....................................... 32,955 55,876
Depreciation and amortization................... (14,461) (8,765)
Foreign exchange gains/losses................... (40,594) (36,364)
Restructuring and special charges............... 44,752 32,366
Tax on unremitted non-U.S. earnings............. 122,410 148,135
State income tax................................ - (20,693)
Prepaid royalty income ......................... 78,111 -
Foreign tax credit carryforward................. 52,473 78,984
Alternative minimum tax credit carryforward..... 9,501 26,362
Other........................................... 34,811 71,930
Less valuation allowance........................ (24,434) (23,961)
-------- --------
$674,218 $690,509
======== ========
2002 Deferred Tax Assets (Liabilities) | 2001 Deferred Tax Assets (Liabilities) | |||||||
(Dollars in Thousands) | ||||||||
Postretirement benefits | $ | 217,949 |
| $ | 215,535 |
| ||
Employee compensation and benefit plans |
| 166,102 |
|
| 163,159 |
| ||
Inventory |
| 25,334 |
|
| 32,955 |
| ||
Depreciation and amortization |
| (14,887 | ) |
| (14,461 | ) | ||
Foreign exchange gains/losses |
| (3,200 | ) |
| (40,594 | ) | ||
Restructuring and special charges |
| 55,243 |
|
| 44,752 |
| ||
Tax on unremitted non-U.S. earnings |
| 128,848 |
|
| 146,533 |
| ||
Additional minimum pension liability |
| 49,802 |
|
| — |
| ||
Prepaid royalty income |
| 52,459 |
|
| 78,111 |
| ||
Foreign tax credit carryforward |
| 70,539 |
|
| 52,473 |
| ||
Alternative minimum tax credit carryforward |
| 22,774 |
|
| 9,501 |
| ||
Other |
| 57,145 |
|
| 34,811 |
| ||
Less valuation allowance |
| (32,690 | ) |
| (33,221 | ) | ||
$ | 795,418 |
| $ | 689,554 |
| |||
The $24.4$32.7 million and $24.0$33.2 million deferred tax valuation allowances at November 25, 200124, 2002 and November 26, 2000,25, 2001, respectively, represent the portion of the Company'sCompany’s consolidated deferred tax assets for which the Company, based upon its projections as of those dates, does not believe that the realization is more likely than not.
At November 24, 2002, the Company had a foreign tax credit carryforward of $70.5 million to reduce future U.S. income taxes. An amount of $23.4 million can be carried forward through 2005 and the remaining amount of $47.1 million can be carried forward through 2007.
The Company'sCompany’s effective income tax rate for fiscal years2002, 2001 2000 and 19992000 differs from the statutory federal income tax rate as follows:
2001 2000 1999
---- ---- ----
Statutory rate.........................................35.0% 35.0% 35.0%
Changes resulting from:
State income taxes, net of federal income tax
benefit......................................... 2.0 2.0 2.0
Change in valuation allowance .................... 0.2 0.7 15.2
Acquisition-related book and tax bases
differences..................................... 1.5 1.1 43.6
Reversal of prior years' accruals.................(2.1) (3.6) (55.0)
Other, net........................................ 0.4 (0.2) (3.8)
---- ---- -----
Effective rate.........................................37.0% 35.0% 37.0%
==== ==== =====
2002 | 2001 | 2000 | |||||||
Statutory rate | 35.0 | % | 35.0 | % | 35.0 | % | |||
Changes resulting from: | |||||||||
State income taxes, net of federal income tax benefit | 2.0 |
| 2.0 |
| 2.0 |
| |||
Change in valuation allowance | (1.1 | ) | 0.2 |
| 0.7 |
| |||
Goodwill and trademarks amortization book and tax bases differences | 7.4 |
| 1.5 |
| 1.1 |
| |||
Adjustments to tax accruals | 4.4 |
| (2.1 | ) | (3.6 | ) | |||
Other, net | 2.3 |
| (0.4 | ) | (0.2 | ) | |||
Effective rate | 50.0 | % | 37.0 | % | 35.0 | % | |||
The consolidated U.S. income tax returns of the Company for 19861996 through 1999 are under examination by the Internal Revenue Service ("IRS"(“IRS”). The Company expects this examination to be completed by early 2004. A settlement agreement covering most issues was reached with the IRS for the years 19861990 through 1989 and1995 during 2002. The Company expects to make a payment was made to the IRS of approximately $115 million during 2001.the second quarter of 2003. After including potential refunds from prior years’ overpayments and taking into account the tax effects of the interest deduction from this payment, the Company expects the net cash payment to be approximately $90 million. The Company believes it has made adequate provision for income taxes and interest for all periods under review.
57
LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
NOTE
Note 5: PROPERTY, PLANT AND EQUIPMENT
Property, Plant and Equipment
The components of property, plant and equipment ("(“PP&E"&E”) are as follows:
2001 2000
----- ----
(DOLLARS IN THOUSANDS)
Land.......................................... $ 33,429 $ 34,458
Buildings and leasehold improvements.......... 406,660 416,935
Machinery and equipment....................... 592,969 610,599
Construction in progress...................... 9,300 8,033
--------- ----------
Total PP&E............................... 1,042,358 1,070,025
Accumulated depreciation...................... (527,647) (495,986)
--------- ----------
PP&E, net..................................... $ 514,711 $ 574,039
========= ==========
2002 | 2001 | |||||||
(Dollars in Thousands) | ||||||||
Land | $ | 32,540 |
| $ | 33,429 |
| ||
Buildings and leasehold improvements |
| 354,752 |
|
| 406,660 |
| ||
Machinery and equipment |
| 539,422 |
|
| 592,969 |
| ||
Capitalized internal-use software |
| 2,373 |
|
| — |
| ||
Construction in progress |
| 31,806 |
|
| 9,300 |
| ||
Total PP&E |
| 960,893 |
|
| 1,042,358 |
| ||
Accumulated depreciation |
| (478,447 | ) |
| (527,647 | ) | ||
PP&E, net | $ | 482,446 |
| $ | 514,711 |
| ||
As of November 25, 2001,24, 2002, the Company had approximately $10.0$2.7 million of PP&E, net, available for sale, consisting primarily of closed facilities.
Depreciation expense for 2002, 2001 and 2000 and 1999 was $60.1 million, $69.9 million $80.2
million and $108.7$80.2 million, respectively. Accumulated depreciation in fiscal
year 20012002 was reduceddecreased by approximately $38.0$109.3 million due to PP&E sales or disposals.
Construction in progress at November 25, 200124, 2002 related to various projects. It is estimatedThe Company estimates that approximately $10.0$70 million in costs will be incurred to complete these projects in 2002.2003. These projects primarily consist of sales
office capital improvements.systems upgrades. Construction in progress at November 26, 2000
related to25, 2001 primarily consisted of sales office capital improvements, sourcing projects, internally
developed softwareimprovements.
Note 6: Goodwill and facilities infrastructure.
NOTE 6: GOODWILL AND OTHER INTANGIBLE ASSETS
Other Intangible Assets
The components of goodwill and other intangible assets are as follows:
2001 2000
---- ----
(DOLLARS IN THOUSANDS)
Goodwill...................................... $ 351,474 $ 351,474
Tradenames and other intangibles.............. 78,362 78,308
--------- ---------
Total intangible assets.................. 429,836 429,782
Accumulated amortization related to goodwill.. (142,782) (133,995)
Other accumulated amortization................ (32,821) (30,831)
--------- ---------
Intangible assets, net........................ $ 254,233 $ 264,956
========= =========
The Company reduced other intangibles by $3.6 million to remove fully
amortized assets in 2000.
2002 | 2001 | |||||||
(Dollars in Thousands) | ||||||||
Goodwill | $ | 351,474 |
| $ | 351,474 |
| ||
Trademarks and other intangibles |
| 79,416 |
|
| 78,362 |
| ||
Total intangible assets |
| 430,890 |
|
| 429,836 |
| ||
Accumulated amortization related to goodwill |
| (151,569 | ) |
| (142,782 | ) | ||
Other accumulated amortization |
| (35,911 | ) |
| (32,821 | ) | ||
Intangible assets, net | $ | 243,410 |
| $ | 254,233 |
| ||
Amortization expense for 2002, 2001 and 2000 and 1999 was $10.9 million, $10.7 million and $10.8 million, respectively.(See Note 1 to the Consolidated Financial Statements under “New Accounting Standards.”)
Note 7: Debt and $11.4 million, respectively.
58
LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
NOTE 7: DEBT AND LINES OF CREDIT
Lines of Credit
Debt and lines of credit are summarized below:
2001 2000
---- ----
(DOLLARS IN THOUSANDS)
LONG-TERM DEBT:
Unsecured:
Notes:
6.80%, due 2003...........................$ 349,053 $ 348,559
7.00%, due 2006........................... 447,679 447,207
11.625% Dollar denominated, due 2008...... 376,119 --
11.625% Euro denominated, due 2008........ 109,643 --
Yen-denominated eurobond:
4.25%, due 2016........................... 163,934 183,486
---------- ----------
1,446,428 979,252
Secured:
Credit Facilities.............................. 252,558 988,639
Domestic Receivables-backed Securitization..... 110,000 --
Customer Service Center Equipment Financing.... 78,686 85,013
European Receivables-backed Securitization..... 41,366 31,148
Industrial development revenue refunding
bond........................................ 10,000 10,000
2002 | 2001 | |||||||
(Dollars in Thousands) | ||||||||
Long-Term Debt: | ||||||||
Unsecured: | ||||||||
Notes: | ||||||||
6.80%, due 2003 | $ | 349,547 |
| $ | 349,053 |
| ||
7.00%, due 2006 |
| 448,151 |
|
| 447,679 |
| ||
11.625% Dollar denominated, due 2008 |
| 376,749 |
|
| 376,119 |
| ||
11.625% Euro denominated, due 2008 |
| 125,668 |
|
| 109,643 |
| ||
Yen-denominated eurobond: | ||||||||
4.25%, due 2016 |
| 166,667 |
|
| 163,934 |
| ||
| 1,466,782 |
|
| 1,446,428 |
| |||
Secured: | ||||||||
Credit Facilities |
| 115,115 |
|
| 252,558 |
| ||
Domestic Receivables-backed Securitization |
| 110,000 |
|
| 110,000 |
| ||
Customer Service Center Equipment Financing |
| 71,769 |
|
| 78,686 |
| ||
European Receivables-backed Securitization |
| 51,161 |
|
| 41,366 |
| ||
Industrial development revenue refunding bond |
| 10,000 |
|
| 10,000 |
| ||
Notes payable, at various rates, due in installments through 2006 |
| 884 |
|
| 1,088 |
| ||
Subtotal |
| 358,929 |
|
| 1,940,126 |
| ||
Current maturities |
| (73,959 | ) |
| (144,637 | ) | ||
Total long-term debt | $ | 1,751,752 |
| $ | 1,795,489 |
| ||
Short-Term Debt: | ||||||||
Short-term borrowings | $ | 21,266 |
| $ | 18,307 |
| ||
Current maturities of long-term debt |
| 73,959 |
|
| 144,637 |
| ||
Total short-term debt | $ | 95,225 |
| $ | 162,944 |
| ||
Unused Lines of Credit: | ||||||||
Short-term | $ | 384,285 |
| $ | 531,333 |
| ||
1996 Notes payable, at various rates, due in
installments through 2006................... 1,088 1,295
---------- ----------
Subtotal.................................... 1,940,126 2,095,347
Current maturities.................................. (144,637) (200,207)
---------- ----------
Total long-term debt.................$1,795,489 $1,895,140
========== ==========
SHORT-TERM DEBT:
Short-term borrowings..........................$ 18,307 $ 31,083
Current maturities of long-term debt........... 144,637 200,207
---------- ----------
Total short-term debt................$ 162,944 $ 231,290
========== ==========
UNUSED LINES OF CREDIT:
Short-term.....................................$ 531,333 $ 469,992
========== ==========
1996 NOTES OFFERING
Offering
In 1996, the Company issued two series of notes payable totaling $800.0 million to qualified institutional investors (the "Notes Offering"“Notes Offering”) in reliance on Rule 144A under the Securities Act of 1933 (the "Securities Act"“Securities Act”). The notes are unsecured obligations of the Company and are not subject to redemption before maturity. The issuance was divided into two series: $350.0 million seven-year notes maturing in November 2003 and $450.0 million ten-year notes maturing in November 2006. The seven- and ten-year notes bear interest at 6.80% and 7.00% per annum, respectively, payable semi-annually in May and November of each year. Discounts of $8.2 million on the original issue are being amortized over the term of the notes using an approximate effective-interest rate method. Net proceeds from the Notes Offering were used to repay a portion of the indebtedness outstanding under a 1996 credit facility agreement.
NOTES EXCHANGE OFFER
The indenture governing these notes contains customary events of default and restricts the Company’s ability and the ability of its subsidiaries and future subsidiaries to incur liens; engage in sale and leaseback transactions and engage in mergers and sales of assets.
Notes Exchange Offer
In May 2000, the Company filed a registration statement on Form S-4 under the Securities Act with the SEC relating to an exchange offer of its 6.80% notes due 2003 and 7.00% notes due 2006 (see "1996“1996 Notes Offering"Offering” above). The exchange offer gave holders of these notes the opportunity to exchange these old notes, which were issued on November 6, 1996 under Rule 144A of the Securities Act, for new notes that are registered under the Securities Act of 1933. The new notes are identical in all material respects to the old notes except that the new notes are registered.
59
LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
The exchange offer ended on June 20, 2000. As a result of the exchange offer, all but $20 thousand of the $350.0 million aggregate principal amount of 6.80% old notes due 2003 were exchanged for the 6.80% exchange notes due 2003; and all $450.0 million aggregate principal amount of the 7.00% old notes due 2006 were exchanged for the 7.00% exchange notes due 2006.
The Company was not obligated by any agreement including its then effective credit facility agreements to engage in the exchange offer. The Company initiated the exchange offer to give holders of these notes the opportunity to exchange the old notes for registered notes.
SENIOR NOTES OFFERING
(See Note 20 to the Consolidated Financial Statements.)
Senior Notes Offering
On January 18, 2001, the Company issued two series of notes payable totaling the equivalentthen-equivalent of $497.5 million to qualified institutional investors in reliance on Rule 144A under the Securities Act and outside the U.S. in accordance with Regulation S under the Securities Act. The notes are unsecured obligations of the Company and may be redeemed at any time after January 15, 2005. The issuance was divided into two series: U.S. $380.0 million dollar notes ("(“Dollar Notes"Notes”) and 125.0 million euro notes ("(“Euro Notes"Notes”), (collectively, the "Notes"“Notes”). Both series of notes are seven-year notes maturing on January 15, 2008 and bear interest at 11.625% per annum, payable semi-annually in January and July of each year. These Notes are callable beginning January 15, 2005. These Notes were offered at a discount of $5.2 million to be amortized over the term of the Notes. Costs representing underwriting fees and other expenses of $14.4 million on the original issue are amortized, using an approximate effective-interest rate method, over the term of the Notes. Net proceeds from the offering were used to repay a portion of the indebtedness outstanding under the Company'sCompany’s then effective credit facility.
The indentures governing the Notes contain covenants that limit the Company'sCompany’s and its subsidiaries'subsidiaries’ ability to incur additional debt; pay dividends or make other restricted payments; consummate specified asset sales; enter into transactions with affiliates; incur liens; impose restrictions on the ability of a subsidiary to pay dividends or make payments to the Company and its subsidiaries; merge or consolidate with any other person; and sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of the Company'sCompany’s assets or the assets of the Company'sCompany’s subsidiaries. If the Company experiences a change in control as defined in the indentures governing the Notes, the Company will be required under the indentures to make an offer to repurchase the Notes at a price equal to 101% of the principal amount plus accrued and unpaid interest, if any, to the date of repurchase. If the Notes receive and maintain an investment grade rating by both Standard and Poor'sPoor’s Ratings Service and Moody'sMoody’s Investors Service and the Company and its subsidiaries are and remain in compliance with the indentures, then the Company and its subsidiaries will not be required to comply with specified covenants contained in the indentures.
SENIOR NOTES EXCHANGE OFFER
Senior Notes Exchange Offer
In March 2001, the Company, as required under registration rights agreements it entered into when it issued the Notes, filed a registration statement on Form S-4 under the Securities Act with the SEC relating to an exchange offer for the Notes. The exchange offer gave holders the opportunity to exchange the Notes for new notes that are registered under the Securities Act. The new notes are identical in all material respects to the old notes except that the new notes are registered under the Securities Act. The exchange offer ended on April 6, 2001. As a result of the exchange offer, all but $200 thousand of the $380.0 million aggregate principal amount of old Dollar Notes were exchanged for new Dollar Notes, and all but 595 thousand euro of the 125.0 million aggregate principal amount of old Euro Notes were exchanged for new Euro Notes.
YEN-DENOMINATED EUROBOND PLACEMENT
Yen-denominated Eurobond Placement
In 1996, the Company issued a (Y)¥ 20 billion principal amount eurobond (equivalent to approximately $180.0 million at the time of issuance) due in November 2016, with interest payable at 4.25% per annum. The bond is redeemable at the option of the Company at a make-whole redemption price commencing in 2006. Net proceeds from the placement were used to repay a portion of the indebtedness outstanding under a 1996 credit facility agreement.
60
LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
CREDIT FACILITIES
The agreement governing these bonds contains customary events of default and restricts the Company’s ability and the ability of its subsidiaries and future subsidiaries to incur liens; engage in sale and leaseback transactions and engage in mergers and sales of assets.
Credit Facilities
On February 1, 2001, the Company entered into a $1.05 billion senior secured credit facility to replace its existinga credit facility dated January 31, 2000 on more favorable terms. The credit facility consisted of a $700.0 million revolving credit facility and $350.0 million of term loans. As of November 25, 2001,24, 2002, the credit facility consists of $625.0$5.0 million revolving credit and $252.6$110.1 million of term loans. This facility reduced the Company'sCompany’s borrowing costs and extendsextended the maturity of the Company'sCompany’s principal bank credit facility to August 2003.
The facility is secured in substantially the same manner as the prior
facility.
Collateral includes: domestic inventories, certain domestic equipment, trademarks, other intellectual property, 100% of the stock in domestic subsidiaries, 65% of the stock of certain foreign subsidiaries and other assets. Borrowings under the facility bear interest at LIBOR or the agent bank'sbank’s base rate plus an incremental borrowing spread. Before the domestic receivables securitization transaction described below, the collateral also included domestic receivables. In connection with the securitization transaction, the lenders under the credit facility released their security interest in receivables sold in that transaction, and retained security interests in certain related assets. Proceeds from the domestic receivables securitization transaction were used to repay debt under this facility.
The facility contains customary covenants restricting the Company'sCompany’s activities as well as those of its subsidiaries, including limitations on the Company'sCompany’s and its subsidiaries'subsidiaries’ ability to sell assets; engage in mergers; enter into operating leases or capital leases; enter into transactions involving related parties, derivatives or letters of credit; enter into intercompany transactions; incur indebtedness or grant liens or negative pledges on the Company'sCompany’s assets; make loans or other investments; pay dividends or repurchase stock or other securities; guaranty third party obligations; make capital expenditures; and make changes in the Company'sCompany’s corporate structure. The facility also contains financial covenants that the Company must satisfy on an ongoing basis, including maximum leverage ratios and minimum coverage ratios. As of November 25, 2001,24, 2002, the Company was in compliance with the financial covenants under the facility.
Effective January 29, 2002, the Company entered into an amendment (See Note 20 to the facility to exclude certain items from the computation of earnings for
compliance purposes and to amend the leverage and senior secured leverage
ratios. (SEE NOTE 20 TO THE CONSOLIDATED FINANCIAL STATEMENTS.Consolidated Financial Statements.)
On January 31, 2000 the Company amended three of its credit facility
agreements and entered into one new agreement to reflect its then current
financial position and extend maturity dates (the "2000 Credit Facility"). The
financing package consisted of four separate agreements: (1) a new $450.0
million bridge facility to fund working capital and support letters of credit,
foreign exchange contracts and derivatives, (2) an amended $300.0 million
revolving credit facility, extending the existing bridge facility, (3) an
amended $545.0 million 364-day credit facility, and (4) an amended $584.0
million 5-year credit facility.
All four facilities were secured by domestic receivables, domestic
inventories, certain domestic equipment, trademarks, other intellectual
property, 100% of the stock in domestic subsidiaries, 65% of the stock of
certain foreign subsidiaries and other assets. The maturity date for all credit
facilities was January 31, 2002. Borrowings under the bank credit facilities did
bear interest at LIBOR or the agent bank's base rate plus an incremental
borrowing spread. For the bridge facility, the spread was 3.00% over LIBOR or
1.75% over the base rate. For each of the three amended facilities, the spread
was 3.25% over LIBOR or 2.00% over the base rate. The 2000 credit facility was
replaced by the February 2001 credit facility.
DOMESTIC RECEIVABLES SECURITIZATION TRANSACTION
Domestic Receivables Securitization Transaction
On July 31, 2001, the Company and several of its subsidiaries completed a receivables securitization transaction involving receivables generated from sales of products to the Company'sCompany’s U.S. customers. The transaction involved the issuance by Levi Strauss Receivables Funding, LLC, an indirect subsidiary of the Company, of $110.0 million in secured term notes. The notes, which are secured by trade receivables originated by Levi Strauss & Co., bear interest at a rate equal to the one-month LIBOR rate plus 0.32% per annum, and have a stated maturity date of November 2005. Net proceeds of the offering were used to repay a portion of the outstanding debt under the Company's senior securedCompany’s 2001 bank credit facility. The transaction did not meet the criteria for sales accounting under SFAS 140 and therefore is accounted for on the balance sheet as a secured borrowing. The purpose of the transaction was to lower the Company'sCompany’s interest expense and diversify its funding sources. The notes were issued in a private placement transaction in accordance with Rule 144A under the Securities Act.
61
LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Under the securitization arrangement, collections on receivables remaining after payment of interest and fees relating to the notes are used to purchase new receivables from Levi Strauss & Co. The securitization agreements provide that, in specified cases, the collections will not be released but will instead be deposited and used to pay the principal amount of the notes. Those circumstances include, among other things, failure to maintain the required level of overcollaterization due to deterioration in the credit quality, or overconcentration or dilution in respect of, the receivables, failure to pay interest or other amounts which is not cured, breaches of covenants, representations and warranties or events of bankruptcy relating to the Company and certain of its subsidiaries.
CUSTOMER SERVICE CENTER EQUIPMENT FINANCING
Additionally, under this arrangement, the Company is required to maintain the level of net eligible U.S. trade receivables at a certain targeted amount. If the targeted amount of net eligible U.S. trade receivables is not met, the trustee under the arrangement retains cash collections in an amount covering the deficiency. Under the agreements, the retention of cash by the trustee has the effect of reducing the deficiency. Amounts retained in this manner are not available to the Company until released by the trustee. The trustee receives daily reports comparing the net eligible receivables with the targeted amount and, if appropriate, releases retained cash accordingly. The amount of cash held by the trustee to cover any deficiency would be shown as “Restricted cash” on the balance sheet.
On April 25, 2002 the Company obtained an amendment to the domestic receivables securitization agreements. Before the amendment, the manner in which sales incentives were treated in the calculation of net eligible U.S. trade receivables decreased net eligible receivables as well as substantially increased the targeted amount. The amendment revises the way sales incentives are treated in calculating the amount of net eligible receivables. This permits the Company greater flexibility in offering sales incentives without affecting the securitization calculations and reduces the likelihood and amount of cash being retained. As of November 24, 2002, there was no deficiency and as a result, no restricted cash on the balance sheet.
Customer Service Center Equipment Financing
In December 1999 the Company entered into a secured financing transaction consisting of a five-year credit facility secured by owned equipment at customer service centers (distribution centers) located in Nevada, Mississippi and Kentucky. The amount financed in December 1999 was $89.5 million, comprised of a $59.5 million tranche ("(“Tranche 1"1”) and a $30.0 million tranche ("(“Tranche 2"2”). Borrowings under Tranche 1 have a fixed interest rate equal to the yield of a four-year Treasury note plus an incremental borrowing spread. Borrowings under Tranche 2 have a floating quarterly interest rate equal to the 90 day LIBOR plus an incremental borrowing spread based on the Company'sCompany’s leverage ratio at that time. Proceeds from the borrowings were used to reduce the commitment amounts of the then-existing credit facilities.
EUROPEAN RECEIVABLES SECURITIZATION AGREEMENTS
European Receivables Securitization Agreements
In February 2000, several of the Company'sCompany’s European subsidiaries entered into receivable securitization financing agreements with several lenders to borrow up to $125.0 million. Any borrowings under the facilities must be used to
reduce the commitment levels under the Company's bank credit facilities. During November 2000, 36.5 million euro (or approximately $30.7 million at time of borrowing) were borrowed under these agreements at initial interest rates of 6.72%. Interest rates under this agreement are variable based on commercial paper market conditions, and the debt ratings of the underlying conduit. In December 2000, an additional 10.4 million euro (equivalent to approximately $9.3 million at time of borrowing) at an initial interest rate of 6.70% was borrowed under these agreements. In April 2002, 2.5 million British Pounds (equivalent to approximately $3.6 million at time of borrowing) at an initial interest rate of 1.70% was borrowed under these agreements. Borrowings are collateralized by a security interest in the receivables of these subsidiaries. Proceeds from the borrowings were used to reduce commitment levels under the Company’s then-effective bank credit facilities. The facilities, which have an annual renewable option upon agreement of all parties, mature on February 28, 2003. The Company will not renew those facilities. The Company adopted SFAS 140, "Accounting“Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,"” in fiscal year 2001. The securitizations did not meet the criteria for sales accounting under SFAS 140 and therefore have been accounted for as a secured borrowing.
INDUSTRIAL DEVELOPMENT REVENUE REFUNDING BOND
Industrial Development Revenue Refunding Bond
In 1995, the City of Canton, Mississippi issued an industrial development revenue refunding bond with a principal amount of $10.0 million, and the proceeds were loaned to the Company to help finance the cost of acquiring a customer service center in Canton. Interest payments are due monthly at a variable rate based upon the J.J. Kenny Index, reset weekly at a maximum rate of 13.00%, and the principal amount is due June 1, 2003. The bond is secured by a letter of credit that expires onin June 15, 2002, which the2003. The Company has the
opportunity to extend or renew.
PRINCIPAL SHORT-TERM AND LONG-TERM DEBT PAYMENTS
does not anticipate renewing this financing.
Principal Short-term and Long-term Debt Payments
As of November 25, 2001,24, 2002, the required aggregate short-term and long-term debt principal payments for the next five years and thereafter are as follows:
PRINCIPAL
YEAR PAYMENTS
---- ---------
(DOLLARS IN THOUSANDS)
2002 ............................... $ 162,944
2003 ............................... 523,275
2004 ............................... 118,521
2005 ............................... 56,202
2006 ............................... 447,703
Thereafter.......................... 649,788
----------
Total.......................... $1,958,433
==========
62
LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
SHORT-TERM CREDIT LINES AND STAND-BY LETTERS OF CREDIT
Principal Payments | |||
(Dollars in Thousands) | |||
Year | |||
2003 | $ | 95,225 | |
2004 |
| 118,521 | |
2005 |
| 56,203 | |
2006 |
| 448,173 | |
2007 |
| — | |
Thereafter |
| 1,128,855 | |
Total | $ | 1,846,977 | |
Short-Term Credit Lines and Stand-By Letters of Credit
At November 25, 2001,24, 2002, the Company had unsecured and uncommitted short-term credit lines available totaling $10.7$13.4 million at various rates. These credit arrangements may be canceled by the bank lenders upon notice and generally have no compensating balance requirements or commitment fees.
At November 24, 2002 and November 25, 2001, and November 26, 2000, the Company had $131.7$213.3 million and $193.4$131.7 million, respectively, of standby letters of credit with various international banks, of which $52.5$48.5 million and $52.5 million, respectively, serve as guarantees by the creditor banks to cover U.S. workers'workers’ compensation claims. In addition, $66.0$151.5 million of these standby letters of credit under the secured2001 bank credit facility support short-term credit lines at November 25,
2001.24, 2002. The Company pays fees on the standby letters of credit. Borrowings against the letters of credit are subject to interest at various rates.
INTEREST RATE CONTRACTS
Interest Rate Contracts
The Company is exposed to interest rate risk. It is the Company'sCompany’s policy and practice to use derivative instruments, primarily interest rate swaps and options, to manage and reduce interest rate exposures. The Company currently has entered intono derivative instruments managing interest rate option contracts to reduce or
neutralize the exposure to changes in variable interest rates. Asrisk outstanding as of November 25, 2001, the contracts represent an outstanding notional amount of $275.0
million and cover a series of variable cash flows through November 29, 2001. 24, 2002.
Interest Rates on Borrowings
The contracts do not qualify for hedge accounting and therefore the Company reports
changes in fair value in other income/expense (SEE NOTE 10 TO THE CONSOLIDATED
FINANCIAL STATEMENTS). At November 25, 2001, the Company had no interest rate
swap transactions outstanding.
The Company's market risk is generally related to fluctuations in interest
rates. The Company is exposed to credit loss in the event of nonperformance by
the counterparties to the interest rate derivative transactions. However, the
Company believes these counterparties are creditworthy financial institutions
and does not anticipate nonperformance.
INTEREST RATES ON BORROWINGS
The Company'sCompany’s weighted average interest rate on average borrowings outstanding during 20012002 and 2000,2001, including the amortization of capitalized bank fees, interest rate swap cancellations and underwriting fees, was 9.47%9.14% and 9.50%9.47%, respectively. The weighted average interest rate on average borrowings outstanding excludes interest payable to participants under deferred compensation plans and other miscellaneous items. The 2001 interest rate additionally excludes the write-off of fees that resulted from the replacement of thea credit agreement dated January 31, 2000,
interest2000.
Dividends and Restrictions
Under the terms of the Company’s 2001 bank credit facility, the Company was prohibited from paying dividends to its stockholders. In addition, the terms of certain of the indentures relating to the Company’s unsecured senior notes limit the Company’s ability to pay dividends. There were no restrictions under the Company’s 2001 bank credit facility or its indentures on deferred compensationthe transfer of the assets of the Company’s subsidiaries to the Company in the form of loans, advances or cash dividends without the consent of a third party.
Note 8: Commitments and other miscellaneous items (SEE "CREDIT
FACILITIES" ABOVE AND NOTE 15 TO THE CONSOLIDATED FINANCIAL STATEMENTS).
NOTE 8: COMMITMENTS AND CONTINGENCIES
FOREIGN EXCHANGE CONTRACTS
Contingencies
Foreign Exchange Contracts
At November 25, 2001,24, 2002, the Company had U.S. dollar spot and forward currency contracts to buy $1.2 billion$972.9 million and to sell $718.5$238.3 million against various foreign currencies. The Company also had euro forward currency contracts to buy 221.87.9 million euro against various foreign currencies and to sell 78.79.9 million euro against various foreign currencies. In addition, the Company had no U.S. dollar option contracts to buy $544.0 million and to sell $514.8 million against
various foreign currencies.outstanding at November 24, 2002. The Company also had euro option currency contracts to buy 50.0 million euro against various foreign currencies and to sell 25.030.0 million euro against various foreign currencies. These contracts are at various exchange rates and expire at various dates through December 2002.
August 2003.
The Company has entered into option contracts to manage its exposure to numerous foreign currencies. Option transactions included in the amounts above
are principally for the exchange of the euro and U.S. dollar. At November 25,
2001,24, 2002, the Company had bought U.S. dollarSwedish Krona options resulting in a net long position against the euro of $53.9$29.0 million should the options be exercised. To
finance the premiums related to the options bought, the Company sold options
resulting in a net long position against the euro of $29.4 million, should the
options be exercised.
63
LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
The Company'sCompany’s market risk is generally related to fluctuations in the currency exchange rates. The Company is exposed to credit loss in the event of nonperformance by the counterparties to the foreign exchange contracts. However, the Company believes these counterparties are creditworthy financial institutions and does not anticipate nonperformance.
OTHER CONTINGENCIES
Other Contingencies
In the ordinary course of its business, the Company has pending various cases involving contractual matters, employee-related matters, distribution questions, product liability claims, trademark infringement and other matters. The Company does not believe there are any pending legal proceedings that will have a material impact on the Company'sCompany’s financial position or results of operations.
The operations and properties of the Company comply with all applicable federal, state and local laws enacted for the protection of the environment, and with permits and approvals issued in connection therewith, except where the failure to comply would not reasonably be expected to have a material adverse effect on the Company'sCompany’s financial position or business operations. Based on currently available information, the Company does not consider there to be any circumstances existing that would be reasonably likely to form the basis of an action against the Company that could have a material adverse effect on the Company'sCompany’s financial position or business operations.
NOTE
Note 9: FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair Value of Financial Instruments
The estimated fair value of certain financial instruments has been determined by the Company using available market information and appropriate valuation methodologies. However, considerable judgment is required in interpreting market data. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that the Company could realize in a current market exchange.
The carrying amount and estimated fair value (in each case including accrued interest) of the Company'sCompany’s financial instrument assets and (liabilities) at November 25, 200124, 2002 and November 26, 200025, 2001 are as follows:
November 24, 2002 | November 25, 2001 | |||||||||||||||
Carrying Value (1) | Estimated Fair Value | Carrying Value (2) | Estimated Fair Value | |||||||||||||
(Dollars in Thousands) | ||||||||||||||||
DEBT INSTRUMENTS: | ||||||||||||||||
U.S. dollar notes offering | $ | (1,193,806 | ) | $ | (1,110,650 | ) | $ | (1,193,012 | ) | $ | (932,138 | ) | ||||
Euro notes offering |
| (130,933 | ) |
| (114,414 | ) |
| (114,378 | ) |
| (85,719 | ) | ||||
Yen-denominated eurobond placement |
| (167,134 | ) |
| (116,667 | ) |
| (164,413 | ) |
| (113,115 | ) | ||||
Credit facilities |
| (115,210 | ) |
| (115,210 | ) |
| (252,748 | ) |
| (252,748 | ) | ||||
Domestic receivables-backed securitization |
| (110,052 | ) |
| (110,052 | ) |
| (110,081 | ) |
| (110,081 | ) | ||||
Customer service center equipment financing |
| (73,203 | ) |
| (74,765 | ) |
| (80,278 | ) |
| (81,970 | ) | ||||
European receivables-backed securitization |
| (51,161 | ) |
| (51,161 | ) |
| (41,366 | ) |
| (41,366 | ) | ||||
Industrial development revenue refunding bond |
| (10,015 | ) |
| (10,015 | ) |
| (10,015 | ) |
| (10,015 | ) | ||||
Short-term and other borrowings |
| (22,150 | ) |
| (22,150 | ) |
| (19,395 | ) |
| (19,395 | ) | ||||
Total | $ | (1,873,664 | ) | $ | (1,725,084 | ) | $ | (1,985,686 | ) | $ | (1,646,547 | ) | ||||
(1) Includes accrued interest of $26.7 million. | ||||||||||||||||
(2) Includes accrued interest of $27.3 million. | ||||||||||||||||
CURRENCY AND INTEREST RATE CONTRACTS: | ||||||||||||||||
Foreign exchange forward contracts | $ | (2,851 | ) | $ | (2,851 | ) | $ | 13,797 |
| $ | 13,797 |
| ||||
Foreign exchange option contracts |
| — |
|
| — |
|
| 4,328 |
|
| 4,328 |
| ||||
Total | $ | (2,851 | ) | $ | (2,851 | ) | $ | 18,125 |
| $ | 18,125 |
| ||||
Interest rate option contracts |
| — |
|
| — |
| $ | (2,266 | ) | $ | (2,266 | ) | ||||
Quoted market prices or dealer quotes are used to determine the estimated fair value of foreign exchange contracts, option contracts and interest rate swap contracts. Dealer quotes and other valuation methods, such as the discounted value of future cash flows, replacement cost and termination cost have been used to determine the estimated fair value for long-term debt and the remaining financial instruments. The carrying values of cash and cash equivalents, trade receivables, current assets, certain current and non-current maturities of long-term debt, short-term borrowings and taxes approximate fair value.
64
LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
The fair value estimates presented herein are based on information available to the Company as of November 25, 200124, 2002 and November 26, 2000.25, 2001. These amounts have not been updated since those dates and, therefore, the current estimates of fair value at dates subsequent to November 25, 200124, 2002 and November 26, 200025, 2001 may differ substantially from these amounts. In addition, the aggregation of the fair value calculations presented herein do not represent and should not be construed to represent the underlying value of the Company.
NOTE
Note 10: DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
Derivative Instruments and Hedging Activities
The Company adopted SFAS 133, "Accounting“Accounting for Derivative Instruments and Hedging Activities,"” on the first day of fiscal year 2001. SFAS 133 requires all derivatives to be recognized as assets or liabilities at fair value. Due to the adoption of SFAS 133, the Company reported a net gain transition amountgain of $87 thousand in other income/expense. This“Other (income) expense, net” for the three months ended February 25, 2001. The transition amount was not recorded on a separate line item as a change in accounting principle, net of tax, due to the minimal impact on the Company'sCompany’s results of operations. In addition, the Company recorded a transition amount of $0.7 million (or $0.4 million net of related income taxes) that reduced accumulated“Accumulated other comprehensive income.
FOREIGN EXCHANGE MANAGEMENT
income (loss).”
Foreign Exchange Management
The Company manages foreign currency exposures primarily to maximize the U.S. dollar value over the long term. The Company attempts to take a long-term view of managing exposures on an economic basis, using forecasts to develop exposure positions and engaging in active management of those exposures with the objective of protecting future cash flows and mitigating risks. As a result, not all exposure management activities and foreign currency derivative instruments will qualify for hedge accounting treatment. For derivative instruments utilized in these transactions, changes in fair value are classified into earnings. The Company holds derivative positions only in currencies to which it has exposure. The Company has established a policy for a maximum allowable level of losses that may occur as a result of its currency exposure management activities. The maximum level of loss is based on a percentage of the total forecasted currency exposure being managed.
The Company uses a variety of derivative instruments, including forward, swap and option contracts, to protect against foreign currency exposures related to sourcing, net investment positions, royalties and cash management.
The derivative instruments used to manage sourcing exposures do not qualify for hedge accounting treatment and are recorded at their fair value and anyvalue. Any changes in fair value are included in other income/expense.
“Other (income) expense, net.”
The Company manages its net investment position in its subsidiaries in major currencies by using forward, swap and option contracts. PartSome of the contracts hedging these net investments qualify for hedge accounting and the related gains and losses are consequently categorized in the cumulative translation adjustment in the accumulated“Accumulated other comprehensive income (loss)” section of stockholders' deficit.Stockholders’ Deficit. At November 25, 2001,24, 2002, the fair value of qualifying net investment hedges was a $5.8$0.1 million net asset that wasliability with the corresponding unrealized loss recorded in the cumulative translation adjustment section of accumulated“Accumulated other comprehensive income. There were no gains or lossesincome (loss).” At November 24, 2002, $1.5 million realized loss has been excluded from hedge effectiveness testing. In addition, the Company holds derivatives managing the net investment positions in major currencies that do not qualify for hedge accounting. The fair value of these net investment hedgesderivatives at November 25, 200124, 2002 represented a $0.3$0.4 million net asset.
asset, and changes in their fair value are included in “Other (income) expense, net.”
The Company designates a portion of its outstanding yen-denominated eurobond as a net investment hedge. As of November 25, 2001,24, 2002, a $6.8$5.3 million net asset related to the translation effects of the yen-denominated eurobond was recorded in the cumulative translation adjustment section of accumulated“Accumulated other comprehensive income.
65
LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Theincome (loss).”
As of November 24, 2002, the Company holds no derivatives hedging forecasted intercompany royalty flows that qualify as cash flow hedges. The fair value of the outstanding contracts
qualifying as cash flow hedges amounted to a $0.9 million net asset as of
November 25, 2001. The gains and losses on the contracts that qualify for hedge
accounting treatment are recorded in accumulated other comprehensive income
until the underlying royalty flow has been settled. Hedging activity for
qualifying cash flow hedges of a net gain of $0.9 million is expected to be
reclassified to earnings in the first quarter of fiscal year 2002 as the
underlying hedged items affect earnings. For the year ended November 25, 2001, a
net gain of $0.1 million related to ineffectiveness of qualifying cash flow
hedges of such intercompany royalty flows was recorded in other income/expense.
The amount of matured cash flow hedges reclassified forduring the fiscal year endedending November 25, 200124, 2002 from accumulated“Accumulated other comprehensive income (loss)” to other income/“Other (income) expense, amountednet” amounts to a net gain of $3.9$0.7 million. For the year ended November 25, 2001,
cash flow hedges, of $0.3 million, hedging forecasted royalty flows for fiscal
year 2002 have been discontinued as these royalty flows have been prepaid during
fiscal year 2001. The Company also enters into contracts managing forecasted intercompany royalty flows that do not qualify as cash flow hedges. Thehedges, and are recorded at their fair value. Any changes in fair value of these instruments as of November 25, 2001 was a $0.2 million net
liability.
are included in “Other (income) expense, net.”
The derivative instruments utilized in transactions managing cash management exposures are currently marked to market at their fair value and any changes in fair value are recorded in other income/expense.
“Other (income) expense, net.” The Company offsets relevant daily cash flows by currency among its affiliates. As a result, the Company hedges only its net foreign currency exposures with external parties.
The Company also entered into transactions managing the exposure related to the Euro Notesnotes issued on January 18, 2001. These derivative instruments are currently marked to market at their fair value and any changes in fair value are recorded in other income/expense.
Fair values of forward transactions and of the forward portion of swap
transactions are calculated using the discounted difference between the contract
forward price and the forward price at the closing date for the remaining life
of the contract. Prior to the adoption of SFAS 133, forward points and option
premiums were recorded as assets or liabilities on the balance sheet and
amortized over the life of the contract. Option contracts are also recorded at
fair value. Due to the adoption of SFAS 133, these changes in valuation methods
resulted in a net gain of $1.3 million that was recorded in other
income/expense. In addition, the accumulated other comprehensive income section
of stockholders' deficit decreased by approximately $0.7 million. As of November
25, 2001, the transition adjustment related to qualifying cash flow hedges has
been reclassified to earnings as the underlying hedged items affected earnings.
During the year ended November 25, 2001, the Company reclassified a net realized
loss of $0.8 million related to transition adjustment of matured cash flow
hedges from accumulated other comprehensive income to other income/expense.
INTEREST RATE MANAGEMENT
“Other (income) expense, net.”
Interest Rate Management
The Company is exposed to interest rate risk. It is the Company'sCompany’s policy and practice to use derivative instruments, primarily interest rate swaps and options, to manage and reduce interest rate exposures using a mix of fixed and variable rate debt. The fair value of theCompany currently has no derivative instruments managing interest rate risk outstanding as of November 25, 2001 was a $2.3 million net liability. As the outstanding
transactions either do not qualify for hedge accounting or management has
elected not to designate such transactions for hedge accounting, the Company
reports the changes in fair value of such derivatives in other income/expense.
24, 2002.
Due to the adoption of SFAS 133, the Company adjusted the carrying value of the outstanding interest rate derivatives to their fair value, which resulted in a net loss of $1.2 million and was recorded in other income/“Other (income) expense, net” during the first quarter of fiscal year 2001.
66
LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
The tables below give an overview of the realized and unrealized gains and losses associated with our foreign exchange management activities and reported in other income/“Other (income) expense, realized and unrealizednet,” “Accumulated other comprehensive income ("OCI"(loss) (“Accumulated OCI”) balances, realized and unrealized cumulative
translation adjustments ("CTA")” balances and the fair values of derivative instruments reported as an asset or liability. Accumulated OCI and CTA are components of the
accumulated other comprehensive incomeis a section of stockholders' deficit.
Stockholders’ Deficit.
Year Ended November 24, 2002 | Year Ended November 25, 2001 | |||||||||||||
Other (income) expense, net | Other (income) expense, net | |||||||||||||
Realized | Unrealized | Realized | Unrealized | |||||||||||
(Dollars in Thousands) | ||||||||||||||
Foreign Exchange Management | $ | 45,881 |
| $ | 11,470 |
| $ | 8,308 | $ | 7,032 | ||||
Transition Adjustments |
| — |
|
| — |
|
| 828 |
| — | ||||
Total | $ | 45,881 |
| $ | 11,470 |
| $ | 9,136 | $ | 7,032 | ||||
Interest Rate Management | $ | 2,266 | (1) | $ | (2,266 | ) | $ | — | $ | 1,476 | ||||
Transition Adjustments |
| — |
|
| — |
|
| — |
| 1,246 | ||||
Total | $ | 2,266 |
| $ | (2,266 | ) | $ | — | $ | 2,722 | ||||
| (1) | Recorded as an increase to interest expense. |
At November 24, 2002 | At November 25, 2001 | |||||||||||||||
Accumulated OCI gain (loss) | Accumulated OCI gain (loss) | |||||||||||||||
Realized | Unrealized | Realized | Unrealized | |||||||||||||
(Dollars in Thousands) | ||||||||||||||||
Foreign Exchange Management | ||||||||||||||||
Net Investment Hedges | ||||||||||||||||
Derivative Instruments | $ | 39,818 |
| $ | (96 | ) | $ | 53,314 |
| $ | 5,664 |
| ||||
Yen Bond |
| — |
|
| 5,277 |
|
| — |
|
| 6,780 |
| ||||
Cash Flow Hedges |
| — |
|
| — |
|
| — |
|
| 908 |
| ||||
Transition Adjustments |
| — |
|
| — |
|
| — |
|
| 120 |
| ||||
Cumulative income taxes |
| (14,732 | ) |
| (1,917 | ) |
| (19,726 | ) |
| (4,985 | ) | ||||
Total | $ | 25,086 |
| $ | 3,264 |
| $ | 33,588 |
| $ | 8,487 |
| ||||
At November 24, 2002 | At November 25, 2001 | |||||||
Fair value asset (liability) | Fair value asset (liability) | |||||||
(Dollars in Thousands) | ||||||||
Foreign Exchange Management | $ | (2,851 | ) | $ | 18,125 |
| ||
Interest Rate Management | $ | — |
| $ | (2,266 | ) | ||
Note 11: LEASES
Leases
The Company is obligated under operating leases for facilities, office space and equipment. At November 25, 2001,24, 2002, obligations under long-term leases are as follows:
MINIMUM
LEASE
PAYMENTS
--------
(DOLLARS IN THOUSANDS)
2002 ...................................... $ 61,974
2003 ...................................... 57,310
2004 ...................................... 54,803
2005 ...................................... 50,472
2006 ...................................... 48,249
Remaining years............................ 209,502
-------
Total minimum lease payments.......... $482,310
========
Minimum Lease Payments | |||
(Dollars in Thousands) | |||
2003 | $ | 64,211 | |
2004 |
| 58,375 | |
2005 |
| 55,051 | |
2006 |
| 52,646 | |
2007 |
| 47,887 | |
Remaining years |
| 189,832 | |
Total minimum lease payments | $ | 468,002 | |
The amounts shown for total minimum lease payments on operating leases have not been reduced by estimated future income of $12.3$11.9 million from non-cancelable subleases. The amounts shown for total minimum lease payments on operating leases have not been increased by estimated future operating expense and property tax escalations.
In general, leases relating to real estate include renewal options of up to approximately 20 years, except for the San Francisco headquarters office lease, which contains multiple renewal options of up to 78 years. Some leases contain escalation clauses relating to increases in operating costs. Certain operating leases provide the Company with an option to purchase the property after the initial lease term at the then prevailing market value. Rental expense for 2002, 2001 and 2000 and 1999 was $76.2 million, $74.0 million and $78.1 million, respectively.
Note 12: Pension and $86.1 million, respectively.
NOTE 12: PENSION AND POSTRETIREMENT BENEFIT PLANS
Postretirement Benefit Plans
The Company has numerousseveral non-contributory defined benefit retirement plans covering substantially all employees. It is the Company'sCompany’s policy to fund its retirement plans based on actuarial recommendations, consistent with applicable laws and income tax regulations. Plan assets, which may be denominated in foreign currencies and issued by foreign issuers, are invested in a diversified portfolio of securities including stocks, bonds, real estate investment funds and cash equivalents. Benefits payable under the plans are based on either years of service or final average compensation. The Company retains the right to amend, curtail or discontinue any aspect of the plans at any time.
The Company also sponsors other retirement plans, primarily for foreign employees. Expense for these plans in 2002, 2001, and 2000 and 1999 totaled $6.7 million, $6.2 million, and $5.0 million, and $12.0 million, respectively.
The Company maintains two plans that provide postretirement benefits, principally health care, to substantially all domestic retirees and their qualified dependents. These plans have been established with the intention that they will continue indefinitely. However, the Company retains the right to amend, curtail or discontinue any aspect of the plans at any time. Under the Company'sCompany’s current policies, employees become eligible for these benefits when they reach age 55 with 15 years of credited service. The plans are contributory and contain certain cost-sharing features, such as deductibles and coinsurance. The Company'sCompany’s policy is to fund postretirement benefits as claims and premiums are paid. In November 2000, the Company announced a plan change for those who retire after March 31, 1989. These changes were effective January 1, 2001 and resulted in increased contributions from retirees for medical coverage and the elimination of any dental subsidies.
The Company instituted early retirement programs offered to some of those affected by the Company's 1997 - 1999 excess manufacturing capacity initiatives
and variousCompany’s reorganization initiatives (SEE NOTE(see Note 3 TO THE CONSOLIDATED FINANCIAL
STATEMENTS)to the Consolidated Financial Statements). A reduced benefit is payable under the programs based on reduced years of age and service than under the defined benefit retirement plans.service. These programs resulted in the recognition of net curtailment gains and losses andresulting from early retirement incentives.
68
LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Pension Benefits | Postretirement Benefits | |||||||||||||||
November 24, 2002 | November 25, 2001 | November 24, 2002 | November 25, 2001 | |||||||||||||
(Dollars in Thousands) | ||||||||||||||||
Change in benefit obligation: | ||||||||||||||||
Benefit obligation at beginning of year | $ | 661,700 |
| $ | 602,060 |
| $ | 561,227 |
| $ | 519,117 |
| ||||
Service cost |
| 14,540 |
|
| 15,249 |
|
| 5,918 |
|
| 6,040 |
| ||||
Interest cost |
| 48,814 |
|
| 47,443 |
|
| 40,874 |
|
| 38,576 |
| ||||
Plan participants’ contributions |
| 277 |
|
| 271 |
|
| 3,152 |
|
| 2,404 |
| ||||
Plan amendments |
| (2,682 | ) |
| — |
|
| (2,989 | ) |
| (21,131 | ) | ||||
Actuarial loss |
| 55,218 |
|
| 35,440 |
|
| 193,362 |
|
| 51,475 |
| ||||
Net curtailment (gain) loss |
| 10,237 |
|
| 19 |
|
| (12,287 | ) |
| — |
| ||||
Settlement gain |
| — |
|
| (177 | ) |
| — |
|
| — |
| ||||
Special termination benefits |
| — |
|
| — |
|
| 11,868 |
|
| — |
| ||||
Benefits paid* |
| (36,119 | ) |
| (38,604 | ) |
| (39,202 | ) |
| (35,254 | ) | ||||
Benefit obligation at end of year |
| 751,985 |
|
| 661,701 |
|
| 761,923 |
|
| 561,227 |
| ||||
Change in plan assets: | ||||||||||||||||
Fair value of plan assets at beginning of year |
| 565,657 |
|
| 639,950 |
|
| — |
|
| — |
| ||||
Actual return on plan assets |
| (46,808 | ) |
| (70,334 | ) |
| — |
|
| — |
| ||||
Employer contribution |
| 26,952 |
|
| 34,374 |
|
| 36,050 |
|
| 32,850 |
| ||||
Plan participants’ contributions |
| 274 |
|
| 271 |
|
| 3,152 |
|
| 2,404 |
| ||||
Benefits paid* |
| (36,116 | ) |
| (38,604 | ) |
| (39,202 | ) |
| (35,254 | ) | ||||
Fair value of plan assets at end of year |
| 509,959 |
|
| 565,657 |
|
| — |
|
| — |
| ||||
Funded status |
| (242,026 | ) |
| (96,044 | ) |
| (761,923 | ) |
| (561,227 | ) | ||||
Unrecognized actuarial loss |
| 174,853 |
|
| 22,198 |
|
| 203,733 |
|
| 20,254 |
| ||||
Unrecognized prior service cost |
| 4,632 |
|
| 11,220 |
|
| (31,659 | ) |
| (44,746 | ) | ||||
Net amount recognized | $ | (62,541 | ) | $ | (62,626 | ) | $ | (589,849 | ) | $ | (585,719 | ) | ||||
| * | Pension benefits are primarily paid by a trust. |
Global capital market developments resulted in negative returns on the Company’s retirement benefit plan assets and a decline in the discount rates used to estimate the liability. As a result, the Company was required to record an additional minimum pension liability of $137.0 million and an intangible asset of $1.1 million for plans where the accumulated benefit obligation exceeded the fair market value of the respective plan assets. The additional minimum pension liability and intangible asset was included in the Company’s accumulated other comprehensive loss ($86.0 million after tax).
Pension Benefits | Postretirement Benefits | |||||||||||||||
2002 | 2001 | 2002 | 2001 | |||||||||||||
(Dollars in Thousands) | ||||||||||||||||
Amounts recognized in the consolidated balance sheets consist of: | ||||||||||||||||
Prepaid benefit cost | $ | 21,605 |
| $ | 5,519 |
| $ | — |
| $ | — |
| ||||
Accrued benefit cost (including short-term) |
| (89,584 | ) |
| (72,962 | ) |
| (589,849 | ) |
| (585,719 | ) | ||||
Additional minimum liability |
| (136,952 | ) |
| — |
|
| — |
|
| — |
| ||||
Intangible asset |
| 6,577 |
|
| 4,817 |
|
| — |
|
| — |
| ||||
Accumulated other comprehensive income |
| 135,813 |
|
| — |
|
| — |
|
| — |
| ||||
Net amount recognized | $ | (62,541 | ) | $ | (62,626 | ) | $ | (589,849 | ) | $ | (585,719 | ) | ||||
Weighted-average assumptions: | ||||||||||||||||
Discount rate |
| 7.0 | % |
| 7.5 | % |
| 7.0 | % |
| 7.5 | % | ||||
Expected return on plan assets |
| 9.0 | % |
| 9.0 | % |
| — |
|
| — |
| ||||
Rate of compensation increase |
| 5.0 | % |
| 6.0 | % |
| — |
|
| — |
| ||||
Pension Benefits | ||||||||||||
2002 | 2001 | 2000 | ||||||||||
(Dollars in Thousands) | ||||||||||||
Components of net periodic benefit cost: | ||||||||||||
Service cost | $ | 14,540 |
| $ | 15,249 |
| $ | 18,661 |
| |||
Interest cost |
| 48,814 |
|
| 47,443 |
|
| 43,678 |
| |||
Expected return on plan assets |
| (49,342 | ) |
| (52,255 | ) |
| (52,337 | ) | |||
Amortization of prior service cost |
| 2,093 |
|
| 2,505 |
|
| 2,052 |
| |||
Recognized actuarial (gain) loss |
| (645 | ) |
| (1,895 | ) |
| (670 | ) | |||
Unrecognized prior service cost |
| 1,623 |
|
| — |
|
| — |
| |||
Net curtailment (gain) loss |
| 10,237 |
|
| 19 |
|
| (18,184 | ) | |||
Settlement gain |
| — |
|
| (177 | ) |
| (187 | ) | |||
Net periodic benefit cost | $ | 27,320 |
| $ | 10,889 |
| $ | (6,987 | ) | |||
Postretirement Benefits | |||||||||||
2002 | 2001 | 2000 | |||||||||
(Dollars in Thousands) | |||||||||||
Components of net periodic benefit cost: | |||||||||||
Service cost | $ | 5,918 |
| $ | 6,040 |
| $ | 7,006 | |||
Interest cost |
| 40,874 |
|
| 38,576 |
|
| 34,943 | |||
Amortization of prior service cost |
| (3,522 | ) |
| (4,125 | ) |
| — | |||
Net curtailment gain |
| (12,554 | ) |
| — |
|
| — | |||
Settlement loss |
| 11,868 |
|
| — |
|
| — | |||
Net periodic benefit cost | $ | 42,584 |
| $ | 40,491 |
| $ | 41,949 | |||
Pension benefit plans with projected benefit obligations exceeding the fair value of plan assets were as follows:
Pension Benefits | ||||||
2002 | 2001 | |||||
(Dollars in Thousands) | ||||||
Aggregate fair value of plan assets | $ | 509,959 | $ | 375,273 | ||
Aggregate projected benefit obligation | $ | 751,985 | $ | 472,556 | ||
Pension benefit plans with accumulated benefit obligations exceeding the fair value of plan assets were as follows:
Pension Benefits | ||||||
2002 | 2001 | |||||
(Dollars in Thousands) | ||||||
Aggregate fair value of plan assets | $ | 495,785 | $ | — | ||
Aggregate accumulated benefit obligation | $ | 685,826 | $ | 52,777 | ||
For postretirement benefits measurement purposes, a 13.0%15.0% and 6.5%7.5% annual rate of increase in the per capita cost of covered health care and Medicare Part B benefits, respectively, arewere assumed for 2002,2002-2003, declining gradually to 5.0% and 2.5% by the year 20112010-2011 and remaining at those rates thereafter.
69
LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
PENSION BENEFITS
-------------------------------
2001 2000 1999
---- ---- ----
(DOLLARS IN THOUSANDS)
COMPONENTS OF NET PERIODIC BENEFIT COST:
Service cost...................................... $15,249 $18,661 $23,743
Interest cost..................................... 47,443 43,678 43,154
Expected return on plan assets.................... (52,255) (52,337) (44,871)
Amortization of prior service cost................ 2,505 2,052 2,309
Recognized actuarial gain......................... (1,895) (670) (487)
Net curtailment (gain) loss....................... 19 (18,184) 21,973
Settlement (gain) loss............................ (177) (187) 540
------- ------- -------
Net periodic benefit cost......................... $10,889 $(6,987) $46,361
======= ======= =======
POSTRETIREMENT BENEFITS
-------------------------------
2001 2000 1999
---- ---- ----
(DOLLARS IN THOUSANDS)
COMPONENTS OF NET PERIODIC BENEFIT COST:
Service cost...................................... $ 6,040 $ 7,006 $ 7,480
Interest cost..................................... 38,576 34,943 33,485
Amortization of prior service cost................ (4,125) -- --
Recognized actuarial gain......................... -- -- (345)
Net curtailment loss.............................. -- -- 13,774
------- ------- -------
Net periodic benefit cost......................... $40,491 $41,949 $54,394
======= ======= =======
The Company has three non-qualified, unfunded pension plans that have total
accumulated benefit obligations in excess of plan assets. The projected benefit
obligation and accumulated benefit obligation for the unfunded pension plans
were $59.2 million and $52.7 million, respectively, as of November 25, 2001 and
$66.2 million and $57.8 million, respectively, as of November 26, 2000.
Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plan. A one-percentage-point change in assumed health care cost trend rates would have the following effects to postretirement benefits:
U.S. 1-Percentage-Point Increase | U.S. 1-Percentage-Point Decrease | ||||||
(Dollars in Thousands) | |||||||
Effect on total of service and interest cost components | $ | 6,125 | $ | (5,358 | ) | ||
Effect on the postretirement benefit obligation |
| 86,132 |
| (72,641 | ) | ||
Note 13: EMPLOYEE INVESTMENT PLANS
Employee Investment Plans
The Company maintains three employee investment plans. The Employee Investment Plan of Levi Strauss & Co. ("EIP"(“EIP”) and the Levi Strauss & Co. Employee Long-Term Investment and Savings Plan ("ELTIS"(“ELTIS”) are two qualified plans that cover eligible compensated Home Office employees and U.S. field employees. The Capital Accumulation Plan of Levi Strauss & Co. ("CAP"(“CAP”) is a non-qualified, self-directed investment program for certain highly compensated employees (as defined by the Internal Revenue Code).
Total amounts charged to expense for these plans in 2002, 2001, and 2000 and
1999 were $13.1$13.3 million, $12.8$10.9 million, and $14.4$9.2 million, respectively.
70
LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
EIP/ELTIS
Under EIP and ELTIS, eligible employees may contribute and direct up to 15% of their annual eligible compensation to various investments among a series of mutual funds. The Company may match the contributions made by employees to all funds maintained under the qualified plans up to the first 10% of eligible
compensation.plans. Employees are always 100% vested in the Company match. The EIP and the ELTIS allow employees a choice of either pre-tax or after-tax contributions. The ELTIS also includes a company profit sharing provision with payments made at the sole discretion of the board of directors.
In December 2000, the Company announced changes to the EIP plan that were effective January 1, 2001. These changes allow eligible employees to contribute and direct up to 15% (from 10% previously) of their annual compensation to various investments among a series of mutual funds. The Company may match contributions made by employees to all funds maintained under the qualified plans up to the first 10% of eligible compensation.
In November 2001, the Company announced changes to the EIP that were effective December 2001. The changes provide that the Company may match eligible employee contributions on a graded scale from 0% to 75% for EIP. The level of the matching contribution will be determined at year end based upon business performance results.
The ELTIS was changed effective April 1, 2001 to allow eligible employees to contribute up to 15% (from 10% previously) of their annual compensation to the plan.Plan. The Company may match 50% of the contributions made by employees to all funds maintained under the qualified plansplan up to the first 10% of eligible compensation.
In November 2001, the Company announced changes to the EIP that was
effective December 2001. The changes provide that the Company may match up to
10% of eligible employee contributions on a graded scale from 0% to 75%. The
level of the matching contribution will be determined at year end based upon
business performance results. Prior to December 2001, the Company may have
matched 50% of the employees' contributions up to the first 10% of their
eligible compensation.
CAP
The CAP allows eligible employees to contribute on an after-tax basis up to 10% of their eligible compensation to an individual retail brokerage account. The Company may match upthese contributions made by employees in cash to 75% of these employee contributions that are
deposited to the employee'seach employee’s account. Employees are always 100% vested in the Company match. All investment decisions, related commissions and charges, investment results and tax reporting requirements are the responsibility of the employee, not the Company. In connectionAssociated with the January 1, 2001 changes in the EIP the Company changed the CAP to provideplan above that were effective January 1, 2001, eligible employees will be ableeligible to participate in the CAP plan after reaching certain salary and contribution thresholds in the EIP.
EIP plan and salary thresholds.
In November 2001, the Company announced changes to the CAP that were effective December 2001. The changes provide that the Company may match up to 10% of
eligible employee contributions on a graded scale from 0% to 115%. for CAP. The level of the matching contribution will be determined at year end based upon business performance results.
NOTE
Note 14: EMPLOYEE COMPENSATION PLANS
ANNUAL INCENTIVE PLAN
Employee Compensation Plans
Annual Incentive Plan
The Annual Incentive Plan ("AIP"(“AIP”) is intended to reward individual and team
contributions to the Company'sCompany’s objectives during the year. The amount of incentivethe cash bonus earned depends on business unit and corporate financial results as measured against pre-established targets and also depends upon the performance and salary grade level of the individual and also depends on business unit and corporate financial results
against pre-established targets.individual. Provisions for the AIP are recorded in accrued salaries, wages and employee benefits. Total amounts charged to expense for 2002, 2001 and 2000 were $48.4 million, $25.6 million and $65.1 million, respectively. In 1999, the
Company did not meet pre-established targets for AIP and did not record an
expense for 1999.
LONG-TERM INCENTIVE PLANS
Long-Term Incentive Plans
The Leadership Shares ("LS"Plan (“LS”) was introduced in early 1999. LS replaced1999 and replaces the
executive Long-Term Incentive Plan ("LTIP"(“LTIP”) with 1999. The LS grants partially based
on individual executive performance during fiscal year 1998. It places greater emphasis on an individual'sindividual’s ability to contribute to and affect the Company'sCompany’s long-term strategic objectives. LSIt is a performance unit plan pursuant to which grants units or "shares"“shares” may be granted at an initial value of $0 each. These "shares"“shares” are not stock and do not represent equity interests in the Company.
71
LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Under
The unit value is determined by an internal measure in the LS plan, theform of Leadership Value Added (“LVA”). LVA measures earnings less taxes and capitals charges. The Company establishes a competitive five-year financial
performanceLVA target for each grant based on among other things, its performance
and expected shareholder value growth at comparable companies. The actual unit value
of the units is determined based on cumulative performance against these measures.this measure. Performance at the target level will yield a per unit value of $25. If performance does not meet athe minimum threshold, standard, then the units will have no value. Performance above target yields correspondingly larger unit values; there
isvalues, with no limit on maximum award potential.
A competitive levelvalue.
The number of five-year Company financial performanceunits granted to executives is
determined by examining expected value growth at other companies. This growth is
then tied to competitive external long-term incentive pay so that the Company will pay its executives at competitive levels when the Company achieves competitive growth. At the end of each fiscal year, a share value is determined
and communicated to participants. The shares vest in one-third increments at the end of the third, fourth and fifth fiscal years of the performance period. Payments are made based on cumulative LVA performance. The Company accounts for the expense related to the LS on a straight-line basis based on estimates of future performance against plan targets.
The LTIP was a long-term incentive plan that ended for all employees during fiscal year 1999 and was replaced by LS for employees at management levels.1999. These incentives were awarded as performance units with each grant'sgrant’s unit value measured based on the Company'sCompany’s three-year cumulative earnings performance and return on investment against pre-established targets. Awards were based on an individual'sindividual’s grade level, salary and performance and arewere paid in one-third annual increments beginning in the year following the three-year performance cycle of the grant. ExistingFinal payments under the LTIP units that were previously grantedmade in 2002. Although there are outstanding grants, they will have no value based on weak performance against the pre-set targets. Accordingly, no further payments will be paid out according tomade under the plan schedule.
LTIP.
The Special Long-Term Incentive Plan ("SLTIP"(“SLTIP”) was intended to provide incentive and reward performance over time for certain key senior employees. Awards under this planthe SLTIP have the same grant unit value, vesting period and pay-out cycle as grants made under the LTIP. There will be no more grants under the SLTIP. A Long-Term Performance Plan ("LTPP"(“LTPP”), pursuant to which awarded grantsawards were made in 1994 and 1995, finished payingwere paid out in 2000.
Total net amounts charged to expense for these long-term incentive plans in 2002, 2001 and 2000 were $69.9 million, $53.2 million and $72.7 million, respectively. In 1999, the
Company did not meet some of the pre-established targets for these long-term
incentive plans and therefore reversed a portion of prior year accruals totaling
$32.5 million.
OTHER COMPENSATION PLANS
GLOBAL SUCCESS SHARING PLAN
The Global Success Sharing Plan ("GSSP") was adopted in 1996 and was
designed to allow all eligible employees to share in the Company's future
success by providing a cash payment based on the achievement of pre-established
financial targets. The plan called for an aggregate cash payment, ranging from
3% to 10% of the achieved cumulative cash flow (defined as earnings before
interest, taxes, depreciation, amortization and certain other items) to be paid
in 2002 by the Company to all eligible employees, assuming a minimum cumulative
cash flow was reached. However, in 1999, the Company lowered its estimate of
financial performance through the year 2001 and determined that payment in 2002
was highly unlikely and therefore the Company did not recognize any GSSP expense
in 2000 or 2001. In 1999, the Company reversed prior years' GSSP accruals
totaling $343.9 million, less related miscellaneous plan expenses. As of
November 25, 2001, the pre-established financial targets were not met and
consequently no cash payments will be made under the GSSP plan.
CASH PERFORMANCE SHARING PLAN
The
Other Compensation Plans
Cash Performance Sharing Plan
The Company through its Cash Performance Sharing Plans awards a cash payment to production employees worldwide based on a percentage of annual salary and certain earnings and revenue criteria. The largest individual plan is the U.S. Field Profit Sharing Plan that covers approximately 5,5002,700 U.S. employees. The total amounts charged to expense for this plan in 2002, 2001 and 2000 were $3.2 million, $1.8 million and $9.2 million, respectively. In 1999, the Company did not meet certain earnings
criteria established by the plan
Key Employee Recognition and therefore no expense was recognized.
72
LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
KEY EMPLOYEE RECOGNITION AND COMMITMENT PLAN
Commitment Plan
The Key Employee Recognition and Commitment Plan ("KEP"(“KEP”) was adopted in 1996 and was designed to recognize and reward key employees for making significant contributions to the Company'sCompany’s future success. Units awarded to employees under the planKEP are subject to a four-year vesting period, which commenced in 1997. Units are exercisable in one-third increments at the end of fiscal years 2001 through 2003 upon reaching a certain minimum cumulative earnings criteria threshold at each fiscal year-end. EmployeesParticipating employees may elect to defer the exercise of each one-third increment until final payment in 2004. Payments may occur earlier under certain circumstances. Unit values will be directly related to the excess over the threshold of the cumulative cash flow (defined as earnings before interest, taxes, depreciation, amortization and certain other items) generated by the Company at the end of the fiscal years
2001 through 2003. The Company did not recognize any KEP expense in 2002, 2001 or 2000. In 1999, the Company lowered its estimate of financial performance through the year 2003 and, consequently, decreased the KEP accrual rate to 0% and reversed prior years KEP accruals totaling $13.6 million. There will be no more grants under the KEP.
SPECIAL DEFERRAL PLAN
Special Deferral Plan
The Special Deferral Plan ("SDP"(“SDP”) was adopted during 1996 and was designed to replace the Company'sCompany’s Stock Appreciation Rights Plan ("SARs"(“SARs”). Existing SARs were transferred in to the SDP at a value of $265 per share. TheGrants were made under the SDP had grants in 1992 and 1994, both of which are fully vested. The SDP bases the appreciation/depreciation of units on certain tracked mutual funds or the prime rate, at the election of the employee. There will be no more grants under SDP.
During 2002, 2001 and 2000, cash disbursements for SDP grants were $2.6 million, $1.2 million and $9.8 million, respectively. The amounts charged (net of forfeitures) to expense for the planSDP in 2002, 2001 and 2000 and 1999 were $0 million, $0.4 million and $1.0 million, and
$(2.3) million, respectively. NOTEThe final payments under the SDP were made in 2002.
Note 15: LONG-TERM EMPLOYEE RELATED BENEFITS
Long-Term Employee Related Benefits
Balances for long-term employee related benefits are as follows:
2001 2000
---- ----
(DOLLARS IN THOUSANDS)
Workers' compensation................... $ 41,685 $ 59,307
Long-term performance programs.......... 132,563 80,549
Deferred compensation................... 94,793 93,681
Pension programs........................ 115,710 125,312
-------- --------
Total.............................. $384,751 $358,849
======== ========
2002 | 2001 | |||||
(Dollars in Thousands) | ||||||
Workers’ compensation | $ | 59,512 | $ | 41,685 | ||
Long-term performance programs |
| 137,514 |
| 132,563 | ||
Deferred compensation |
| 87,630 |
| 94,793 | ||
Pension programs |
| 242,762 |
| 115,710 | ||
Total | $ | 527,418 | $ | 384,751 | ||
Included in the liability for workers'workers’ compensation are accrued expenses related to the Company'sCompany’s program that provides for early identification and treatment of employee injuries. Changes in the Company'sCompany’s safety programs, medical and disability management and the long-term effects of statutory changes have decreased workers'workers’ compensation costs substantially from historical trends. Provisions for workers'workers’ compensation of $21.0$24.3 million and $13.6$21.0 million were recorded during fiscal years2002 and 2001, and 2000, respectively. Reclassifications toIn addition, in 2002, the Company recorded a one-time provision of $17.9 million associated with the 2002 plant closures. Workers’ compensation current liabilities represented a reduction of approximately $27.3$26.8 million in fiscal year 20012002 and $28.0$33.0 million in fiscal year 2000.2001. Long-term performance programs include accrued liabilities for LS and LTIP (SEE NOTE(see Note 14 TO THE
CONSOLIDATED FINANCIAL STATEMENTS)to the Consolidated Financial Statements). Deferred compensation represents non-qualified agreementsplans under which certain employees may defer income. The pension programs include the accrued benefit cost for the qualified pension plans and the liability accrued for the non-qualified pension programs (SEE NOTE(see Note 12 TO THE CONSOLIDATED FINANCIAL STATEMENTS)to the Consolidated Financial Statements).
NOTE
Note 16: COMMON STOCK
Common Stock
The Company has a capital structure consisting of 270,000,000 authorized shares of common stock, par value $.01 per share, of which 37,278,238 shares are issued and outstanding.
73
LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
NOTE
Note 17: RELATED PARTIES
COMPENSATION OF DIRECTORS
Related Parties
Compensation of Directors
Directors of the Company who are also stockholders or employees of the
Company do not receive compensation for their services as directors. Directors who are not stockholders or employees (Angela Glover Blackwell, James C. Gaither, Peter A. Georgescu, Patricia Salas Pineda, T. Gary Rogers and G. Craig Sullivan) receive annual compensation of approximately $88,000.$90,000. This amount includes an annual retainer fee of $36,000, meeting fees of $1,000 per meeting day attended and long-term variable pay in the form of 1,800 LS units, forLeadership Shares, with a target value of $45,000 per year (SEE NOTE(see Note 14 TO THE CONSOLIDATED FINANCIAL
STATEMENTS)to the Consolidated Financial Statements). The actual amount for each of the above payments varies depending on the years of service, the number of meetings attended and the actual value of the granted units upon vesting. Directors, in their first sixfive years of service, receive a cash amount equivalent to the target value of their long-term variable pay or $45,000. This amount is decreased by approximately 1/3 each year at the start of actual payments from LS&CO.'sthe LS plan.Plan. Directors who are not employees or stockholders also receive travel accident insurance while on Company business and are eligible to participate in a deferred compensation plan.
Messrs. Gaither, Georgescu, Rogers and Sullivan, and Ms. Blackwell and Ms. Pineda each received 1,800 LS unitsLeadership Shares in both2002, 2001 and 2000. In 2002, Ms. Blackwell, Mr. Gaither and Ms. Pineda each received payments of $1,462 under the Long-Term Incentive Plan (“LTIP”). In 2001, Ms. Blackwell, Mr. Gaither and Ms. Pineda each received payments of $9,727, under LTIP. In 2000, Mr. Gaither, Ms. Blackwell Mr. Gaither and Ms. Pineda each received payments of $30,637 under the LTIP and LTPPLong-Term Performance Plan combined.
OTHER TRANSACTIONS
Other Transactions
F. Warren Hellman, a director of the Company, is chairman and a general partner of Hellman & Friedman LLC, an investment banking firm that has provided financial advisory services to the Company in the past. The Company did not pay any fees to Hellman & Friedman LLC during fiscal years2002, 2001 2000 and 1999.2000. At November 25, 200124, 2002 and November 26, 2000,25, 2001, Mr. Hellman and his family, other partners, and former partners of Hellman & Friedman LLC beneficially owned an aggregate of less than 5% of the outstanding common stock of the Company.
James C. Gaither, a director of the Company, is a senior counsel of the law firm Cooley Godward LLP. The firm provided legal services to the Company in 2002, 2001 2000 and 19992000 and received in fees approximately $18,000, $91,000 and $60,000, and
$165,000, respectively.
ESTATE TAX REPURCHASE POLICY
The Company has a policy under which it will, subject to certain
conditions, repurchase a portion of the shares offered by the estate of a
deceased stockholder in order to generate funds for payment of estate taxes.
The purchase price will be based on a valuation received from an investment
banking or appraisal firm. Estate repurchase transactions will be subject to,
among other things, compliance with applicable laws governing stock repurchases,
board approval and restrictions under the Company's credit facilities and
indentures relating to 11.625% senior notes due 2008 (SEE NOTE 7 TO THE
CONSOLIDATED FINANCIAL STATEMENTS). The policy does not create a contractual
obligation on the Company. No shares were repurchased under this policy in 2001,
2000 and 1999.
NOTE
Note 18: BUSINESS SEGMENT INFORMATION
Business Segment Information
The Company manages its only segment, the apparel business, based on geographic regions consisting of the Americas, which includes the U.S., Canada and Latin America; Europe, the Middle East and Africa; and Asia Pacific. All Other consists of functions that are directed by the corporate office and are not allocated to a specific geographic region. Under Geographic Information for all periods presented, no single country other than the U.S. had net sales exceeding 10% of consolidated net sales.
The Company designs and markets jeans and jeans-related pants, casual and dress pants, tops, jackets and related accessories, for men, women and children, under the Company's Levi's(R)Company’s Levi’s® and Dockers(R)Dockers® brands. Its products are distributed in the U.S. primarily through chain retailers and department stores and abroad through department stores, specialty retailers and franchised stores. The Company also maintains a network of approximately 840900 franchised or independently owned stores dedicated to its products outside the U.S. and operates a small number of company-owned stores in ten countries. The Company obtains its products from a combination of independent manufacturers and company-owned facilities and
independent manufacturers.
74
LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
facilities.
The Company evaluates performance and allocates resources based on regional profits or losses. The accounting policies of the regions are the same as those described in Note 1, "Summary“Summary of Significant Accounting Policies."” Regional profits exclude net interest expense, special compensation program expenses, excess capacity/restructuring charges/charges, net of reversals and expenses that are controlled at the corporate level. Management financial information for the Company is as follows:
Americas | Europe | Asia Pacific | All Other | Consolidated | |||||||||||
(Dollars in Thousands) | |||||||||||||||
2002: | |||||||||||||||
Net sales from external customers | $ | 2,692,129 | $ | 1,093,110 | $ | 351,351 | $ | — | $ | 4,136,590 | |||||
Intercompany sales |
| 35,216 |
| 890,036 |
| 32,445 |
| — |
| 957,697 | |||||
Depreciation and amortization expense |
| 50,470 |
| 16,532 |
| 4,069 |
| — |
| 71,071 | |||||
Earnings contribution |
| 364,200 |
| 201,500 |
| 62,600 |
| — |
| 628,300 | |||||
Interest expense |
| — |
| — |
| — |
| 186,493 |
| 186,493 | |||||
Restructuring charges, net of reversals |
| — |
| — |
| — |
| 124,595 |
| 124,595 | |||||
Corporate and other expenses |
| — |
| — |
| — |
| 267,254 |
| 267,254 | |||||
Income before income taxes |
| — |
| — |
| — |
| — |
| 49,958 | |||||
Total regional assets |
| 6,009,383 |
| 2,428,771 |
| 359,270 |
| — |
| 8,797,424 | |||||
Elimination of intercompany assets |
| — |
| — |
| — |
| — |
| 5,780,140 | |||||
Total assets |
| — |
| — |
| — |
| — |
| 3,017,284 | |||||
Expenditures for long-lived assets |
| 46,125 |
| 10,028 |
| 2,935 |
| — |
| 59,088 | |||||
United States | Foreign Countries | Consolidated | |||||||
Geographic Information: | |||||||||
Net sales | $ | 2,504,681 | $ | 1,631,909 | $ | 4,136,590 | |||
Deferred tax assets |
| 730,383 |
| 65,035 |
| 795,418 | |||
Long-lived assets |
| 1,034,621 |
| 357,162 |
| 1,391,783 | |||
Americas | Europe | Asia Pacific | All Other | Consolidated | |||||||||||||
(Dollars in Thousands) | |||||||||||||||||
2001: | |||||||||||||||||
Net sales from external customers | $ | 2,856,086 | $ | 1,066,345 | $ | 336,243 | $ | — |
| $ | 4,258,674 |
| |||||
Intercompany sales |
| 34,630 |
| 913,786 |
| 36,372 |
| — |
|
| 984,788 |
| |||||
Depreciation and amortization expense |
| 57,686 |
| 18,572 |
| 4,361 |
| — |
|
| 80,619 |
| |||||
Earnings contribution |
| 382,700 |
| 203,900 |
| 56,600 |
| — |
|
| 643,200 |
| |||||
Interest expense |
| — |
| — |
| — |
| 230,772 |
|
| 230,772 |
| |||||
Restructuring charges, net of reversals |
| — |
| — |
| — |
| (4,286 | ) |
| (4,286 | ) | |||||
Corporate and other expenses |
| — |
| — |
| — |
| 177,025 |
|
| 177,025 |
| |||||
Income before income taxes |
| — |
| — |
| — |
| — |
|
| 239,689 |
| |||||
Total regional assets |
| 5,579,491 |
| 2,204,701 |
| 309,888 |
| — |
|
| 8,094,080 |
| |||||
Elimination of intercompany assets |
| — |
| — |
| — |
| — |
|
| 5,110,594 |
| |||||
Total assets |
| — |
| — |
| — |
| — |
|
| 2,983,486 |
| |||||
Expenditures for long-lived assets |
| 13,708 |
| 6,372 |
| 2,461 |
| — |
|
| 22,541 |
| |||||
United States | Foreign Countries | Consolidated | |||||||
Geographic Information: | |||||||||
Net sales | $ | 2,656,745 | $ | 1,601,929 | $ | 4,258,674 | |||
Deferred tax assets |
| 637,758 |
| 51,796 |
| 689,554 | |||
Long-lived assets |
| 1,122,208 |
| 349,987 |
| 1,472,195 | |||
Americas | Europe | Asia Pacific | All Other | Consolidated | |||||||||||||
(Dollars in Thousands) | |||||||||||||||||
2000: | |||||||||||||||||
Net sales from external customers | $ | 3,148,219 | $ | 1,104,522 | $ | 392,385 | $ | — |
| $ | 4,645,126 |
| |||||
Intercompany sales |
| 65,600 |
| 911,489 |
| 33,523 |
| — |
|
| 1,010,612 |
| |||||
Depreciation and amortization expense |
| 64,109 |
| 21,151 |
| 5,721 |
| — |
|
| 90,981 |
| |||||
Earnings contribution |
| 449,900 |
| 225,800 |
| 55,300 |
| — |
|
| 731,000 |
| |||||
Interest expense |
| — |
| — |
| — |
| 234,098 |
|
| 234,098 |
| |||||
Restructuring charges, net of reversals |
| — |
| — |
| — |
| (33,144 | ) |
| (33,144 | ) | |||||
Corporate and other expenses |
| — |
| — |
| — |
| 186,366 |
|
| 186,366 |
| |||||
Income before income taxes |
| — |
| — |
| — |
| — |
|
| 343,680 |
| |||||
Total regional assets |
| 5,187,778 |
| 1,461,877 |
| 471,068 |
| — |
|
| 7,120,723 |
| |||||
Elimination of intercompany assets |
| — |
| — |
| — |
| — |
|
| 3,914,994 |
| |||||
Total assets |
| — |
| — |
| — |
| — |
|
| 3,205,728 |
| |||||
Expenditures for long-lived assets |
| 16,900 |
| 8,323 |
| 2,732 |
| — |
|
| 27,955 |
| |||||
United States | Foreign Countries | Consolidated | |||||||
Geographic Information: | |||||||||
Net sales | $ | 2,923,799 | $ | 1,721,327 | $ | 4,645,126 | |||
Deferred tax assets |
| 646,303 |
| 44,206 |
| 690,509 | |||
Long-lived assets |
| 1,141,523 |
| 358,281 |
| 1,499,804 | |||
For 2002, 2001 2000 and 1999,2000, the Company had one customer, J. C. Penney Company, Inc., that represented approximately 13%12%, 12%13% and 11%12%, respectively, of net sales. No other customer accounted for more than 10% of net sales.
76
LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
NOTE
Note 19: QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarterly Financial Data (Unaudited)
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
2001
Net sales........................................................ $ 996,382 $1,043,937 $ 983,508 $1,234,846
Cost of goods sold............................................... 556,449 591,442 584,279 729,028
---------- ---------- ---------- ----------
Gross profit..................................................... 439,933 452,495 399,229 505,818
Marketing, general and administrative............................ 326,095 336,128 314,482 379,179
Other operating (income)......................................... (7,174) (7,365) (8,377) (10,504)
Excess capacity/restructuring charges (reversals)................ -- -- -- (4,286)
---------- ---------- ---------- ----------
Operating income................................................. 121,012 123,732 93,124 141,429
Interest expense................................................. 69,205 53,898 55,429 52,240
Other (income) expense, net...................................... 4,868 899 13,850 (10,781)
---------- ---------- ---------- ----------
Income before taxes.............................................. 46,939 68,935 23,845 99,970
Income tax expense............................................... 17,367 25,507 8,822 36,989
---------- ---------- ---------- ----------
Net income....................................................... $ 29,572 $ 43,428 $ 15,023 $ 62,981
========== ========== ========== ==========
Earnings per share--basic and diluted............................. $ 0.79 $ 1.16 $ 0.40 $ 1.69
========== ========== ========== ==========
2000
Net sales........................................................ $1,082,437 $1,149,044 $1,127,740 $1,285,905
Cost of goods sold............................................... 632,442 661,469 663,418 732,841
---------- ---------- ---------- ----------
Gross profit..................................................... 449,995 487,575 464,322 553,064
Marketing, general and administrative............................ 322,111 367,417 358,524 433,666
Other operating (income)......................................... (4,183) (6,265) (10,404) (11,528)
Excess capacity/restructuring (reversals)........................ -- -- -- (33,144)
---------- ---------- ---------- ----------
Operating income................................................. 132,067 126,423 116,202 164,070
Interest expense................................................. 56,782 60,989 59,406 56,921
Other income, net................................................ (24,958) (3,835) (1,359) (8,864)
---------- ---------- ---------- ----------
Income before taxes.............................................. 100,243 69,269 58,155 116,013
Income tax expense............................................... 35,084 24,245 20,354 40,605
---------- ---------- ---------- ----------
Net income....................................................... $ 65,159 $ 45,024 $ 37,801 $ 75,408
========== ========== ========== ==========
Earnings per share--basic and diluted............................. $ 1.75 $ 1.21 $ 1.01 $ 2.02
========== ========== ========== ==========
First Quarter | Second Quarter | Third Quarter | Fourth Quarter | |||||||||||||
(Dollars in Thousands, Except Per Share Data) | ||||||||||||||||
2002: | ||||||||||||||||
Net sales | $ | 935,285 |
| $ | 923,518 |
| $ | 1,017,744 |
| $ | 1,260,044 |
| ||||
Cost of goods sold |
| 536,701 |
|
| 553,974 |
|
| 603,249 |
|
| 757,862 |
| ||||
Gross profit |
| 398,584 |
|
| 369,544 |
|
| 414,495 |
|
| 502,182 |
| ||||
Marketing, general and administrative expenses |
| 298,935 |
|
| 318,804 |
|
| 340,390 |
|
| 374,669 |
| ||||
Other operating (income) |
| (6,113 | ) |
| (8,511 | ) |
| (6,015 | ) |
| (13,810 | ) | ||||
Restructuring charges, net of reversals |
| — |
|
| 141,078 |
|
| (16,565 | ) |
| 82 |
| ||||
Operating income |
| 105,762 |
|
| (81,827 | ) |
| 96,685 |
|
| 141,241 |
| ||||
Interest expense |
| 48,023 |
|
| 42,510 |
|
| 48,476 |
|
| 47,483 |
| ||||
Other (income) expense, net |
| (9,677 | ) |
| 9,499 |
|
| 20,791 |
|
| 4,799 |
| ||||
Income before taxes |
| 67,416 |
|
| (133,836 | ) |
| 27,418 |
|
| 88,959 |
| ||||
Income tax expense |
| 24,944 |
|
| (58,154 | ) |
| 13,709 |
|
| 44,479 |
| ||||
Net income | $ | 42,472 |
| $ | (75,682 | ) | $ | 13,709 |
| $ | 44,480 |
| ||||
Earnings per share—basic and diluted | $ | 1.14 |
| $ | (2.03 | ) | $ | 0.37 |
| $ | 1.19 |
| ||||
2001: | ||||||||||||||||
Net sales | $ | 996,382 |
| $ | 1,043,937 |
| $ | 983,508 |
| $ | 1,234,846 |
| ||||
Cost of goods sold |
| 556,449 |
|
| 591,442 |
|
| 584,279 |
|
| 729,028 |
| ||||
Gross profit |
| 439,933 |
|
| 452,495 |
|
| 399,229 |
|
| 505,818 |
| ||||
Marketing, general and administrative expenses |
| 326,095 |
|
| 336,128 |
|
| 314,482 |
|
| 379,179 |
| ||||
Other operating (income) |
| (7,174 | ) |
| (7,365 | ) |
| (8,377 | ) |
| (10,504 | ) | ||||
Restructuring charges, net of reversals |
| — |
|
| — |
|
| — |
|
| (4,286 | ) | ||||
Operating income |
| 121,012 |
|
| 123,732 |
|
| 93,124 |
|
| 141,429 |
| ||||
Interest expense |
| 69,205 |
|
| 53,898 |
|
| 55,429 |
|
| 52,240 |
| ||||
Other (income) expense, net |
| 4,868 |
|
| 899 |
|
| 13,850 |
|
| (10,781 | ) | ||||
Income before taxes |
| 46,939 |
|
| 68,935 |
|
| 23,845 |
|
| 99,970 |
| ||||
Income tax expense |
| 17,367 |
|
| 25,507 |
|
| 8,822 |
|
| 36,989 |
| ||||
Net income | $ | 29,572 |
| $ | 43,428 |
| $ | 15,023 |
| $ | 62,981 |
| ||||
Earnings per share—basic and diluted | $ | 0.79 |
| $ | 1.16 |
| $ | 0.40 |
| $ | 1.69 |
| ||||
During the fourth quarter of 2002 the Company recorded a restructuring charge of $1.6 million for a European restructuring initiative. The restructuring charge was offset by reversals of $1.5 million for prior years’ restructuring costs. During the third quarter of 2002 the Company recorded reversals of $16.6 million of prior restructuring costs. During the second quarter of 2002 the Company recorded restructuring charges of $150.2 million for plant closures in the U.S. and Europe. The Company recorded a reversal of $9.1 million of prior years’ restructuring costs. (See Note 3 to the Consolidated Financial Statements.)
During the fourth quarter of 2001 the Company recorded the reversal of $26.6 million of prior years'years’ restructuring costs. This reversal was based on updated estimates. The Company also had charges of $22.4 million for various reorganization initiatives in the U.S. and Japan. (SEE NOTE(See Note 3 TO THE
CONSOLIDATED FINANCIAL STATEMENTS.to the Consolidated Financial Statements.)
Note 20: Subsequent Events
Senior Notes Offering
On December 4, 2002, the Company issued $425.0 million in notes to qualified institutional buyers in reliance on Rule 144A under the Securities Act. These notes are unsecured obligations that rank equally with all of the Company’s other existing and future unsecured and unsubordinated debt. These notes are 10-year notes maturing on December 15, 2012 and bear interest at 12.25% per annum, payable semi-annually in arrears on December 15 and June 15, commencing on June 15, 2003. These notes are callable beginning December 15, 2007. These notes were offered at a discount of $6.0 million to be amortized over the term of the notes using an approximate effective-interest rate method. Costs representing underwriting fees and other expenses of approximately $12.6 million are amortized over the term of notes. Approximately $125.0 million of the net proceeds from the offering were used to repay remaining indebtedness under the Company’s 2001 bank credit facility as of the close of business on December 3, 2002. A portion of the net proceeds were used to pay $72.8 million of the 6.80% notes due November 1, 2003. The Company intends to use the remaining net proceeds to either (i) refinance (whether through payment at maturity, repurchase or otherwise) a portion of the $350 million aggregate principal amount of our 6.80% notes due November 1, 2003, or other outstanding indebtedness, or (ii) for working capital or other general corporate purposes.
On January 22, 2003 and on January 23, 2003, the Company issued an additional $100.0 million of these notes at a premium of $3.0 million and an additional $50.0 million of these notes at a discount of $0.7 million. Both the discount and premium will be amortized over the term of the notes using an approximate effective-interest rate method. The notes issued in these additional offerings were issued under the same indenture as, have the same terms as, and constitute the same issue of, the December 2002 notes. The Company intends to use a portion of the remaining net proceeds from the December 2002 notes issuance, plus the $47.3 million net proceeds from the issuance of an additional $50.0 million of these notes and the $99.8 million net proceeds from the issuance of an additional $100.0 million of these notes to refinance (whether through payment at maturity, repurchase or otherwise) all of the remaining aggregate principal amount of our 6.80% notes due November 1, 2003. Any remaining proceeds will be used to refinance other outstanding indebtedness or for working capital or other general corporate purposes. On January 22, 2003, the Company purchased approximately $27.0 million of the 6.80% notes due November 1, 2003.
The indenture governing these notes contain covenants that limit the Company’s and its subsidiaries’ ability to incur additional debt; pay dividends or make other restricted payments; consummate specified asset sales; enter into transactions with affiliates; incur liens; impose restrictions on the ability of a subsidiary to pay dividends or make payments to the Company and its subsidiaries; merge or consolidate with any other person; and sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of the Company’s assets or its subsidiaries’ assets. If the Company experiences a change in control as defined in the indenture governing the notes, then the Company will be required under the indenture to make an offer to repurchase the notes at a price equal to 101% of the principal amount plus accrued and unpaid interest, if any, to the date of repurchase. If these notes receive and maintain an investment grade rating by both Standard and Poor’s and Moody’s and the Company and its subsidiaries are and remain in compliance with the indenture, then the Company and its subsidiaries will not be required to comply with specified covenants contained in the indenture.
Senior Secured Credit Facility
On January 31, 2003, the Company entered into a new $750.0 million senior secured credit facility to replace the 2001 credit facility that matures in August 2003. The credit facility consists of a $375.0 million revolving credit facility and a $375.0 million Tranche B term loan facility. The Company will use the borrowings under the new bank credit facility for working capital or general corporate purposes.
The $375.0 million revolving credit facility matures on March 31, 2006. The Company’s Tranche B term loan facility is subject to repayment based on a specified scheduled amortization, with the final payment of all amounts outstanding thereunder being due on July 31, 2006. The Company is required to make principal amortization payments on the Tranche B term loan facility at a quarterly rate beginning in May 2003, with the substantial majority of the quarterly payments being due from the quarter ending in November 2005. The Company’s bank credit facility also requires mandatory prepayments in certain events, such as if there are asset sales. The interest rate for the Company’s revolving credit facility varies, for Eurodollar Rate Loans, from 3.25% to 4.00% over the Eurodollar Rate (as defined in the credit agreement) or, for Base Rate Loans, from 2.25% to 3.00% over the higher of (i) the Citibank base rate and (ii) the Federal Funds rate plus 0.50% (the “Base Rate”), with the exact rate depending upon the Company’s performance under specified financial criteria. The interest rate for the Company’s Tranche B term loan facility is 4.00% over the Eurodollar Rate or 3.00% over the Base Rate. The bank credit facility also requires that the Company set aside sufficient funds to satisfy all principal and interest payments on the outstanding 6.80% notes due November 2003 and allows for repurchase of these bonds prior to their maturity.
The Company’s bank credit facility is guaranteed by certain of its material domestic subsidiaries and is secured by domestic inventories, certain domestic equipment, trademarks, other intellectual property, 100% of the stock in certain domestic subsidiaries, 65% of the stock of certain foreign subsidiaries and other assets. Excluded from the assets securing the bank credit facility are all of the Company’s most valuable real property interests and all of the capital stock and debt of its affiliates in Germany and the United Kingdom and any other affiliates that become restricted subsidiaries under the indenture governing the Company’s notes due 2003 and 2006.
The bank credit facility contains customary covenants restricting the Company’s activities as well as those of its subsidiaries, including limitations on the Company’s, and its subsidiaries’, ability to sell assets; engage in mergers; enter into capital leases or certain leases not in the ordinary course of business; enter into transactions involving related parties or derivatives; incur indebtedness or grant liens or negative pledges on the Company’s assets; make loans or other investments; pay dividends or repurchase stock or other securities; guaranty third party obligations; make capital expenditures; and make changes in the Company’s corporate structure. The credit agreement also contains financial covenants that the Company must satisfy on an ongoing basis, including maximum leverage ratios and minimum coverage ratios.
The credit agreement contains customary events of default, including payment failures; failures to satisfy other obligations under the credit agreements; material judgments; pension plan terminations or specified underfunding; substantial voting trust certificate or stock ownership changes; specified changes in the composition of the Company’s board of directors; and invalidity of the guaranty or security agreements. If an event of default occurs, the Company’s lenders could terminate their commitments, declare immediately payable all borrowings under the credit facilities and foreclose on the collateral, including the Company’s trademarks.
The following is a pro forma table as of November 24, 2002, of the required aggregate short-term and long-term debt principal payments for the next five years and thereafter that includes the senior notes offering and the senior secured credit facility.
Year | Principal Payments | ||
(Dollars in Thousands) | |||
2003 | $ | 93,039 | |
2004 |
| 122,271 | |
2005 |
| 150,421 | |
2006 |
| 722,392 | |
2007 |
| — | |
Thereafter |
| 1,240,452 | |
Total | $ | 2,328,575 | |
| Item 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
The financial statements for the fiscal year ended November 24, 2002 included in this report, have been audited by KPMG LLP, independent public accountants, as stated in their audit report appearing herein. The financial statements for the fiscal years ended November 25, 2001 and November 26, 2000 included in this report, have been audited by Arthur Andersen LLP, independent public accountants, as stated in their audit report appearing herein. Arthur Andersen LLP has not consented to the inclusion of their audit report in this report. For a discussion of the risks relating to Arthur Andersen LLP’s audit of our financial statements, please see “Risk Factors—Risks relating to Arthur Andersen LLP.”
On May 2, 2002, our board of directors, on the recommendation of our audit committee, dismissed Arthur Andersen LLP as our independent public accountants and engaged KPMG LLP to serve as our independent public accountants for the fiscal year ending November 24, 2002. KPMG LLP has not been engaged to audit, and has not audited, any of the financial statements included in this report other than for the fiscal year ending November 24, 2002.
Arthur Andersen LLP’s reports on our consolidated financial statements for each of the fiscal years ended November 25, 2001 and November 26, 2000 included elsewhere in this report, did not contain an adverse opinion or disclaimer of opinion, nor were they qualified or modified as to uncertainty, audit scope or accounting principles.
During the fourth quarteryears ended November 25, 2001 and November 26, 2000 and through the date we dismissed Arthur Andersen LLP, there were no disagreements with Arthur Andersen LLP on any matter of 2000,accounting principle or practice, financial statement disclosure, or auditing scope or procedure which, if not resolved by Arthur Andersen LLP’s satisfaction, would have caused them to make reference to the Company recorded the reversal of
$33.1 million of prior years' restructuring costs. This reversal was based on
updated estimates. (SEE NOTE 3 TO THE CONSOLIDATED FINANCIAL STATEMENTS.)
In addition,subject matter in connection with physical inventories, actuarial studies of
postretirement benefitstheir report on our consolidated financial statements for such years; and workers' compensation, and reviews of other
liabilities, the Company recorded adjustments related to warranty provisions,
physical inventory provisions and postretirement benefitsthere were no reportable events as set forth in the fourth quarter
of 2000 that resulted inapplicable SEC regulations.
We provided Arthur Andersen LLP with a net increase of approximately 8% to fourth
quarter operating income.
77
LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
NOTE 20: SUBSEQUENT EVENTS
CREDIT FACILITY AMENDMENT
Effective January 29, 2002, the Company completed an amendment to its
principal credit agreement. The amendment has three principal features. First,
the amendment excludes from the computation of earnings for covenant compliance
purposes certain cash expenses, as well as certain non-cash costs, relating to
potential plant closures in the U.S. and Scotland in 2002. The Company
has not made final decisions regarding potential plant closures. The amendment
also excludes from those computations the non-cash portioncopy of the Company's
long-term incentive compensation plans. Second, the amendment reduces by 0.25
the amount of the required tightening of the leverage ratio beginningabove disclosures on May 6, 2002. In a letter dated May 6, 2002, Arthur Andersen LLP confirmed its agreement with the
fourth quarter of 2002. Third, the amendment tightens the senior secured
leverage ratio. The amendment did not change the interest rate, size of the
facility or required payment provisions of the facility.
POTENTIAL FACILITY CLOSURES
The Company is now discussing with its unions in the U.S. potential
additional closures of manufacturing facilities in the U.S. and is consulting
with union and employee representatives regarding a proposal to close two plants
in Scotland. If the Company ultimately decides to close facilities, it will then
record restructuring charges relating to employee severance and benefits, and
other costs associated with facility exit activities.
78
TEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
79
PART III
ITEM
Item 10. DIRECTORS AND EXECUTIVE OFFICERS
Set forth below is information concerning our directors and executive officers as of January 1,November 24, 2002.
Name | Age | Office and Position | ||
Peter E. Haas, Sr. | 83 | Director, Chairman of the Executive Committee | ||
Robert D. | 60 | Director, Chairman of the Board of Directors | ||
Philip A. | 56 | Director, President and Chief Executive Officer | ||
Angela Glover | 57 | Director | ||
Robert E. | 53 | Director | ||
Tully M. | 60 | Director | ||
James C. | 65 | Director | ||
Peter A. | 63 | Director | ||
Peter E. Haas, Jr. | 55 | Director | ||
Walter J. | 53 | Director | ||
F. Warren | 68 | Director | ||
Patricia Salas | 50 | Director | ||
T. Gary | 60 | Director | ||
G. Craig | 62 | Director | ||
R. John | 51 | Senior Vice President and President, Levi Strauss Asia Pacific | ||
David G. | 47 | Senior Vice President and Chief Information Officer | ||
William B. | 50 | Senior Vice President and Chief Financial Officer | ||
Joseph | 46 | Senior Vice President and President, Levi Strauss Europe, Middle East, | ||
Albert F. | 58 | Senior Vice President, General Counsel and Assistant Secretary | ||
Fred | 38 | Senior Vice President, Worldwide Human Resources |
In addition, in December 2002, we announced the appointment of Paul Harrington as our Senior Vice President of the Worldwide Supply Chain, commencing on January 6, 2003.
All members of the Haas family are descendants of our founder, Levi Strauss. Peter E. Haas, Sr. is the father of Peter E. Haas, Jr. and the uncle of Robert D. Haas and Walter J. Haas. Robert E. Friedman is a descendant of Daniel E. Koshland, who joined his brother-in-law, Walter A. Haas, Sr., in our management in 1922.
PETER
Peter E. HAAS, SR. Haas, Sr.became Chairman of the Executive Committee of our Boardboard of Directorsdirectors in 1989 after serving as Chairman of our Boardboard since 1981. He has been a member of our Boardboard since 1948. He joined us in 1945, became President in 1970 and Chief Executive Officer in 1976. Mr. Haas is a former Director of American Telephone and Telegraph Co., Crocker National Corporation and Crocker National Bank.
ROBERT
Robert D. HAAS Haasis the Chairman of our Board.board. He was named Chairman in 1989 and served as Chief Executive Officer from 1984 until 1999. Mr. Haas joined us in 1973 and served in a variety of marketing, planning and operating positions before becoming Chief Executive Officer.
PHILIP
Philip A. MARINEAU,Marineau, a director since 1999, is our President and Chief Executive Officer. He is also presently serving as President, Levi Strauss,
Americas. Prior to joining us, Mr. Marineau was the President and Chief Executive Officer of Pepsi-Cola North America from 1997 to 1999. From 1996 to 1997, Mr. Marineau was PresidentwasPresident and Chief Operating Officer of Dean Foods Company. From 1972From1972 to 1996, Mr. Marineau held a series of positions at Quaker Oats Company including President and Chief Operating Officer from 1993 to 1996. ANGELA GLOVER BLACKWELL,Mr. Marineau is currently a director of Meredith Corporation.
Angela Glover Blackwell, a director since 1994, is founder and president of PolicyLink, a nonprofit research, advocacy and communications organization devoted to eliminating poverty and strengthening communities. From 1995 to 1998, Ms. Blackwell was Senior Vice President of the Rockefeller Foundation where she oversaw the foundation'sfoundation’s domestic and cultural divisions. Ms. Blackwell was the founder of Oakland, California'sCalifornia’s Urban Strategies Council, a nonprofit organization focused on reducing persistent urban poverty.
80
ROBERT
Robert E. FRIEDMAN,Friedman, a director since 1998, is founder and Chairman of the Boardboard of the Corporation for Enterprise Development, a Washington, D.C.-based not-for-profit economic development research, technical assistance and demonstration organization which he founded in 1979. The Corporation for Enterprise Development works with public and private policymakers in governments, international organizations, corporations, private foundations, labor unions and community groups to design and implement economic development strategies.
TULLY
Tully M. FRIEDMAN,Friedman, a director since 1985, is Chairman and Chief Executive Officer of Friedman Fleischer & Lowe LLC, a private equity investment firm he founded in 1997. Formerly, Mr. Friedman was a founding partner of Hellman & Friedman, a private investment firm. Prior to forming Hellman & Friedman in 1984, he was a managing director and general partner of Salomon Brothers, Inc. Mr. Friedman currently serves on the board of directors of Archimedes Technology Group, CapitalSource LLC, The Clorox Company, Mattel, Inc. and McKesson Corporation.
JAMES
James C. GAITHER,Gaither, a director since 1988, is Managing Director of Sutter Hill Ventures, a venture capital investment firm and senior counsel of the law firm of Cooley Godward LLP in San Francisco, California. Prior to joining Cooley Godward in 1969, he served as law clerk to the Honorable Earl Warren, Chief Justice of the United States, special assistant to the Assistant Attorney General in the U.S. Department of Justice and staff assistant to the President of the United States, Lyndon B. Johnson. Mr. Gaither is currently a director of Basic American, Inc., Nvidia Corporation, Siebel Systems, Inc., Kineto, Inc. and Satmetrix, Inc.
PETER
Peter A. GEORGESCU,Georgescu, a director since February 2000, is Chairman Emeritus of Young & Rubicam Inc. (now WPP Group plc), a global advertising agency. Prior to his retirement in January 2000, Mr. Georgescu served as Chairman and Chief Executive Officer of Young & Rubicam since 1993 and, prior to that, as President of Y&R Inc. from 1990 to 1993, Y&R Advertising from 1986 to 1990 and President of its Young & Rubicam international division from 1982 to 1986. Mr. Georgescu is currently a director of IFF Corporation, Toys “R” Us, Inc. and Briggs & Stratton, Inc.
PETEREMI Group plc.
Peter E. HAAS, JR.Haas, Jr., a director since 1985, is a director or trustee of each of the Levi Strauss Foundation, Red Tab Foundation, San Francisco Foundation, The Stern Grove Festival Foundation, Walter and Elise Haas Fund and the Novato Youth Center Honorary Board. Mr. Haas was one of our managers from 1972 to 1989. He was Director of Product Integrity of The Jeans Company, one of our former operating units, from 1984 to 1989. He served as Director of Materials Management for Levi Strauss USA in 1982 and Vice President and General Manager in the Menswear Division in 1980.
WALTER
Walter J. HAAS,Haas, a director since 1995, served as Chairman and Chief Executive Officer of the Oakland A'sA’s Baseball Company from 1993 to 1995, President and Chief Executive Officer from 1991 to 1993 and in other management positions with the club from 1980 to 1991.
F. WARREN HELLMAN,Warren Hellman, a director since 1985, has served as chairman and general partner of Hellman & Friedman LLC, a private investment firm, since its inception in 1984. Previously, he was a general partner of Hellman Ferri (now Matrix Partners) and managing director of Lehman Brothers Kuhn Loeb, Inc. Mr. Hellman is currently a director of NASDAQ Stock Market, Inc., DN&E Walter & Co., WPP Group plc and Sugar Bowl Corporation.
PATRICIA SALAS PINEDA,
Patricia Salas Pineda, a director since 1991, is currently Vice President of Legal, Human Resources, Government Relations and Environmental Affairs and Corporate Secretary of New United Motor Manufacturing, Inc. She has held this position since 1996. Prior to assuming that position, she served as General Counsel from 1990 to 1996. Ms. Pineda is currently a trustee of the RAND Corporation and a director of the James Irvine Foundation.
T. GARY ROGERS,Gary Rogers, a director since 1998, is Chairman of the Boardboard and Chief Executive Officer of Dreyer'sDreyer’s Grand Ice Cream, Inc., a manufacturer and marketer of premium and super-premium ice cream products. He has held this position since 1977. He serves as a director of Shorenstein Company, L.P., Stanislaus Food Products and Gardonjim Farms.
G. CRAIG SULLIVAN,Craig Sullivan, a director since 1998, is Chairman of the Boardboard and Chief Executive Officer of The Clorox Company, a major consumer products firm. Prior to his election as Vice Chairman and Chief Executive Officer of Clorox in 1992, Mr. Sullivan was group vice president with overall responsibility for manufacturing and marketing, the company'scompany’s laundry and cleaning products in the United States, the international business, the manufacturing and marketing of products for the food service industry and the corporate purchasing and distribution functions. Mr. Sullivan currently serves on the board of directors of Mattel, Inc.
R. JOHN ANDERSON,John Anderson, our Senior Vice President and President of our Asia Pacific Division since 1998, joined us in 1979. Mr. Anderson served as General Manager of Levi Strauss Canada and as President of Levi Strauss Canada and Latin America from 1996 to 1998. He has held a series of merchandising positions with us in Europe and the United States, including Vice President, Merchandising and Product Development for the Levi's(R)Levi’s® brand in 1995.
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DAVID
David G. BERGEN,Bergen, our Senior Vice President and Chief Information Officer, joined us in November 2000. He was most recently Senior Vice President and Chief Information Officer of CarStation.com. From 1998 to 2000, Mr. Bergen was Senior Vice President and Chief Information Officer of LVMH, Inc. Prior to joining LVMH, Inc., Mr. Bergen held a series of management positions at GAP Inc., including Vice President of Application Development.
WILLIAM
William B. CHIASSON,Chiasson, our Senior Vice President and Chief Financial Officer, joined us in 1998. From 1988 to 1998, Mr. Chiasson held various positions with Kraft Foods Inc., a subsidiary of Philip Morris Companies Inc., including Senior Vice President of Finance and Information Systems. Prior to joining Kraft Foods, he was Vice President and Controller for Baxter Healthcare Corporation, Hospital Group.
KAREN DUVALL, our Senior Vice President of Worldwide Supply Chain, joined
us in 2000. Ms. Duvall was Vice President of Global Operations for Warner
Lambert Company, a major pharmaceutical firm, from 1997 to 2000. At Warner
Lambert, Ms. Duvall also served as Director of Global Sourcing for Marketing
Services from 1996 to 1997. From 1994 to 1996, Ms. Duvall was a management
consultant at Booz Allen & Hamilton.
JOSEPH MIDDLETON,
Joseph Middleton, our Senior Vice President and President of Levi Strauss Europe, Middle East and Africa since 1999, joined us in 1981. He held the position of General Manager of the Dockers(R)Dockers® brand in Europe from 1993 to 1999, General Manager of Levi Strauss New Zealand from 1990 to 1993 and a variety of other positions from 1981 to 1990.
ALBERT
Albert F. MORENO,Moreno, our Senior Vice President and General Counsel since 1996, joined us in 1978. He held the position of Chief Counsel for Levi Strauss North America from 1994 to 1996 and Deputy General Counsel from 1985 to 1994. He is a member of the Boardboard of Directorsdirectors of Xcel Energy, Inc.
FRED PAULENICH,
Fred Paulenich, our Senior Vice President of Worldwide Human Resources, joined us in 2000. Prior to joining us, Mr. Paulenich was Vice President and Chief Personnel Officer of Pepsi-Cola North America from 1999 to 2000. At Pepsi-Cola, he has held a series of management positions including Vice President of Headquarters Human Resources from 1996 to 1998 and Vice President of Personnel from 1995 to 1996.
OUR BOARD OF DIRECTORS
Paul Harrington, our Senior Vice President, Worldwide Supply Chain, joined us on January 6, 2003. From 1995 to 2002, Mr. Harrington held various positions with Reebok International Ltd. (“RIL”), including, most recently, Senior Vice President, RIL Supply Chain. Prior to joining RIL, he worked with Ford Motor Company in various managerial capacities.
Our Board of Directors
Our board of directors has 14 members. In March 2001, we amended our certificate of incorporation and by-laws to create a staggered board arrangement. Our board is divided into three classes with directors elected for overlapping three-year terms. The initial term for directors in class 1 (Mr. R. Friedman, Mr. Georgescu, Mr. Sullivan and Mr. R.D. Haas) ends in 2002.2005. The
initial term for directors in class 2 (Mr. T. Friedman, Ms. Pineda, Mr. Rogers, Mr. Hellman and Mr. P.E. Haas, Jr.) ends in 2003. The initial term for directors in class 3 (Ms. Blackwell, Mr. W.J.W. J. Haas, Mr. Gaither, Mr. Marineau and Mr. P.E. Haas, Sr.) ends in 2004. Directors in each class may be removed at any time, with or without cause, by the trustees of the voting trust.
COMMITTEES.
Committees. Our board of directors currently has four committees.
o AUDIT. Our audit committee provides assistance to the Board in the
Board's oversight of the integrity of our financial statements,
financial reporting processes, system of internal control, compliance
with legal requirements and independence and performance of our
internal and external auditors.
--Members: Until June 28, 2001, the members were Ms. Blackwell, Mr. T.
Friedman, Mr. Georgescu, Mr. P.E. Haas, Jr., Mr. W.J. Haas, Mr.
Hellman, Ms. Pineda and Mr. Sullivan. Effective June 28, 2001, the
members were
| • | Audit. Our audit committee provides assistance to the board in the board’s oversight of the integrity of our financial statements, financial reporting processes, system of internal control, compliance with legal requirements and independence and performance of our internal and external auditors. |
—Members: Mr. Gaither, Mr. Georgescu, Mr. Hellman, Ms. Pineda and Mr. Sullivan.
o FINANCE. Our finance committee provides assistance to the Board in the
Board's oversight of our financial condition and management, financing
strategies and execution and relationships with stockholders,
creditors and other members of the financial community. We created the
Finance Committee in June 2001.
--Members:
| • | Finance. Our finance committee provides assistance to the board in the board’s oversight of our financial condition and management, financing strategies and execution and relationships with stockholders, creditors and other members of the financial community. |
—Members: Mr. T. Friedman, Mr. Georgescu, Mr. P.E. Haas, Jr., Mr. Hellman and Mr. Rogers.
o HUMAN RESOURCES. Our human resources committee provides assistance to
the Board in the Board's oversight of our compensation, benefits and
human resources programs and of senior management performance,
composition and compensation.
82
--Members: Until June 28, 2001, the members were Mr. R. Friedman, Mr.
Gaither, Mr. Georgescu, Mr. Hellman, Ms. Pineda, Mr. Rogers and Mr.
Sullivan. Effective June 28, 2001, the members were
| • | Human Resources. Our human resources committee provides assistance to the board in the board’s oversight of our compensation, benefits and human resources programs and of senior management performance, composition and compensation. |
—Members: Ms. Blackwell, Mr. T. Friedman, Mr. Gaither, Mr. Rogers and Mr. Sullivan.
o CORPORATE SOCIAL RESPONSIBILITY. Our corporate social responsibility
committee provides assistance to the Board in the Board's oversight of
our values, ethics and social responsibility as demonstrated through
our policies, practices and interactions with stockholders, employees,
suppliers, customers, consumers, communities, governmental authorities
and others having a relationship with us.
--Members: Until June 28, 2001, the members were Ms. Blackwell, Mr. R.
Friedman, Mr. T. Friedman, Mr. Gaither, Mr. Georgescu, Mr. P.E. Haas,
Jr., Mr. P.E. Haas, Sr., Mr. R.D. Haas, Mr. W.J. Haas, Mr. Marineau
and Mr. Rogers. Effective June 28, 2001, the members were
| • | Corporate Social Responsibility. Our corporate social responsibility committee provides assistance to the board in the board’s oversight of our values, ethics and social responsibility as demonstrated through our policies, practices and interactions with stockholders, employees, suppliers, customers, consumers, communities, governmental authorities and others having a relationship with us. |
—Members: Ms. Blackwell, Mr. R. Friedman, Mr. P.E. Haas, Sr., Mr. W.J.W. J. Haas and Ms. Pineda.
Mr. R.D. Haas and Mr. Marineau are ex-officio members of all standing committees of the Boardboard of Directors.
COMPENSATION.directors, except the audit committee.
Compensation. Directors who are also stockholders or employees do not receive compensation for their services as directors. Directors who are not stockholders or employees, Mr. Gaither, Ms. Blackwell, Ms. Pineda, Mr. Rogers, Mr. Sullivan and Mr. Georgescu, receive annual compensation of approximately $88,000.$90,000. This amount includes an annual retainer fee of $36,000, meeting fees of $1,000 per meeting day attended and long-term variable pay in the form of 1,800 Leadership Shares, units, forwith a target value of $45,000 per year. The actual amount for each paymentof the above payments varies depending on the years of service, the number of meetings attended and the actual value of the granted units upon vesting. Directors, in their first sixfive years of service, receive a cash amount equivalent to the target value of their long-term variable pay or $45,000. This amount is decreased by approximately 1/ 1/3 each year at the start of actual payments from LS&CO.'sthe Leadership Shares Plan.
Mr. Gaither, Mr. Georgescu, Ms. Blackwell, Ms. Pineda, Mr. Rogers and Mr.
Sullivan each received 1,800 Leadership Shares units in 2001. In 2001, Ms.
Blackwell, Mr. Gaither and Ms. Pineda each received payments of $9,728 under the
Long-Term Incentive Plan. Mr. Gaither, Ms. Blackwell and Ms. Pineda each
received payments under the Long-Term Incentive Plan and the Long-Term
Performance Plan of approximately $30,637 in 2000. Directors who are not employees or stockholders also receive travel accident insurance while on Company business and are eligible to participate in a deferred compensation plan.
HUMAN RESOURCES COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of our human resources committee until June 28, 2001 were Mr.
Friedman, Mr. Gaither, Mr. Georgescu, Mr. Hellman, Ms. Pineda, Mr. Rogers
Human Resources Committee Interlocks and Mr. Sullivan. Beginning June 28, 2001, the members of our human resources
committee were Ms. Blackwell, Mr. T. Friedman, Mr. Gaither, Mr. Rogers and Mr.
Sullivan.
Insider Participation
Mr. Hellman is chairman and a general partner of Hellman & Friedman, a private investment firm that has provided financial advisory services to us in the past. We did not pay any fees to Hellman & Friedman during fiscal year 2001.2002. Mr. Gaither is senior counsel of the law firm Cooley Godward LLP. Cooley Godward provided legal services to us in 20012002 and received approximately $91,000$18,000 in fees.
83
ITEM
Item 11. EXECUTIVE COMPENSATION
EXECUTIVE COMPENSATION
Executive Compensation
This table provides compensation information for our chief executive officer and other executive officers who were our most highly compensated officers in 2001.
2002.
Summary Compensation Table
Annual Compensation | Long-Term Compensation | All Other Compensation (3) | ||||||||||
Name/Principal Position | Year | Salary | Bonus (1) | LTIP | ||||||||
Philip A. Marineau President and Chief Executive Officer (4) | 2002 2001 2000 | $ | 1,161,538 1,000,000 1,000,000 | $ | 1,272,600 450,000 | $22,540,000 — — | $ 165,777 233,284 1,173,761 | |||||
Robert D. Haas Chairman of the Board | 2002 2001 2000 | 750,000 798,077 | 715,838 350,000 | 2,070,000 — — | 106,950 180,433 78,750 | |||||||
William B. Chiasson Senior Vice President and | 2002 2001 2000 | 536,154 512,539 | 326,430 163,000 661,650 | 2,484,000 — — | 288,375 360,740 351,558 | |||||||
Joseph Senior Vice President and Levi Strauss Europe, | 2002 2001 2000 | 497,786 461,185 | 100,000 428,026 | 2,484,000 — — | 137,929 55,908 56,528 | |||||||
R. John Senior Vice President and Levi Strauss, | 2002 2001 | 396,535 383,413 | 420,420 163,000 446,160 | 1,380,000 — | 42,861 41,129 56,785 | |||||||
| (1) | We pay annual bonuses under our Annual Incentive Plan. The Annual Incentive Plan is intended to reward individual contributions to our objectives during the year. The plan is funded based on business unit and corporate financial results against pre-established targets. The amount of |
| (2) | For |
We did not meet threshold performance for the 1999 grant under the Leadership Shares Plan. As a result, we will not make payments (which would otherwise have been payable in 2001 and 2002) with respect to these units.
We did not make any long-term compensation payments in 2000 because of our weak performance with respect to the 1998 grant under our Long-Term Incentive Plan. This performance unit plan was replaced by our Leadership Shares Plan in 1999.
| (3) | For |
| For Mr. Marineau, the 2002 amount shown |
| For Mr. Chiasson, the 2002 amount shown reflects |
| For Mr. Middleton, |
| Mr. Middleton is a United Kingdom citizen who lives and works in Brussels, Belgium. Our approach for |
| In April 2002, we made an interest-free loan to Mr. Middleton. The loan amount was $1,000,000 to assist in the purchase of a home and is to be repaid by February 28, 2005 or earlier in the event his employment terminates. |
| For Mr. Anderson, the 2002, 2001 and 2000 amounts shown consist of allowances due to his global assignment. Mr. Anderson is an Australian citizen who lives and works in Singapore. We take the same |
Long-Term Incentive Plans—Awards in Last Fiscal Year (2002)
Name/Principal Position | Number of Leadership Shares Awarded | Target (1) | Performance Period (2) | ||||
Philip A. Marineau President and Chief Executive Officer | 250,000 | $ | 6,250,000 | 5 years | |||
Robert D. Haas Chairman of the Board | 90,000 |
| 2,250,000 | 5 years | |||
William B. Chiasson Senior Vice President and Chief Financial Officer | 75,000 |
| 1,875,000 | 5 years | |||
Joseph Middleton Senior Vice President and President, Levi Strauss Europe, Middle East and Africa | 55,000 |
| 1,375,000 | 5 years | |||
R. John Anderson Senior Vice President and President, Levi Strauss, Asia Pacific Division | 55,000 |
| 1,375,000 | 5 years | |||
| (1) | This table shows awards under our Leadership Shares Plan. The Leadership Shares Plan is a long-term cash performance unit plan. Under this plan, we establish a five-year financial performance target for each grant based on targeted growth in shareholder value. The value of the units is determined based on actual performance relative to target. Performance at the target level will yield a per unit value of $25. If performance does not meet a minimum level or threshold, |
| (2) | The performance period is five years from the time of award. The awards vest in one-third increments on the last day of the third, fourth and fifth fiscal years of the performance period. We pay the awards in the year after they vest. |
Pension Plan Table
The following table shows the estimated annual benefits payable upon retirement under our U.S. home office pension and benefit restoration plans to persons in various compensation and years-of-service classifications prior to mandatory offset of Social Security benefits:
Covered Compensation | Years of Service | ||||||||||||||||||||
5 | 10 | 15 | 20 | 25 | 30 | 35 | |||||||||||||||
$ 400,000 | $ | 40,000 | $ | 80,000 | $ | 120,000 | $ | 160,000 | $ | 200,000 | $ | 205,000 | $ | 210,000 | |||||||
600,000 |
| 60,000 |
| 120,000 |
| 180,000 |
| 240,000 |
| 300,000 |
| 307,500 |
| 315,000 | |||||||
800,000 |
| 80,000 |
| 160,000 |
| 240,000 |
| 320,000 |
| 400,000 |
| 410,000 |
| 420,000 | |||||||
1,000,000 |
| 100,000 |
| 200,000 |
| 300,000 |
| 400,000 |
| 500,000 |
| 512,500 |
| 525,000 | |||||||
1,200,000 |
| 120,000 |
| 240,000 |
| 360,000 |
| 480,000 |
| 600,000 |
| 615,000 |
| 630,000 | |||||||
1,400,000 |
| 140,000 |
| 280,000 |
| 420,000 |
| 560,000 |
| 700,000 |
| 717,500 |
| 735,000 | |||||||
1,600,000 |
| 160,000 |
| 320,000 |
| 480,000 |
| 640,000 |
| 800,000 |
| 820,000 |
| 840,000 | |||||||
1,800,000 |
| 180,000 |
| 360,000 |
| 540,000 |
| 720,000 |
| 900,000 |
| 922,500 |
| 945,000 | |||||||
2,000,000 |
| 200,000 |
| 400,000 |
| 600,000 |
| 800,000 |
| 1,000,000 |
| 1,025,000 |
| 1,050,000 | |||||||
2,200,000 |
| 220,000 |
| 440,000 |
| 660,000 |
| 880,000 |
| 1,100,000 |
| 1,127,500 |
| 1,155,000 | |||||||
2,400,000 |
| 240,000 |
| 480,000 |
| 720,000 |
| 960,000 |
| 1,200,000 |
| 1,230,000 |
| 1,260,000 | |||||||
2,600,000 |
| 260,000 |
| 520,000 |
| 780,000 |
| 1,040,000 |
| 1,300,000 |
| 1,332,500 |
| 1,365,000 | |||||||
2,800,000 |
| 280,000 |
| 560,000 |
| 840,000 |
| 1,120,000 |
| 1,400,000 |
| 1,435,000 |
| 1,470,000 | |||||||
3,000,000 |
| 300,000 |
| 600,000 |
| 900,000 |
| 1,200,000 |
| 1,500,000 |
| 1,537,500 |
| 1,575,000 | |||||||
3,200,000 |
| 320,000 |
| 640,000 |
| 960,000 |
| 1,280,000 |
| 1,600,000 |
| 1,640,000 |
| 1,680,000 | |||||||
3,400,000 |
| 340,000 |
| 680,000 |
| 1,020,000 |
| 1,360,000 |
| 1,700,000 |
| 1,742,500 |
| 1,785,000 | |||||||
The table assumes retirement at the age of 65, with payment to the employee in the form of a single-life annuity. As of year-end 2001,2002, the credited years of service for Messrs. Marineau, Haas and Chiasson were 29 and Lewis were 2, 28, 3, and 0,4, respectively. The 20012002 compensation covered by the pension plan and the benefit restoration plan and deferred compensation plan for Messrs. Marineau, Haas and Chiasson was $1.1 million and Lewis were $3.25 million, $2.6 million, $644,869$702,000, respectively. Based on Mr. Marineau’s employment agreement, as of year-end 2002, he had 21 years of credited service and $0,
respectively. Mr. Lewis did not receive a full credited yearhis 2002 covered compensation was $1.9 million. This amount reflects the higher of service.
his i) initial base salary and target annual bonus and his ii) covered compensation in accordance with the plans.
Mr. Middleton participates in the Levi Strauss United Kingdom pension plan. It provides him both a defined benefit and a defined contribution pension. If Mr. Middleton retires at age 60, the plan will provide two-thirds of his base salary (average of the top three years salary out of the last ten before his retirement date) in a defined benefit pension. Based on his current compensation, if Mr. Middleton retires at age 60, he would receive upon retirement a U.S. dollar equivalent of approximately $270,000$345,000 annually. We also contribute 20% of Mr. Middleton'sMiddleton’s annual bonus each year toward his defined contribution pension that he can use to purchase additional pension benefits upon retirement.
Mr. Anderson participates in the Levi Strauss Australia pension plan and also has a supplemental plan. The pension payment Mr. Anderson will receive upon retirement is based on years of service and his final average salary. Under the supplemental plan, we contribute 20% of his annual base salary and bonus to his pension each year. Mr. Anderson'sAnderson’s benefit under these combined plans, to be paid in lump sums upon retirement, is estimated to be approximately $1.53$1.8 million if he retires at age 55, or approximately $4.62$4.8 million if he retires at age 65.
EMPLOYMENT AGREEMENTS
PHILIP MARINEAU.
Employment Agreements
Philip Marineau. We have an employment agreement with Philip Marineau, our President and Chief Executive Officer. The agreement provides for a minimum base salary of $1.0 million in accordance with our executive salary policy and a target annual cash bonus of 90% of base salary, with a maximum bonus of 180% of base salary. In addition, Mr. Marineau is eligible to participate in all other executive compensation and benefit programs, including the Leadership Shares Plan. Under the employment agreement, we made a one-time grant of 810,000 Leadership Shares units to compensate him for the potential value of stock options he forfeited upon leaving his previous employer to join us. We also provide under the agreement a supplemental pension benefit to Mr. Marineau.
87
The agreement terminatesis in September 2002 but extends automatically after
this dateeffect until terminated by either Mr. Marineau or us. We may terminate the agreement upon Mr. Marineau'sMarineau’s death or disability, for cause (as defined in the agreement), and without cause upon 30 days notice. Mr. Marineau may terminate the agreement for good reason (as defined in the agreement) or other than for good reason upon 30 days notice to us. The consequences of termination depend on the basis for the termination:
o
Senior Executive Severance Plan
Messrs. Chiasson, Middleton and Anderson are eligible for payments and other benefits under our Senior Executive Severance Plan, which is an unfunded plan available to a select group of management to recognize their past service to the Company in the event their employment is involuntarily terminated. In exchange for the executive’s execution of a general release agreement with us, following an involuntary termination, we will pay the executive, at our sole discretion, his or her base salary, plus a target bonus amount for the fiscal year in which the executive is notified of his or her employment termination. This payment will be made either in installments or in a lump sum payment for a period ranging from 26 weeks to 104 weeks depending on the classification of the executive.
In addition to the foregoing severance payments, we will pay an affected executive the same percentage of the monthly cost of the medical coverage we provide pursuant to the Consolidated Omnibus Budget Reconciliation Act (COBRA) (to the extent the executive elects COBRA coverage) that he was entitled to during his active employment. The subsidized COBRA medical coverage will continue during the period that the executive is entitled to receive severance payments, subject to a maximum period ending on the earlier of the 18-month period following the termination date or the date the executive is entitled to other medical coverage. We will also pay the cost of premiums under our standard basic life insurance program of $10,000 during the same period that we subsidize the COBRA coverage. If the executive becomes eligible to receive retiree health benefits, we will subsidize retiree medical coverage during the same period that we subsidize the COBRA coverage. In addition, we will provide an affected executive with career counseling and transition services.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
All shares of our common stock are deposited in a voting trust, a legal arrangement that transfers the voting power of the shares to a trustee or group of trustees. The four voting trustees are Peter E. Haas, Sr., Peter E. Haas, Jr., Robert D. Haas and F. Warren Hellman. The voting trustees have the exclusive ability to elect and remove directors, amend our by-laws and take certain other actions which would normally be within the power of stockholders of a Delaware corporation. Our equity holders who, as a result of the voting trust, legally hold "voting“voting trust certificates",certificates,” not stock, retain the right to direct the trustees on specified mergers and business combinations, liquidations, sales of substantially all of our assets and specified amendments to our certificate of incorporation.
The voting trust will last until April 2011, unless the trustees unanimously decide, or holders of at least two-thirds of the outstanding voting trust certificates decide, to terminate it earlier. If Robert D. Haas ceases to be a trustee for any reason, then the question of whether to continue the voting trust will be decided by the holders. If Peter E. Haas, Sr. ceases to be a trustee, his successor will be his spouse, Miriam L. Haas. The existing trustees will select the successors to the other trustees. The agreement among the stockholders and the trustees creating the voting trust contemplates that, in selecting successor trustees, the trustees will attempt to select individuals who share a common vision with the sponsors of the 1996 transaction that gave rise to the voting trust, represent and reflect the financial and other interests of the equity holders and bring a balance of perspectives to the trustee group as a whole. A trustee may be removed if the other three trustees unanimously vote for removal or if holders of at least two-thirds of the outstanding voting trust certificates vote for removal.
The table on the following page contains information about the beneficial ownership of our voting trust certificates as of January 1,November 24, 2002, by:
o
Under the rules of the As of November 24, 2002, there were 167 record holders of voting trust certificates.Commission,SEC, a person is deemed to be a "beneficial
owner"“beneficial owner” of a security if that person has or shares "voting power",“voting power,” which includes the power to vote or to direct the voting of the security, or "investment
power",“investment power,” which includes the power to dispose of or to direct the disposition of the security. A person is also deemed to be a beneficial owner of any securities
of which that person has a right to acquire beneficial ownership within 60 days. Under these rules, more than one person may be deemed a beneficial owner of the same securities and a person may be deemed to be a beneficial owner of securities as to which that person has no economic interest. Except as described in the footnotes to the table below, the individuals named in the table have sole voting and investment power with respect to all voting trust certificates beneficially owned by them, subject to community property laws where applicable.
89
The percentage of beneficial ownership shown in the table is based on 37,278,238 shares of common stock and related voting trust certificates outstanding as of
PERCENTAGE OF
NUMBER OF VOTING VOTING TRUST
TRUST CERTIFICATES CERTIFICATES
NAME BENEFICIALLY OWNED OUTSTANDING
---- ------------------ -------------
Peter E. Haas, Sr. ............................................................. 13,954,709(1) 37.43%
Peter E. Haas, Jr. ............................................................. 6,720,141(2) 18.02%
Robert D. Haas.................................................................. 3,723,679(3) 9.99%
Miriam L. Haas.................................................................. 2,980,200(4) 7.99%
Margaret E. Haas................................................................ 2,644,549(5) 7.09%
Josephine B. Haas............................................................... 2,228,527(6) 5.98%
Robert E. Friedman.............................................................. 1,320,134(7) 3.54%
F. Warren Hellman............................................................... 527,342(8) 1.41%
Walter J. Haas.................................................................. 258,348(9) *
Tully M. Friedman............................................................... 235,186(10) *
James C. Gaither................................................................ -- --
Peter A. Georgescu.............................................................. -- --
Angela Glover Blackwell......................................................... -- --
Philip A. Marineau.............................................................. -- --
Patricia Salas Pineda........................................................... -- --
T. Gary Rogers.................................................................. -- --
G. Craig Sullivan............................................................... -- --
William B. Chiasson............................................................. -- --
Joseph Middleton................................................................ -- --
R. John Anderson................................................................ -- --
Directors and executive officers as a group (21 persons)(11).................... 26,739,539 71.72%
(1) Includes 3,515,116 voting trust certificates held by the Walter A. Haas, Jr. QTIP Trusts A and B for which Mr. Haas
is a trustee or co-trustee. Mr. Haas disclaims beneficial ownership of those shares. Includes 670,000 voting trust
certificates held by a trust for the benefit of Josephine B. Haas, former spouse of Mr. Haas. Mr. Haas has sole voting
power and Mrs. Josephine B. Haas has sole investing powers with respect to those voting trust certificates. Mr. Haas
disclaims beneficial ownership of those shares. Includes 2,063,167 voting trust certificates which are held by a
partnership for the benefit of Peter E. Haas, Jr. and Margaret E. Haas but for which Mr. Haas has voting powers. Mr.
Haas disclaims beneficial ownership of those voting trust certificates. Excludes 2,980,200 voting trust certificates
held by Mr. Haas' wife, Miriam L. Haas.
(2) Includes a total of 2,118,994 voting trust certificates held by Mr. Haas' wife, children and trusts for the benefit
of his children for which Mr. Haas is trustee and 61,709 voting trust certificates held by trusts, for which Mr. Haas
is trustee, for the benefit of Michael S. Haas. Mr. Haas disclaims beneficial ownership of all of those voting trust
certificates. Includes 2,657,721 voting trust certificates held by partnerships for which Mr. Haas is managing general
partner.
(3) Includes 527,674 voting trust certificates owned by the spouse and daughter of Mr. Haas and by trusts for the benefit
of his daughter. Mr. Haas disclaims beneficial ownership of those voting trust certificates.
(4) Excludes 7,706,426 voting trust certificates held by Peter E. Haas, Sr. Mrs. Haas disclaims beneficial ownership of
those voting trust certificates.
(5) Includes 1,439 voting trust certificates held by a trust for the benefit of Ms. Haas' son. Ms. Haas disclaims
beneficial ownership of those voting trust certificates.
(6) Includes 1,203,255 voting trust certificates held by a trust, for which Mrs. Haas is co-trustee, for the benefit of
Margaret E. Haas. Mrs. Haas disclaims ownership of all of those voting trust certificates. Includes 300,272 voting
trust certificates held by the Josephine B. Haas Family Partnership, for which Mrs. Haas is a limited partner.
(7) Includes 92,500 voting trust certificates held by Mr. Friedman's children and by trusts, for which Mr. Friedman is
co-trustee, for the benefit of his children and 195,834 voting trust certificates held by trusts, for which Mr. Friedman
is co-trustee, for the benefit of Mr. Friedman's nieces and nephew. Mr. Friedman disclaims beneficial ownership of those
voting trust certificates. Includes 1,010,000 voting trust certificates held by Copper Reservoir, a California limited
partnership, for which Mr. Friedman is a general partner.
(8) Excludes 360,314 voting trust certificates held by a trust, for which Mr. Hellman is co-trustee, for the benefit of
the daughter of Robert D. Haas. Mr. Hellman disclaims beneficial ownership of those voting trust certificates.
(9) Includes 248,348 voting trust certificates held by trusts, for which Mr. Haas is trustee or co-trustee, for the
benefit of Mr. Haas' children. Mr. Haas disclaims beneficial ownership of those voting trust certificates.
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(10) Includes 13,105 voting trust certificates held by a trust, for which Mr. Friedman is trustee, for the benefit of Mr.
Friedman's former wife, Ann Barry. Also includes 25,000 voting trust certificates held by The Friedman Family
Partnership. Mr. Friedman disclaims beneficial ownership of all but 500 of the Friedman Family Partnership voting trust
certificates.
(11) As of January 1, 2002, there were 166January 1,November 24, 2002. The business address of all persons listed, including the trustees under the voting trust, is 1155 Battery Street, San Francisco, California 94111.
STOCKHOLDERS' AGREEMENT
Name | Number of Voting Trust Certificates Beneficially Owned | Percentage of Voting Trust Certificates Outstanding | ||||
Peter E. Haas, Sr. | 13,952,454 | (1) | 37.43 | % | ||
Peter E. Haas, Jr. | 6,582,741 | (2) | 17.66 | % | ||
Josephine B. Haas | 4,766,233 | (3) | 12.79 | % | ||
Robert D. Haas | 3,309,909 | (4) | 8.88 | % | ||
Miriam L. Haas | 2,980,200 | (5) | 7.99 | % | ||
Margaret E. Haas | 2,644,549 | (6) | 7.09 | % | ||
Robert E. Friedman | 1,320,134 | (7) | 3.54 | % | ||
F. Warren Hellman | 887,656 | (8) | 2.38 | % | ||
Walter J. Haas | 241,671 | (9) | * |
| ||
Tully M. Friedman | 231,179 | (10) | * |
| ||
James C. Gaither | — |
| — |
| ||
Peter A. Georgescu | — |
| — |
| ||
Angela Glover Blackwell | — |
| — |
| ||
Philip A. Marineau | — |
| — |
| ||
Patricia Salas Pineda | — |
| — |
| ||
T. Gary Rogers | — |
| — |
| ||
G. Craig Sullivan | — |
| — |
| ||
William B. Chiasson | — |
| — |
| ||
Joseph Middleton | — |
| — |
| ||
R. John Anderson | — |
| — |
| ||
Directors and executive officers as a group (22 persons) | 24,462,457 |
| 65.62 | % |
| (1) | Includes 3,512,861 voting trust certificates held by the Walter A. Haas, Jr. QTIP Trusts A and B for the benefit of Mrs. Walter A. Haas, Jr. and the children of Walter A. Haas, Jr., and for which Peter E. Haas, Sr. is a trustee or co-trustee. Peter E. Haas, Sr. disclaims beneficial ownership of these voting trust certificates. Includes 670,000 voting trust certificates held by a trust for the benefit of Josephine B. Haas, former spouse of Peter E. Haas, Sr. Mr. Peter E. Haas, Sr. has sole voting power and Mrs. Josephine B. Haas has sole investing power with respect to these voting trust certificates. Peter E. Haas, Sr. disclaims beneficial ownership of these voting trust certificates. Includes 2,063,167 voting trust certificates which are held by a partnership but for which Peter E. Haas, Sr. has voting powers. Excludes 2,980,200 voting trust certificates held by Peter E. Haas, Sr.’s wife, Miriam L. Haas. |
| (2) | Includes a total of 1,981,594 voting trust certificates held by Mr. Haas’ wife and by trusts, of which Mr. Haas is trustee, for the benefit of his children. Mr. Haas disclaims beneficial ownership of these voting trust certificates. Includes 61,709 voting trust certificates held by trusts, of which Mr. Haas is trustee, for the benefit of the children of Mr. Haas and of Margaret E. Haas. Mr. Haas disclaims beneficial ownership of these voting trust certificates. Includes 2,657,721 voting trust certificates held by partnerships of which Mr. Haas is managing general partner. |
| (3) | Includes 1,203,255 voting trust certificates held by a trust, of which Mrs. Haas is co-trustee, for the benefit of Margaret E. Haas. Mrs. Haas disclaims ownership of these voting trust certificates. Includes 2,357,449 voting trust certificates held by the Josephine B. Haas Investments Limited Partnership. Includes 300,272 voting trust certificates held by the Josephine B. Haas Family Limited Partnership. Includes 180,257 voting trust certificates held by the Michael S. Haas Annuity Partnership. Mrs. Haas is the trustee of a trust which is a general partner in the Michael S. Haas Annuity Partnership. Mrs. Haas disclaims beneficial ownership of these voting trust certificates. |
| (4) | Includes 113,904 voting trust certificates owned by the spouse of Mr. Haas and by trusts, of which Mr. Haas is trustee, for the benefit of their daughter. Mr. Haas disclaims beneficial ownership of these voting trust certificates. |
| (5) | Excludes 7,706,426 voting trust certificates held by Peter E. Haas, Sr., spouse of Miriam L. Haas. |
| (6) | Includes 1,439 voting trust certificates held by a trust, of which Ms. Haas is trustee, for the benefit of Ms. Haas’ son. Ms. Haas disclaims beneficial ownership of these voting trust certificates. |
| (7) | Includes 92,500 voting trust certificates held by Mr. Friedman’s children and by trusts, of which Mr. Friedman is co-trustee, for the benefit of his children and 195,834 voting trust certificates held by trusts, of which Mr. Friedman is co-trustee, for the benefit of Mr. Friedman’s nieces and nephew. Mr. Friedman disclaims beneficial ownership of these voting trust certificates. Includes 1,010,000 voting trust certificates held by Copper Reservoir, a California limited partnership, for which Mr. Friedman is a general partner. |
| (8) | Includes 360,314 voting trust certificates held by a trust, of which Mr. Hellman is co-trustee, for the benefit of the daughter of Robert D. Haas. Mr. Hellman disclaims beneficial ownership of these voting trust certificates. |
| (9) | Includes 233,005 voting trust certificates held by the spouse of Mr. Haas and by trusts, of which Mr. Haas is trustee or co-trustee, for the benefit of Mr. Haas’ children. Mr. Haas disclaims beneficial ownership of these voting trust certificates. |
| (10) | Includes 9,098 voting trust certificates held by a trust, of which Mr. Friedman is trustee, for the benefit of Mr. Friedman’s former wife, Ann Barry. Also includes 25,000 voting trust certificates held by The Friedman Family Partnership, of which Mr. Friedman is a managing general partner. Mr. Friedman disclaims beneficial ownership of all but 500 of the Friedman Family Partnership voting trust certificates. |
Stockholders’ Agreement
Our common stock and the voting trust certificates are not publicly held or traded. All shares and the voting trust certificates are subject to a stockholders'stockholders’ agreement. The agreement, which expires in April 2016, limits the transfer of shares and certificates to other holders, family members, specified charities and foundations and to us. The agreement does not provide for registration rights or other contractual devices for forcing a public sale of shares, certificates or other access to liquidity. The scheduled expiration date of the stockholders'stockholders’ agreement is five years later than that of the voting trust agreement in order to permit an orderly transition from effective control by the voting trust trustees to direct control by the stockholders.
ESTATE TAX REPURCHASE POLICY
Estate Tax Repurchase Policy
We have a policy under which we will repurchase a portion of the shares offered by the estate of a deceased stockholder in order to generate funds for payment of estate taxes. The purchase price will be based on a valuation received from an investment banking or appraisal firm. Estate repurchase transactions are subject to applicable laws governing stock repurchases, board approval and restrictions under our credit agreements. Our 2003 bank credit facilities prohibitfacility prohibits repurchases without the consent of the lenders, and the indentures relating to our 11.625% notes due 2008 and our 12.25% notes due 2012 limit our ability to make repurchases. (SEE NOTE 18 TO THE CONSOLIDATED FINANCIAL STATEMENTS.) The policy does not create a contractual obligation on our part. We may amend or terminate this policy at any time. No shares were repurchased under this policy in 2000,
19992002, 2001 or 1998.
VALUATION POLICY
2000.
Valuation Policy
We have a policy under which we obtain, and make available to our stockholders, an annual valuation of our voting trust certificates. The policy provides that we will make reasonable efforts to defend valuations we obtain which are challenged in any tax or regulatory proceeding involving a stockholder (including an estate) that used the valuation and that was challenged on that use. The policy provides that we will not indemnify any stockholder against any judgment or settlement amounts or expenses specific to any individual stockholder arising from the use of a valuation. We may amend or terminate this policy at any time.
VOTING TRUSTEE COMPENSATION
Voting Trustee Compensation
The voting trust agreement provides that trustees who are also beneficial owners of 1% or more of our stock are not entitled to compensation for their services as trustees. Trustees who are not beneficial owners of more than 1% of our outstanding stock may receive such compensation, upon approval of our Board.board. All trustees are entitled to reimbursement for reasonable expenses and charges, which may be incurred in carrying out their duties as trustees. Of the current
trustees, Mr. Hellman beneficially owns less than 1%As of our outstanding stock.
He is not currently receiving compensation from us for his service as a trustee.
AllNovember 24, 2002, all of the other trustees each beneficially ownsowned more than 1% of our outstanding stock.
VOTING TRUSTEE INDEMNIFICATION
Voting Trustee Indemnification
Under the voting trust agreement, the trustees are not liable to us or to the holders of voting trust certificates for any actions undertaken in their capacity as trustees, except in cases of willful misconduct. The voting trust will indemnify the trustees in respect of actions taken by them under the voting trust agreement in their capacity as trustees, except in cases of willful misconduct.
We have agreed to reimburse the voting trust for any amounts paid by the trust as a result of its indemnity obligation on behalf of the trustees.
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LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
Limitation of Liability and Indemnification Matters
As permitted by Delaware law, we have included in our certificate of incorporation a provision to eliminate generally the personal liability of directors for monetary damages for breach or alleged breach of their fiduciary duties as directors. In addition, our by-laws provide that we are required to indemnify our officers and directors under a number of circumstances, including circumstances in which indemnification would otherwise be discretionary, and we are required to advance expenses to our officers and directors as incurred in connection with proceedings against them for which they may be indemnified. In addition, our board of directors adopted resolutions making clear that officers and directors of our foreign subsidiaries are covered by these indemnification provisions. We are not aware of any pending or threatened litigation or proceeding involving a director, officer, employee or agent of ours in which indemnification would be required or permitted. We believe that these indemnification provisions are necessary to attract and retain qualified persons as directors and officers.
Insofar as indemnification for liabilities under the Securities Act may be granted to directors, officers or persons controlling us under the foregoing provisions, we have been informed that in the opinion of the CommissionSEC this indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable.
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ITEM
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
F. Warren Hellman, one of our directors, is chairman and a general partner
of Hellman & Friedman LLC, a private investment firm that has provided financial
advisory services to us in the past. We did not pay any fees to Hellman &
Friedman LLC during the years 2001, 2000 and 1999.
James C. Gaither, one of our directors, is senior counsel of the law firm Cooley Godward LLP. Cooley Godward provided legal services to us in 2002, 2001 2000
and 1999,2000, for which we paid fees of approximately $18,000, $91,000 $60,000 and $165,000,$60,000, respectively, in those years.
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Item 14. CONTROLS AND PROCEDURES
As of February 5, 2003 (the “Evaluation Date”), we evaluated the effectiveness of the design and operation of our “disclosure controls and procedures” for purposes of filing reports under the Securities Exchange Act of 1934 (the “Exchange Act”) and our “internal controls and procedures” for financial reporting purposes. This evaluation (the “controls evaluation”) was done under the supervision and with the participation of management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”). Rules adopted by the SEC require that in this section of the annual report we present the conclusions of the CEO and the CFO about the effectiveness of our disclosure controls and internal controls based on and as of the Evaluation Date.
Disclosure controls and procedures are designed with the objective of ensuring that information required to be disclosed in our reports filed under the Exchange Act, such as this annual report on Form 10-K, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures are also designed with the objective of ensuring that such information is accumulated and communicated to our management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosure. Internal controls and procedures are designed with the objective of providing reasonable assurance that our transactions are properly authorized; our assets are safeguarded against unauthorized or improper use; and our transactions are properly recorded and reported, all to permit the preparation of our financial statements in conformity with generally accepted accounting principles.
Our management, including the CEO and CFO, does not expect that our disclosure controls and procedures or our internal controls and procedures will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
We plan to evaluate our disclosure and internal controls and procedures on a quarterly basis in accordance with the Exchange Act so that the conclusions concerning controls effectiveness can be reported in our quarterly reports on Form 10-Q and our annual reports on Form 10-K. Our internal controls and procedures are also evaluated on an ongoing basis by personnel in our finance organization and by our independent auditors in connection with their audit and review activities. The overall goals of these various evaluation activities are to monitor our disclosure and internal controls and procedures and to make modifications as necessary; our intent in this regard is that these controls and procedures will be maintained as dynamic systems that change (including with improvements and corrections) as conditions warrant.
Among other matters, we sought in our evaluation to determine whether there were any “significant deficiencies” or “material weaknesses” in our internal controls and procedures, or whether we had identified any acts of fraud involving personnel who have a significant role in our internal controls and procedures. This information was important both for the controls evaluation generally and because the CEO and CFO certification requirement under items 5 and 6 of Section 302 of the Sarbanes-Oxley Act of 2002 mandates that they disclose that information to our audit committee and to our independent auditors and to report on related matters in this section of the annual report on Form 10-K. In the professional auditing literature, “significant deficiencies” are referred to as “reportable conditions”; those control issues that could have a significant adverse effect on the ability to record, process, summarize and report financial data in the financial statements. A “material weakness” is defined in the auditing literature as a particularly serious reportable condition where the internal control does not reduce to a relatively low level the risk that misstatements caused by error or fraud may occur in amounts that would be material in relation to the financial statements and not be detected within a timely period by employees in the normal course of performing their assigned functions. We also sought to deal with other controls matters in the controls evaluation and where appropriate to consider what revision, improvement and/or correction to make in accord with our ongoing procedures.
Based upon the controls evaluation, our CEO and CFO have concluded that, subject to the limitations noted above, as of the Evaluation Date our disclosure controls and procedures are effective to ensure that material information relating to the company and our consolidated subsidiaries is made known to management, including the CEO and CFO, particularly during the period when our periodic reports are being prepared, and that our internal controls and procedures are effective to provide reasonable assurance that our financial statements are fairly presented in conformity with generally accepted accounting principles. In accordance with SEC requirements, the CEO and CFO note that, since the Evaluation Date to the date of this annual report on Form 10-K, there have been no significant changes in internal controls and procedures or in other factors that could significantly affect internal controls and procedures, including any corrective actions with regard to significant deficiencies and material weaknesses.
PART IV
ITEM 14.
Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)
List the following documents filed as a part of the report:
1. Financial Statements
The following consolidated financial statements of the Company are
included in Item 8:
Report of Independent Public Accountants
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Stockholders' Deficit
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Quarterly Financial Data (Unaudited)
2. Financial Statement Schedule
Schedule II - Valuation and Qualifying Accounts......Form 10-K page 102
1. | Financial Statements | |
The following consolidated financial statements of the Company are included in Item 8: | ||
Report of Independent Public Accountants | ||
Consolidated Balance Sheets | ||
Consolidated Statements of Income | ||
Consolidated Statements of Stockholders’ Deficit | ||
Consolidated Statements of Cash Flows | ||
Notes to Consolidated Financial Statements | ||
Quarterly Financial Data (Unaudited) |
Financial Statement Schedule | ||
Independent Auditors’ Report on Financial Statement Schedule | Form 10-K page 124 | |
Schedule II—Valuation and Qualifying Accounts | Form 10-K page 125 |
All other schedules have been omitted because they are inapplicable, not required or the information is included in the Consolidated Financial Statements or Notes thereto.
3.
Exhibits
3.1 Restated Certificate of Incorporation. Previously filed as Exhibit 3.3
to Registrant's Quarterly Report on Form 10-Q filed with the Commission
on April 6, 2001.
3.2 Amended and Restated By-Laws. Previously filed as Exhibit 3.4 to
Registrant's Quarterly Report on Form 10-Q filed with the Commission on
April 6, 2001.
4.1 Indenture, dated as of November 6, 1996, between the Registrant and
Citibank, N.A., relating to the 6.80% Notes due 2003 and the 7.00%
Notes due 2006. Previously filed as Exhibit 4.1 to Registrant's
Registration Statement on Form S-4 filed with the Commission on May 3,
2000.
4.2 Fiscal Agency Agreement, dated as of November 21, 1996, between the
Registrant and Citibank, N.A., relating to (Y)20 billion 4.25% bonds
due 2016. Previously filed as Exhibit 4.2 to Registrant's Registration
Statement on Form S-4 filed with the Commission on May 3, 2000.
4.3 Lease Intended as Security, dated as of December 3, 1996, among the
Registrant, First Security Bank, National Association as Agent and
named lessors. Previously filed as Exhibit 4.3 to Registrant's
Registration Statement on Form S-4 filed with the Commission on May 3,
2000.
4.4 Supplemental Indenture, dated as of May 16, 2000, between the
Registrant and Citibank, N.A., relating to the 6.80% Notes due 2003 and
the 7.00% Notes due 2006. Previously filed as Exhibit 4.4 to Amendment
No. 1 to Registrant's Registration Statement on Form S-4 filed with the
Commission on May 17, 2000.
4.5 Purchase Agreement, dated as of January 12, 2001, among the Registrant
and Salomon Smith Barney Inc. and the other Initial Purchases named
therein, relating to the 11.625% US Dollar Notes due 2008 and the
11.625% Euro Notes due 2008. Previously filed as Exhibit 4.5 to
Registrant's Annual Report on Form 10-K filed with the Commission on
February 5, 2001.
4.6 Registration Rights Agreement, dated as of January 18, 2001, between
the Registrant and Salomon Smith Barney Inc. and the other Initial
Purchases named therein, relating to the 11.625% US Dollar Notes due
2008. Previously filed as Exhibit 4.6 to Registrant's Annual Report on
Form 10-K filed with the Commission on February 5, 2001.
94
4.7 Registration Rights Agreement, dated as of January 18, 2001, between
the Registrant and Salomon Smith Barney Inc. and the other Initial
Purchases named therein, relating to the 11.625% Euro Notes due 2008.
Previously filed as Exhibit 4.7 to Registrant's Annual Report on Form
10-K filed with the Commission on February 5, 2001.
4.8 U.S. Dollar Indenture, dated as of January 18, 2001, between the
Registrant and Citibank, N.A., relating to the 11.625% US Dollar Notes
due 2008. Previously filed as Exhibit 4.8 to Registrant's Annual Report
on Form 10-K filed with the Commission on February 5, 2001.
4.9 Euro Indenture, dated as of January 18, 2001, between the Registrant
and Citibank, N.A., relating to the 11.625% Euro Notes due 2008.
Previously filed as Exhibit 4.9 to Registrant's Annual Report on Form
10-K filed with the Commission on February 5, 2001.
9. Voting Trust Agreement, dated as of April 15, 1996, among LSAI Holding
Corp. (predecessor of the Registrant), Robert D. Haas, Peter E. Haas,
Sr., Peter E. Haas, Jr., F. Warren Hellman, as voting trustees, and the
stockholders. Previously filed as Exhibit 9 to Registrant's
Registration Statement on Form S-4 filed with the Commission on May 3,
2000.
10.1 Stockholders Agreement, dated as of April 15, 1996, among LSAI Holding
Corp. (predecessor of the Registrant) and the stockholders. Previously
filed as Exhibit 10.1 to Registrant's Registration Statement on Form
S-4 filed with the Commission on May 3, 2000.
10.2 Form of European Receivables Agreement, dated February 2000, between
the Registrant and Tulip Asset Purchase Company B.V. Previously filed
as Exhibit 10.16 to Registrant's Registration Statement on Form S-4
filed with the Commission on May 3, 2000.
10.3 Form of European Servicing Agreement, dated January 2000, between
Registrant and Tulip Asset Purchase Company B.V. Previously filed as
Exhibit 10.17 to Registrant's Registration Statement on Form S-4 filed
with the Commission on May 3, 2000.
10.4 Supply Agreement, dated as of March 30, 1992, and First Amendment to
Supply Agreement, between the Registrant and Cone Mills Corporation.
Previously filed as Exhibit 10.18 to Registrant's Registration
Statement on Form S-4 filed with the Commission on May 3, 2000.
10.5 Home Office Pension Plan. Previously filed as Exhibit 10.19 to
Registrant's Registration Statement on Form S-4 filed with the
Commission on May 3, 2000. *
10.6 Employee Investment Plan. Previously filed as Exhibit 10.20 to
Registrant's Registration Statement on Form S-4 filed with the
Commission on May 3, 2000. *
10.7 Capital Accumulation Plan. Previously filed as Exhibit 10.21 to
Registrant's Registration Statement on Form S-4 filed with the
Commission on May 3, 2000. *
10.8 Special Deferral Plan. Previously filed as Exhibit 10.22 to
Registrant's Registration Statement on Form S-4 filed with the
Commission on May 3, 2000. *
10.9 Key Employee Recognition and Commitment Plan. Previously filed as
Exhibit 10.23 to Registrant's Registration Statement on Form S-4 filed
with the Commission on May 3, 2000. *
10.10 Global Success Sharing Plan. Previously filed as Exhibit 10.24 to
Registrant's Registration Statement on Form S-4 filed with the
Commission on May 3, 2000. *
10.11 Deferred Compensation Plan for Executives. Previously filed as Exhibit
10.25 to Registrant's Registration Statement on Form S-4 filed with the
Commission on May 3, 2000. *
10.12 Deferred Compensation Plan for Outside Directors. Previously filed as
Exhibit 10.26 to Registrant's Registration Statement on Form S-4 filed
with the Commission on May 3, 2000. *
95
10.13 Excess Benefit Restoration Plan. Previously filed as Exhibit 10.27 to
Registrant's Registration Statement on Form S-4 filed with the
Commission on May 3, 2000. *
10.14 Supplemental Benefit Restoration Plan. Previously filed as Exhibit
10.28 to Registrant's Registration Statement on Form S-4 filed with the
Commission on May 3, 2000. *
10.15 Leadership Shares Plan. Previously filed as Exhibit 10.29 to
Registrant's Registration Statement on Form S-4 filed with the
Commission on May 3, 2000. *
10.16 Annual Incentive Plan. Previously filed as Exhibit 10.30 to
Registrant's Registration Statement on Form S-4 filed with the
Commission on May 3, 2000. *
10.17 Long-Term Incentive Plan. Previously filed as Exhibit 10.31 to
Registrant's Registration Statement on Form S-4 filed with the
Commission on May 3, 2000. *
10.18 Long-Term Performance Plan. Previously filed as Exhibit 10.32 to
Registrant's Registration Statement on Form S-4 filed with the
Commission on May 3, 2000. *
10.19 Employment Agreement, dated as of September 30, 1999, between the
Registrant and Philip Marineau. Previously filed as Exhibit 10.33 to
Registrant's Registration Statement on Form S-4 filed with the
Commission on May 3, 2000. *
10.20 Supplemental Executive Retirement Agreement, dated as of January 1,
1998, between the Registrant and Gordon Shank. Previously filed as
Exhibit 10.34 to Registrant's Registration Statement on Form S-4 filed
with the Commission on May 3, 2000. *
10.21 Form of Indemnification Agreement, dated as of November 30, 1995, for
members of the Special Committee of Board of Directors created by the
Board of Directors on November 30, 1995. Previously filed as Exhibit
10.35 to Registrant's Registration Statement on Form S-4 filed with the
Commission on May 3, 2000. *
10.22 Discretionary Supplemental Executive Retirement Plan Arrangement for
Selected Executive Officers. Previously filed as Exhibit 10.36 to
Amendment No. 1 to Registrant's Registration Statement on Form S-4
filed with the Commission on May 17, 2000. *
10.23 Employment Agreement, dated as of May 15, 2000, between the Registrant
and James Lewis. Previously filed as Exhibit 10.37 to Amendment No. 1
to Registrant's Registration Statement on Form S-4 filed with the
Commission on May 17, 2000. *
10.24 Amendment to Deferred Compensation Plan for Executives effective March
1, 2000. Previously filed as Exhibit 10.42 to Registrant's Annual
Report on Form 10-K filed with the Commission on February 5, 2001. *
10.25 Amendments to Employee Investment Plan effective April 3, 2000.
Previously filed as Exhibit 10.43 to Registrant's Annual Report on Form
10-K filed with the Commission on February 5, 2001. *
10.26 Amendments to Capital Accumulation Plan effective April 3, 2000.
Previously filed as Exhibit 10.44 to Registrant's Annual Report on Form
10-K filed with the Commission on February 5, 2001. *
10.27 Amendment to Deferred Compensation Plan for Executives effective August
1, 2000. Previously filed as Exhibit 10.45 to Registrant's Annual
Report on Form 10-K filed with the Commission on February 5, 2001. *
10.28 Amendment to Employee Investment Plan effective November 28, 2000.
Previously filed as Exhibit 10.46 to Registrant's Annual Report on Form
10-K filed with the Commission on February 5, 2001. *
10.29 Amendments to Capital Accumulation Plan, Supplemental Benefit
Restoration Plan, and Employee Investment Plan effective January 1,
2001. Previously filed as Exhibit 10.47 to Registrant's Annual Report
on Form 10-K filed with the Commission on February 5, 2001. *
96
10.30 Amendments to Employee Investment Plan effective January 1, 2001.
Previously filed as Exhibit 10.48 to Registrant's Annual Report on Form
10-K filed with the Commission on February 5, 2001. *
10.31 Amendment to Capital Accumulation Plan, Plan Document and Employee
Booklet effective January 1, 2001. Previously filed as Exhibit 10.49 to
Registrant's Annual Report on Form 10-K filed with the Commission on
February 5, 2001. *
10.32 Credit Agreement, dated as of February 1, 2001, among the Registrant,
the Initial Lenders and Issuing Banks named therein, Bank of America,
N.A., as Administrative Agency and Collateral Agent, Bank of America
Securities LLC and Salomon Smith Barney Inc., as Co-Arrangers and Joint
Book Managers, Citicorp USA, Inc., as Syndication Agent, and The Bank
of Nova Scotia, as Documentation Agent. Previously filed as Exhibit
10.57 to Registrant's Annual Report on Form 10-K filed with the
Commission on February 5, 2001.
10.33 Pledge and Security Agreement, dated as of February 1, 2001, among the
Registrant, certain subsidiaries of the Registrant and Bank of America,
N.A., as agent. Previously filed as Exhibit 10.58 to Registrant's
Annual Report on Form 10-K filed with the Commission on February 5,
2001.
10.34 Subsidiary Guaranty, dated as of February 1, 2001, between certain
subsidiaries of the Registrant and Bank of America, N.A., as agent.
Previously filed as Exhibit 10.59 to Registrant's Annual Report on Form
10-K filed with the Commission on February 5, 2001.
10.35 Forms of Amendments to European Receivables and Servicing Agreements
among Registrant, certain subsidiaries of Registrant and Tulip Asset
Purchase B.V. effective November 22, 2000. Previously filed as Exhibit
10.60 to Registrant's Annual Report on Form 10-K filed with the
Commission on February 5, 2001.
10.36 First Amendment to Credit Agreement, dated as of July 11, 2001, among
the Registrant, the Initial Lenders and Issuing Banks named therein,
Bank of America, N.A., as Administrative Agency and Collateral Agent,
Bank of America Securities LLC and Salomon Smith Barney Inc., as
Co-Lead Arrangers and Joint Book Managers, Citicorp USA, Inc., as
Syndication Agent, and The Bank of Nova Scotia, as Documentation Agent.
Previously filed as Exhibit 10.1 to Registrant's Quarterly Report on
Form 10-Q filed with the Commission on October 3, 2001.
10.37 Master Indenture, dated as of July 31, 2001, by and between Levi
Strauss Receivables Funding, LLC, as issuer, and Citibank, N.A. as
Indenture Trustee, Paying Agent, Authentication Agent and Transfer
Agent and Registrar. Previously filed as Exhibit 10.2 to Registrant's
Quarterly Report on Form 10-Q filed with the Commission on October 3,
2001.
10.38 Indenture Supplement, dated as of July 31, 2001, by and among Levi
Strauss Receivables Funding, LLC, as Issuer, Levi Strauss Financial
Center Corporation as Servicer and Citibank, N.A. as Indenture Trustee,
Paying Agent, Authentication Agent and Transfer Agent and Registrar.
Previously filed as Exhibit 10.3 to Registrant's Quarterly Report on
Form 10-Q filed with the Commission on October 3, 2001.
10.39 Receivables Purchase Agreement, dated as of July 31, 2001, made by and
among Levi Strauss Receivables Funding, LLC, as Issuer, Levi Strauss
Funding, LLC, as Transferor, Levi Strauss Financial Center Corporation,
as Seller and Servicer, and Levi Strauss Securitization Corp. as SPC
Member. Previously filed as Exhibit 10.4 to Registrant's Quarterly
Report on Form 10-Q filed with the Commission on October 3, 2001.
10.40 Parent Undertaking, dated as of July 31, 2001, made by the Registrant
in favor of Levi Strauss Receivables Funding, LLC. Previously filed as
Exhibit 10.5 to Registrant's Quarterly Report on Form 10-Q filed with
the Commission on October 3, 2001.
10.41 Consent and Release Agreement, dated as of July 31, 2001, entered into
by and among Levi Strauss Funding, LLC, as Transferor, Levi Strauss
Financial Center Corporation, as Seller, the Registrant, as Originator,
Levi Strauss Receivables Funding, LLC, as Issuer, Citibank, N.A. as
Indenture Trustee, and Bank of America, N.A. as Agent. Previously filed
as Exhibit 10.6 to Registrant's Quarterly Report on Form 10-Q filed
with the Commission on October 3, 2001.
10.42 Senior Executive Severance Plan effective July 1, 2000. Filed
herewith. *
97
10.43 Amendment to Home Office Pension Plan signed on August 2, 2001. Filed
herewith. *
10.44 Amendment to Home Office Pension Plan effective November 27, 2000.
Filed herewith. *
10.45 Amendment to Revised Employee Retirement signed on August 2, 2001.
Filed herewith. *
10.46 Amendment to Employee Investment Plan effective January 1, 2002. Filed
herewith. *
10.47 Amendment to Employee Investment Plan effective January 1, 2001. Filed
herewith. *
10.48 Amendment to Employee Long-Term Investment and Savings Plan effective
January 1, 2002. Filed herewith. *
10.49 Amendment to the Employee Long-Term Investment and Savings Plan
effective April 1, 2001. Filed herewith. *
10.50 Plan Document and Employee Booklet of Capital Accumulation Plan as
amended and restated effective January 1, 2001. Filed herewith. *
10.51 Amendment to Capital Accumulation Plan effective January 1, 2001.
Filed herewith. *
10.52 Plan Document and Employee Booklet of Capital Accumulation Plan as
amended and restated effective November 26, 2001. Filed herewith. *
10.53 Amendment to Capital Accumulation Plan effective November 26, 2001.
Filed herewith. *
10.54 Amendment to Annual Incentive Plan effective November 26, 2001. Filed
herewith. *
10.55 Second Amendment to Comprehensive Welfare Plan for Home Office Payroll
Employees and Retirees effective January 1, 2001. Filed herewith. *
10.56 Second Amendment to Credit Agreement, dated January 28, 2002, between
the Registrant, the Initial Lenders and Issuing Banks named therein,
Bank of America, N.A., as Administrative Agent and Collateral Agent,
Bank of America Securities LLC and Salomon Smith Barney Inc., as
Co-Lead Arrangers and Joint Book Managers, Citicorp USA, Inc., as
Syndication Agent, and The Bank of Nova Scotia, as Documentation Agent.
Previously filed as Exhibit 99.1 to Registrant's Form 8-K filed with
the Commission on January 30, 2002.
10.57 First Amendment to Subsidiary Guaranty, dated January 28, 2002, between
certain subsidiaries of the Registrant and Bank of America, N.A., as
agent. Previously filed as Exhibit 99.2 to Registrant's Form 8-K filed
with the Commission on January 30, 2002.
10.58 First Amendment to Pledge and Security Agreement, dated January 28,
2002, among the Registrant, certain subsidiaries of the Registrant and
Bank of America, N.A., as agent. Previously filed as Exhibit 99.3 to
Registrant's Form 8-K filed with the Commission on January 30, 2002.
12 Statements re: Computation of Ratios. Filed herewith.
21 Subsidiaries of the Registrant. Filed herewith.
24 Power of Attorney. Contained in signature pages hereto.
* Management contract, compensatory plan or arrangement.
98
(b)
3.1 | Restated Certificate of Incorporation. Previously filed as Exhibit 3.3 to Registrant’s Quarterly Report on Form 10-Q filed with the Commission on April 6, 2001. | |
3.2 | Amended and Restated By-Laws. Previously filed as Exhibit 3.4 to Registrant’s Quarterly Report on Form 10-Q filed with the Commission on April 6, 2001. | |
4.1 | Indenture, dated as of November 6, 1996, between the Registrant and Citibank, N.A., relating to the 6.80% Notes due 2003 and the 7.00% Notes due 2006. Previously filed as Exhibit 4.1 to Registrant’s Registration Statement on Form S-4 filed with the Commission on May 3, 2000. | |
4.2 | Fiscal Agency Agreement, dated as of November 21, 1996, between the Registrant and Citibank, N.A., relating to ¥20 billion 4.25% bonds due 2016. Previously filed as Exhibit 4.2 to Registrant’s Registration Statement on Form S-4 filed with the Commission on May 3, 2000. | |
4.3 | Lease Intended as Security, dated as of December 3, 1996, among the Registrant, First Security Bank, National Association as Agent and named lessors. Previously filed as Exhibit 4.3 to Registrant’s Registration Statement on Form S-4 filed with the Commission on May 3, 2000. | |
4.4 | Supplemental Indenture, dated as of May 16, 2000, between the Registrant and Citibank, N.A., relating to the 6.80% Notes due 2003 and the 7.00% Notes due 2006. Previously filed as Exhibit 4.4 to Amendment No. 1 to Registrant’s Registration Statement on Form S-4 filed with the Commission on May 17, 2000. | |
4.5 | Purchase Agreement, dated as of January 12, 2001, among the Registrant and Salomon Smith Barney Inc. and the other Initial Purchasers named therein, relating to the 11.625% US Dollar Notes due 2008 and the 11.625% Euro Notes due 2008. Previously filed as Exhibit 4.5 to Registrant’s Annual Report on Form 10-K filed with the Commission on February 5, 2001. | |
4.6 | Registration Rights Agreement, dated as of January 18, 2001, between the Registrant and Salomon Smith Barney Inc. and the other Initial Purchasers named therein, relating to the 11.625% US Dollar Notes due 2008. Previously filed as Exhibit 4.6 to Registrant’s Annual Report on Form 10-K filed with the Commission on February 5, 2001. |
4.7 | Registration Rights Agreement, dated as of January 18, 2001, between the Registrant and Salomon Smith Barney Inc. and the other Initial Purchasers named therein, relating to the 11.625% Euro Notes due 2008. Previously filed as Exhibit 4.7 to Registrant’s Annual Report on Form 10-K filed with the Commission on February 5, 2001. | |
4.8 | U.S. Dollar Indenture, dated as of January 18, 2001, between the Registrant and Citibank, N.A., relating to the 11.625% US Dollar Notes due 2008. Previously filed as Exhibit 4.8 to Registrant’s Annual Report on Form 10-K filed with the Commission on February 5, 2001. | |
4.9 | Euro Indenture, dated as of January 18, 2001, between the Registrant and Citibank, N.A., relating to the 11.625% Euro Notes due 2008. Previously filed as Exhibit 4.9 to Registrant’s Annual Report on Form 10-K filed with the Commission on February 5, 2001. | |
4.10 | Master Indenture, dated as of July 31, 2001, by and between Levi Strauss Receivables Funding, LLC, as issuer, and Citibank, N.A. as Indenture Trustee, Paying Agent, Authentication Agent and Transfer Agent and Registrar. Previously filed as Exhibit 10.2 to Registrant’s Quarterly Report on Form 10-Q filed with the Commission on October 3, 2001. | |
4.11 | Indenture Supplement, dated as of July 31, 2001, by and among Levi Strauss Receivables Funding, LLC, as Issuer, Levi Strauss Financial Center Corporation as Servicer and Citibank, N.A. as Indenture Trustee, Paying Agent, Authentication Agent and Transfer Agent and Registrar. Previously filed as Exhibit 10.3 to Registrant’s Quarterly Report on Form 10-Q filed with the Commission on October 3, 2001. | |
4.12 | Receivables Purchase Agreement, dated as of July 31, 2001, made by and among Levi Strauss Receivables Funding, LLC, as Issuer, Levi Strauss Funding, LLC, as Transferor, Levi Strauss Financial Center Corporation, as Seller and Servicer, and Levi Strauss Securitization Corp. as SPC Member. Previously filed as Exhibit 10.4 to Registrant’s Quarterly Report on Form 10-Q filed with the Commission on October 3, 2001. | |
4.13 | Amendment No. 1 dated as of April 24, 2002, to Master Indenture Series 2001-A Indenture Supplement and Receivables Purchase Agreement each dated as of July 31, 2001, by and among Levi Strauss Receivables Funding, LLC, as Issuer, Citibank, N.A. as Indenture Trustee, Levi Strauss Financial Center Corporation as Servicer and Seller, and Registrar. Previously filed as Exhibit 10 to Registrant’s Current Report on Form 8-K filed with the Commission on May 6, 2002. | |
4.14 | Purchase Agreement, dated as of November 26, 2002 among the Registrant and Salomon Smith Barney Inc. and the other Initial Purchasers named therein, relating to the purchase of $425 million of 12.25% Senior Notes due 2012. Filed herewith. | |
4.15 | Registration Rights Agreement, dated as of November 26, 2002 between the Registrant and Salomon Smith Barney Inc. and the other Initial Purchasers named therein, relating to the $425 million of 12.25% Senior Notes due 2012. Filed herewith. | |
4.16 | Indenture relating to 12.25% Senior Notes due 2012, dated as of December 4, 2002, between the Registrant and Wilmington Trust Company, as Trustee. Filed herewith. | |
4.17 | Purchase Agreement, dated as of January 15, 2003 among the Registrant and Salomon Smith Barney Inc. and the other Initial Purchasers named therein, relating to the purchase of $100 million of 12.25% Senior Notes due 2012. Filed herewith. | |
4.18 | Registration Rights Agreement, dated as of January 15, 2002, between the Registrant and Salomon Smith Barney Inc. and the other Initial Purchasers named therein, relating to the $100 million of 12.25% Senior Notes due 2012. Filed herewith. | |
4.19 | Securities Purchase Agreement, dated as of January 15, 2003, between the Registrant and affiliates of AIG Global Investment Corp. relating to the purchase of $50 million of 12.25% Senior Notes due 2012. Filed herewith. |
9. | Voting Trust Agreement, dated as of April 15, 1996, among LSAI Holding Corp. (predecessor of the Registrant), Robert D. Haas, Peter E. Haas, Sr., Peter E. Haas, Jr., F. Warren Hellman, as voting trustees, and the stockholders. Previously filed as Exhibit 9 to Registrant’s Registration Statement on Form S-4 filed with the Commission on May 3, 2000. | |
10.1 | Stockholders Agreement, dated as of April 15, 1996, among LSAI Holding Corp. (predecessor of the Registrant) and the stockholders. Previously filed as Exhibit 10.1 to Registrant’s Registration Statement on Form S-4 filed with the Commission on May 3, 2000. | |
10.2 | Form of European Receivables Agreement, dated February 2000, between the Registrant and Tulip Asset Purchase Company B.V. Previously filed as Exhibit 10.16 to Registrant’s Registration Statement on Form S-4 filed with the Commission on May 3, 2000. | |
10.3 | Form of European Servicing Agreement, dated January 2000, between Registrant and Tulip Asset Purchase Company B.V. Previously filed as Exhibit 10.17 to Registrant’s Registration Statement on Form S-4 filed with the Commission on May 3, 2000. | |
10.4 | Supply Agreement, dated as of March 30, 1992, and First Amendment to Supply Agreement, between the Registrant and Cone Mills Corporation. Previously filed as Exhibit 10.18 to Registrant’s Registration Statement on Form S-4 filed with the Commission on May 3, 2000. | |
10.5 | Home Office Pension Plan. Previously filed as Exhibit 10.19 to Registrant’s Registration Statement on Form S-4 filed with the Commission on May 3, 2000. * | |
10.6 | Employee Investment Plan. Previously filed as Exhibit 10.20 to Registrant’s Registration Statement on Form S-4 filed with the Commission on May 3, 2000. * | |
10.7 | Capital Accumulation Plan. Previously filed as Exhibit 10.21 to Registrant’s Registration Statement on Form S-4 filed with the Commission on May 3, 2000. * | |
10.8 | Special Deferral Plan. Previously filed as Exhibit 10.22 to Registrant’s Registration Statement on Form S-4 filed with the Commission on May 3, 2000. * | |
10.9 | Key Employee Recognition and Commitment Plan. Previously filed as Exhibit 10.23 to Registrant’s Registration Statement on Form S-4 filed with the Commission on May 3, 2000. * | |
10.10 | Global Success Sharing Plan. Previously filed as Exhibit 10.24 to Registrant’s Registration Statement on Form S-4 filed with the Commission on May 3, 2000. * | |
10.11 | Deferred Compensation Plan for Executives. Previously filed as Exhibit 10.25 to Registrant’s Registration Statement on Form S-4 filed with the Commission on May 3, 2000. * | |
10.12 | Deferred Compensation Plan for Outside Directors. Previously filed as Exhibit 10.26 to Registrant’s Registration Statement on Form S-4 filed with the Commission on May 3, 2000. * | |
10.13 | Excess Benefit Restoration Plan. Previously filed as Exhibit 10.27 to Registrant’s Registration Statement on Form S-4 filed with the Commission on May 3, 2000. * | |
10.14 | Supplemental Benefit Restoration Plan. Previously filed as Exhibit 10.28 to Registrant’s Registration Statement on Form S-4 filed with the Commission on May 3, 2000. * | |
10.15 | Leadership Shares Plan. Previously filed as Exhibit 10.29 to Registrant’s Registration Statement on Form S-4 filed with the Commission on May 3, 2000. * | |
10.16 | Annual Incentive Plan. Previously filed as Exhibit 10.30 to Registrant’s Registration Statement on Form S-4 filed with the Commission on May 3, 2000. * |
10.17 | Long-Term Incentive Plan. Previously filed as Exhibit 10.31 to Registrant’s Registration Statement on Form S-4 filed with the Commission on May 3, 2000. * | |
10.18 | Long-Term Performance Plan. Previously filed as Exhibit 10.32 to Registrant’s Registration Statement on Form S-4 filed with the Commission on May 3, 2000. * | |
10.19 | Employment Agreement, dated as of September 30, 1999, between the Registrant and Philip Marineau. Previously filed as Exhibit 10.33 to Registrant’s Registration Statement on Form S-4 filed with the Commission on May 3, 2000. * | |
10.20 | Form of Indemnification Agreement, dated as of November 30, 1995, for members of the Special Committee of Board of Directors created by the Board of Directors on November 30, 1995. Previously filed as Exhibit 10.35 to Registrant’s Registration Statement on Form S-4 filed with the Commission on May 3, 2000. * | |
10.21 | Discretionary Supplemental Executive Retirement Plan Arrangement for Selected Executive Officers. Previously filed as Exhibit 10.36 to Amendment No. 1 to Registrant’s Registration Statement on Form S-4 filed with the Commission on May 17, 2000. * | |
10.22 | Employment Agreement, dated as of May 15, 2000, between the Registrant and James Lewis. Previously filed as Exhibit 10.37 to Amendment No. 1 to Registrant’s Registration Statement on Form S-4 filed with the Commission on May 17, 2000. * | |
10.23 | Amendment to Deferred Compensation Plan for Executives effective March 1, 2000. Previously filed as Exhibit 10.42 to Registrant’s Annual Report on Form 10-K filed with the Commission on February 5, 2001. * | |
10.24 | Amendments to Employee Investment Plan effective April 3, 2000. Previously filed as Exhibit 10.43 to Registrant’s Annual Report on Form 10-K filed with the Commission on February 5, 2001. * | |
10.25 | Amendments to Capital Accumulation Plan effective April 3, 2000. Previously filed as Exhibit 10.44 to Registrant’s Annual Report on Form 10-K filed with the Commission on February 5, 2001. * | |
10.26 | Amendment to Deferred Compensation Plan for Executives effective August 1, 2000. Previously filed as Exhibit 10.45 to Registrant’s Annual Report on Form 10-K filed with the Commission on February 5, 2001. * | |
10.27 | Amendment to Employee Investment Plan effective November 28, 2000. Previously filed as Exhibit 10.46 to Registrant’s Annual Report on Form 10-K filed with the Commission on February 5, 2001. * | |
10.28 | Amendments to Capital Accumulation Plan, Supplemental Benefit Restoration Plan, and Employee Investment Plan effective January 1, 2001. Previously filed as Exhibit 10.47 to Registrant’s Annual Report on Form 10-K filed with the Commission on February 5, 2001. * | |
10.29 | Amendments to Employee Investment Plan effective January 1, 2001. Previously filed as Exhibit 10.48 to Registrant’s Annual Report on Form 10-K filed with the Commission on February 5, 2001. * | |
10.30 | Amendment to Capital Accumulation Plan, Plan Document and Employee Booklet effective January 1, 2001. Previously filed as Exhibit 10.49 to Registrant’s Annual Report on Form 10-K filed with the Commission on February 5, 2001. * | |
10.31 | Credit Agreement, dated as of February 1, 2001, among the Registrant, the Initial Lenders and Issuing Banks named therein, Bank of America, N.A., as Administrative Agency and Collateral Agent, Bank of America Securities LLC and Salomon Smith Barney Inc., as Co-Arrangers and Joint Book Managers, Citicorp USA, Inc., as Syndication Agent, and The Bank of Nova Scotia, as Documentation Agent. Previously filed as Exhibit 10.57 to Registrant’s Annual Report on Form 10-K filed with the Commission on February 5, 2001. | |
10.32 | Pledge and Security Agreement, dated as of February 1, 2001, among the Registrant, certain subsidiaries of the Registrant and Bank of America, N.A., as agent. Previously filed as Exhibit 10.58 to Registrant’s Annual Report on Form 10-K filed with the Commission on February 5, 2001. |
10.33 | Subsidiary Guaranty, dated as of February 1, 2001, between certain subsidiaries of the Registrant and Bank of America, N.A., as agent. Previously filed as Exhibit 10.59 to Registrant’s Annual Report on Form 10-K filed with the Commission on February 5, 2001. | |
10.34 | Forms of Amendments to European Receivables and Servicing Agreements among Registrant, certain subsidiaries of Registrant and Tulip Asset Purchase B.V. effective November 22, 2000. Previously filed as Exhibit 10.60 to Registrant’s Annual Report on Form 10-K filed with the Commission on February 5, 2001. | |
10.35 | First Amendment to Credit Agreement, dated as of July 11, 2001, among the Registrant, the Initial Lenders and Issuing Banks named therein, Bank of America, N.A., as Administrative Agency and Collateral Agent, Bank of America Securities LLC and Salomon Smith Barney Inc., as Co-Lead Arrangers and Joint Book Managers, Citicorp USA, Inc., as Syndication Agent, and The Bank of Nova Scotia, as Documentation Agent. Previously filed as Exhibit 10.1 to Registrant’s Quarterly Report on Form 10-Q filed with the Commission on October 3, 2001. | |
10.36 | Parent Undertaking, dated as of July 31, 2001, made by the Registrant in favor of Levi Strauss Receivables Funding, LLC. Previously filed as Exhibit 10.5 to Registrant’s Quarterly Report on Form 10-Q filed with the Commission on October 3, 2001. | |
10.37 | Consent and Release Agreement, dated as of July 31, 2001, entered into by and among Levi Strauss Funding, LLC, as Transferor, Levi Strauss Financial Center Corporation, as Seller, the Registrant, as Originator, Levi Strauss Receivables Funding, LLC, as Issuer, Citibank, N.A. as Indenture Trustee, and Bank of America, N.A. as Agent. Previously filed as Exhibit 10.6 to Registrant’s Quarterly Report on Form 10-Q filed with the Commission on October 3, 2001. | |
10.38 | Senior Executive Severance Plan effective July 1, 2000. Previously filed as Exhibit 10.42 to Registrant’s Annual Report on Form 10-K filed with the Commission on February 7, 2002. * | |
10.39 | Amendment to Home Office Pension Plan signed on August 2, 2001. Previously filed as Exhibit 10.43 to Registrant’s Annual Report on Form 10-K filed with the Commission on February 7, 2002. * | |
10.40 | Amendment to Home Office Pension Plan effective November 27, 2000. Previously filed as Exhibit 10.44 to Registrant’s Annual Report on Form 10-K filed with the Commission on February 7, 2002. * | |
10.41 | Amendment to Revised Employee Retirement signed on August 2, 2001. Previously filed as Exhibit 10.45 to Registrant’s Annual Report on Form 10-K filed with the Commission on February 7, 2002. * | |
10.42 | Amendment to Employee Investment Plan effective January 1, 2002. Previously filed as Exhibit 10.46 to Registrant’s Annual Report on Form 10-K filed with the Commission on February 7, 2002. * | |
10.43 | Amendment to Employee Investment Plan effective January 1, 2001. Previously filed as Exhibit 10.47 to Registrant’s Annual Report on Form 10-K filed with the Commission on February 7, 2002. * | |
10.44 | Amendment to Employee Long-Term Investment and Savings Plan effective January 1, 2002. Previously filed as Exhibit 10.48 to Registrant’s Annual Report on Form 10-K filed with the Commission on February 7, 2002. * | |
10.45 | Amendment to the Employee Long-Term Investment and Savings Plan effective April 1, 2001. Previously filed as Exhibit 10.49 to Registrant’s Annual Report on Form 10-K filed with the Commission on February 7, 2002. * | |
10.46 | Plan Document and Employee Booklet of Capital Accumulation Plan as amended and restated effective January 1, 2001. Previously filed as Exhibit 10.50 to Registrant’s Annual Report on Form 10-K filed with the Commission on February 7, 2002. * | |
10.47 | Amendment to Capital Accumulation Plan effective January 1, 2001. Previously filed as Exhibit 10.51 to Registrant’s Annual Report on Form 10-K filed with the Commission on February 7, 2002. * |
10.48 | Plan Document and Employee Booklet of Capital Accumulation Plan as amended and restated effective November 26, 2001. Previously filed as Exhibit 10.52 to Registrant’s Annual Report on Form 10-K filed with the Commission on February 7, 2002. * | |
10.49 | Amendment to Capital Accumulation Plan effective November 26, 2001. Previously filed as Exhibit 10.53 to Registrant’s Annual Report on Form 10-K filed with the Commission on February 7, 2002. * | |
10.50 | Amendment to Annual Incentive Plan effective November 26, 2001. Previously filed as Exhibit 10.54 to Registrant’s Annual Report on Form 10-K filed with the Commission on February 7, 2002. * | |
10.51 | Second Amendment to Comprehensive Welfare Plan for Home Office Payroll Employees and Retirees effective January 1, 2001. Previously filed as Exhibit 10.55 to Registrant’s Annual Report on Form 10-K filed with the Commission on February 7, 2002. * | |
10.52 | Second Amendment to Credit Agreement, dated January 28, 2002, between the Registrant, the Initial Lenders and Issuing Banks named therein, Bank of America, N.A., as Administrative Agent and Collateral Agent, Bank of America Securities LLC and Salomon Smith Barney Inc., as Co-Lead Arrangers and Joint Book Managers, Citicorp USA, Inc., as Syndication Agent, and The Bank of Nova Scotia, as Documentation Agent. Previously filed as Exhibit 99.1 to Registrant’s Current Report on Form 8-K filed with the Commission on January 30, 2002. | |
10.53 | First Amendment to Subsidiary Guaranty, dated January 28, 2002, between certain subsidiaries of the Registrant and Bank of America, N.A., as agent. Previously filed as Exhibit 99.2 to Registrant’s Current Report on Form 8-K filed with the Commission on January 30, 2002. | |
10.54 | First Amendment to Pledge and Security Agreement, dated January 28, 2002, among the Registrant, certain subsidiaries of the Registrant and Bank of America, N.A., as agent. Previously filed as Exhibit 99.3 to Registrant’s Current Report on Form 8-K filed with the Commission on January 30, 2002. | |
10.55 | Second Amendment to Supply Agreement dated as of May 13, 2002, between the Registrant and Cone Mills Corporation dated as of March 30, 1992. Previously filed as Exhibit 10.1 to Registrant’s Quarterly Report on Form 10-Q/A filed with the Commission on September 19, 2002. | |
10.56 | Amendment to Employee Investment Plan signed May 17, 2002. Previously filed as Exhibit 10.2 to Registrant’s Quarterly Report on Form 10-Q/A filed with the Commission on September 19, 2002. * | |
10.57 | Third Amendment to Credit Agreement and Consent dated as of July 26, 2002. Previously filed as Exhibit 10.1 to Registrant’s Quarterly Report on Form 10-Q filed with the Commission on October 8, 2002. | |
10.58 | Second Amendment to Pledge and Security Agreement dated as of July 26, 2002. Previously filed as Exhibit 10.2 to Registrant’s Quarterly Report on Form 10-Q filed with the Commission on October 8, 2002. | |
10.59 | Second Amendment to Subsidiary Guaranty dated as of July 26, 2002. Previously filed as Exhibit 10.3 to Registrant’s Quarterly Report on Form 10-Q filed with the Commission on October 8, 2002. | |
10.60 | Employee Loan Agreement, dated as of April 16, 2002 between the Registrant and Joe Middleton. Previously filed as Exhibit 10.4 to Registrant’s Quarterly Report on Form 10-Q filed with the Commission on October 8, 2002. * | |
10.61 | First Amendment to the Revised Home Office Pension Plan of Levi Strauss & Co. effective as of May 31, 2002. Previously filed as Exhibit 10.5 to Registrant’s Quarterly Report on Form 10-Q filed with the Commission on October 8, 2002. * | |
10.62 | First Amendment to the Employee Investment Plan of Levi Strauss & Co. primarily effective as of January 1, 2002. Previously filed as Exhibit 10.6 to Registrant’s Quarterly Report on Form 10-Q filed with the Commission on October 8, 2002. * |
10.63 | Fourth Amendment to Credit Agreement dated as of November 25, 2002 by and among Levi Strauss & Co., the banks, financial institutions and other institutional lenders listed therein, Bank of America, N.A., as the provider of Swing Line Advances, Banc of America Securities LLC and Salomon Smith Barney Inc., as co-lead arrangers and joint book managers, Citicorp USA, Inc., as the syndication agent, The Bank of Nova Scotia, as the documentation agent, and Bank of America, N.A., as the administrative and collateral agent. Previously filed as Exhibit 99.1 to Registrant’s Current Report on Form 8-K filed with the Commission on November 26, 2002. | |
10.64 | Deferred Compensation Plan for Executives and Outside Directors, effective January 1, 2003. Filed herewith.* | |
10.65 | Rabbi Trust Agreement, effective January 1, 2003, between the Registrant and Boston Safe Deposit and Trust Company. Filed herewith.* | |
10.66 | Credit Agreement, dated January 31, 2003, between the Registrant, the LC Issuers and Other Lenders named therein, Citicorp North America, Inc., as Administrative Agent and Swing Line Lender, The Bank of Nova Scotia, Salomon Smith Barney Inc. and Bank of America Securities LLC, as Joint Lead Arrangers and Joint Book Managers, The Bank of Nova Scotia and Bank of America Securities LLC, as Co-Syndication Agents. Filed herewith. | |
10.67 | Pledge and Security Agreement, dated January 31, 2003, between the Registrant, certain Subsidiaries of the Registrant, and Citicorp North America, Inc., as Administrative Agent. Filed herewith. | |
10.68 | Form of Guaranty dated January 31, 2003, entered into by certain Subsidiaries of the Registrant in favor of Citicorp North America, Inc., as Administrative Agent. Filed herewith. | |
10.69 | Parent Guaranty, dated as of January 31, 2003, entered into by Registrant in favor of Citicorp North America, Inc., as Administrative Agent. Filed herewith. | |
10.70 | Amendment to Employee Investment Plan effective September 9, 2002. Filed herewith. * | |
12 | Statements re: Computation of Ratios. Filed herewith. | |
16 | Letter dated as of May 6, 2002 from the Registrant’s previous independent accountants, Arthur Andersen LLP, to the Securities and Exchange Commission regarding its concurrence with the statements made by the Registrant in the current report concerning their dismissal. Previously filed as Exhibit 16 to Registrant’s Current Report on Form 8-K filed with the Commission on May 6, 2002. | |
21 | Subsidiaries of the Registrant. Filed herewith. | |
24 | Power of Attorney. Contained in signature pages hereto. |
| * | Management contract, compensatory plan or arrangement. |
Reports on Form 8-K
Current Report on Form 8-K ondated September 19, 20012002 and filed pursuant to Item 9 of the report relating to filing our Amended Quarterly Reports on Form 10-Q/A for the quarterly periods ended February 24, 2002 and May 26, 2002; and containing a copy of the Section 906 of the Sarbanes-Oxley Act of 2002 certifications.
Current Report on Form 8-K dated September 23, 2002 and filed pursuant to Item 5 of the report and containing a copy of the Company'sCompany’s press release titled "Levi“Levi Strauss & Co. ReportsAnnounces Third-Quarter 2002 Financial Results."
”
Current Report on Form 8-K dated October 8, 2002 and filed pursuant to Item 9 of the report and containing a copy of each of the sworn statements of the Principal Executive Officer, Philip A. Marineau, and the Principal Financial Officer, William B. Chiasson, of Levi Strauss & Co. submitted to the Securities and Exchange Commission pursuant to SEC Order No. 4-460. Additionally the report contains certifications pursuant to 18 U.S.C. § 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002.
Current Report on January 16,Form 8-K dated October 30, 2002 and filed pursuant to Item 5 of the report and containing a copy of the Company'sCompany’s press release titled "Levi“Levi Strauss & Co. Announces Fourth-Quarter and Fiscal 2001
Financial Results."
Launches New Casual Clothing Brand For Value-Conscious Consumers.”
Current Report on Form 8-K dated October 31, 2002 and filed pursuant to Item 9 of the report and containing a copy of the Company’s Investor Presentation Materials, dated October 31, 2002, for use at a financial community meeting held in New York on January 30,October 31, 2002.
Current Report on Form 8-K dated November 12, 2002 and filed pursuant to Item 5 of the report and containing a copy of Standard & Poor’s press release dated November 1, 2002 titled “S&P Lowers Levi Strauss Ratings; Outlook Stable.”
Current Report on Form 8-K dated November 25, 2002 and filed pursuant to Item 5 of the report relating to amendmentsan amendment to the Company'sCompany’s principal credit agreement.
99
Current Report on Form 8-K dated November 25, 2002 and filed pursuant to Item 5 of the report and containing copies of the Company’s press releases dated November 25, 2002 titled “Levi Strauss & Co. Reaffirms 2002 Financial Targets and Reiterates 2003 Financial Goals” and “Levi Strauss & Co. Commences Private Placement of Senior Notes Due 2012” and containing copies of press releases of each of Moody’s Investors Service, Standard & Poor’s Rating Service and Fitch Ratings, dated November 25, 2002, relating to the rating of the Company’s senior notes due 2012 filed pursuant to Item 9 of the Report.
Current Report on Form 8-K dated December 4, 2002 and filed pursuant to Item 5 of the report relating to the closing of the Company’s offering of $425 million of 12¼% Senior Notes due 2012, which were sold in accordance with a private placement conducted pursuant to Rule 144A and Regulation S under the Securities Act of 1933.
Current Report on Form 8-K dated January 7, 2003 and filed pursuant to Item 9 of the report and containing a copy of Moody’s Investors Service’s press release dated January 7, 2003 upgrading the Company’s senior unsecured debt ratings to B3 from Caa1 and confirming the Company’s senior implied rating of B2 and its existing bank facility rating of B1.
Current Report on Form 8-K dated January 13, 2003 and filed pursuant to Item 5 of the report and containing a copy of the Company’s press release dated January 13, 2003 titled “Levi Strauss & Co. Enters into Binding Commitment Letter to Sell $50 million of 12.25% Senior Notes to AIG Global Investment Corp. or its Affiliate.”
Current Report on Form 8-K dated January 13, 2003 and filed pursuant to Item 5 of the report and containing a copy of the Company’s press release dated January 13, 2003 titled “Levi Strauss & Co. Announces Fourth-Quarter and Fiscal 2002 Financial Results.” In addition pursuant to Item 9, the Company publicly provided information in connection with presenting its fourth quarter and fiscal year 2002 financial results on January 13, 2003. The public information is contained in this report.
Current Report on Form 8-K dated January 16, 2003 and filed pursuant to Item 5 of the report containing a copy of the Company’s press release dated January 16, 2003 titled “Levi Strauss & Co. Prices Additional $100 million of 12.25% Senior Notes Due 2012.”
Current Report on Form 8-K dated January 22, 2003 and filed pursuant to Item 5 of the report relating to the Company completing on January 22, 2003 its offering of an additional $100 million of 12.25% Senior Notes due 2012 sold in accordance with a private placement conducted pursuant to Rule 144A and Regulation S under the Securities Act of 1933 and relating to the Company completing on January 23, 2003 its offering of an additional $50 million of 12.25% Senior Notes due 2012 to affiliates of AIG Global Investment Corp. sold in accordance with a private placement under the Securities Act.
Current Report on Form 8-K dated January 31, 2003 and filed pursuant to Item 5 of the report relating to the Company closing an agreement on January 31, 2003 for a new $750 million senior secured credit facility consisting of a $375 million revolving credit facility and $375 million of term loans.
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.
LEVI STRAUSS & CO.
By: /s/ WILLIAM B. CHIASSON
______________________________
William B. Chiasson
Senior Vice President and
Chief Financial Officer
Date: JANUARY 30, 2002
LEVI STRAUSS & CO. | ||
By: | /s/ William B. Chiasson | |
William B. Chiasson Senior Vice President and Chief Financial Officer | ||
Date: | FEBRUARY 6, 2003 | |
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints William B. Chiasson, Gary W. Grellman, and Jay A. Mitchell and Hilary A. Fenner, and each of them, his or her attorney-in-fact with power of substitution for him or her in any and all capacities, to sign any amendments, supplements or other documents relating to this Annual Report on Form 10-K he deems necessary or appropriate, and to file the same, with exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that such attorney-in-fact or his substitute may do or cause to be done by virtue hereof.
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.
SIGNATURE TITLE
--------- -----
/s/ ROBERT D. HAAS Chairman of the Board
------------------
Signature | Title | |
/s/Robert D. Haas Robert D. Haas | Chairman of the Board Date: February 6, 2003 | |
/s/ Philip A. Marineau Philip A. Marineau | Director, President and Chief Executive Officer Date: February 6, 2003 | |
/s/ Peter E. Haas, Sr. Peter E. Haas, Sr. | Director Date: February 6, 2003 | |
/s/ Angela Glover Blackwell Angela Glover Blackwell | Director Date: February 6, 2003 | |
/s/ Robert E. Friedman Robert E. Friedman | Director Date: February 6, 2003 | |
/s/ Tully M. Friedman Tully M. Friedman | Director Date: February 6, 2003 | |
/s/ James C. Gaither James C. Gaither | Director Date: February 6, 2003 |
Signature | Title | |
/s/ Peter A. Georgescu Peter A. Georgescu | Director Date: February 6, 2003 | |
/s/ Peter E. Haas, Jr. Peter E. Haas, Jr. | Director Date: February 6, 2003 | |
/s/ Walter J. Haas Walter J. Haas | Director Date: February 6, 2003 | |
/s/ F. Warren Hellman F. Warren Hellman | Director Date: February 6, 2003 | |
/s/ Patricia Salas Pineda Patricia Salas Pineda | Director Date: February 6, 2003 | |
/s/ T. Gary Rogers T. Gary Rogers | Director Date: February 6, 2003 | |
/s/ G. Craig Sullivan G. Craig Sullivan | Director Date: February 6, 2003 | |
/s/ Gary W. Grellman Gary W. Grellman | Vice President and Controller (Principal Accounting Officer) Date: February 6, 2003 |
I, Philip A. Marineau, certify that:
| 1. | I have reviewed this annual report on Form 10-K of Levi Strauss & Co.; |
| 2. | Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; |
| 4. | The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: |
| a) | Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; |
| b) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and |
| c) | Presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; |
| 5. | The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions): |
| a) | All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and |
| b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and |
| 6. | The registrant’s other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. |
Date: January 30, 2002
Robert D. Haas
/s/ PHILIPFebruary 12, 2003
/s/ Philip A. MARINEAU Director, Marineau
Philip A. Marineau
President and Chief ---------------------- Executive Officer
Philip A. Marineau
I, William B. Chiasson, certify that:
| 1. | I have reviewed this annual report on Form 10-K of Levi Strauss & Co.; |
| 2. | Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; |
| 4. | The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: |
| a) | Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; |
| b) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and |
| c) | Presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; |
| 5. | The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions): |
| a) | All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and |
| b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and |
| 6. | The registrant’s other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. |
Date: February 12, 2003
/s/ William B. Chiasson | ||
William B. Chiasson Senior Vice President and Chief Financial Officer | ||
Independent Auditors’ Report on Financial Statement Schedule
The Stockholders and Board of Directors
Levi Strauss & Co.:
We have audited and reported separately herein on the financial statements of Levi Strauss & Co. and subsidiaries as of and for the year ended November 24, 2002. The November 25, 2001 and November 26, 2000 balance sheets, and the related consolidated statements of income, stockholders’ deficit and comprehensive income and cash flows and related information included in Schedule II for the fiscal years ended November 25, 2001 and November 26, 2000 were audited by other auditors who have ceased operations. Those auditors expressed an unqualified opinion on those financial statements in their report dated December 21, 2001 (except with respect to the matters discussed in Note 20, as to which the date is January 30, 2002
/s/ PETER E. HAAS, SR. Director
---------------------- Date: January 30, 2002
Peter E. Haas, Sr.
/s/ ANGELA GLOVER BLACKWELL Director
--------------------------- Date: January 30, 2002
Angela Glover Blackwell
/s/ ROBERT E. FRIEDMAN Director
---------------------- Date: January 30, 2002
Robert E. Friedman
/s/ TULLY M. FRIEDMAN Director
--------------------- Date: January 30, 2002
Tully M. Friedman
/s/ JAMES C. GAITHER Director
-------------------- Date: January 30, 2002
James C. Gaither
100
SIGNATURE TITLE
--------- -----
/s/ PETER A. GEORGESCU Director
---------------------- Date: January 30, 2002
Peter A. Georgescu
/s/ PETER E. HAAS, JR. Director
---------------------- Date: January 30, 2002
Peter E. Haas, Jr.
/s/ WALTER J. HAAS Director
------------------ Date: January 30, 2002
Walter J. Haas
/s/ F. WARREN HELLMAN Director
--------------------- Date: January 30, 2002
F. Warren Hellman
/s/ PATRICIA SALAS PINEDA Director
------------------------- Date: January 30, 2002
Patricia Salas Pineda
/s/ T. GARY ROGERS Director
------------------ Date: January 30, 2002
T. Gary Rogers
/s/ G. CRAIG SULLIVAN Director
--------------------- Date: January 30, 2002
G. Craig Sullivan
/s/ GARY W. GRELLMAN Vice President29, 2002).
Our audit was made for the purpose of forming an opinion on the basic financial statements of Levi Strauss & Co. taken as a whole. The supplementary information included in Schedule II is presented for purposes of additional analysis and Controller
-------------------- (Principal Accounting Officer)
Gary W. Grellman Date: January 30, 2002
101
/s/ KPMG LLP | ||
KPMG LLP | ||
February 5, 2003
SCHEDULE II
LEVI STRAUSS & CO. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(Dollars
(Dollars in Thousands)
BALANCE AT ADDITIONS
ALLOWANCE FOR BEGINNING CHARGED TO DEDUCTIONS BALANCE AT
DOUBTFUL ACCOUNTS OF PERIOD EXPENSES TO RESERVES END OF PERIOD
- ----------------- ---------- ---------- ----------- -------------
November 25, 2001 $29,717 $ 6,429 $ 9,480 $26,666
======= ======= ======= =======
November 26, 2000 30,017 12,171 12,471 29,717
======= ======= ======= =======
November 28, 1999 39,987 5,396 15,366 30,017
======= ======= ======= =======
102
Allowance for Doubtful Accounts | Balance at Beginning of Period | Additions Charged to Expenses | Deductions to Reserves | Balance at End of Period | ||||||||
November 24, 2002 | $ | 26,666 | $ | 2,241 | $ | 4,050 | $ | 24,857 | ||||
November 25, 2001 |
| 29,717 |
| 6,429 |
| 9,480 |
| 26,666 | ||||
November 26, 2000 |
| 30,017 |
| 12,171 |
| 12,471 |
| 29,717 | ||||
The Company will furnish an annual report to security holders subsequent to this filing.
103
EXHIBIT INDEX
3.1 Restated Certificate of Incorporation. Previously filed as Exhibit 3.3
to Registrant's Quarterly Report on Form 10-Q filed with the Commission
on April 6, 2001.
3.2 Amended and Restated By-Laws. Previously filed as Exhibit 3.4 to
Registrant's Quarterly Report on Form 10-Q filed with the Commission on
April 6, 2001.
4.1 Indenture, dated as of November 6, 1996, between the Registrant and
Citibank, N.A., relating to the 6.80% Notes due 2003 and the 7.00%
Notes due 2006. Previously filed as Exhibit 4.1 to Registrant's
Registration Statement on Form S-4 filed with the Commission on May 3,
2000.
4.2 Fiscal Agency Agreement, dated as of November 21, 1996, between the
Registrant and Citibank, N.A., relating to (Y)20 billion 4.25% bonds
due 2016. Previously filed as Exhibit 4.2 to Registrant's Registration
Statement on Form S-4 filed with the Commission on May 3, 2000.
4.3 Lease Intended as Security, dated as of December 3, 1996, among the
Registrant, First Security Bank, National Association as Agent and
named lessors. Previously filed as Exhibit 4.3 to Registrant's
Registration Statement on Form S-4 filed with the Commission on May 3,
2000.
4.4 Supplemental Indenture, dated as of May 16, 2000, between the
Registrant and Citibank, N.A., relating to the 6.80% Notes due 2003 and
the 7.00% Notes due 2006. Previously filed as Exhibit 4.4 to Amendment
No. 1 to Registrant's Registration Statement on Form S-4 filed with the
Commission on May 17, 2000.
4.5 Purchase Agreement, dated as of January 12, 2001, among the Registrant
and Salomon Smith Barney Inc. and the other Initial Purchases named
therein, relating to the 11.625% US Dollar Notes due 2008 and the
11.625% Euro Notes due 2008. Previously filed as Exhibit 4.5 to
Registrant's Annual Report on Form 10-K filed with the Commission on
February 5, 2001.
4.6 Registration Rights Agreement, dated as of January 18, 2001, between
the Registrant and Salomon Smith Barney Inc. and the other Initial
Purchases named therein, relating to the 11.625% US Dollar Notes due
2008. Previously filed as Exhibit 4.6 to Registrant's Annual Report on
Form 10-K filed with the Commission on February 5, 2001.
4.7 Registration Rights Agreement, dated as of January 18, 2001, between
the Registrant and Salomon Smith Barney Inc. and the other Initial
Purchases named therein, relating to the 11.625% Euro Notes due 2008.
Previously filed as Exhibit 4.7 to Registrant's Annual Report on Form
10-K filed with the Commission on February 5, 2001.
4.8 U.S. Dollar Indenture, dated as of January 18, 2001, between the
Registrant and Citibank, N.A., relating to the 11.625% US Dollar Notes
due 2008. Previously filed as Exhibit 4.8 to Registrant's Annual Report
on Form 10-K filed with the Commission on February 5, 2001.
4.9 Euro Indenture, dated as of January 18, 2001, between the Registrant
and Citibank, N.A., relating to the 11.625% Euro Notes due 2008.
Previously filed as Exhibit 4.9 to Registrant's Annual Report on Form
10-K filed with the Commission on February 5, 2001.
9. Voting Trust Agreement, dated as of April 15, 1996, among LSAI Holding
Corp. (predecessor of the Registrant), Robert D. Haas, Peter E. Haas,
Sr., Peter E. Haas, Jr., F. Warren Hellman, as voting trustees, and the
stockholders. Previously filed as Exhibit 9 to Registrant's
Registration Statement on Form S-4 filed with the Commission on May 3,
2000.
10.1 Stockholders Agreement, dated as of April 15, 1996, among LSAI Holding
Corp. (predecessor of the Registrant) and the stockholders. Previously
filed as Exhibit 10.1 to Registrant's Registration Statement on Form
S-4 filed with the Commission on May 3, 2000.
104
10.2 Form of European Receivables Agreement, dated February 2000, between
the Registrant and Tulip Asset Purchase Company B.V. Previously filed
as Exhibit 10.16 to Registrant's Registration Statement on Form S-4
filed with the Commission on May 3, 2000.
10.3 Form of European Servicing Agreement, dated January 2000, between
Registrant and Tulip Asset Purchase Company B.V. Previously filed as
Exhibit 10.17 to Registrant's Registration Statement on Form S-4 filed
with the Commission on May 3, 2000.
10.4 Supply Agreement, dated as of March 30, 1992, and First Amendment to
Supply Agreement, between the Registrant and Cone Mills Corporation.
Previously filed as Exhibit 10.18 to Registrant's Registration
Statement on Form S-4 filed with the Commission on May 3, 2000.
10.5 Home Office Pension Plan. Previously filed as Exhibit 10.19 to
Registrant's Registration Statement on Form S-4 filed with the
Commission on May 3, 2000. *
10.6 Employee Investment Plan. Previously filed as Exhibit 10.20 to
Registrant's Registration Statement on Form S-4 filed with the
Commission on May 3, 2000. *
10.7 Capital Accumulation Plan. Previously filed as Exhibit 10.21 to
Registrant's Registration Statement on Form S-4 filed with the
Commission on May 3, 2000. *
10.8 Special Deferral Plan. Previously filed as Exhibit 10.22 to
Registrant's Registration Statement on Form S-4 filed with the
Commission on May 3, 2000. *
10.9 Key Employee Recognition and Commitment Plan. Previously filed as
Exhibit 10.23 to Registrant's Registration Statement on Form S-4 filed
with the Commission on May 3, 2000. *
10.10 Global Success Sharing Plan. Previously filed as Exhibit 10.24 to
Registrant's Registration Statement on Form S-4 filed with the
Commission on May 3, 2000. *
10.11 Deferred Compensation Plan for Executives. Previously filed as Exhibit
10.25 to Registrant's Registration Statement on Form S-4 filed with the
Commission on May 3, 2000. *
10.12 Deferred Compensation Plan for Outside Directors. Previously filed as
Exhibit 10.26 to Registrant's Registration Statement on Form S-4 filed
with the Commission on May 3, 2000. *
10.13 Excess Benefit Restoration Plan. Previously filed as Exhibit 10.27 to
Registrant's Registration Statement on Form S-4 filed with the
Commission on May 3, 2000. *
10.14 Supplemental Benefit Restoration Plan. Previously filed as Exhibit
10.28 to Registrant's Registration Statement on Form S-4 filed with the
Commission on May 3, 2000. *
10.15 Leadership Shares Plan. Previously filed as Exhibit 10.29 to
Registrant's Registration Statement on Form S-4 filed with the
Commission on May 3, 2000. *
10.16 Annual Incentive Plan. Previously filed as Exhibit 10.30 to
Registrant's Registration Statement on Form S-4 filed with the
Commission on May 3, 2000. *
10.17 Long-Term Incentive Plan. Previously filed as Exhibit 10.31 to
Registrant's Registration Statement on Form S-4 filed with the
Commission on May 3, 2000. *
10.18 Long-Term Performance Plan. Previously filed as Exhibit 10.32 to
Registrant's Registration Statement on Form S-4 filed with the
Commission on May 3, 2000. *
10.19 Employment Agreement, dated as of September 30, 1999, between the
Registrant and Philip Marineau. Previously filed as Exhibit 10.33 to
Registrant's Registration Statement on Form S-4 filed with the
Commission on May 3, 2000. *
105
10.20 Supplemental Executive Retirement Agreement, dated as of January 1,
1998, between the Registrant and Gordon Shank. Previously filed as
Exhibit 10.34 to Registrant's Registration Statement on Form S-4 filed
with the Commission on May 3, 2000. *
10.21 Form of Indemnification Agreement, dated as of November 30, 1995, for
members of the Special Committee of Board of Directors created by the
Board of Directors on November 30, 1995. Previously filed as Exhibit
10.35 to Registrant's Registration Statement on Form S-4 filed with the
Commission on May 3, 2000. *
10.22 Discretionary Supplemental Executive Retirement Plan Arrangement for
Selected Executive Officers. Previously filed as Exhibit 10.36 to
Amendment No. 1 to Registrant's Registration Statement on Form S-4
filed with the Commission on May 17, 2000. *
10.23 Employment Agreement, dated as of May 15, 2000, between the Registrant
and James Lewis. Previously filed as Exhibit 10.37 to Amendment No. 1
to Registrant's Registration Statement on Form S-4 filed with the
Commission on May 17, 2000. *
10.24 Amendment to Deferred Compensation Plan for Executives effective March
1, 2000. Previously filed as Exhibit 10.42 to Registrant's Annual
Report on Form 10-K filed with the Commission on February 5, 2001. *
10.25 Amendments to Employee Investment Plan effective April 3, 2000.
Previously filed as Exhibit 10.43 to Registrant's Annual Report on Form
10-K filed with the Commission on February 5, 2001. *
10.26 Amendments to Capital Accumulation Plan effective April 3, 2000.
Previously filed as Exhibit 10.44 to Registrant's Annual Report on Form
10-K filed with the Commission on February 5, 2001. *
10.27 Amendment to Deferred Compensation Plan for Executives effective August
1, 2000. Previously filed as Exhibit 10.45 to Registrant's Annual
Report on Form 10-K filed with the Commission on February 5, 2001. *
10.28 Amendment to Employee Investment Plan effective November 28, 2000.
Previously filed as Exhibit 10.46 to Registrant's Annual Report on Form
10-K filed with the Commission on February 5, 2001. *
10.29 Amendments to Capital Accumulation Plan, Supplemental Benefit
Restoration Plan, and Employee Investment Plan effective January 1,
2001. Previously filed as Exhibit 10.47 to Registrant's Annual Report
on Form 10-K filed with the Commission on February 5, 2001. *
10.30 Amendments to Employee Investment Plan effective January 1, 2001.
Previously filed as Exhibit 10.48 to Registrant's Annual Report on Form
10-K filed with the Commission on February 5, 2001. *
10.31 Amendment to Capital Accumulation Plan, Plan Document and Employee
Booklet effective January 1, 2001. Previously filed as Exhibit 10.49 to
Registrant's Annual Report on Form 10-K filed with the Commission on
February 5, 2001. *
10.32 Credit Agreement, dated as of February 1, 2001, among the Registrant,
the Initial Lenders and Issuing Banks named therein, Bank of America,
N.A., as Administrative Agency and Collateral Agent, Bank of America
Securities LLC and Salomon Smith Barney Inc., as Co-Arrangers and Joint
Book Managers, Citicorp USA, Inc., as Syndication Agent, and The Bank
of Nova Scotia, as Documentation Agent. Previously filed as Exhibit
10.57 to Registrant's Annual Report on Form 10-K filed with the
Commission on February 5, 2001.
10.33 Pledge and Security Agreement, dated as of February 1, 2001, among the
Registrant, certain subsidiaries of the Registrant and Bank of America,
N.A., as agent. Previously filed as Exhibit 10.58 to Registrant's
Annual Report on Form 10-K filed with the Commission on February 5,
2001.
10.34 Subsidiary Guaranty, dated as of February 1, 2001, between certain
subsidiaries of the Registrant and Bank of America, N.A., as agent.
Previously filed as Exhibit 10.59 to Registrant's Annual Report on Form
10-K filed with the Commission on February 5, 2001.
106
10.35 Forms of Amendments to European Receivables and Servicing Agreements
among Registrant, certain subsidiaries of Registrant and Tulip Asset
Purchase B.V. effective November 22, 2000. Previously filed as Exhibit
10.60 to Registrant's Annual Report on Form 10-K filed with the
Commission on February 5, 2001.
10.36 First Amendment to Credit Agreement, dated as of July 11, 2001, among
the Registrant, the Initial Lenders and Issuing Banks named therein,
Bank of America, N.A., as Administrative Agency and Collateral Agent,
Bank of America Securities LLC and Salomon Smith Barney Inc., as
Co-Lead Arrangers and Joint Book Managers, Citicorp USA, Inc., as
Syndication Agent, and The Bank of Nova Scotia, as Documentation Agent.
Previously filed as Exhibit 10.1 to Registrant's Quarterly Report on
Form 10-Q filed with the Commission on October 3, 2001.
10.37 Master Indenture, dated as of July 31, 2001, by and between Levi
Strauss Receivables Funding, LLC, as issuer, and Citibank, N.A. as
Indenture Trustee, Paying Agent, Authentication Agent and Transfer
Agent and Registrar. Previously filed as Exhibit 10.2 to Registrant's
Quarterly Report on Form 10-Q filed with the Commission on October 3,
2001.
10.38 Indenture Supplement, dated as of July 31, 2001, by and among Levi
Strauss Receivables Funding, LLC, as Issuer, Levi Strauss Financial
Center Corporation as Servicer and Citibank, N.A. as Indenture Trustee,
Paying Agent, Authentication Agent and Transfer Agent and Registrar.
Previously filed as Exhibit 10.3 to Registrant's Quarterly Report on
Form 10-Q filed with the Commission on October 3, 2001.
10.39 Receivables Purchase Agreement, dated as of July 31, 2001, made by and
among Levi Strauss Receivables Funding, LLC, as Issuer, Levi Strauss
Funding, LLC, as Transferor, Levi Strauss Financial Center Corporation,
as Seller and Servicer, and Levi Strauss Securitization Corp. as SPC
Member. Previously filed as Exhibit 10.4 to Registrant's Quarterly
Report on Form 10-Q filed with the Commission on October 3, 2001.
10.40 Parent Undertaking, dated as of July 31, 2001, made by the Registrant
in favor of Levi Strauss Receivables Funding, LLC. Previously filed as
Exhibit 10.5 to Registrant's Quarterly Report on Form 10-Q filed with
the Commission on October 3, 2001.
10.41 Consent and Release Agreement, dated as of July 31, 2001, entered into
by and among Levi Strauss Funding, LLC, as Transferor, Levi Strauss
Financial Center Corporation, as Seller, the Registrant, as Originator,
Levi Strauss Receivables Funding, LLC, as Issuer, Citibank, N.A. as
Indenture Trustee, and Bank of America, N.A. as Agent. Previously filed
as Exhibit 10.6 to Registrant's Quarterly Report on Form 10-Q filed
with the Commission on October 3, 2001.
10.42 Senior Executive Severance Plan effective July 1, 2000. Filed
herewith. *
10.43 Amendment to Home Office Pension Plan signed on August 2, 2001. Filed
herewith. *
10.44 Amendment to Home Office Pension Plan effective November 27, 2000.
Filed herewith. *
10.45 Amendment to Revised Employee Retirement signed on August 2, 2001.
Filed herewith. *
10.46 Amendment to Employee Investment Plan effective January 1, 2002.
Filed herewith. *
10.47 Amendment to Employee Investment Plan effective January 1, 2001.
Filed herewith. *
10.48 Amendment to Employee Long-Term Investment and Savings Plan effective
January 1, 2002. Filed herewith. *
10.49 Amendment to the Employee Long-Term Investment and Savings Plan
effective April 1, 2001. Filed herewith. *
10.50 Plan Document and Employee Booklet of Capital Accumulation Plan as
amended and restated effective January 1, 2001. Filed herewith. *
10.51 Amendment to Capital Accumulation Plan effective January 1, 2001.
Filed herewith. *
107
10.52 Plan Document and Employee Booklet of Capital Accumulation Plan as
amended and restated effective November 26, 2001. Filed herewith. *
10.53 Amendment to Capital Accumulation Plan effective November 26, 2001.
Filed herewith. *
10.54 Amendment to Annual Incentive Plan effective November 26, 2001. Filed
herewith. *
10.55 Second Amendment to Comprehensive Welfare Plan for Home Office Payroll
Employees and Retirees effective January 1, 2001. Filed herewith. *
10.56 Second Amendment to Credit Agreement, dated January 28, 2002, between
the Registrant, the Initial Lenders and Issuing Banks named therein,
Bank of America, N.A., as Administrative Agent and Collateral Agent,
Bank of America Securities LLC and Salomon Smith Barney Inc., as
Co-Lead Arrangers and Joint Book Managers, Citicorp USA, Inc., as
Syndication Agent, and The Bank of Nova Scotia, as Documentation Agent.
Previously filed as Exhibit 99.1 to Registrant's Form 8-K filed with
the Commission on January 30, 2002.
10.57 First Amendment to Subsidiary Guaranty, dated January 28, 2002, between
certain subsidiaries of the Registrant and Bank of America, N.A., as
agent. Previously filed as Exhibit 99.2 to Registrant's Form 8-K filed
with the Commission on January 30, 2002.
10.58 First Amendment to Pledge and Security Agreement, dated January 28,
2002, among the Registrant, certain subsidiaries of the Registrant and
Bank of America, N.A., as agent. Previously filed as Exhibit 99.3 to
Registrant's Form 8-K filed with the Commission on January 30, 2002.
12 Statements re: Computation of Ratios. Filed herewith.
21 Subsidiaries of the Registrant. Filed herewith.
24 Power of Attorney. Contained in signature pages hereto.
3.1 | Restated Certificate of Incorporation. Previously filed as Exhibit 3.3 to Registrant’s Quarterly Report on Form 10-Q filed with the Commission on April 6, 2001. | |
3.2 | Amended and Restated By-Laws. Previously filed as Exhibit 3.4 to Registrant’s Quarterly Report on Form 10-Q filed with the Commission on April 6, 2001. | |
4.1 | Indenture, dated as of November 6, 1996, between the Registrant and Citibank, N.A., relating to the 6.80% Notes due 2003 and the 7.00% Notes due 2006. Previously filed as Exhibit 4.1 to Registrant’s Registration Statement on Form S-4 filed with the Commission on May 3, 2000. | |
4.2 | Fiscal Agency Agreement, dated as of November 21, 1996, between the Registrant and Citibank, N.A., relating to ¥20 billion 4.25% bonds due 2016. Previously filed as Exhibit 4.2 to Registrant’s Registration Statement on Form S-4 filed with the Commission on May 3, 2000. | |
4.3 | Lease Intended as Security, dated as of December 3, 1996, among the Registrant, First Security Bank, National Association as Agent and named lessors. Previously filed as Exhibit 4.3 to Registrant’s Registration Statement on Form S-4 filed with the Commission on May 3, 2000. | |
4.4 | Supplemental Indenture, dated as of May 16, 2000, between the Registrant and Citibank, N.A., relating to the 6.80% Notes due 2003 and the 7.00% Notes due 2006. Previously filed as Exhibit 4.4 to Amendment No. 1 to Registrant’s Registration Statement on Form S-4 filed with the Commission on May 17, 2000. | |
4.5 | Purchase Agreement, dated as of January 12, 2001, among the Registrant and Salomon Smith Barney Inc. and the other Initial Purchasers named therein, relating to the 11.625% US Dollar Notes due 2008 and the 11.625% Euro Notes due 2008. Previously filed as Exhibit 4.5 to Registrant’s Annual Report on Form 10-K filed with the Commission on February 5, 2001. | |
4.6 | Registration Rights Agreement, dated as of January 18, 2001, between the Registrant and Salomon Smith Barney Inc. and the other Initial Purchasers named therein, relating to the 11.625% US Dollar Notes due 2008. Previously filed as Exhibit 4.6 to Registrant’s Annual Report on Form 10-K filed with the Commission on February 5, 2001. | |
4.7 | Registration Rights Agreement, dated as of January 18, 2001, between the Registrant and Salomon Smith Barney Inc. and the other Initial Purchasers named therein, relating to the 11.625% Euro Notes due 2008. Previously filed as Exhibit 4.7 to Registrant’s Annual Report on Form 10-K filed with the Commission on February 5, 2001. | |
4.8 | U.S. Dollar Indenture, dated as of January 18, 2001, between the Registrant and Citibank, N.A., relating to the 11.625% US Dollar Notes due 2008. Previously filed as Exhibit 4.8 to Registrant’s Annual Report on Form 10-K filed with the Commission on February 5, 2001. | |
4.9 | Euro Indenture, dated as of January 18, 2001, between the Registrant and Citibank, N.A., relating to the 11.625% Euro Notes due 2008. Previously filed as Exhibit 4.9 to Registrant’s Annual Report on Form 10-K filed with the Commission on February 5, 2001. | |
4.10 | Master Indenture, dated as of July 31, 2001, by and between Levi Strauss Receivables Funding, LLC, as issuer, and Citibank, N.A. as Indenture Trustee, Paying Agent, Authentication Agent and Transfer Agent and Registrar. Previously filed as Exhibit 10.2 to Registrant’s Quarterly Report on Form 10-Q filed with the Commission on October 3, 2001. | |
4.11 | Indenture Supplement, dated as of July 31, 2001, by and among Levi Strauss Receivables Funding, LLC, as Issuer, Levi Strauss Financial Center Corporation as Servicer and Citibank, N.A. as Indenture Trustee, Paying Agent, Authentication Agent and Transfer Agent and Registrar. Previously filed as Exhibit 10.3 to Registrant’s Quarterly Report on Form 10-Q filed with the Commission on October 3, 2001. |
4.12 | Receivables Purchase Agreement, dated as of July 31, 2001, made by and among Levi Strauss Receivables Funding, LLC, as Issuer, Levi Strauss Funding, LLC, as Transferor, Levi Strauss Financial Center Corporation, as Seller and Servicer, and Levi Strauss Securitization Corp. as SPC Member. Previously filed as Exhibit 10.4 to Registrant’s Quarterly Report on Form 10-Q filed with the Commission on October 3, 2001. | |
4.13 | Amendment No. 1 dated as of April 24, 2002, to Master Indenture Series 2001-A Indenture Supplement and Receivables Purchase Agreement each dated as of July 31, 2001, by and among Levi Strauss Receivables Funding, LLC, as Issuer, Citibank, N.A. as Indenture Trustee, Levi Strauss Financial Center Corporation as Servicer and Seller, and Registrar. Previously filed as Exhibit 10 to Registrant’s Current Report on Form 8-K filed with the Commission on May 6, 2002. | |
4.14 | Purchase Agreement, dated as of November 26, 2002 among the Registrant and Salomon Smith Barney Inc. and the other Initial Purchasers named therein, relating to the purchase of $425 million of 12.25% Senior Notes due 2012. Filed herewith. | |
4.15 | Registration Rights Agreement, dated as of November 26, 2002 between the Registrant and Salomon Smith Barney Inc. and the other Initial Purchasers named therein, relating to the $425 million of 12.25% Senior Notes due 2012. Filed herewith. | |
4.16 | Indenture relating to 12.25% Senior Notes due 2012, dated as of December 4, 2002, between the Registrant and Wilmington Trust Company, as Trustee. Filed herewith. | |
4.17 | Purchase Agreement, dated as of January 15, 2003 among the Registrant and Salomon Smith Barney Inc. and the other Initial Purchasers named therein, relating to the purchase of $100 million of 12.25% Senior Notes due 2012. Filed herewith. | |
4.18 | Registration Rights Agreement, dated as of January 15, 2002, between the Registrant and Salomon Smith Barney Inc. and the other Initial Purchasers named therein, relating to the $100 million of 12.25% Senior Notes due 2012. Filed herewith. | |
4.19 | Securities Purchase Agreement, dated as of January 15, 2003, between the Registrant and affiliates of AIG Global Investment Corp. relating to the purchase of $50 million of 12.25% Senior Notes due 2012. Filed herewith. | |
9. | Voting Trust Agreement, dated as of April 15, 1996, among LSAI Holding Corp. (predecessor of the Registrant), Robert D. Haas, Peter E. Haas, Sr., Peter E. Haas, Jr., F. Warren Hellman, as voting trustees, and the stockholders. Previously filed as Exhibit 9 to Registrant’s Registration Statement on Form S-4 filed with the Commission on May 3, 2000. | |
10.1 | Stockholders Agreement, dated as of April 15, 1996, among LSAI Holding Corp. (predecessor of the Registrant) and the stockholders. Previously filed as Exhibit 10.1 to Registrant’s Registration Statement on Form S-4 filed with the Commission on May 3, 2000. | |
10.2 | Form of European Receivables Agreement, dated February 2000, between the Registrant and Tulip Asset Purchase Company B.V. Previously filed as Exhibit 10.16 to Registrant’s Registration Statement on Form S-4 filed with the Commission on May 3, 2000. | |
10.3 | Form of European Servicing Agreement, dated January 2000, between Registrant and Tulip Asset Purchase Company B.V. Previously filed as Exhibit 10.17 to Registrant’s Registration Statement on Form S-4 filed with the Commission on May 3, 2000. | |
10.4 | Supply Agreement, dated as of March 30, 1992, and First Amendment to Supply Agreement, between the Registrant and Cone Mills Corporation. Previously filed as Exhibit 10.18 to Registrant’s Registration Statement on Form S-4 filed with the Commission on May 3, 2000. | |
10.5 | Home Office Pension Plan. Previously filed as Exhibit 10.19 to Registrant’s Registration Statement on Form S-4 filed with the Commission on May 3, 2000. * |
10.6 | Employee Investment Plan. Previously filed as Exhibit 10.20 to Registrant’s Registration Statement on Form S-4 filed with the Commission on May 3, 2000. * | |
10.7 | Capital Accumulation Plan. Previously filed as Exhibit 10.21 to Registrant’s Registration Statement on Form S-4 filed with the Commission on May 3, 2000. * | |
10.8 | Special Deferral Plan. Previously filed as Exhibit 10.22 to Registrant’s Registration Statement on Form S-4 filed with the Commission on May 3, 2000. * | |
10.9 | Key Employee Recognition and Commitment Plan. Previously filed as Exhibit 10.23 to Registrant’s Registration Statement on Form S-4 filed with the Commission on May 3, 2000. * | |
10.10 | Global Success Sharing Plan. Previously filed as Exhibit 10.24 to Registrant’s Registration Statement on Form S-4 filed with the Commission on May 3, 2000. * | |
10.11 | Deferred Compensation Plan for Executives. Previously filed as Exhibit 10.25 to Registrant’s Registration Statement on Form S-4 filed with the Commission on May 3, 2000. * | |
10.12 | Deferred Compensation Plan for Outside Directors. Previously filed as Exhibit 10.26 to Registrant’s Registration Statement on Form S-4 filed with the Commission on May 3, 2000. * | |
10.13 | Excess Benefit Restoration Plan. Previously filed as Exhibit 10.27 to Registrant’s Registration Statement on Form S-4 filed with the Commission on May 3, 2000. * | |
10.14 | Supplemental Benefit Restoration Plan. Previously filed as Exhibit 10.28 to Registrant’s Registration Statement on Form S-4 filed with the Commission on May 3, 2000. * | |
10.15 | Leadership Shares Plan. Previously filed as Exhibit 10.29 to Registrant’s Registration Statement on Form S-4 filed with the Commission on May 3, 2000. * | |
10.16 | Annual Incentive Plan. Previously filed as Exhibit 10.30 to Registrant’s Registration Statement on Form S-4 filed with the Commission on May 3, 2000. * | |
10.17 | Long-Term Incentive Plan. Previously filed as Exhibit 10.31 to Registrant’s Registration Statement on Form S-4 filed with the Commission on May 3, 2000. * | |
10.18 | Long-Term Performance Plan. Previously filed as Exhibit 10.32 to Registrant’s Registration Statement on Form S-4 filed with the Commission on May 3, 2000. * | |
10.19 | Employment Agreement, dated as of September 30, 1999, between the Registrant and Philip Marineau. Previously filed as Exhibit 10.33 to Registrant’s Registration Statement on Form S-4 filed with the Commission on May 3, 2000. * | |
10.20 | Form of Indemnification Agreement, dated as of November 30, 1995, for members of the Special Committee of Board of Directors created by the Board of Directors on November 30, 1995. Previously filed as Exhibit 10.35 to Registrant’s Registration Statement on Form S-4 filed with the Commission on May 3, 2000. * | |
10.21 | Discretionary Supplemental Executive Retirement Plan Arrangement for Selected Executive Officers. Previously filed as Exhibit 10.36 to Amendment No. 1 to Registrant’s Registration Statement on Form S-4 filed with the Commission on May 17, 2000. * | |
10.22 | Employment Agreement, dated as of May 15, 2000, between the Registrant and James Lewis. Previously filed as Exhibit 10.37 to Amendment No. 1 to Registrant’s Registration Statement on Form S-4 filed with the Commission on May 17, 2000. * | |
10.23 | Amendment to Deferred Compensation Plan for Executives effective March 1, 2000. Previously filed as Exhibit 10.42 to Registrant’s Annual Report on Form 10-K filed with the Commission on February 5, 2001. * |
10.24 | Amendments to Employee Investment Plan effective April 3, 2000. Previously filed as Exhibit 10.43 to Registrant’s Annual Report on Form 10-K filed with the Commission on February 5, 2001. * | |
10.25 | Amendments to Capital Accumulation Plan effective April 3, 2000. Previously filed as Exhibit 10.44 to Registrant’s Annual Report on Form 10-K filed with the Commission on February 5, 2001. * | |
10.26 | Amendment to Deferred Compensation Plan for Executives effective August 1, 2000. Previously filed as Exhibit 10.45 to Registrant’s Annual Report on Form 10-K filed with the Commission on February 5, 2001. * | |
10.27 | Amendment to Employee Investment Plan effective November 28, 2000. Previously filed as Exhibit 10.46 to Registrant’s Annual Report on Form 10-K filed with the Commission on February 5, 2001. * | |
10.28 | Amendments to Capital Accumulation Plan, Supplemental Benefit Restoration Plan, and Employee Investment Plan effective January 1, 2001. Previously filed as Exhibit 10.47 to Registrant’s Annual Report on Form 10-K filed with the Commission on February 5, 2001. * | |
10.29 | Amendments to Employee Investment Plan effective January 1, 2001. Previously filed as Exhibit 10.48 to Registrant’s Annual Report on Form 10-K filed with the Commission on February 5, 2001. * | |
10.30 | Amendment to Capital Accumulation Plan, Plan Document and Employee Booklet effective January 1, 2001. Previously filed as Exhibit 10.49 to Registrant’s Annual Report on Form 10-K filed with the Commission on February 5, 2001. * | |
10.31 | Credit Agreement, dated as of February 1, 2001, among the Registrant, the Initial Lenders and Issuing Banks named therein, Bank of America, N.A., as Administrative Agency and Collateral Agent, Bank of America Securities LLC and Salomon Smith Barney Inc., as Co-Arrangers and Joint Book Managers, Citicorp USA, Inc., as Syndication Agent, and The Bank of Nova Scotia, as Documentation Agent. Previously filed as Exhibit 10.57 to Registrant’s Annual Report on Form 10-K filed with the Commission on February 5, 2001. | |
10.32 | Pledge and Security Agreement, dated as of February 1, 2001, among the Registrant, certain subsidiaries of the Registrant and Bank of America, N.A., as agent. Previously filed as Exhibit 10.58 to Registrant’s Annual Report on Form 10-K filed with the Commission on February 5, 2001. | |
10.33 | Subsidiary Guaranty, dated as of February 1, 2001, between certain subsidiaries of the Registrant and Bank of America, N.A., as agent. Previously filed as Exhibit 10.59 to Registrant’s Annual Report on Form 10-K filed with the Commission on February 5, 2001. | |
10.34 | Forms of Amendments to European Receivables and Servicing Agreements among Registrant, certain subsidiaries of Registrant and Tulip Asset Purchase B.V. effective November 22, 2000. Previously filed as Exhibit 10.60 to Registrant’s Annual Report on Form 10-K filed with the Commission on February 5, 2001. | |
10.35 | First Amendment to Credit Agreement, dated as of July 11, 2001, among the Registrant, the Initial Lenders and Issuing Banks named therein, Bank of America, N.A., as Administrative Agency and Collateral Agent, Bank of America Securities LLC and Salomon Smith Barney Inc., as Co-Lead Arrangers and Joint Book Managers, Citicorp USA, Inc., as Syndication Agent, and The Bank of Nova Scotia, as Documentation Agent. Previously filed as Exhibit 10.1 to Registrant’s Quarterly Report on Form 10-Q filed with the Commission on October 3, 2001. | |
10.36 | Parent Undertaking, dated as of July 31, 2001, made by the Registrant in favor of Levi Strauss Receivables Funding, LLC. Previously filed as Exhibit 10.5 to Registrant’s Quarterly Report on Form 10-Q filed with the Commission on October 3, 2001. | |
10.37 | Consent and Release Agreement, dated as of July 31, 2001, entered into by and among Levi Strauss Funding, LLC, as Transferor, Levi Strauss Financial Center Corporation, as Seller, the Registrant, as Originator, Levi Strauss Receivables Funding, LLC, as Issuer, Citibank, N.A. as Indenture Trustee, and Bank of America, N.A. as Agent. Previously filed as Exhibit 10.6 to Registrant’s Quarterly Report on Form 10-Q filed with the Commission on October 3, 2001. |
10.38 | Senior Executive Severance Plan effective July 1, 2000. Previously filed as Exhibit 10.42 to Registrant’s Annual Report on Form 10-K filed with the Commission on February 7, 2002. * | |
10.39 | Amendment to Home Office Pension Plan signed on August 2, 2001. Previously filed as Exhibit 10.43 to Registrant’s Annual Report on Form 10-K filed with the Commission on February 7, 2002. * | |
10.40 | Amendment to Home Office Pension Plan effective November 27, 2000. Previously filed as Exhibit 10.44 to Registrant’s Annual Report on Form 10-K filed with the Commission on February 7, 2002. * | |
10.41 | Amendment to Revised Employee Retirement signed on August 2, 2001. Previously filed as Exhibit 10.45 to Registrant’s Annual Report on Form 10-K filed with the Commission on February 7, 2002. * | |
10.42 | Amendment to Employee Investment Plan effective January 1, 2002. Previously filed as Exhibit 10.46 to Registrant’s Annual Report on Form 10-K filed with the Commission on February 7, 2002. * | |
10.43 | Amendment to Employee Investment Plan effective January 1, 2001. Previously filed as Exhibit 10.47 to Registrant’s Annual Report on Form 10-K filed with the Commission on February 7, 2002. * | |
10.44 | Amendment to Employee Long-Term Investment and Savings Plan effective January 1, 2002. Previously filed as Exhibit 10.48 to Registrant’s Annual Report on Form 10-K filed with the Commission on February 7, 2002. * | |
10.45 | Amendment to the Employee Long-Term Investment and Savings Plan effective April 1, 2001. Previously filed as Exhibit 10.49 to Registrant’s Annual Report on Form 10-K filed with the Commission on February 7, 2002. * | |
10.46 | Plan Document and Employee Booklet of Capital Accumulation Plan as amended and restated effective January 1, 2001. Previously filed as Exhibit 10.50 to Registrant’s Annual Report on Form 10-K filed with the Commission on February 7, 2002. * | |
10.47 | Amendment to Capital Accumulation Plan effective January 1, 2001. Previously filed as Exhibit 10.51 to Registrant’s Annual Report on Form 10-K filed with the Commission on February 7, 2002. * | |
10.48 | Plan Document and Employee Booklet of Capital Accumulation Plan as amended and restated effective November 26, 2001. Previously filed as Exhibit 10.52 to Registrant’s Annual Report on Form 10-K filed with the Commission on February 7, 2002. * | |
10.49 | Amendment to Capital Accumulation Plan effective November 26, 2001. Previously filed as Exhibit 10.53 to Registrant’s Annual Report on Form 10-K filed with the Commission on February 7, 2002. * | |
10.50 | Amendment to Annual Incentive Plan effective November 26, 2001. Previously filed as Exhibit 10.54 to Registrant’s Annual Report on Form 10-K filed with the Commission on February 7, 2002. * | |
10.51 | Second Amendment to Comprehensive Welfare Plan for Home Office Payroll Employees and Retirees effective January 1, 2001. Previously filed as Exhibit 10.55 to Registrant’s Annual Report on Form 10-K filed with the Commission on February 7, 2002. * | |
10.52 | Second Amendment to Credit Agreement, dated January 28, 2002, between the Registrant, the Initial Lenders and Issuing Banks named therein, Bank of America, N.A., as Administrative Agent and Collateral Agent, Bank of America Securities LLC and Salomon Smith Barney Inc., as Co-Lead Arrangers and Joint Book Managers, Citicorp USA, Inc., as Syndication Agent, and The Bank of Nova Scotia, as Documentation Agent. Previously filed as Exhibit 99.1 to Registrant’s Current Report on Form 8-K filed with the Commission on January 30, 2002. | |
10.53 | First Amendment to Subsidiary Guaranty, dated January 28, 2002, between certain subsidiaries of the Registrant and Bank of America, N.A., as agent. Previously filed as Exhibit 99.2 to Registrant’s Current Report on Form 8-K filed with the Commission on January 30, 2002. |
10.54 | First Amendment to Pledge and Security Agreement, dated January 28, 2002, among the Registrant, certain subsidiaries of the Registrant and Bank of America, N.A., as agent. Previously filed as Exhibit 99.3 to Registrant’s Current Report on Form 8-K filed with the Commission on January 30, 2002. | |
10.55 | Second Amendment to Supply Agreement dated as of May 13, 2002, between the Registrant and Cone Mills Corporation dated as of March 30, 1992. Previously filed as Exhibit 10.1 to Registrant’s Quarterly Report on Form 10-Q/A filed with the Commission on September 19, 2002. | |
10.56 | Amendment to Employee Investment Plan signed May 17, 2002. Previously filed as Exhibit 10.2 to Registrant’s Quarterly Report on Form 10-Q/A filed with the Commission on September 19, 2002. * | |
10.57 | Third Amendment to Credit Agreement and Consent dated as of July 26, 2002. Previously filed as Exhibit 10.1 to Registrant’s Quarterly Report on Form 10-Q filed with the Commission on October 8, 2002. | |
10.58 | Second Amendment to Pledge and Security Agreement dated as of July 26, 2002. Previously filed as Exhibit 10.2 to Registrant’s Quarterly Report on Form 10-Q filed with the Commission on October 8, 2002. | |
10.59 | Second Amendment to Subsidiary Guaranty dated as of July 26, 2002. Previously filed as Exhibit 10.3 to Registrant’s Quarterly Report on Form 10-Q filed with the Commission on October 8, 2002. | |
10.60 | Employee Loan Agreement, dated as of April 16, 2002 between the Registrant and Joe Middleton. Previously filed as Exhibit 10.4 to Registrant’s Quarterly Report on Form 10-Q filed with the Commission on October 8, 2002. * | |
10.61 | First Amendment to the Revised Home Office Pension Plan of Levi Strauss & Co. effective as of May 31, 2002. Previously filed as Exhibit 10.5 to Registrant’s Quarterly Report on Form 10-Q filed with the Commission on October 8, 2002. * | |
10.62 | First Amendment to the Employee Investment Plan of Levi Strauss & Co. primarily effective as of January 1, 2002. Previously filed as Exhibit 10.6 to Registrant’s Quarterly Report on Form 10-Q filed with the Commission on October 8, 2002. * | |
10.63 | Fourth Amendment to Credit Agreement dated as of November 25, 2002 by and among Levi Strauss & Co., the banks, financial institutions and other institutional lenders listed therein, Bank of America, N.A., as the provider of Swing Line Advances, Banc of America Securities LLC and Salomon Smith Barney Inc., as co-lead arrangers and joint book managers, Citicorp USA, Inc., as the syndication agent, The Bank of Nova Scotia, as the documentation agent, and Bank of America, N.A., as the administrative and collateral agent. Previously filed as Exhibit 99.1 to Registrant’s Current Report on Form 8-K filed with the Commission on November 26, 2002. | |
10.64 | Deferred Compensation Plan for Executives and Outside Directors, effective January 1, 2003. Filed herewith.* | |
10.65 | Rabbi Trust Agreement, effective January 1, 2003, between the Registrant and Boston Safe Deposit and Trust Company. Filed herewith.* | |
10.66 | Credit Agreement, dated January 31, 2003, between the Registrant, the LC Issuers and Other Lenders named therein, Citicorp North America, Inc., as Administrative Agent and Swing Line Lender, The Bank of Nova Scotia, Salomon Smith Barney Inc. and Bank of America Securities LLC, as Joint Lead Arrangers and Joint Book Managers, The Bank of Nova Scotia and Bank of America Securities LLC, as Co-Syndication Agents. Filed herewith. | |
10.67 | Pledge and Security Agreement, dated January 31, 2003, between the Registrant, certain Subsidiaries of the Registrant, and Citicorp North America, Inc., as Administrative Agent. Filed herewith. | |
10.68 | Form of Guaranty dated January 31, 2003, entered into by certain Subsidiaries of the Registrant in favor of Citicorp North America, Inc., as Administrative Agent. Filed herewith. | |
10.69 | Parent Guaranty, dated as of January 31, 2003, entered into by Registrant in favor of Citicorp North America, Inc., as Administrative Agent. Filed herewith. |
10.70 | Amendment to Employee Investment Plan effective September 9, 2002. Filed herewith. * | |
12 | Statements re: Computation of Ratios. Filed herewith. | |
16 | Letter dated as of May 6, 2002 from the Registrant’s previous independent accountants, Arthur Andersen LLP, to the Securities and Exchange Commission regarding its concurrence with the statements made by the Registrant in the current report concerning their dismissal. Previously filed as Exhibit 16 to Registrant’s Current Report on Form 8-K filed with the Commission on May 6, 2002. | |
21 | Subsidiaries of the Registrant. Filed herewith. | |
24 | Power of Attorney. Contained in signature pages hereto. |
* Management contract, compensatory plan or arrangement.
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